Electromed, Inc. - Quarter Report: 2011 March (Form 10-Q)

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

          Some of the statements in this report may contain forward-looking statements 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; our ability to gain market share; 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; future innovations in our product offerings; and our beliefs regarding the sufficiency of working capital and our ability 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 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, that 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”) technologies 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.

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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, 2010. The critical accounting policies used in the preparation of the financial statements as of March 31, 2011 have remained unchanged from June 30, 2010.

          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 and warranty liability.

Results of Operations

Three Months Ended March 31, 2011 Compared to Three Months Ended March 31, 2010

          Revenues

          Revenue results for the three month periods are summarized in the table below (dollar amounts in thousands).

		Three Months Ended March 31,
		2011			2010			Increase (Decrease)
Total Revenue		$	5,199		$	4,229		$	970			22.9	%
Home Care Revenue		$	4,689		$	3,726		$	963			25.8	%
International Revenue		$	143		$	267		$	(124	)		(46.4	)%
Government/Institutional Revenue		$	367		$	236		$	131			55.5	%

          Home Care Revenue. Home care revenue was approximately $4,689,000 for the three months ended March 31, 2011, representing an increase of approximately $963,000, or 25.8%, compared to the same period in 2010. This resulted from a 24.1% increase in referrals, from 576 in the three months ended March 31, 2010, to 715 in the same period in the current year. The increase in revenues and the increase in referrals reflect an increase in the existing sales staff from 15 full time equivalents (FTE’s) in the three months ended March 31, 2010, to 23 in the same period in the current year. A larger sales force has allowed us to expand our presence into new territories and to increase our penetration in territories in which we have previously sold the SmartVest System.

          International Revenue. International revenue was approximately $143,000 for the three months ended March 31, 2011, representing a decrease of approximately $124,000, or 46.4%, compared to the same period in 2010. This resulted primarily from a decrease in sales to Europe from approximately $151,000 in the three months ended March 31, 2010 to approximately $70,000 in the comparable period in 2011, and a decrease in sales in Asia from approximately $101,000 in the three months ended March 31, 2010 to approximately $68,000 in the comparable period in 2011. Sales to other regions decreased by approximately $10,000 during this period from 2010 to 2011.

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          Government/Institutional Revenue. Government/institutional revenue was approximately $367,000 for the three months ended March 31, 2011, representing an increase of approximately $131,000, or 55.5%, compared to approximately $236,000 during the same period in 2010. Government revenues rose to approximately $90,000 in the third quarter of 2011 compared to approximately $65,000 during the same period the prior year. Sales to distributors, group purchasing organization (“GPO”) members, and other institutions rose to approximately $277,000 in the third quarter of 2011 compared to approximately $171,000 during the same period the prior year as the efforts of our larger sales force continued to produce higher sales.

          Gross Profit

          Gross profit increased to approximately $3,703,000, or 71.2% of net revenues, for the three months ended March 31, 2011, from approximately $2,983,000, or 70.5% of net revenues in the same period in 2010. The increase in gross profit dollars resulted primarily from an increase in sales volume.

          Operating expenses

          Selling, general and administrative expenses. Selling, general and administrative expenses were approximately $2,759,000 for the three months ended March 31, 2011, representing an increase of approximately $735,000, or 36.3%, compared to selling, general and administrative expenses of approximately $2,024,000 for the same period the prior year. Payroll and compensation-related expenses were approximately $1,376,000 for the three months ended March 31, 2011, representing an increase of approximately $351,000, or 34.2%, compared to approximately $1,025,000 in the same period the prior year. This increase primarily resulted from a 46.2% increase in total employees from an average of 39 SG&A FTE employees in 2010 compared to an average of 57 SG&A FTE employees in 2011.

          Health insurance costs for full-time employees were approximately $92,000 for the three months ended March 31, 2011, representing a decrease of approximately $38,000, or 29.3%, from approximately $130,000 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 $404,000 in the three months ended March 31, 2011, representing an increase of approximately $167,000, or 70.5%, compared to approximately $237,000 the same period in the prior year. This increase is primarily due to the 53.3% increase in the size of the sales force and the overall number of trade shows in which Electromed participated.

          Advertising and marketing expenses for the three months ended March 31, 2011 were approximately $219,000, an increase of approximately $74,000, or 51.0% compared to approximately $145,000 in the same period the prior year. These increased expenditures related to providing marketing support to a larger sales team.

          Patient training expenses for the three months ended March 31, 2011 were approximately $125,000, an increase of approximately $27,000, or 27.6% compared to approximately $98,000 in the same period the prior year. These increases reflected the increased volume of home care patient referrals for the three months ended March 31, 2011 compared to the same period the prior year.

          Professional fees for the three months ended March 31, 2011 were approximately $170,000, an increase of approximately $120,000 compared to approximately $50,000 in the same period the prior year. This was primarily the result of services related to greater reporting requirements, expenses related to security and backup, consulting expenses, and expenses for printing and shareowner services related to the transition to a public company.

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          Research and development expenses. Research and development expenses were approximately $272,000 for the three months ended March 31, 2011, representing an increase of approximately $78,000, or 40.2%, compared to approximately $194,000 in the same period the prior year. The increase is related to efforts directed toward system design and performance and possible product additions to the SmartVest® line. Research and development costs for the three months ended March 31, 2011 were 5.2% of revenue, compared to 4.6% of revenue in the same period the prior year. Management plans for research and development expenses to be approximately 5% or greater of revenue in the future.

          Interest expense

          Interest expense was approximately $41,000 for the three months ended March 31, 2011 representing a decrease of approximately $18,000, or 30.5%, compared to approximately $59,000 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 loan charges amortized relating to our outstanding credit agreements.

          Income tax expense

          Income tax expense is estimated at approximately $146,000 for the three months ended March 31, 2011 compared to $227,000 in the same period the prior year. The effective tax rates for the three months ended March 31, 2011 and March 31, 2010 were 23.0% and 32.1% respectively. The lower effective tax rate for the three months ended March 31, 2011 was due to discrete items recorded in the third quarter related to higher than originally estimated tax credits and differences from the filing of the 2010 income tax return over the amount originally estimated.

          Net income

          Net income for the three months ended March 31, 2011 was approximately $487,000, or 9.4% of revenues at the time of the writing of this report, compared to approximately $475,000, or 11.2% of revenues, for the same period 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. Management continues to believe the increases in sales force, support and production personnel coupled with an aggressive expansion of marketing and research and development efforts is providing the foundation for a successful increase in market share.

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Nine Months Ended March 31, 2011 Compared to Nine Months Ended March 31, 2010

          Revenues

          Revenue results for the nine month periods are summarized in the table below (dollar amounts in thousands).

		Nine Months Ended March 31,
		2011			2010			Increase (Decrease)
Total Revenue		$	14,050		$	10,680		$	3,370			31.6	%
Home Care Revenue		$	12,738		$	9,708		$	3,030			31.2	%
International Revenue		$	501		$	542		$	(41	)		(7.6	)%
Government/Institutional Revenue		$	811		$	430		$	381			88.6	%

          Home Care Revenue. Home care revenue was approximately $12,738,000 for the nine months ended March 31, 2011, representing an increase of approximately $3,030,000, or 31.2%, compared to approximately $9,708,000 for the same period in 2010. This resulted from a 28% increase in referrals, advancing from 1,541 in the nine months ended March 31, 2010 to 1,972 in the same period in 2011. The increase in revenues and the increase in referrals resulted primarily from a 50% increase in our existing sales staff, from 14 FTE’s in the nine months ended March 31, 2010, to 21 FTE’s in the comparable period in 2010. Although the percentage increase in sales has not equaled the increase in our sales force, management believes the new members of our sales staff will contribute more as their experience and customer contacts grow.

          International Revenue. International revenue was approximately $501,000 for the nine months ended March 31, 2011, representing a decrease of approximately $41,000, or 7.6%, compared to approximately $542,000 the same period the prior year. This resulted from a decrease in sales to Europe from approximately $345,000 in the nine months ended March 31, 2010 to approximately $252,000 in the comparable period in 2011, and an increase in sales in Asia from approximately $125,000 in the nine months ended March 31, 2010 to approximately $197,000 in the comparable period in 2011. Sales to other regions decreased from approximately $72,000 in the nine months ended March 31, 2010, to approximately $52,000 in the comparable period in 2011.

          Government/Institutional Revenue. Government/institutional revenue was approximately $811,000 for the nine months ended March 31, 2011, representing an increase of approximately $381,000, or 88.6%, compared to approximately $430,000 the same period in 2010. Government revenues rose to approximately $187,000 in the nine months ended March 31, 2011, compared to approximately $100,000 during the same period the prior year, and sales to distributors, GPO members, and other institutions rose to approximately $624,000 in the third quarter of 2011 compared to approximately $330,000 during the same period the prior year as the efforts of our larger sales force continued to produce higher sales.

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          Gross Profit

          Gross profit increased to $10,177,000, or 72.4% of net revenues, for the nine months ended March 31, 2011, from approximately $7,681,000 million, or 71.9% of net revenues in the same period in 2010. The increase in gross profit dollars resulted primarily from the increase in sales volume.

          Operating expenses

          Selling, general and administrative expenses. Selling, general and administrative expenses were approximately $8,026,000 for the nine months ended March 31, 2011, representing an increase of approximately $2,347,000, or 41.3%, compared to selling, general and administrative expenses of approximately $5,679,000 for the same period the prior year. Payroll and compensation-related expenses were approximately $3,727,000 for the nine months ended March 31, 2011, representing an increase of approximately $1,050,000, or 39.2%, compared to payroll and compensation-related expenses of approximately $2,677,000 in the same period the prior year. This increase primarily resulted from a 47.2% increase in employees from an average of 36 FTE SG&A employees for the nine months ended March 31, 2010 compared to an average of 53 FTE SG&A employees for the same period the current year.

          Health insurance costs for full-time employees were approximately $422,000 for the nine months ended March 31, 2011, representing an increase of approximately $77,000, or 22.3%, from approximately $345,000 in 2010. This increase resulted primarily from an increase in the number of participants in the health insurance plan as the number of qualifying employees increased offset by management adjusting the employee participation amount of the health insurance cost in the third quarter. Travel, trade show, and meals and entertainment expenses were approximately $1,189,000 in the nine months ended March 31, 2011, representing an increase of approximately $413,000, or 53.2%, compared to approximately $776,000 the same period in the prior year. This increase was primarily due to the 50% increase in the size of the sales force along with increased travel costs from management in connection with training new staff.

          Advertising and marketing expenses for the nine months ended March 31, 2011 were approximately $705,000, an increase of approximately $314,000, or 80.3% compared to approximately $391,000 in the same period the prior year. These increased expenditures related to providing greater marketing support to a larger sales team. Patient training expenses for the nine months ended March 31, 2011 were approximately $343,000, an increase of approximately $88,000, or 34.5% compared to approximately $255,000 in the same period the prior year. These increases reflected the increased volume of home care patient referrals for the nine months ended March 31, 2011 compared to the same period the prior year.

          Research and development expenses. Research and development expenses were approximately $689,000 for the nine months ended March 31, 2011, representing an increase of approximately $244,000, or 54.8%, compared to approximately $445,000 in the same period the prior year. The increase is related to various research projects related to system design and performance, enhancements to therapy garments and possible product additions to the SmartVest line. Research and development costs for the nine months ended March 31, 2011 were 4.9% of revenue, compared to 4.2% of revenue for the same period the prior year. Management plans for research and development expense to be approximately 5% or greater of revenue in the future.

          Interest expense

          Interest expense was approximately $160,000 for the nine months ended March 31, 2011 representing a decrease of approximately $51,000, or 24.2%, compared to approximately $211,000 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, lower average interest rates on outstanding debt, and a decrease in the amount of loan charges amortized relating to our outstanding credit agreements.

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          Income tax expense

          Income tax expense was estimated at approximately $420,000 for the nine months ended March 31, 2011, compared to $487,000 in the same period the prior year. The effective tax rates for the nine months ended March 31, 2011 and March 31, 2010 were 32.0% and 36.1% respectively. The lower effective tax rate for the nine months ended March 31, 2011 was due to discrete items recorded in the third quarter related to higher than originally estimated tax credits and differences from the filing of the 2010 income tax return over the amount originally estimated.

          Net income

          Net income for the nine months ended March 31, 2011, was approximately $891,000, or 6.3% of revenues, compared to approximately $846,000, or 7.9% of revenues, for the same period 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. Management continues to believe the increases in sales force, support and production personnel coupled with an aggressive expansion of marketing and research and development efforts is providing the foundation for a successful increase in market share.

Liquidity and Capital Resources

Cash Flows and Sources of Liquidity

          Cash Flows from Operating Activities

          For the nine months ended March 31, 2011, net cash used by operating activities was approximately $1,276,000. Cash flows used by operations consisted of approximately $891,000 in net income, adjusted for non-cash expenses of approximately $504,000, offset by increases in accounts receivable, inventory, and prepaid expenses of $2,656,000, $194,000, and $150,000 respectively. In addition, trade payables and other accrued liabilities increased approximately $329,000.

          For the nine months ended March 31, 2010, net cash provided by operating activities was approximately $1,093,000. Cash flows provided by operations were primarily a result of net income adjusted for non-cash expenses of approximately $1,160,000, offset by increases in accounts receivable, inventories and prepaid expenses of approximately $554,000, $75,000 and $67,000 respectively. In addition, trade payables and other accrued liabilities increased by approximately $629,000.

          Management believes that the net cash used by operating activities during the nine months ended March 31, 2011 was attributable, in part, to the significant investment in sales and marketing designed to increase sales, combined with the normal lag in collecting accounts receivable from third-party payors, as demonstrated by the increase in accounts receivable of approximately $2,656,000 for the nine months ended March 31, 2011, as compared to approximately $554,000 for the nine months ended March 31, 2010.

          Cash Flows from Investing Activities

          For the nine months ended March 31, 2011 cash used in investing activities was approximately $964,000. During this period the Company paid approximately $649,000 in costs related to defending the SmartVest® trademark and approximately $315,000 for purchases of property and equipment.

          For the nine months ended March 31, 2010, cash used for investing activities was approximately $824,000. During this period the Company paid approximately $509,000 in costs related to defending the SmartVest® trademark, $125,000 for the purchase of the non-controlling interest in Electromed Financial, LLC, and approximately $190,000 for the purchase of equipment.

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          Cash Flows from Financing Activities

          For the nine months ended March 31, 2011, cash provided by financing activities was approximately $5,581,000, consisting of approximately $6,388,000 net proceeds during the nine month period from the issuance of common stock in our initial public offering (IPO) and $27,000 in proceeds from subscription notes receivable. This was offset by net payments on a revolving credit line of $500,000, principal payments on long-term debt of approximately $327,000 and payment of deferred financing fees of approximately $7,000.

          For the nine months ended March 31, 2010, cash used by financing activities was approximately $96,000, consisting of approximately $1,268,000 net borrowings on a revolving line of credit along with proceeds from long-term debt of approximately $2,520,000 and approximately $82,000 from the sale of common stock and receipts on subscription notes receivable, offset by payments on long-term debt of approximately $3,544,000, expenditures for IPO costs of approximately $329,000, payment of deferred financing fees of approximately $76,000, and payment of non-controlling interest distributions of approximately $18,000 in Electromed Financial, LLC.

Adequacy of Capital Resources

          We believe, based on our current operational performance, our available borrowings under our existing credit facility and available cash from the successful completion of our IPO are sufficient to meet our liquidity needs for, at a minimum, the next twelve months. We may need to incur additional indebtedness if we have an unforeseen need for additional capital equipment or if our operating performance does not generate adequate cash flow.

          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 nine months of fiscal 2011 and 2010, respectively, we spent approximately $315,000 and $190,000 on property and equipment. We currently expect to finance equipment purchases with borrowings under the credit facility and with available cash. In addition, we have incurred and capitalized approximately a total of $1,163,000 of legal defense costs associated with a trademark lawsuit, which was settled pursuant to a confidential settlement agreement on September 30, 2010. Accordingly, we anticipate future costs associated with intellectual property to be at significantly lower levels.

          We currently have a credit facility with U.S. Bank, National Association (“U.S. Bank”) that provides for a $3,500,000 revolving line of credit 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 2.75% (3.06% at March 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 is scheduled to expire on November 30, 2011, if not 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 March 31, 2011, we had approximately $1,268,000 outstanding on the operating line of credit and approximately $2,034,000 outstanding on the term loan debt for a total outstanding under the U.S. Bank credit facility of $3,302,000. As of March 31, 2011, we had net unused availability of $2,232,000 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.

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          The agreement governing the credit facility contains certain covenants that restrict our ability to, among other things, pay cash dividends, incur indebtedness or liens, change Chief Executive Officer or Chief Financial 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 cash flow coverage ratios. Our obligations under the U.S. Bank credit facility are secured by substantially all of our assets and are guaranteed by our wholly owned subsidiary, Electromed Financial, LLC.

          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, Felt 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.

Certain Information Concerning Off-Balance Sheet Arrangements

          We have no off-balance sheet arrangements.

Item 3. Quantitative and Qualitative Disclosure About Market Risk

          Not applicable to smaller reporting companies.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

          Our principal executive officer and principal financial officer evaluated the effectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e) or Rule 15d-15(e), as of the end of the period subject to this Report. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in our periodic and current reports that are filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the periods specified by the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer as appropriate to allow timely decisions regarding required disclosures.

Changes to Internal Control Over Financial Reporting

          There were no changes in our internal control over financial reporting that occurred during the first nine months of fiscal 2011 that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

          As previously disclosed in Part II, Item I of our Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2010, we reached a definitive settlement agreement on September 30, 2010, with respect to our litigation with Hill-Rom Services, Inc., ARI, Hill-Rom Company, Inc., and Hill-Rom Services Pte. Ltd. (collectively, “Hill-Rom”). The terms of the settlement are confidential. We have no plans to change our use of the SmartVest® marks.

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          In addition to the foregoing, we may be party to legal actions, proceedings, or claims in the ordinary course of business. Corresponding costs are accrued when it is more likely than not that we will incur a loss and the amount can be precisely or reasonably estimated. We are not aware of any undisclosed actual or threatened litigation that would have a material adverse effect on its financial condition or results of operations.

Item 1A. Risk Factors

          Not applicable to smaller reporting companies.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Unregistered Sales of Equity Securities

          On January 1, 2011, we issued 12,000 shares of common stock to an employee pursuant to a warrant exercise for cash consideration of $24,000. The transaction did not involve an underwriter. We believe the transaction was exempt from the registration requirements of the Securities Act of 1933, as amended, by virtue of Section 4(2) thereof, based on the limited number of offerees and the identity of the offeree as an executive officer of the Company, and Section 3(a)(9) thereof and Rule 701 promulgated thereunder, because the sale was made pursuant to a written compensatory benefit contract, and the offer of the securities commenced prior to the time the Company became subject to Exchange Act reporting obligations.

Use of Proceeds

          We completed our IPO of shares of common stock, $0.01 par value during the fiscal quarter ended September 30, 2010. The effective date of the registration statement relating to the IPO, filed on Form S-1 under the Securities Act of 1933 (File No. 333-166470), was August 12, 2010. A total of 1,700,000 shares of common stock were registered and sold in the IPO. In addition, we granted Feltl and Company, Inc. (“Feltl”), the underwriter of the IPO, warrants to purchase up to 170,000 additional shares of our common stock at a price of $4.80 per share and an over-allotment option to purchase 255,000 shares at $4.00 per share, less an underwriting discount of $0.30 per share. On September 28, 2010, Feltl exercised its overallotment option to acquire 200,000 additional shares of common stock. As a result of this exercise, Feltl also received warrants to purchase up to 20,000 additional shares of our common stock.

          The aggregate offering price of the securities sold in the IPO, including the shares sold to Feltl upon exercise of its overallotment option, was equal to $7,600,000. The aggregate underwriting discount for shares sold in the offering and pursuant to the overallotment option was equal to $570,000, none of which was or will be paid to our affiliates. We incurred approximately $1,084,000 of offering costs in connection with the IPO. We received net proceeds from the IPO of approximately $5,946,000. We have used $500,000 to reduce the amount of existing indebtedness under our credit facility with U.S. Bank, National Association. We have used and intend to use the remainder of the proceeds from the offering, if necessary, to add employees to our Reimbursement, Patient Services and Administrative Departments; add members to our sales force and further develop its focus on institutional sales; continue its 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.

Item 3. Defaults Upon Senior Securities

          None.

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Item 4. (Removed and Reserved)

Item 5. Other Information

          None.

Item 6. Exhibits

          See attached exhibit index.

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SIGNATURES

          Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	ELECTROMED, INC.
Date: May 13, 2011	/s/ Robert D. Hansen
	Robert D. Hansen, Chief Executive Officer
	(Principal Executive Officer)
	/s/ Terry M. Belford
	Terry M. Belford, Chief Financial Officer
	(Principal Financial Officer)

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EXHIBIT INDEX
ELECTROMED, INC.
FORM 10-Q

Exhibit Number		Description
10.1		Summary of Director Compensation, as of February 11, 2011
31.1		Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1		Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2		Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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