ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
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.
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," “plan,”"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, 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 2018, the Company added a new sales solution for physicians designed to reduce inventory costs while expanding access to AMERX’s full line of products. AMERX expanded the size of the warehouse facilities to address current demands and allow for future growth as the Company continues to focus efforts towards product line expansion.
In fiscal 2018, AMERX’s new product, Extremit-Ease Compression Garment, was listed among the Top 10 Innovations Award presented by HMP Communications. Extremit-Ease continues to gain momentum in the wound care, edema and lymphedema markets and expansion of the line is planned for Fiscal 2019.
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, 2018, which was filed with the Securities and Exchange Commission on September 27, 2018. 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 theyare 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.
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 March 31, 2019, and June 30, 2018, our allowance for doubtful accounts totaled $6,719 and $2,804, 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 $144,348 and $133,867, respectively, as of March 31, 2019 and June 30, 2018. 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.
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 March 31, 2019 the Company's principal sources of liquid assets included cash of $253,434, inventories of $432,156, and net accounts receivable of $415,532. The Company also has $153,874 in Certificate of Deposits. The Company had net working capital of $1,235,791, and no long-term debt at March 31, 2019.
During the nine months ended March 31, 2019 cash decreased from $270,313 as of June 30, 2018, to $253,434. Operating activities used cash of $5,263 during the period. The change is primarily the result of an increase in prepaid expenses.
The Company reflected a net non-current deferred tax asset of $227,125, at March 31, 2019. 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 nine months ended March 31, 2019 and 2018.
Net Sales during the quarter ended March 31, 2019, were $1,070,830 as compared to the previous year's quarter net sales of $1,107,018, a decrease of $36,188, or approximately 3%. We believe decreased sales for the three months ended March 31, 2019, continued as a result of purchasing trends effected by one of our major distributor’s merger into a larger company. Net Sales during the nine months ended March 31, 2019, were $3,075,918 as compared to the previous year's nine month period net sales of $2,955,868, an increase of $120,050, or approximately 4%. We believe increased sales were driven by expansion of our distribution network partners, expansion into new markets and new customer sales of both existing and new products.
Gross profit during the quarter ended March 31, 2019, was $782,146 as compared to $809,129 during the quarter ended March 31, 2018, a decrease of $26,983 or 3%. As a percentage of net sales, gross profit was approximately 73% in the quarter ended March 31, 2019, and approximately 73% in the corresponding quarter in 2018. Gross profit during the nine months ended March 31, 2019, was $2,243,042 as compared to $2,162,246 during the nine months ended March 31, 2018, an increase of $80,796 or 4%. As a percentage of net sales, gross profit was approximately 73% in the six months ended March 31, 2019, and approximately 73% in the corresponding period in 2018.
Operating expenses during the quarter ended March 31, 2019 were $694,953, consisting of $379,399 in salaries and benefits and $315,554 in selling, general and administrative expenses. This compares to operating expenses during the quarter ended March 31, 2018 of $726,450, consisting of $390,860 in salaries and benefits; and $335,590 in selling, general and administrative expenses. Expenses for the quarter ended March 31, 2019, decreased by $31,497 or approximately 4% compared to the corresponding quarter in 2018. The expense decrease came mainly from decreased marketing expenses. Operating expenses during the nine months ended March 31, 2019 were $2,107,303, consisting of $1,112,133 in salaries and benefits and $995,170 in selling, general and administrative expenses. This compares to operating expenses during the nine months ended March 31, 2018 of $2,043,118, consisting of $1,119,944 in salaries and benefits; and $923,174 in selling, general and administrative expenses. Expenses for the nine months ended March 31, 2019, increased by $64,185 or approximately 3% compared to the corresponding period in 2018. The expense increase came mainly from professional fees.
Operating profit increased by $4,514 to an operating income of $87,193 for the quarter ended March 31, 2019, as compared to an operating profit of $82,679 in the comparable quarter of the prior year. We believe the increase in net income for the three month period, of the comparable quarter of the prior year before income taxes was primarily attributable to the decrease in overall expenses. Operating profit increased by $16,611 to an operating profit of $135,739 for the nine months ended March 31, 2019, as compared to an operating profit of $119,128 in the comparable period of the prior year. We believe the increase in net income for the nine month period, of the comparable period of the prior year before income taxes was primarily attributable to the increase in Net Sales.