Advertising and marketing expenses, including tradeshows and event sponsorships expenses were approximately $263,000 in the six months ended December 31, 2013, representing a decrease of approximately $39,000, or 12.9%, compared to approximately $302,000 in the same period in the prior year. This decrease was primarily due to the elimination of industry training that was sponsored by Electromed as well as targeting more cost-effective advertising.
Professional fees for the six months ended December 31, 2013 were approximately $445,000, a decrease of approximately $182,000 compared to approximately $627,000 in the same period in the prior year. These fees are for services related to legal costs, reporting requirements, expenses related to information technology security and backup, one-time consulting expenses, and expenses for printing and other shareowner services. The decrease in fees over the same period last year was primarily due to one-time consulting fees related to upgrading our information technology infrastructure that occurred in the prior year, as well as a shareholder’s proposal at our 2013 Annual Meeting of Shareholders and the resulting litigation, which was concluded by settlement of the parties during the first quarter of fiscal year 2014. We have insurance for professional fees and expenses incurred in connection with the litigation and are working with our insurance carrier on coverage matters. While we believe that a majority of our fees and expenses incurred as a result of the litigation will be covered by insurance, there can be no guarantee of any specific coverage amount.
Interest expense was approximately $46,000 for the six months ended December 31, 2013, representing a decrease of approximately $32,000, or 41.0%, compared to approximately $78,000 for the same period the prior year. The decrease resulted from a decrease in average debt outstanding.
Income tax benefit is estimated at approximately $346,000 for the six months ended December 31, 2013 compared to income tax benefit of approximately $272,000 in the same period in the prior year. The effective tax rates for the six months ended December 31, 2013 and December 31, 2012 were 37.6% and 36.1%, respectively. On a quarterly basis, we estimate what the effective tax rate will be for the full fiscal year and record 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. We record net deferred tax assets to the extent these assets will more likely than not be realized. Although realization is not assured, we believe it is more likely than not that all of the deferred tax asset will be realized. In the event that we continue to incur losses in the near future, or if we were to determine that we would be not able to realize our deferred income tax assets, we would make an adjustment to a valuation allowance, which would reduce the benefit for income taxes.
Net loss for the six months ended December 31, 2013 was approximately $575,000 compared to net loss of approximately $482,000 for the same period the prior year. The increase in net loss primarily resulted from a decrease in sales volume partially offset by decreases in expenses. The net loss was primarily the result of a decrease in domestic home care revenue caused by lower average selling price from continued downward pricing pressure and a decrease in referral counts, year over year. There also continues to be added administrative procedures implemented by third party payers in the insurance claims process which has lengthened the approval process compared to the prior year. The net loss was also impacted by increased leverage of manufacturing costs which increased our gross margin percentage, as well as a decrease in consulting fees and legal expenses primarily due to the settlement of litigation during the first quarter of fiscal year 2014 that resulted from a shareholder’s proposal at our 2013 Annual Meeting of Shareholders.
Table of Contents
Our focus remains on controlling costs more aggressively in an environment of downward reimbursement pressure while implementing key growth strategies. These include marketing and selling our recently FDA-cleared SQL to the domestic homecare market, developing more international distributors and strengthening our focus on the institutional market by adding a senior sales position to increase and better leverage contracts.
Liquidity and Capital Resources
Cash Flows and Sources of Liquidity
Cash Flows from Operating Activities
For the six months ended December 31, 2013, net cash provided by operating activities was approximately $1,132,000. Cash flows provided by operations consisted of approximately $575,000 in net loss, adjusted for non-cash expenses of approximately $424,000, offset by decreases in accounts receivable of $1,973,000 and increases in inventories and prepaid expenses and other assets of $887,000 and $211,000, respectively. In addition, accounts payable and accrued liabilities increased approximately $408,000.
For the six months ended December 31, 2012, net cash provided by operating activities was approximately $1,202,000. Cash flows provided by operations consisted of approximately $482,000 in net loss, adjusted for non-cash expenses of approximately $413,000, offset by decreases in accounts receivable and inventories of $1,126,000 and $493,000, respectively, and increases in prepaid expenses and other assets of $272,000. In addition, accounts payable and accrued liabilities decreased approximately $75,000.
Cash Flows from Investing Activities
For the six months ended December 31, 2013, cash used in investing activities was approximately $293,000. During this period we paid approximately $291,000 for purchases of property and equipment. We also paid approximately $2,000 for patent related costs.
For the six months ended December 31, 2012, cash used in investing activities was approximately $510,000. During this period we paid approximately $482,000 for purchases of property and equipment. We also paid approximately $28,000 for patent related costs.
Cash Flows from Financing Activities
For the six months ended December 31, 2013, cash used in financing activities was approximately $105,000, which consisted of principal payments on long-term debt of $70,000, and payments of deferred financing fees of $35,000.
For the six months ended December 31, 2012, cash used in financing activities was approximately $1,389,000, which consisted of principal payments on long-term debt of $221,000, and payments on our revolving line of credit of $1,168,000.
- 16 -
Table of Contents
Adequacy of Capital Resources
Based on our current operational performance, we believe our working capital of approximately $10 million and available borrowings under the existing credit facility will provide adequate liquidity for the next year. Our current line of credit expires on December 18, 2014. Based on our ability to service our debt we believe that we will be able to renew our line of credit prior to December 18, 2014 or obtain alternative financing. However, we cannot guarantee that we will be able to procure additional financing upon favorable terms, if at all. Our credit facility contains certain financial and nonfinancial covenants and restricts us from incurring certain additional indebtedness and the payment of dividends. The agreement also contains financial covenants which require maintaining a minimum tangible net worth.
Any failure to comply with these covenants in the future may result in an event of default, which if not cured or waived, could result in the lender accelerating the maturity of our indebtedness or preventing access to additional funds under the credit facility, or requiring prepayment of outstanding indebtedness under the credit facility, or the inability to renew the line of credit. If the maturity of the indebtedness is accelerated or the line of credit is not renewed, sufficient cash resources to satisfy the debt obligations may not be available and we may not be able to continue operations as planned. The indebtedness under the credit agreement is secured by a security interest in substantially all of our tangible and intangible assets. If we are unable to repay such indebtedness, the bank could foreclose on these assets.
On December 18, 2013, we entered into a new credit facility with Venture Bank, which replaced our facility with U.S. Bank. The new credit facility provides for a $2,500,000 revolving line of credit. There was no outstanding principal balance on the line of credit as of December 31, 2013. Interest on the line of credit accrues at the prime rate plus 1.50%, with a floor of 4.50% (4.75% at December 31, 2013) and is payable monthly. The amount eligible for borrowing on the line of credit is limited to the lesser of $2,500,000 or 57.75% of eligible accounts receivable and the line of credit expires on December 18, 2014, if not renewed. The line of credit is secured by a security interest in substantially all of the tangible and intangible assets of the Company.
As a part of the new credit facility, we also refinanced our outstanding U.S. Bank term loan which had an outstanding principal balance of approximately $1,341,000 and bore interest at 5.79%. It was repaid in full and replaced by a $1,300,000 term loan from Venture Bank that bears interest at 5.00%, with monthly payments of principal and interest of approximately $8,600 and a final payment of principal and interest of approximately $1,095,000 due on the maturity date of December 18, 2018. The term loan is secured by a mortgage on the our real property.
Our new credit facility contains certain financial and nonfinancial covenants which include requiring the us to maintain a minimum tangible net worth of not less than $12,000,000 and restricting our ability to incur certain additional indebtedness or pay dividends. As a result of paying off our outstanding loan and terminating the credit facility with U.S. Bank, we incurred approximately $3,000 in prepayment penalties. As of December 31, 2013, we had net unused availability of $2,500,000 under the line of credit.
For the first six months of fiscal years 2013 and 2012, we spent approximately $291,000 and $482,000 on property and equipment, respectively. We currently expect to finance equipment purchases with cash flows from operations or borrowings under our credit facility. We may need to incur additional debt if we have an unforeseen need for additional capital equipment or if our operating performance does not generate adequate cash flows.
Certain Information Concerning Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Item 3. Quantitativeand Qualitative Disclosure About Market Risk
As a smaller reporting company, we are not required to provide disclosure pursuant to this item.
- 17 -
Table of Contents
Item 4. Controlsand 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 Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”), 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.
Changes to Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the three months ended December 31, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Occasionally, we may be party to legal actions, proceedings, or claims in the ordinary course of business, including claims based on assertions of patent and trademark infringement. Corresponding costs are accrued when it is probable that loss will be incurred 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 our financial condition or results of operations.
Item 1A.Risk Factors
As a smaller reporting company, we are not required to provide disclosure pursuant to this item.
Item 2. UnregisteredSales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
Item 5. Other Information
None.
Item 6. Exhibits
See attached exhibit index.
- 18 -
Table of Contents
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: February 11, 2014 | /s/ Kathleen S. Skarvan |
| Kathleen S. Skarvan, Chief Executive Officer |
| (Principal Executive Officer) |
| |
| /s/ Jeremy T. Brock |
| Jeremy T. Brock, Chief Financial Officer |
| (Principal Financial Officer and Principal Accounting Officer) |
- 19 -
Table of Contents
EXHIBITINDEX
ELECTROMED, INC.
FORM 10-Q
| | |
Exhibit | | |
Number | | Description |
| | |
10.1 | | Business Loan Agreement (Asset Based) between the Company and Venture Bank, dated December 18, 2013 (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on December 20, 2013). |
| | |
10.2 | | Rider to Business Loan Agreement (Asset Based) and Related Documents between the Company and Venture Bank, dated December 18, 2013 (incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on December 20, 2013). |
| | |
10.3 | | Promissory Note from the Company to Venture Bank, dated December 18, 2013 (incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on December 20, 2013). |
| | |
10.4 | | Commercial Security Agreement between the Company and Venture Bank, dated December 18, 2013 (incorporated by reference to Exhibit 10.4 of the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on December 20, 2013). |
| | |
10.5 | | Business Loan Agreement between the Company and Venture Bank, dated December 18, 2013 (incorporated by reference to Exhibit 10.5 of the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on December 20, 2013). |
| | |
10.6 | | Rider to Business Loan Agreement and Related Documents between the Company and Venture Bank, dated December 18, 2013 (incorporated by reference to Exhibit 10.6 of the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on December 20, 2013). |
| | |
10.7 | | Promissory Note from the Company to Venture Bank, dated December 18, 2013 (incorporated by reference to Exhibit 10.7 of the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on December 20, 2013). |
| | |
10.8 | | Mortgage between the Company and Venture Bank, dated December 18, 2013 (incorporated by reference to Exhibit 10.8 of the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on December 20, 2013). |
| | |
10.9 | | Assignment of Rents between the Company and Venture Bank, dated December 18, 2013 (incorporated by reference to Exhibit 10.9 of the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on December 20, 2013). |
| | |
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 |
| | |
101 | | Financial statements from the quarterly report on Form 10-Q of the Company for the quarter ended December 31, 2013, formatted in XBRL: (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Income, (iii) the Condensed Consolidated Statements of Cash Flows, and (iv) the Notes to Condensed Consolidated Financial Statements. |
- 20 -
