Interim Financial Reporting

9 Months Ended

Mar. 31, 2019

Accounting Policies [Abstract]

Interim Financial Reporting

Note 1. Interim Financial Reporting

Basis of presentation: 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 home health care and institutional markets for use by patients in personal residences, hospitals and clinics. The Company also sells internationally both directly and through distributors. International sales were approximately $556,000 and $386,000 for the nine months ended March 31, 2019 and 2018, respectively. Since its inception, the Company has operated in a single industry segment: developing, manufacturing and marketing medical equipment.

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 audited financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2018 (“fiscal 2018”).

A summary of the Company’s significant accounting policies follows:

Use of estimates: Management uses estimates and assumptions in preparing the condensed financial statements in accordance with U.S. GAAP. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could vary from the estimates that were used. The Company believes the critical accounting policies that require the most significant assumptions and judgments in the preparation of its condensed financial statements include revenue recognition and the related estimation of variable consideration, allowance for doubtful accounts, the potential impairment of intangible and long-lived assets, inventory obsolescence, share-based compensation, income taxes and the warranty reserve.

Net income per common share: Net income is presented on a per share basis for both basic and diluted common shares. Basic net income per common share is computed using the weighted average number of common shares outstanding during the period, excluding any restricted stock awards which have not vested. The diluted net income per common share calculation includes outstanding restricted stock grants and assumes that all stock options were exercised and converted into shares of common stock at the beginning of the period unless their effect would be anti-dilutive. Common stock equivalents excluded from the calculation of diluted earnings per share because their impact was anti-dilutive was 323,750 for both the three and nine months ended March 31, 2019 and were 194,500 and 184,500 for the three and nine months ended March 31, 2018, respectively.

New accounting pronouncements: In May 2014, the Financial Accounting Standards Board (“FASB”) issued guidance creating Accounting Standards Codification (“ASC”) 606, “Revenue from Contracts with Customers.” The new section replaces ASC 605, “Revenue Recognition,” and replaces all revenue guidance for specialized transactions and industries. The new section is intended to conform revenue accounting principles to concurrently issued International Financial Reporting Standards with previously differing treatment between U.S. practice and that of much of the rest of the world, as well as to enhance disclosures related to disaggregated revenue information.

The Company adopted the new standard effective July 1, 2018, utilizing the full retrospective method, which required the Company to recast each prior reporting period presented and included adjustments with the cumulative impact of increasing retained earnings by $0.8 million as of July 1, 2017. The Company has updated its control framework for new internal controls and made changes to existing controls related to the new revenue recognition standard. 

Primary changes resulting from the adoption of ASC 606:

The Company’s adoption of ASC 606 resulted in a change to the timing of revenue recognition, primarily driven by the following:

● Some of the Company’s SmartVest^® Airway Clearance Systems (“SmartVest Systems”) are sold to customers (patients) who have coverage with certain third-party insurance providers from which the Company receives reimbursements on a monthly installment basis over a specific term. The ultimate amount of consideration received can be significantly less than expected if the applicable third-party insurance provider discontinues payments due to changes in the patient’s status, including insurance coverage, hospitalization, death, or otherwise becoming unable to use the SmartVest System. As the transaction price was not deemed to be fixed and determinable, the Company previously deferred revenue recognition at the time of sale and recognized revenue as each installment became billable and other criteria were met. Under ASC 606, the Company estimates variable consideration in the transaction price at contract inception and through the duration of the contract based on historical experience and other relevant factors and recognizes revenue when control of the SmartVest System is transferred to the patient, which occurs at the time of shipment. This results in an acceleration of the timing of revenue recognition relative to prior accounting treatment.

● The Company sells the SmartVest Systems to patients under circumstances where it believes the criteria for reimbursement under government or commercial payer contracts has been met; however, coverage is unconfirmed or payments are under appeal, leading to uncertainty as to the amount of the transaction price that will be collected. Additionally, amounts due directly from patients for deductibles, coinsurance and copays may be subject to implicit price concessions if the patient becomes unable to pay due to hospitalization or death. Previously, the Company fully deferred revenue at the time of sale until the transaction price for these contracts was deemed to be fixed and determinable (i.e., when the appeal was settled, or payment was received). Under ASC 606, the Company estimates variable consideration in the transaction price at contract inception and reassesses throughout the contract period based on historical experience and other relevant factors and recognizes revenue when control of the SmartVest System is transferred to the patient, which occurs at the time of shipment or delivery.

Impact on previously reported results:

The following tables present a recast of selected unaudited statement of operations line items after giving effect to the adoption of ASC 606:

	For the three months ended March 31, 2018
	As Previously Reported		Effect of Adoption			As Adjusted
Net revenues	$	7,090,654	$	76,410		$	7,167,064
Cost of revenues		1,491,156		166,350			1,657,506
Gross profit		5,599,498		(89,940	)		5,509,558
Operating expenses
Selling, general and administrative		5,071,724		(182,654	)		4,889,070
Research and development		42,665		–			42,665
Total operating expenses		5,114,389		(182,654	)		4,931,735
Operating income		485,109		92,714			577,823
Interest income (expense), net		669		(1	)		668
Net income before income taxes		485,778		92,713			578,491
Income tax expense		173,000		29,000			202,000
Net income	$	312,778	$	63,713		$	376,491
Income per share:
Basic	$	0.04	$	0.01		$	0.05
Diluted	$	0.04	$	0.00		$	0.04

	For the nine months ended March 31, 2018
	As Previously Reported			Effect of Adoption			As Adjusted
Net revenues	$	20,457,058		$	(22,628	)	$	20,434,430
Cost of revenues		4,334,441			497,097			4,831,538
Gross profit		16,122,617			(519,725	)		15,602,892
Operating expenses
Selling, general and administrative		14,534,886			(549,740	)		13,985,146
Research and development		170,123			–			170,123
Total operating expenses		14,705,009			(549,740	)		14,155,269
Operating income		1,417,608			30,015			1,447,623
Interest income (expense), net		(8,425	)		–			(8,425	)
Net income before income taxes		1,409,183			30,015			1,439,198
Income tax expense		626,000			(64,000	)		562,000
Net income	$	783,183		$	94,015		$	877,198
Income per share:
Basic	$	0.10		$	0.01		$	0.11
Diluted	$	0.09		$	0.01		$	0.10

The following table presents a recast of selected unaudited balance sheet line items after giving effect to the adoption of ASC 606:

	June 30, 2018
	As Previously Reported		Effect of Adoption			As Adjusted
Assets
Current Assets
Accounts receivable, net of allowances for doubtful accounts	$	11,563,208	$	248,100		$	11,811,308
Contract assets		–		776,338		$	776,338
Inventories		2,360,693		126,155			2,486,848
Prepaid expenses and other current assets		832,202		(80,661	)		751,541
Other assets		91,912		(86,005	)		5,907
Deferred income taxes		594,000		(230,000	)		364,000
Liabilities and Shareholders’ Equity
Accrued compensation		1,209,738		60,111			1,269,849
Retained earnings		6,859,042		693,816			7,552,858

The following table presents a recast of selected unaudited statement of cash flow line items after giving effect to the adoption of ASC 606:

	For the nine months ended March 31, 2018
	As Previously Reported			Effect of Adoption			As Adjusted
Cash Flows From Operating Activities
Net income	$	783,183		$	94,015		$	877,198
Deferred taxes		43,000			(64,000	)		(21,000	)
Accounts receivable		(125,452	)		13,879			(111,573	)
Contract assets		-			(16,209	)		(16,209	)
Inventories		373,417			(10,374	)		363,043
Prepaid expenses and other assets		(90,132	)		(24,259	)		(114,391	)
Accounts payable and accrued liabilities		(55,007	)		6,948			(48,059	)

Lease Accounting:

In February 2016, FASB issued Accounting Standards Update (“ASU”) 2016-02, “Leases (Topic 842).” This standard requires the recognition of all lease transactions with terms in excess of 12 months on the balance sheet as a lease liability and a right-of-use asset (as defined in the standard). ASU 2016-02 will be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with earlier application permitted.  Upon adoption, the lessee will apply the new standard retrospectively to all periods presented or retrospectively using a cumulative effect adjustment in the year of adoption. The Company is currently evaluating ASU 2016-02 and expects that it will have no material impact on its financial statements or financial statement disclosures upon adoption based on current facts and circumstances.