General
You should read the following discussion and analysis in conjunction with the
unaudited Condensed Financial Statements and Notes thereto appearing elsewhere
in this report.
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This Report on Form 10-Q, including Management's Discussion and Analysis of
Financial Condition and Results of Operations, contains forward-looking
statements. When used in this report, the words "may," "will," "expect,"
"anticipate," "continue," "estimate," "project," "intend," "hope," "believe" and
similar expressions, variations of these words or the negative of those words,
and, any statement regarding possible or assumed future results of operations of
the Company's business, the markets for its products, anticipated expenditures,
regulatory developments or competition, or other statements regarding matters
that are not historical facts, are intended to identify forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934 regarding events, conditions
and financial trends including, without limitation, business conditions in the
skin and wound care market and the general economy, competitive factors, changes
in product mix, production delays, product recalls, manufacturing capabilities,
the loss of any significant customers or suppliers, general supply chain delays,
the cost of rising inflation, cyber security breaches, natural disaster impacts,
the impact of the COVID-19 pandemic on the Company's sales, operations and
supply chain and other risks or uncertainties detailed in other of the Company's
Securities and Exchange Commission filings. Such statements are based on
management's current expectations and are subject to risks, uncertainties and
assumptions. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, the Company's actual plan of
operations, business strategy, operating results and financial position could
differ materially from those expressed in, or implied by, such forward-looking
statements.
Recent Developments
In fiscal 2023 to date, management has expanded on the services and options the
Company provides for its customers. We have introduced a new Rolled Gauze form
of our Amerx Branded Collagen Wound Care Kits. We also introduced a gel form of
our Collagen products.
Impact of COVID-19 on Our Business
The financial effects of the COVID-19 pandemic started showing their impact on
our Company in March of 2020. Due to the timing of these events, the full effect
of COVID-19 on our business cannot yet be fully quantified. We have felt the
effects of the COVID-19 pandemic in our operations, as management continues to
dedicate time and effort researching, discussing and implementing policies and
procedures necessary to navigate through the ever changing landscape the
COVID-19 pandemic has and continues to provide. As an essential business,
management was tasked with remaining open, while keeping our employees safe, and
providing our customers, who were still able to actively provide healthcare
services, with the products they need.
The most severe effects of the pandemic on our business were seen in April 2020;
however, this could change with news of expected spikes and potential shut down
in the future. This was a direct result of the inability for customers to have
elective surgery. Once elective surgeries were permitted again we have seen a
steady increase in volume. We continue to monitor operations, and are still
implementing procedures to keep all our employees as safe as possible.
Currently, the Company is restricted in its marketing efforts as Tradeshows for
the most part are typically well attended in their traditional in-person form.
Most available tradeshows have chosen the virtual route, which has not proven
successful from a vendor sales relationship perspective. Operationally, the
pandemic has made it increasingly difficult to hire new or replacement personnel
to support the Company's growth. It has also caused wages to increase
dramatically.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's condensed consolidated financial statements have been prepared in
accordance with standards of the Public Company Accounting Oversight Board
(United States), which require the Company to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses, and
the related disclosures. A summary of those significant accounting policies can
be found in the Notes to the Consolidated Financial Statements included in the
Company's annual report on form 10-K, for the year ended June 30, 2022, which
was filed with the Securities and Exchange Commission on September 28, 2022. The
estimates used by management are based upon the Company's historical experiences
combined with management's understanding of current facts and circumstances.
Certain of the Company's accounting policies are considered critical as they are
both important to the portrayal of the Company's financial condition and the
results of its operations and require significant or complex judgments on the
part of management. We believe that the following critical accounting policies
affect the more significant judgments and estimates used in the preparation of
our consolidated financial statements.
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Accounts Receivable Allowance
Accounts receivable allowance reflects a reserve that reduces our customer
accounts and receivable to the net amount estimated to be collectible. The
valuation of accounts receivable is based upon the credit-worthiness of
customers and third-party payers as well as historical collection experience.
Allowances for doubtful accounts are recorded as a selling, general and
administrative expense for estimated amounts expected to be uncollectible from
third-party payers and customers. The Company bases its estimates on its
historical collection experience, current trends, credit policy and on the
analysis of accounts by aging category. At December 31, 2022, and June 30, 2022,
our allowance for doubtful accounts totaled $12,755 and $13,569, respectively.
Advertising and Marketing
The Company uses several forms of advertising, including sponsorships to
agencies who represent the professionals in their respective fields. The Company
expenses these sponsorships over the term of the advertising arrangements on a
straight line basis. Other forms of advertising used by the Company include
professional journal advertisements, distributor catalogs, website and mailing
campaigns. These forms of advertising are expensed when incurred.
Deferred Income Taxes
Deferred income taxes are recognized for the expected tax consequences in future
years for differences between the tax bases of assets and liabilities and their
financial reporting amounts, based upon enacted tax laws and statutory tax rates
applicable to the periods in which the differences are expected to affect
taxable income. The Company accounts for income taxes under Topic 740 - Income
Tax in the Accounting Standards Codification. A valuation allowance is used to
reduce deferred tax assets to the net amount expected to be recovered in future
periods. The estimates for deferred tax assets and the corresponding valuation
allowance require us to exercise complex judgments. We periodically review and
adjust those estimates based upon the most current information available. The
Company had a valuation allowance of $0 as of December 31, 2022 and $31,960 as
of June 30, 2022, respectively. Because the recoverability of deferred tax
assets is directly dependent upon future operating results, actual
recoverability of deferred tax assets may differ materially from our estimates.
Revenue Recognition
The Company recognizes revenue in accordance with the Financial Accounting
Standards Board's (FASB) release of Accounting Standards Update (ASU) 2014-09,
Revenue from Contracts with Customers (Topic 606) which requires that five basic
criteria must be met before revenue can be recognized: (1) identify the contract
with a customer; (2) identify the performance obligations in the contract; (3)
determine the transaction price; (4) allocate the transaction price to the
performance obligations in the contract, and (5) recognize revenue when (or as)
the entity satisfies a performance obligation.
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Stock Based Compensation
Stock based compensation is accounted for in accordance with Topic 718 -
Compensation - Stock Compensation in the Accounting Standards Codification. All
share-based payments to employees, including grants of employee stock options,
are to be recognized in the statement of operations based upon their fair
values. Topic 718 rescinds the acceptance of pro forma disclosure.
FINANCIAL CONDITION
As of December 31, 2022 the Company's principal sources of liquid assets
included cash of $604,752, inventories of $854,404, and net accounts receivable
of $585,644. The Company also has $281,419 in Certificate of Deposits. The
Company had net working capital of $1,791,071, and long-term lease of $406,584,
at December 31, 2022.
During the six months ended December 31, 2022 cash decreased from $760,396 as of
June 30, 2022, to $604,752. Operating activities used cash of $51,552 during the
period. Investing and Financing activities used cash of $23,761 and $80,331,
respectively during the period.
The Company reflected a net non-current deferred tax asset of $154,853, at
December 31, 2022. Because the recoverability of deferred tax assets is directly
dependent upon future operating results, actual recoverability of deferred tax
assets may differ materially from our estimates.
RESULTS OF OPERATIONS
Comparison of the three and six months ended December 31, 2022 and 2021.
Net sales during the quarter ended December 31, 2022, were $1,183,937 as
compared to the previous year's quarter net sales of $1,330,636, a decrease of
$146,699, or approximately 11%. We believe the decrease in sales was driven by
many factors including fluctuations in sales cycles related to international
sales, economic pressure on consumers and customers staffing challenges
throttling utilization of AMERX products. Net sales during the six months ended
December 31, 2022, were $2,359,640 as compared to the previous year's period net
sales of $2,520,613, a decrease of $160,973, or approximately 6%. We believe the
decrease in sales was driven by many factors including fluctuations in sales
cycles related to international sales, economic pressure on consumers and
customers staffing challenges throttling utilization of AMERX products.
Gross profit during the quarter ended December 31, 2022, was $890,482 as
compared to $918,722 during the quarter ended December 31, 2021, a decrease of
$28,240 or 3%. As a percentage of net sales, gross profit was approximately 75%
in the quarter ended December 31, 2022, and approximately 69% in the
corresponding quarter in 2021. We believe the increase in Gross Profit comes
from a shift in sales channels to more sales coming from our highest margin
channel of retail sales. Gross profit during the six months ended December 31,
2022, was $1,771,281 as compared to $1,780,446 during the six months ended
December 31, 2021, a decrease of $9,165 or 1%. As a percentage of net sales,
gross profit was approximately 75% in the six months ended December 31, 2022,
and approximately 71% in the corresponding quarter in 2021. We believe the
increase in Gross Profit comes from a shift in sales channels to more sales
coming from our highest margin channel of retail sales.
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Operating expenses during the quarter ended December 31, 2022 were $922,027,
consisting of $447,633 in salaries and benefits and $474,394 in selling, general
and administrative expenses. This compares to operating expenses during the
quarter ended December 31, 2021 of $972,632, consisting of $497,261 in salaries
and benefits; and $475,371 in selling, general and administrative expenses.
Expenses for the quarter ended December 31, 2022, decreased by $50,605 or
approximately 5% compared to the corresponding quarter in 2021. Salaries and
Benefits decreased as a result of shifts in personnel needs . Operating expenses
were consistent in comparing the two periods. Operating expenses during the six
months ended December 31, 2022 were $1,814,279, consisting of $915,790 in
salaries and benefits and $898,489 in selling, general and administrative
expenses. This compares to operating expenses during the six months ended
December 31, 2021 of $1,768,472, consisting of $936,721 in salaries and
benefits; and $831,751 in selling, general and administrative expenses. Expenses
for the six months ended December 31, 2022, increased by $45,808 or
approximately 3% compared to the corresponding period in 2021. Salaries and
Benefits decreased as a result of employee turnover. Operating expenses
increased primarily due to increases in marketing expenses and expenses
associated with tradeshows, as some shows have begun to open back up, and
channel fees from new retail markets.
Operating loss decreased by $22,365 to an operating loss of $31,545 for the
quarter ended December 31, 2022, as compared to an operating loss of $53,910 in
the comparable quarter of the prior year. The decrease in net loss for the three
month period, of the comparable quarter of the prior year before income taxes
was primarily attributable to the decreases in salaries and benefits. Operating
profit decreased by $54,972 to an operating loss of $42,998 for the six months
ended December 31, 2022, as compared to an operating profit of $11,974 in the
comparable period of the prior year. The decrease in net income for the six
month period, of the comparable period of the prior year before income taxes was
primarily attributable to the increases in marketing expenses, including Trade
Shows and new Retail channel fees.
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