Electromed, Inc. Fiscal 2018 Form 10-K Summary
Reporting period: Fiscal year ended June 30, 2018, compared with fiscal 2017. The source is an annual Form 10-K, not a standalone 2017 fourth-quarter filing. Electromed develops, manufactures and sells SmartVest high-frequency chest wall oscillation airway-clearance systems and related products for home-care and institutional markets.
Financial Performance and Position
| Metric | Fiscal 2018 | Fiscal 2017 | Change |
|---|---|---|---|
| Net revenue | $28.698 million | $25.861 million | Up 11.0% |
| Home-care revenue | $26.612 million | $23.387 million | Up 13.8% |
| Institutional revenue | $1.585 million | $1.758 million | Down 9.8% |
| International revenue | $0.501 million | $0.716 million | Down 30.0% |
| Gross profit | $22.856 million | $20.568 million | Up 11.1% |
| Gross margin | 79.6% | 79.5% | Up 0.1 percentage point |
| Operating income | $3.009 million | $3.569 million | Down 15.7% |
| Net income | $1.902 million | $2.229 million | Down 14.7% |
| Diluted earnings per share | $0.22 | $0.26 | Down |
| Cash flow from operations | $2.442 million | $1.191 million | Up $1.251 million |
SG&A increased 19.5% to $19.596 million, principally because of additional sales personnel, compensation, incentives, professional fees, recruiting and travel. R&D declined to $251,000 from $597,000, but management expects fiscal 2019 R&D spending to increase. The effective tax rate was 37.2%, compared with 36.7%.
At June 30, 2018, cash was $7.456 million, accounts receivable were $11.563 million, inventory was $2.361 million and total current assets were $22.212 million. Working capital was approximately $17.469 million. Total assets were $26.638 million and shareholders’ equity was $21.895 million.
The Company generated $2.442 million from operations, used $571,000 in investing activities, and generated $12,000 from financing activities. Capital expenditures were $526,000. Cash increased to $7.456 million from $5.574 million.
Debt and Liquidity
- The Company had no outstanding balance on its $2.5 million revolving line of credit at June 30, 2018; the full amount was available, subject to borrowing-base limitations.
- A term loan had approximately $1.103 million of principal outstanding, bearing interest at 3.88%, with approximately $1.085 million due at maturity on December 18, 2018.
- The revolving line of credit expired on December 18, 2018, if not renewed. Debt was secured by substantially all tangible and intangible assets and a mortgage on the Company’s real property.
- The credit agreements included a minimum tangible net worth covenant of $10.125 million and restrictions on additional debt and dividends. The Company reported compliance at June 30, 2018.
- Management stated that working capital and available credit were expected to provide adequate liquidity for fiscal 2019.
Material Changes and Unusual Items
- Home-care growth reflected improved reimbursement operations, a higher referral-to-approval rate and higher average revenue per device.
- Institutional revenue declined, although management reported approximately $971,000 of institutional sales in the second half of fiscal 2018 and expected the new sales strategy to support a recovery.
- The IRS agreed to refund approximately $406,000 of previously paid medical-device excise taxes after determining that SmartVest sales qualified for the retail exemption. The refund was recognized in fiscal 2018 and received in July 2018.
- Fiscal 2018 included a $100,000 reserve for potentially obsolete SV2100 components, compared with $30,000 in fiscal 2017.
- Share-based compensation increased to approximately $863,000 from $479,000.
- Electromed plans to discontinue direct distribution of the Aerobika OPEP device before December 1, 2018.
- The Company adopted the new revenue-recognition standard on July 1, 2018 using the full retrospective method. It estimated an approximately $0.8 million increase to opening retained earnings, a $1.4 million increase in accounts receivable, and a subsequent restatement that would reduce reported fiscal 2018 revenue by approximately $0.4 million and net income by approximately $0.1 million.
Outlook, Commentary and Risks
Management’s fiscal 2019 priorities were profitable growth, increasing quality referrals and reimbursement rates, and maintaining standards for integrity, respect and privacy. Growth initiatives included expanding adult pulmonology and bronchiectasis referrals, improving clinic penetration and sales productivity, strengthening reimbursement support, expanding clinical evidence, enhancing SmartVest Connect, and increasing institutional market share.
- Revenue depends heavily on Medicare, Medicaid and commercial insurance reimbursement. Coverage, allowable amounts, patient eligibility and collection timing can materially affect revenue and margins.
- The direct-to-patient model creates accounts-receivable and reimbursement risks, including installment collections that may extend over 18 to 60 months.
- Competition includes Hill-Rom’s Advanced Respiratory business, Philips/RespirTech and International Biophysics, as well as alternative airway-clearance therapies.
- The Company is subject to FDA, foreign regulatory, quality-system, privacy, fraud-and-abuse and healthcare marketing requirements. Noncompliance could result in fines, recalls, product restrictions or loss of market access.
- The revolving credit facility required renewal after December 18, 2018, and the term loan’s large maturity payment created refinancing and liquidity risk.
- Other risks include dependence on product development and intellectual-property protection, supply-chain continuity, warranty obligations, reimbursement-policy changes and international market conditions.
- The Company reported no material litigation, no off-balance-sheet arrangements and effective disclosure controls and internal control over financial reporting. The auditor did not provide an internal-control attestation because Electromed qualified as a smaller reporting company.
Investor Verification Items
- Verify the fiscal 2018 figures after the ASC 606 retrospective restatement, particularly revenue, net income, accounts receivable and retained earnings.
- Confirm renewal or replacement of the revolving credit facility and repayment or refinancing of the approximately $1.1 million term-loan maturity.
- Assess whether higher sales-force and SG&A investments produce sustained home-care and institutional growth.
- Monitor reimbursement approvals, payer mix, average reimbursement per device, collection performance and installment-sale exposure.
- Evaluate the impact of SmartVest Connect, planned product enhancements and the discontinuation of Aerobika distribution.
- Review the effects of the medical-device excise-tax exemption, the Tax Cuts and Jobs Act and the expected fiscal 2019 increase in R&D spending.