Electromed, Inc. — Q1 FY2022 Form 10-Q Summary
Business context and reporting period
Electromed develops, manufactures and markets SmartVest airway-clearance systems using High Frequency Chest Wall Oscillation therapy. Products are sold primarily in U.S. home-care and institutional markets, with additional distributor and international sales. This unaudited quarterly report covers the three months ended September 30, 2021, compared with the three months ended September 30, 2020. The company had 8,569,639 shares outstanding as of November 5, 2021.
Financial performance and liquidity
| Metric | Q1 FY2022 | Q1 FY2021 | Change |
|---|---|---|---|
| Net revenue | $10.001 million | $8.004 million | +25.0% |
| Gross profit | $7.701 million | $6.148 million | +25.3% |
| Gross margin | 77.0% | 76.8% | +0.2 percentage points |
| Operating income | $538,000 | $663,000 | -18.9% |
| Net income | $439,000 | $535,000 | -17.9% |
| Net margin | 4.4% | 6.7% | Down |
| Diluted EPS | $0.05 | $0.06 | Down |
| Cash flow from operations | $(576,000) | $822,000 | Declined |
- Revenue growth was led by home care revenue of $9.284 million, up 24.4%, and institutional revenue of $449,000, up 61.5%. International revenue increased 33.3% to $112,000, while home-care distributor revenue declined 12.4% to $156,000.
- Gross profit benefited from stronger revenue and favorable mix, partly offset by higher raw-material and shipping costs.
- SG&A increased 35.6% to $6.787 million. Payroll, travel, sales commissions, systems investments and professional fees increased; professional fees rose substantially because of shareholder-activism-related costs and other infrastructure investments.
- R&D decreased to $376,000, or 3.8% of revenue, from $481,000, or 6.0% of revenue.
- Operating cash flow was negative primarily because accounts receivable increased by $1.331 million, reflecting growth in Medicare-related business with a stated 13-month payment cycle, and income tax receivables increased by $498,000.
- Cash was $10.980 million at September 30, 2021, versus $11.889 million at June 30, 2021. Working capital was approximately $27.617 million.
- Investing cash outflow was $270,000, including $225,000 for property and equipment and $45,000 for intangible assets. Financing cash outflow was $63,000, primarily for taxes on net share settlements.
- Total assets were $37.900 million and total shareholders’ equity was $33.041 million at quarter-end. Total liabilities were $4.859 million.
Material changes versus the prior comparable period
- Revenue increased $1.997 million, or 25.0%, driven primarily by higher referrals and approvals in home care and recovery in institutional utilization as hospitals resumed HFCWO protocols.
- Gross margin was broadly stable and increased modestly despite higher input and shipping costs.
- Profitability declined because operating-expense growth exceeded gross-profit growth, particularly due to SG&A, shareholder-activism expenses and systems investments.
- Cash flow shifted from $822,000 provided by operations to $576,000 used by operations, primarily because of working-capital investment in receivables and tax receivables.
- Share-based compensation increased to $249,000 from $191,000. The company granted 70,800 options and 25,900 restricted shares during the quarter.
Outlook, risks, contingencies and unusual items
- Management believes current working capital and available credit will provide adequate liquidity during fiscal 2022, but the $2.5 million revolving credit facility expires on December 18, 2021 if not renewed. No principal was outstanding at quarter-end, and the full $2.5 million was available.
- The facility carries financial and nonfinancial covenants, including a minimum tangible net worth of $10.125 million, and restricts certain additional debt and dividends.
- COVID-19 continued to limit clinic access and face-to-face sales activity, particularly as the Delta variant increased. Management used a hybrid sales model and expects pandemic effects to continue through fiscal 2022.
- Management reported minor supply-chain delays and higher raw-material and shipping costs but no material supply-chain impact during the quarter. Future disruptions could reduce production and gross margins.
- Temporary CMS waivers continued to support Medicare referrals and approvals for non-covered diagnoses. The filing states the waiver was expected to remain effective until January 2022 and was extended for an additional 90-day period beginning October 15, 2021.
- Proposed and federal-contractor vaccination requirements could cause employee attrition or operational disruption. Approximately $557,000, or 1.6%, of fiscal 2021 revenue came from the Veterans Administration.
- A putative class action filed in September 2021 alleges injury arising from the company’s previously announced data breach. The company disputes the claims, intends to defend the action and cannot determine the outcome or potential loss exposure.
- The company authorized up to $3.0 million of share repurchases through May 26, 2022; no repurchases occurred during the quarter, leaving approximately $1.876 million available under the program.
- The company reported no off-balance-sheet arrangements and stated that disclosure controls and internal control over financial reporting were effective.
Important facts for investors to verify
- Whether the revolving credit facility was renewed after its December 18, 2021 expiration date and whether covenant compliance remained intact.
- The sustainability of revenue growth after expiration or modification of CMS reimbursement waivers and as clinic access normalizes.
- Collection performance and cash conversion for the growing Medicare-related accounts receivable balance.
- The magnitude and recurrence of shareholder-activism, legal, systems-investment and other professional-fee expenses.
- Potential financial exposure from the data-breach class action and any related remediation or legal costs.
- The effect of COVID-19, vaccination requirements, supply-chain constraints and raw-material or shipping inflation on staffing, production and gross margin.