Electromed, Inc. Q1 Fiscal 2017 Form 10-Q Summary
Business context and reporting period
Electromed develops, manufactures and markets airway-clearance products using High Frequency Chest Wall Oscillation technology, principally the SmartVest Airway Clearance System. Products are sold in U.S. home-care and institutional markets and internationally through direct sales and distributors. The filing covers the three months ended September 30, 2016, compared with the three months ended September 30, 2015. The filing was signed November 8, 2016.
Financial performance and condition
| Metric | Q1 FY2017 | Q1 FY2016 | Change |
|---|---|---|---|
| Net revenues | $5.545 million | $5.001 million | +10.9% |
| Gross profit | $4.328 million | $3.859 million | +12.1% |
| Gross margin | 78.1% | 77.2% | +0.9 percentage points |
| Operating income | $0.289 million | $0.585 million | -50.6% |
| Operating margin | 5.2% | 11.7% | Down approximately 6.5 points |
| Net income | $0.191 million | $0.341 million | -43.9% |
| Diluted EPS | $0.02 | $0.04 | Declined |
| Net cash from operating activities | $(1.216) million | $0.311 million provided | Negative swing |
Home-care revenue increased 14.4% to approximately $5.132 million, while institutional revenue declined 12.4% to $346,000 and international revenue declined 44.2% to $67,000. Gross-margin expansion reflected higher home-care revenue, higher average selling prices and lower SmartVest SQL manufacturing costs.
SG&A increased 14.1% to $3.688 million, including higher payroll, compensation, sales incentives, professional fees, travel and share-based compensation. Research and development increased to $351,000 from $42,000, primarily for development of a wireless connectivity feature. Interest expense, net, was $17,000 versus $20,000. Income tax expense was $81,000, producing a 29.8% effective tax rate, compared with $224,000 and 39.4% in the prior-year quarter.
Cash was $3.824 million at September 30, 2016, compared with $5.123 million at June 30, 2016. Working capital was approximately $13.196 million. Total assets were $19.705 million and shareholders’ equity was $16.659 million. Accounts receivable were $8.044 million and inventories were $2.606 million.
Net cash used in investing activities was $71,000, consisting primarily of $49,000 of property and equipment expenditures and $22,000 of patent costs. Financing activities used $13,000 for principal payments on long-term debt.
Debt, liquidity and material changes
- The company had no balance outstanding on its $2.5 million revolving line of credit; the full amount was available at September 30, 2016, subject to borrowing-base limits.
- The revolving facility expires December 18, 2016 if not renewed and bears interest at the prime rate, reported as 3.50% at quarter-end.
- The term loan had approximately $1.189 million of principal outstanding, bears interest at 5.00%, requires monthly payments of approximately $8,600 and has a final payment of approximately $1.090 million due December 18, 2018.
- The company was in compliance with its minimum tangible net worth covenant of $10.125 million and other debt covenants at September 30, 2016.
- Operating cash flow deteriorated primarily because employee incentive payments accrued in fiscal 2016 were paid during the quarter, accounts receivable increased $432,000, and inventories increased $101,000.
- The company adopted debt-issuance-cost presentation guidance retrospectively, reclassifying approximately $10,000 from other assets as a deduction from long-term debt. The reclassification did not affect net income or equity.
- Share-based compensation expense increased to approximately $109,000 from $39,000. The company issued 176,500 stock options and 30,000 restricted shares during the quarter.
Outlook, commentary, risks and unusual items
- Management expects the wireless connectivity feature for its HFCWO device to launch before the end of fiscal 2017 and expects R&D expenses to remain elevated over the next several quarters.
- Management believes working capital and available credit will provide adequate liquidity for the next year, but this assessment depends in part on renewal of the revolving line of credit and continued operating performance.
- The federal medical-device excise tax remained subject to a two-year moratorium beginning January 1, 2016, benefiting operating profit by approximately $66,000 in the quarter compared with the prior-year period.
- The quarter’s effective tax rate benefited by approximately $22,000 from the lapse of the statute of limitations on uncertain tax positions.
- Key risks include reimbursement changes affecting Medicare, Medicaid and private insurers; competition; regulatory compliance and approvals; intellectual-property protection; international-market volatility; and the ability to renew or obtain credit.
- The company provides a lifetime warranty for U.S. patient sales and a three-year warranty for institutional and non-U.S. sales. The warranty reserve remained $660,000 at quarter-end.
- The filing reports no material undisclosed litigation, no off-balance-sheet arrangements and no material changes to internal control over financial reporting.
Important facts for investors to verify
- Whether the revolving credit facility was renewed before its December 18, 2016 expiration and on what terms.
- Whether the negative operating cash flow was temporary and whether accounts receivable, inventory and accrued liabilities normalized.
- Progress, launch timing and commercial contribution of the planned wireless connectivity feature, alongside the effect of sustained higher R&D spending.
- Durability of home-care revenue growth and reimbursement improvements, particularly amid declines in institutional and international revenue.
- Future gross-margin performance after the reported SmartVest SQL manufacturing-cost benefits.
- Compliance with debt covenants and ability to fund the approximately $1.090 million final term-loan payment due in December 2018.
- Potential effects of changes to insurance reimbursement, healthcare laws, medical-device regulation and international distribution activity.