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ELECTROMED, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations
(Edgar Glimpses Via Acquire Media NewsEdge) Some of the statements in this report may contain forward-looking statements
made pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995 that reflect our current view on future events, future
business, industry and other conditions, our future performance, and our plans
and expectations for future operations and actions. In some cases, you can
identify forward-looking statements by the following words: "anticipate,"
"believe," "continue," "could," "estimate," "expect," "intend," "may,"
"ongoing," "plan," "potential," "predict," "project," "should," "will," "would,"
or the negative of these terms or other comparable terminology, although not all
forward-looking statements contain these words. Our forward-looking statements
in this report primarily relate to the following: our ability to receive
reimbursement for our products and the effect of reimbursement on long-term
margins; our ability to gain market share; the impact of our business strategy
on revenues and earnings, including the expected contributions of new members of
our sales staff; expected expenditures for research and development; anticipated
expenses related to our intellectual property and expectations regarding use of
our intellectual property; future innovations in our product offerings; our
expectations regarding the continued use of proceeds from our initial public
offering; and our beliefs regarding the sufficiency of working capital and our
ability and intention to renew or obtain financing. These statements involve
known and unknown risks, uncertainties and other factors that may cause our
results or our industry's actual results, levels of activity, performance or
achievements to be materially different from the information expressed or
implied by these forward-looking statements. Forward-looking statements are only
predictions and are not guarantees of performance. These statements are based on
our management's beliefs and assumptions, which in turn are based on currently
available information.
You should read this report thoroughly with the understanding that our actual
results and actions may differ materially from those set forth in the
forward-looking statements for many reasons, including events beyond our control
and assumptions that prove to be inaccurate or unfounded. Our actual results or
actions could and likely will differ materially from those anticipated in the
forward-looking statements for many reasons, including the reasons described in
this report. These factors include, but are not limited to: the competitive
nature of our market; the risks associated with expansion into international
markets; changes to Medicare, Medicaid, or private insurance reimbursement
policies; changes to health care laws; changes affecting the medical device
industry; our need to maintain regulatory compliance and to gain future
regulatory approvals and clearances; our ability to recruit, train and retain an
effective sales force, reimbursement staff, and patient services staff; our
ability to protect our intellectual property; the effect of litigation,
including legal expenses, which may arise with respect to our intellectual
property in the ordinary course of business or otherwise; the impact of tight
credit markets on our ability to continue to obtain financing on reasonable
terms; and general economic and business conditions.
Overview
Electromed, Inc. ("we," "us," "our," "the Company," or "Electromed") was
incorporated in 1992. We are engaged in the business of providing innovative
airway clearance products applying High Frequency Chest Wall Oscillation
("HFCWO") therapy in pulmonary care for patients of all ages.
We manufacture, market and sell products that provide HFCWO, including the
Electromed, Inc. SmartVest® Airway Clearance System ("SmartVest System") and
related products, to patients with compromised pulmonary function. The products
are sold for both the home health care market and the institutional market for
use by patients in hospitals, which are referred to as "institutional sales."
For approximately ten years, we have marketed the SmartVest System and its
predecessor products to patients suffering from cystic fibrosis, chronic
obstructive pulmonary disease ("COPD"), bronchiectasis and related conditions
which can result in repeated episodes of pneumonia. Additionally, we offer such
products, upon physician prescription to a patient population that includes
post-surgical and intensive care patients at risk of developing pneumonia,
patients with end-stage neuromuscular disease, and ventilator-dependent
patients. Our goal is to be a consistent innovator in providing HFCWO to
patients with compromised pulmonary function.
Critical Accounting Policies and Estimates
Our significant accounting policies and estimates are disclosed in Part II, Item
7, "Management's Discussion and Analysis of Financial Condition and Results of
Operations," and Note 1 to our Audited Consolidated Financial Statements,
included in Part II, Item 8, of our Annual Report on Form 10-K for the fiscal
year ended June 30, 2011. The critical accounting policies used in the
preparation of the financial statements as of and for the three and six month
periods ended December 31, 2011, have remained unchanged from June 30, 2011.
Some of our accounting policies require us to exercise significant judgment in
selecting the appropriate assumptions for calculating financial statements. Such
judgments are subject to an inherent degree of uncertainty. These judgments are
based upon our historical experience, known trends in our industry, terms of
existing contracts and other information from outside sources, as appropriate.
The Company believes the critical accounting policies that require the most
significant assumptions and judgments in the preparation of its consolidated
financial statements include: revenue recognition and the estimation of selling
price adjustments, allowance for doubtful accounts, inventory obsolescence,
share-based compensation, income taxes, and warranty liability.
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Results of Operations
Three Months Ended December 31, 2011 Compared to Three Months Ended December 31,
2010
Revenues
Revenue results for the three month periods are summarized in the table below
(dollar amounts in thousands).
Three Months Ended
December 31,
2011 2011 Increase (Decrease)
Total Revenue $ 4,790 $ 4,686 $ 104 2.2 %
Home Care Revenue $ 4,298 $ 4,246 $ 52 1.2
International Revenue $ 192 $ 199 $ (7 ) (3.5 )%
Government/Institutional Revenue $ 300 $ 241 $ 59 24.5 %
Home Care Revenue. Home care revenue was approximately $4,298,000 for the three
months ended December 31, 2011, representing an increase of approximately
$52,000, or 1.2%, compared to the same period in 2010. The change in revenues
reflects an increase in the existing sales staff from 21 full time equivalents
("FTEs") in the three months ended December 31, 2010, to 25 in the same period
in the current year partially offset by turnover in Clinical Area Managers
(CAMs) of 16%, or four CAMs, during the quarter. A larger sales force has
allowed us to introduce our product into new territories.
International Revenue. International revenue was approximately $192,000 for the
three months ended December 31, 2011, representing a decrease of approximately
$7,000, or 3.5%, compared to the same period in 2010. This decrease resulted
primarily from a decrease in sales to Europe, from approximately $98,000 in the
three months ended December 31, 2010 to approximately $54,000 in the comparable
period in the current year, and a decrease in sales to Asia, from approximately
$101,000 in the three months ended December 31, 2010 to approximately $92,000 in
the comparable period in the current year. The decreases in sales to Europe and
Asia were offset by an increase in sales to other regions by approximately
$46,000 during this period from 2010 to 2011. The sales to other regions are
made up primarily of sales to Argentina of approximately $36,000. Management
believes the decrease in international sales has been driven by conditions in
the current global economy, including the European sovereign debt situation and
related austerity measures. Management continues to explore international
opportunities while focusing on continued domestic sales growth.
Government/Institutional Revenue. Government/institutional revenue was
approximately $300,000 for the three months ended December 31, 2011,
representing an increase of approximately $59,000, or 24.5%, compared to
approximately $241,000 during the same period in 2010. This resulted from a
$61,000 increase in sales to the U.S. Department of Veterans Affairs and other
government entities which increased to approximately $79,000 for the three
months ended December 31, 2011, from approximately $18,000 during the same
period the prior year as the efforts of our larger sales force continued to
produce higher governmental sales. The increase in Institutional sales was
offset by a decrease in sales to distributors, group purchasing organization
("GPO") members, and other institutions of $2,000, from approximately $223,000
in the three months ended December 31, 2010 to approximately $221,000 in the
comparable period in the current year.
Gross Profit
Gross profit decreased to approximately $3,480,000, or 72.6% of net revenues,
for the three months ended December 31, 2011, from approximately $3,540,000, or
75.6% of net revenues, in the same period in 2010. The decrease in gross profit
percentage was primarily the result of a change in average reimbursement from
the mix of referrals during the three month period. Factors such as diagnoses
that are not assured of reimbursement and insurance programs with lower
allowable reimbursement amounts (for example, state Medicaid programs) affect
average reimbursement received on a short-term basis. These factors tend to
fluctuate on a quarterly basis. However, management does not believe the results
of the quarter ended December 31, 2011, are indicative of a long-term trend in
decreasing margins.
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Operating expenses
Selling, general and administrative expenses.Selling, general and administrative
("SG&A") expenses were approximately $3,129,000 for the three months ended
December 31, 2011, representing an increase of approximately $351,000, or 12.6%,
compared to SG&A expenses of approximately $2,778,000 for the same period the
prior year. Payroll and compensation-related expenses were approximately
$1,496,000 for the three months ended December 31, 2011, representing an
increase of approximately $293,000, or 24.3%, compared to approximately
$1,203,000 in the same period the prior year. This increase primarily resulted
from a 34.5% increase in employees in our reimbursement, sales, administrative,
and patient services departments from 45 SG&A FTEs for the three months ended
December 31, 2010 compared to 61 SG&A FTEs during the same period in the current
year.
Health insurance costs for FTEs were approximately $134,000 for the three months
ended December 31, 2011, representing a decrease of approximately $38,000, or
22.1%, from approximately $172,000 for the same period in 2010. This decrease
resulted primarily from management adjusting the employee participation amount
of the health insurance cost. Travel, meals and entertainment, and trade show
expenses were approximately $465,000 in the three months ended December 31,
2011, representing an increase of approximately $50,000, or 12.0%, compared to
approximately $415,000 in the same period in the prior year. This increase was
primarily due to the increase in the size of the sales force and an increase in
the overall number of trade shows in which we participated.
Advertising and marketing expenses for the three months ended December 31, 2011
were approximately $212,000, a decrease of approximately $50,000, or 19.1%,
compared to approximately $262,000 in the same period the prior year. The
decrease was related to the timing of certain marketing expenditures compared to
the prior year.
Patient training expenses for the three months ended December 31, 2011 were
approximately $134,000, an increase of approximately $16,000, or 13.6%, compared
to approximately $118,000 in the same period the prior year. These increases
reflected the increased volume of home care patient referrals for the three
months ended December 31, 2011 compared to the same period in the prior year.
Professional fees for the three months ended December 31, 2011 were
approximately $137,000, a decrease of approximately $3,000 compared to
approximately $140,000 in the same period in the prior year. These fees are for
services related to reporting requirements, expenses related to information
technology security and backup, interim consulting expenses, and expenses for
printing and other shareowner services.
Research and development expenses. Research and development expenses were
approximately $250,000 for the three months ended December 31, 2011,
representing an increase of approximately $31,000, or 14.2%, compared to
approximately $219,000 in the same period the prior year. Research and
development costs for the three months ended December 31, 2011 were 5.2% of
revenue, compared to 4.7% of revenue in the same period the prior year. As a
percentage of sales, management expects to spend at least 5.0% of sales on
Research and Development expenses for the foreseeable future.
Interest expense
Interest expense was approximately $44,000 for the three months ended December
31, 2011, representing a decrease of approximately $9,000, or 17.0%, compared to
approximately $53,000 for the same period the prior year. The decrease resulted
from a combination of a decrease in average debt outstanding due to payments on
term loans and a decrease in the amount of debt issuance costs amortized during
the period.
Income tax expense
Income tax expense is estimated at approximately $32,000 for the three months
ended December 31, 2011, compared to $198,000 in the same period in the prior
year. The effective tax rates for the three months ended December 31, 2011 and
2010 were 56.6% and 40.4%, respectively.
Net income
Net income for the three months ended December 31, 2011 was approximately
$25,000, or 0.5% of revenues, compared to approximately $292,000, or 6.2% of
revenues, for the same period in the prior year. The decrease in net income as a
percentage of revenues primarily resulted from increases in expenses designed to
develop, support and maintain a higher sales level as well as turnover of
approximately 16% of the sales force. Management continues to believe the
increases in sales force, reimbursement and production personnel, coupled with
the expansion of marketing and research and development efforts, will provide an
infrastructure for sales growth.
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Six Months Ended December 31, 2011 Compared to Six Months Ended December 31,
2010
Revenues
Revenue results for the six month periods are summarized in the table below
(dollar amounts in thousands).
Six Months Ended
December 31,
2011 2010 Increase (Decrease)
Total Revenue $ 10,169 $ 8,851 $ 1,318 14.9 %
Home Care Revenue $ 9,430 $ 8,049 $ 1,381 17.2
International Revenue $ 229 $ 358 $ (129 ) (36.0 )%
Government/Institutional Revenue $ 510 $ 444 $ 66 14.9 %
Home Care Revenue. Home care revenue was approximately $9,430,000 for the six
months ended December 31, 2011, representing an increase of approximately
$1,381,000, or 17.2%, compared to the same period in 2010. The increase in
revenues reflects an increase in the existing sales staff from 21 full time
equivalents ("FTEs") in the six months ended December 31, 2010, to 25 in the
same period in the current year partially offset by turnover in Clinical Area
Managers (CAMs) of 16%, or four CAMs, during the six months ended December 31,
2011. A larger sales force has allowed us to introduce our product into new
territories.
International Revenue. International revenue was approximately $229,000 for the
six months ended December 31, 2011, representing a decrease of approximately
$129,000, or 36.0%, compared to the same period in 2010. This decrease resulted
primarily from a decrease in sales to Europe, from approximately $182,000 in the
six months ended December 31, 2010 to approximately $56,000 in the comparable
period in 2011, and a decrease in sales to Asia, from approximately $168,000 in
the six months ended December 31, 2010 to approximately $127,000 in the
comparable period in 2011. The decreases in sales to Europe and Asia were offset
by an increase in sales to other regions. Revenue for other regions was
approximately $46,000 for the six months ended December 31, 2011, representing
an increase of approximately $39,000, from approximately $7,000 during the same
period in 2010. The sales to other regions for the six months ended December 31,
2011 are made up primarily of sales to Argentina of approximately $36,000.
Management believes the decrease in international sales has been affected by
conditions in the current global economy, including the European sovereign debt
situation and related austerity measures. Management continues to explore
international opportunities while focusing on continued domestic sales growth.
Government/Institutional Revenue. Government/institutional revenue was
approximately $510,000 for the six months ended December 31, 2011, representing
an increase of approximately $66,000, or 14.9%, compared to approximately
$444,000 during the same period in 2010. This resulted from a $52,000 increase
in sales to distributors, group purchasing organization ("GPO") members, and
other institutions which increased to approximately $399,000 for the six months
ended December 31, 2011, from approximately $347,000 during the same period the
prior year. Sales to the U.S. Department of Veterans Affairs and other
government entities also increased by approximately $14,000, to $111,000 for the
six months ended December 31, 2011, compared to $97,000 for the same period in
2010. The increase in government/institutional sales is due to the efforts of
our sales force continuing to produce higher sales in these categories.
Gross Profit
Gross profit increased to approximately $7,538,000, or 74.1% of net revenues,
for the six months ended December 31, 2011, from approximately $6,474,000, or
73.1% of net revenues, in the same period in 2010. The increase in gross profit
dollars resulted primarily from the increase in sales volume. The increase in
gross profit percentage was primarily the result of higher than average
reimbursement from the mix of referrals during the six month period. Factors
such as diagnoses that are not assured of reimbursement and insurance programs
with lower allowable reimbursement amounts (for example, state Medicaid
programs) affect average reimbursement received on a short-term basis. These
factors tend to fluctuate on a quarterly basis. However, management does not
believe the results of the six months ended December 31, 2011, are indicative of
a long-term increase in margins.
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Operating expenses
Selling, general and administrative expenses.Selling, general and administrative
("SG&A") expenses were approximately $6,527,000 for the six months ended
December 31, 2011, representing an increase of approximately $1,261,000, or
23.9%, compared to SG&A expenses of approximately $5,266,000 for the same period
the prior year. Payroll and compensation-related expenses were approximately
$3,121,000 for the six months ended December 31, 2011, representing an increase
of approximately $771,000, or 32.7%, compared to approximately $2,350,000 in the
same period the prior year. This increase primarily resulted from a 34.2%
increase in employees in our reimbursement, sales, administrative and patient
services departments from 45 SG&A FTEs at for the six months ended December 31,
2010 compared to 60 SG&A FTEs during the same period in the current year.
Health insurance costs were approximately $258,000 for the six months ended
December 31, 2011, representing a decrease of approximately $72,000, or 21.8%,
from approximately $330,000 for the same period in 2010. This decrease resulted
primarily from management adjusting the employee participation amount of the
health insurance cost. Travel, meals and entertainment and trade show expenses
were approximately $941,000 in the six months ended December 31, 2011,
representing an increase of approximately $156,000, or 19.9%, compared to
approximately $785,000 in the same period in the prior year. This increase was
primarily due to the 12% increase in the size of the sales force and an increase
in the overall number of trade shows in which the Company participated.
Advertising and marketing expenses for the six months ended December 31, 2011
were approximately $499,000, an increase of approximately $13,000, or 2.7%,
compared to approximately $486,000 in the same period the prior year. These
increased expenditures related to providing marketing support to the larger
sales team.
Patient training expenses for the six months ended December 31, 2011 were
approximately $263,000, an increase of approximately $45,000, or 20.6%, compared
to approximately $218,000 in the same period the prior year. These increases
reflected the increased volume of home care patient referrals for the six months
ended December 31, 2011 compared to the same period in the prior year.
Professional fees for the six months ended December 31, 2011 were approximately
$331,000, an increase of approximately $102,000 compared to approximately
$229,000 in the same period in the prior year. These fees are for services
related to reporting requirements, expenses related to information technology
security and backup, interim consulting expenses, and expenses for printing and
other shareowner services.
Research and development expenses. Research and development expenses were
approximately $458,000 for the six months ended December 31, 2011, representing
an increase of approximately $41,000, or 9.8%, compared to approximately
$417,000 in the same period the prior year. Research and development costs for
the six months ended December 31, 2011 were 4.5% of revenue, compared to 4.7% of
revenue in the same period the prior year. As a percentage of sales, management
expects to spend at least 5.0% of sales on R&D expenses for the foreseeable
future.
Interest expense
Interest expense was approximately $88,000 for the six months ended December 31,
2011, representing a decrease of approximately $25,000, or 22.1%, compared to
approximately $113,000 for the same period the prior year. The decrease resulted
from a combination of a decrease in average debt outstanding due to payments on
term loans and a decrease in the amount of debt issuance costs amortized during
the period.
Income tax expense
Income tax expense is estimated at approximately $195,000 for the six months
ended December 31, 2011 compared to $274,000 in the same period in the prior
year. The effective tax rates for the six months ended December 31, 2011 and
December 31, 2010 were 41.9% and 40.4%, respectively. On a quarterly basis,
Management estimates what its effective tax rate will be for the full fiscal
year and records a quarterly income tax provision based on the anticipated rate.
As the year progresses, the estimate is refined based on the facts and
circumstances by each tax jurisdiction. The increase in the effective tax rate
is related to changes in permanent differences including the estimate for the
Federal Research and Development Tax Credit which has not been extended past
December 31, 2011, by the U.S. Congress.
Net income
Net income for the six months ended December 31, 2011 was approximately
$270,000, or 2.7% of revenues, compared to approximately $404,000, or 4.6% of
revenues, for the same period the prior year. The decrease in net income as a
percentage of revenues primarily resulted from increases in sales volume
partially offset by increases in expenses designed to develop, support and
maintain a higher sales level. Management continues to believe the increases in
sales force, reimbursement and production personnel, coupled with an aggressive
expansion of marketing and research and development efforts, will provide an
infrastructure for continued sales growth.
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Liquidity and Capital Resources
Cash Flows and Sources of Liquidity
Cash Flows from Operating Activities
For the six months ended December 31, 2011, net cash used in operating
activities was approximately $1,533,000. Cash flows used by operations consisted
of approximately $270,000 in net income, adjusted for non-cash expenses of
approximately $332,000, offset by increases in accounts receivable, inventory,
and prepaid expenses of $1,112,000, $541,000, and $139,000, respectively. In
addition, trade payables and other accrued liabilities decreased approximately
$343,000.
For the six months ended December 31, 2010, net cash used in operating
activities was approximately $236,000. Cash flows used by operations was
primarily attributable to net income adjusted for non-cash expenses of
approximately $740,000, combined with a decrease in prepaid expenses, and an
increase in trade payables and other accrued liabilities of approximately
$360,000. This was offset by increases in accounts receivable and inventory of
$1,272,000 and $64,000, respectively.
Cash Flows from Investing Activities
For the six months ended December 31, 2011, cash used in investing activities
was approximately $642,000. During this period we paid approximately $619,000
for purchases of property and equipment, including $414,000 for converting
approximately 10,000 square feet of a newly leased building to office space. We
also paid approximately $23,000 for patent related costs.
For the six months ended December 31, 2010, cash used in investing activities
was approximately $857,000. During the period we paid approximately $649,000 in
costs related to defending our SmartVest trademark and approximately $208,000
for purchases of property and equipment.
Cash Flows from Financing Activities
For the six months ended December 31, 2011, cash used in financing activities
was approximately $172,000. We received approximately $28,000 from warrant
exercises and receipts on subscription notes receivable, offset by principal
payments on long-term debt of approximately $189,000 and payments of deferred
financing fees of approximately $11,000.
For the six months ended December 31, 2010, cash provided by financing
activities was approximately $5,643,000, consisting of approximately $6,364,000
in net proceeds from the issuance of common stock in our initial public offering
(IPO). This was offset by payments on our revolving credit line of $500,000,
principal payments on long-term debt of approximately $216,000 and payments of
deferred financing fees of approximately $5,000.
Adequacy of Capital Resources
Based on our current operational performance, we believe our cash and available
borrowings under the existing credit facility will provide adequate liquidity
for the next year. However, we cannot guarantee that we will be able to procure
additional financing upon favorable terms, if at all.
Our primary capital requirements relate to adding employees in our
Reimbursement, Patient Services and Administrative Departments; adding members
to our sales force; continuing research and development efforts; and for general
corporate purposes, including to finance equipment purchases and other capital
expenditures in the ordinary course of business and to satisfy working capital
needs.
For the first six months of fiscal years 2012 and 2011, we spent approximately
$619,000 and $208,000 on property and equipment, respectively. We currently
expect to finance equipment purchases with borrowings under our credit facility
and cash flows from operations. We may need to incur additional debt or equity
financing if we have an unforeseen need for additional capital equipment or if
our operating performance does not generate adequate cash flows.
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On December 30, 2011 we entered into an amended and restated credit facility
with U.S. Bank, National Association ("U.S. Bank") that provides for an increase
in the revolving line of credit to $6,000,000, an increase of $2,500,000 over
the prior credit agreement, and $2,520,000 in term debt. A $1,520,000 Term Loan
bears interest at 5.79% ("Term Loan A"). The remaining $1,000,000 term loan
bears interest at 4.28% ("Term Loan B"). Interest on the operating line of
credit accrues at LIBOR plus 3.08% (3.39% at December 31, 2011) and is payable
monthly. The amount eligible for borrowing on the line of credit is limited to
60% of eligible accounts receivable less the outstanding balance on our Term
Loan B. The line of credit will expire on December 31, 2013, if not earlier
renewed. Term Loan A requires monthly payments of principal and interest of
approximately $10,700 and has a maturity date of December 9, 2014. Term Loan B
requires monthly payments of principal and interest of approximately $29,600 and
has a maturity date of December 9, 2012. As of December 31, 2011, we had
approximately $1,768,000 outstanding on the operating line of credit and
approximately $1,782,000 outstanding on the term loan debt for a total amount
outstanding under the U.S. Bank credit facility of $3,550,000. As of December
31, 2011, we had net unused availability of $3,252,000 under the line of credit.
We are required to pay a fee of 0.125% per annum on unused portions of the
revolving line of credit.
The agreement governing the credit facility contains certain covenants that
restrict our ability to, among other things, pay cash dividends, make certain
investments, incur indebtedness or liens, change our Chief Executive Officer,
merge or consolidate with any person, or sell, lease, assign, transfer or
otherwise dispose of any assets other than in the ordinary course of business.
The agreement also contains financial covenants that require maintenance of
certain fixed charge and total cash flow leverage ratios. We were in compliance
with all requirements under the credit facility as of December 31, 2011.
On August 13, 2010, we completed the sale of 1,700,000 shares of common stock,
par value $0.01 per share, in an IPO, at an offering price of $4.00 per share.
On September 28, 2010, Feltl and Company, Inc., the underwriter of the IPO,
acquired 200,000 shares of our common stock at a price of $4.00 per share,
pursuant to exercise of its over-allotment option. Gross proceeds from the
issuance of common stock in connection with the IPO, including the overallotment
option, were approximately $7,600,000. After deducting the payment of
underwriters' discounts and commissions and offering expenses, our net proceeds
from the sale of shares in the IPO, including the overallotment option, were
approximately $5,946,000.
In connection with the employment agreement we entered into with our Chief
Executive Officer on January 1, 2010, we may be required to make cash payments
to this officer if he resigns following a change in control or is terminated at
any time without cause. With respect to a resignation upon a change in control,
the amount of the severance payment would be equal to two times the annual base
salary then in effect. With respect to a termination without cause, the amount
of the severance payment would be equal to the base salary of the executive then
in effect. In each instance, the executive would also be entitled to a pro rata
portion of any earned but unpaid incentive compensation at the time of
termination, the severance would be payable in a lump sum within 60 days of the
separation event, and the executive would, in order to receive the severance and
continued benefits, be required to sign a release of claims against us, return
all property owned by Electromed and agree not to disparage us.
In connection with the employment agreement we entered into with our new Chief
Financial Officer on October 18, 2011, we may be required to make cash payments
to this officer if he resigns following a change in control or is terminated at
any time without cause. With respect to a resignation upon a change in control
or a termination without cause, the amount of the severance payment would be an
amount equal to his ending base salary from the date of termination through the
expiration of the then-current term. The first term of the agreement ended the
last day of the calendar year 2011 and automatically renewed for a one-year
period. The agreement will automatically renew for successive one calendar year
periods unless terminated pursuant to the terms of the agreement. The severance
amount would be payable in a lump sum within 60 days of the separation event,
and the executive would, in order to receive the severance and continued
benefits, be required to sign a release of claims against us, return all
property owned by Electromed and agree not to disparage us.
On August 19, 2011, we entered into a Transition Agreement with our former Chief
Financial Officer, pursuant to which he retired effective on October 18, 2011,
the date on which our new Chief Financial Officer commenced employment. We
entered into a Separation Agreement and Release on the effective date of Mr.
Belford's retirement, which supersedes Mr. Belford's January 1, 2010 employment
agreement. The Separation Agreement and Release provides that Mr. Belford will
receive approximately $27,600 as payment for accrued but unused vacation time
and a payment in the amount of approximately $147,000 representing six months of
separation pay and a pro rata portion of the calendar year 2011 bonus payment,
which will be paid in a lump sum on the first day of the seventh month following
the effective date of Mr. Belford's retirement. In exchange, Mr. Belford
executed a general release of claims, will continue to be bound by the terms of
his Non-Competition, Non-Solicitation and Confidentiality Agreement dated
January 1, 2010, and must provide consulting and transition services as
reasonably requested by the Company through December 31, 2011.
Certain Information Concerning Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
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