Electromed, Inc. — Q1 Fiscal 2021 Form 10-Q Summary
Business Context and Reporting Period
Electromed develops, manufactures and markets SmartVest high-frequency chest wall oscillation airway-clearance systems for home care, institutional and international markets. The filing covers the three months ended September 30, 2020, compared with the three months ended September 30, 2019. The financial statements are unaudited and prepared under U.S. GAAP.
Key Financial Metrics
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Net revenues | $8.004 million | $8.302 million | Down 3.6% |
| Gross profit | $6.148 million | $6.342 million | Down 3.1% |
| Gross margin | 76.8% | 76.4% | Up 0.4 percentage points |
| Operating income | $663,000 | $1.349 million | Down 50.9% |
| Net income | $535,000 | $1.015 million | Down 47.3% |
| Diluted EPS | $0.06 | $0.12 | Down $0.06 |
| Cash provided by operations | $822,000 | $629,000 | Up 30.7% |
Revenue mix included home care of approximately $7.464 million, institutional revenue of $278,000, home care distributor revenue of $178,000 and international revenue of $84,000. International revenue represented approximately $84,000 versus $66,000 in the prior-year quarter.
SG&A expense increased 2.2% to approximately $5.004 million. R&D expense increased to $481,000 from $99,000, primarily due to next-generation platform development. Interest income declined to approximately $9,000 from $40,000. The effective tax rate was 20.4%, compared with 26.9% in the prior-year quarter, including a $39,000 discrete tax benefit related to exercised stock options.
Financial Position, Liquidity and Debt
| Balance-sheet item | September 30, 2020 | June 30, 2020 |
|---|---|---|
| Cash | $11.143 million | $10.479 million |
| Total current assets | $29.337 million | $28.023 million |
| Total current liabilities | $3.529 million | $2.986 million |
| Total liabilities | $3.535 million | $2.995 million |
| Shareholders’ equity | $30.856 million | $30.249 million |
Working capital was approximately $25.809 million. The company had no outstanding borrowings under its $2.5 million revolving credit facility and stated that the full amount was available at September 30, 2020. The facility bears interest at the prime rate less 1.00%, is secured by substantially all tangible and intangible assets, and was scheduled to expire on December 18, 2020 if not renewed. Covenants include a minimum tangible net worth of $10.125 million and restrictions on additional indebtedness and dividends.
Investing cash outflows were $82,000, consisting of $16,000 for property and equipment and $66,000 for patent costs. Financing cash outflows were $76,000 for taxes paid on a net basis related to stock-option exercises. Cash increased by $664,000 during the quarter. The company reported no off-balance-sheet arrangements.
Material Changes Versus the Prior Comparable Period
- Total revenue declined 3.6%, primarily because institutional revenue fell 55.5% as COVID-19 reduced hospital purchasing activity.
- Home care revenue was broadly stable, down 0.4%, while home care distributor revenue increased 48.3% and international revenue increased 27.3%.
- Gross margin improved modestly because of the higher mix of home care revenue, despite lower gross profit dollars.
- Operating income and net income fell substantially due to lower institutional revenue, increased R&D spending and higher sales and marketing headcount.
- R&D expense increased by approximately $382,000 to support next-generation platform development.
- Travel, meals and entertainment expense declined 37.8% because of COVID-19-related travel reductions, while direct marketing expense increased 198.7% due to a direct-to-consumer campaign begun in May 2020.
- Operating cash flow improved despite lower earnings, aided by a $501,000 increase in accounts payable and accrued liabilities and non-cash expenses of approximately $410,000. This was partly offset by a $684,000 increase in accounts receivable.
Guidance, Outlook, Risks and Unusual Items
Management did not provide specific quantitative revenue or earnings guidance. Management stated that existing working capital, operating cash flow and available credit were expected to provide adequate liquidity during fiscal 2021.
COVID-19 continued to restrict healthcare-facility access, reduce patient consultations and referrals, postpone institutional orders and limit hospital and long-term-care procurement. Management observed improved clinician and sales-team access as restrictions eased and expected the adverse impact to decrease, but warned that renewed outbreaks, restrictions or stay-at-home orders could materially harm operations, cash flows and financial condition. The company had not experienced material supply-chain disruption at the filing date but identified future manufacturing or supply interruptions as a risk.
CMS temporary waivers eased certain documentation and face-to-face requirements for Medicare respiratory products, including SmartVest, and were extended for an additional 90-day period beginning October 23, 2020. The future duration and effect of these waivers remain uncertain.
Other important risks include changes to Medicare, Medicaid and private-insurance reimbursement, competition, regulatory compliance and approvals, dependence on new sales channels, intellectual-property protection, international sales volatility and renewal or replacement of the revolving credit facility. The company reported ordinary-course claims and disputes but was not aware of undisclosed litigation expected to have a material adverse effect.
Investor Verification Items
- Verify whether the revolving credit facility was renewed after its December 18, 2020 expiration date and on what terms.
- Assess the persistence of COVID-19 effects on institutional purchasing, home-care referrals and clinic access.
- Track whether next-generation platform R&D spending produces revenue growth sufficient to offset near-term margin and earnings pressure.
- Review reimbursement-policy changes and the continuation or expiration of CMS respiratory-product waivers.
- Monitor accounts receivable, contract assets and variable-consideration estimates, which depend on payer approvals, appeals and patient coverage status.
- Evaluate warranty exposure; the recorded warranty reserve was $750,000 at September 30, 2020.
- Confirm subsequent-period trends in institutional, distributor and international revenue, which may fluctuate materially by quarter.