Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of financial statements requires managers to make estimates and disclosures on the date of the financial statements. On an on-going basis, we evaluate our estimates including, but not limited to, those related to revenue recognition, inventory valuation and property and equipment. We use authoritative pronouncements, historical experience and other assumptions as the basis for making judgments. Actual results could differ from those estimates. We believe that the following critical accounting policies affect our more significant judgments and estimates in the preparation of our financial statements.

Revenue Recognition. Revenue is recognized once our mobile rental and technicians services are performed and billable. We are required to make judgments based on historical experience and future expectations, as to the realizability of goods and services billed to our customers. These judgments are required to assess the propriety of the recognition of revenue based on Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition,” and related guidance. We make such assessments based on the following factors: (a) customer-specific information, and (b) historical experience for issues not yet identified.

Inventory Valuation. We are required to make judgments based on historical experience and future expectations as to the realizability of our inventory. We make these assessments based on the following factors: (a) existing orders and usage, (b) age of the inventory, and (c) historical experience.

 

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Property and Equipment. We are required to make judgments based on historical experience and future expectations as to the realizability of our property and equipment. We made these assessments based on the following factors: (a) the estimated useful lives of such assets, (b) technological changes in our industry, and (c) the changing needs of our customers.

Results of Operations

The following table sets forth certain selected unaudited condensed consolidated statements of income data for the periods indicated in dollars and as a percentage of total revenues. The following discussions relate to our results of operations for the periods noted which include the results of operations for the Services Division acquired on August 8, 2008, as discussed herein, for the periods from January 1, 2009 to September 30, 2009 and from August 9, 2008 to September 30, 2008. The results of operations for the periods noted are not necessarily indicative of the results expected for any other interim period or any future fiscal year. In addition, we note that the period-to-period comparison may not be indicative of future performance.

		Three Months Ended																Nine Months Ended
		September 30,																September 30,
		2009				%				2008				%				2009				%				2008				%
Revenue		$	7,981,464				100	%		$	6,394,974				100	%		$	23,105,272				100	%		$	15,800,812				100	%
Cost of goods sold			4,802,495				60	%			3,751,747				59	%			13,839,056				60	%			9,067,764				57	%
Gross profit			3,178,969				40	%			2,643,227				41	%			9,266,216				40	%			6,733,048				43	%
Selling, general, and administrative expenses			1,490,174				19	%			1,498,459				23	%			4,442,338				19	%			3,753,553				24	%
Income from operations			1,688,795				21	%			1,144,768				18	%			4,823,878				21	%			2,979,495				19	%
Other income (expense)			(80,116	)			-1	%			(70,502	)			-1	%			(223,295	)			-1	%			(143,577	)			-1	%
Income before provision for income taxes and minority interest			1,608,679				20	%			1,074,266				17	%			4,600,583				20	%			2,835,918				18	%
Provision for income taxes			(553,000	)			-7	%			(77,972	)			-1	%			(1,604,634	)			-7	%			(213,472	)			-1	%
Net income before minority interest			1,055,679				13	%			996,294				16	%			2,995,949				13	%			2,622,446				17	%
Minority interest in income of consolidated limited liability companies			(225,023	)			-3	%			(254,484	)			-4	%			(597,030	)			-3	%			(737,368	)			-5	%
Net income		$	830,656				10	%		$	741,810				12	%		$	2,398,919				10	%		$	1,885,078				12	%

 

Comparison of the Three Months Ended September 30, 2009 to September 30, 2008

The Company generated revenues of $7,981,464 in 2009 compared to $6,394,974 in 2008. The increase in revenues in 2009 of $1,586,490, or 25% is primarily related to the inclusion of revenues from the Services Division, which we acquired in August 2008 and from an increase in revenues from our other surgical procedures.

Cost of goods sold was $4,802,495 in 2009 or 60% of revenues, compared to $3,751,747 or 59% of revenues for 2008. Costs of goods sold primarily consist of payroll costs and related expenses for technicians, cost of disposables consumed, depreciation and amortization related to equipment, insurance costs and other operating costs incurred in rendering mobile medical equipment and technician services. The overall increase in cost of goods sold of $1,050,748 or 28% for 2009 is due to the inclusion of costs for the Services Division, which we acquired in August 2008 as well as increases in disposable costs, payroll and related costs, depreciation and amortization expenses and to increases in equipment maintenance costs. Disposable costs increased due to increased sales volume, payroll and payroll related costs increased due to an increase in the number of employees, depreciation and amortization expense increased due to equipment purchases in 2009 and 2008. The net change in other cost categories included in cost of goods sold remained relatively consistent in 2009 compared to 2008.

Gross profit from operations was $3,178,969 in 2009, compared to $2,643,227 in 2008. Gross profit as a percentage of revenues was 40% for 2009 compared to 41% for 2008. Gross margins after disposable costs will vary depending on the type of surgical procedure performed due to the fact that certain procedures require more expensive disposable items. In addition, gross margin rates will vary from period to period depending upon other factors including pricing considerations, and equipment and technician utilization rates. The gross margin for 2009 is not necessarily indicative of the margins that may be realized in future periods.

 

 

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Selling, general, and administrative expenses were $1,490,174 or 19% of revenues for 2009 and $1,498,459 or 23% of revenues for 2008. Such costs include, among others, payroll and related expenses, insurance costs and occupancy costs. The decrease in selling and general and administrative expenses of $8,285 is related to the fact that we recognized compensation expense of $93,937 in the prior year quarter in connection with our private placement of common stock and certain other acquisition related expenses, while no such expense was recognized in 2009. The decrease in such expenses in 2009 compared to 2008 offset increases in performance-based incentive compensation and to increases in sales management and other payroll related expenses for 2009 compared to 2008

Other income (expense) was $(80,116) in 2009 compared to $(70,502) in 2008. Other income (expense) includes interest income and expense, gains and losses on disposal of property and equipment, and other miscellaneous income and expense items. The net increase in other expense of $9,614 is primarily related to an increase in net interest expense of $5,892; offset by a net decease in gain on the disposal of property and equipment and other income of $3,722. The net increase in interest expense relates to new equipment leases entered into during 2009 and 2008, including the equipment financing lease incurred in connection with the acquisition of the Services Division in August 2008. The net decrease in gain on disposal of property and equipment and other income is related to a decrease in such miscellaneous income items in 2009 compared to 2008.

The minority interest (ownership interests held by third-parties) in net income of limited liability companies was $225,023 in 2009 compared to $254,484 in 2008. In 2009 and 2008, we held ownership interests in thirteen and eleven entities, respectively. During the quarter ended September 30, 2009 three LLCs ceased operations and we began the wind-down and dissolution process. The decrease in minority interest in earnings is related to the winding-down of operations for such LLCs. As of September 30, 2009 and 2008, in accordance with guidance issued by the FASB, the Company accounted for its equity investments in entities in which it holds a minority interest under the full consolidation method.

Net income was $830,656 in 2009 compared to $741,810 in 2008. Provision for income taxes was $553,000 in 2009 as compared to $77,972 in 2008. During the fourth quarter of 2008 we recognized deferred tax benefits of $1,331,512 related to operating losses from prior years. We did not reverse the valuation allowance until it was “more likely than not” that the tax asset would be realized. The provision for income taxes of $553,000 as of September 30, 2009 is comprised of state taxes, federal Alternative Minimum Taxes (AMT), and the utilization of deferred income tax assets. At December 31, 2008, the Company had net operating loss carryforwards of approximately $7.6 million for federal tax purposes. Basic net income per share for 2009 and 2008 was $0.12 and $0.12, respectively, while fully diluted net income per share for 2009 and 2008 was $0.12 and $0.11, respectively. Basic and fully diluted weighted average shares outstanding for 2009 were 6,745,663 and 7,089,598, respectively, and 6,183,074 and 6,606,416 for 2008, respectively.

 

Comparison of the Nine Months Ended September 30, 2009 to September 30, 2008

The Company generated revenues of $23,105,272 in 2009 compared to $15,800,812 in 2008. The increase in revenues in 2009 of $7,304,460, or 46% is primarily related to the inclusion of revenues from the Services Division, which we acquired in August 2008 and from an increase in revenues from our other surgical procedures.

Cost of goods sold was $13,839,056 in 2009 or 60% of revenues, compared to $9,067,764 or 57% of revenues for 2008. Costs of goods sold primarily consist of payroll costs and related expenses for technicians, cost of disposables consumed, depreciation and amortization related to equipment, insurance costs and other operating costs incurred in rendering mobile medical equipment and technician services. The overall increase in cost of goods sold of $4,771,292 or 53% for 2009 is due to the inclusion of costs for the Services Division, which we acquired in August 2008, as well as increases in disposable costs, payroll and related costs, depreciation and amortization expenses and to increases in equipment maintenance costs. Disposable costs increased due to increased sales volume, payroll and payroll related costs increased due to an increase in the number of employees, depreciation and amortization expense increased due to equipment purchases in 2009 and 2008. The net change in other cost categories included in cost of goods sold remained relatively consistent in 2009 compared to 2008.

 

Gross profit from operations was $9,266,216 in 2009 compared to $6,733,048 in 2008. Gross profit as a percentage of revenues was 40% in 2009 compared to 43% in 2008. Gross margins after disposable costs will vary depending on the type of surgical procedure performed due to the fact that certain procedures require more expensive disposable items. In addition, gross margin rates will vary from period to period depending upon other factors including pricing considerations, and equipment and technician utilization rates. The gross margin for 2009 is not necessarily indicative of the margins that may be realized in future periods.

 

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Selling, general, and administrative expenses were $4,442,338 or 19% of revenues for 2009 and $3,753,553 or 24% of revenues for 2008. Such costs include, among others, payroll and related expenses, insurance costs and occupancy costs. The increase in selling, general and administrative expenses of $688,785 in 2009 is primarily related to increases in performance-based incentive compensation and to increases in sales management and other payroll related expenses.

Other income (expense) was $(223,295) in 2009 compared to $(143,577) in 2008. Other income (expense) includes interest income and expense, gains and losses on disposal of property and equipment, and other miscellaneous income and expense items. The net increase in other expense of $79,718 is primarily related to an increase in net interest expense of $55,745; offset by a net decrease in gain on disposal of property and equipment and other income of $23,973. The net increase in interest expense relates to new equipment leases entered into during 2009 and 2008, including the equipment financing lease incurred in connection with the acquisition of the Services Division in August 2008. The net decrease in gain on disposal of property and equipment and other income is related to a decrease in such miscellaneous income items in 2009 compared to 2008.

The minority interest (ownership interests held by third-parties) in net income of limited liability companies was $597,030 in 2009 compared to $737,368 in 2008. In 2009 and 2008, we held ownership interests in thirteen and eleven entities, respectively. The decrease in the minority interest in income for 2009 is related to the fact that three LLCs ceased operations during the third quarter of 2009 and began the wind-down and dissolution process.  In addition, the LLCs generated lower earnings during the nine months ended September 30, 2009 compared to 2008. As of September 30, 2009 and 2008, in accordance with guidance issued by the FASB, the Company accounted for its equity investments in entities in which it holds a minority interest under the full consolidation method.

Net income was $2,398,919 in 2009 compared to $1,885,078 in 2008. Provision for income taxes was $1,604,634 in 2009 as compared to $213,472 in 2008. During the fourth quarter of 2008 we recognized deferred tax benefits of $1,331,512 related to operating losses from prior years. We did not reverse the valuation allowance until it was “more likely than not” that the tax asset would be realized. The provision for income taxes of $1,604,634 as of September 30, 2009 is comprised of state taxes, federal Alternative Minimum Taxes (AMT), and the utilization of deferred income tax assets. At December 31, 2008 the Company had net operating loss carryforwards of approximately $7.6 million for federal tax purposes. Basic net income per share for 2009 and 2008 was $0.36 and $0.32, respectively, while fully diluted net income per share for 2009 and 2008 was $0.34 and $0.30, respectively. Basic and fully diluted weighted average shares outstanding for 2009 were 6,710,175 and 7,059,774, respectively, and 5,856,867 and 6,284,005 for 2008, respectively.

Liquidity and Capital Resources

The Company entered into a new credit agreement (the “Agreement”) with a bank in June 2008, which was amended and renewed in August 2009. The Agreement, as amended, provides for a line of credit of $1.5 million and is collateralized by substantially all unencumbered assets of the Company. Advances under the Agreement bear interest at the prime rate, plus one-half of one percent (3.75% as of September 30, 2009), with interest payable monthly. Subject to the terms of the Agreement, the Company may request and repay advances from time to time through the expiration date. The Agreement includes certain financial covenants that must be met including a covenant that for a period of not less than thirty (30) consecutive days during the loan term, that no loan amount will be outstanding under the Agreement. The Agreement expires on August 3, 2010. As of September 30, 2009 the Company was in compliance with the terms of its revolving credit agreement and no amounts have been drawn under this facility.

In connection with the acquisition of the Services Division, we entered into an equipment lease financing loan with a bank for $1,750,000. The equipment lease is collaterialized by the acquired assets and other assets of the Company and provides for monthly payments of principal and interest of $46,378 commencing on September 1, 2008 over 42 months, with interest at 6.4%. The lease financing agreement also requires Emergent to meet certain financial covenants over the loan term. As of the filing date of this Form 10-Q, the Company was in compliance with such financial covenants.

In May 2009, the Company purchased certain medical equipment from a limited liability company for approximately $111,000. The purchase price was satisfied through the use of lease financing.

 

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The Company had cash and cash equivalents of $5,957,808 at September 30, 2009. Cash provided by operating activities for the nine months ended September 30, 2009 was $5,921,788. Cash generated from operations includes net income of $2,398,919, depreciation and amortization of $1,620,057, deferred income taxes of $1,217,122, minority interest in net income of $597,030, stock-based compensation of $170,494, an increase in provision for doubtful accounts of $21,415, and increases in accounts payable and accrued expenses of $396,288 and $262,699, respectively; and inventory and other expense-noncash of $7,812; offset by increases in accounts receivable, prepaid expenses, deposits and other assets, and gain on disposal of property and equipment of $547,292; $89,329; $125,377, and $8,050, respectively. Cash used in investing activities was $1,104,436 and consisted of the purchase of property and equipment of $517,582, cash distributions of $703,404 to members of limited liability companies, offset by contributions from new members to limited liability companies of $112,500 and proceeds from the sale of equipment of $4,050. Cash used for financing activities was $3,445,651 and consisted of payment of dividends on common stock of $1,989,750, and payments of $1,492,241 on lease obligations; offset by proceeds of $34,740 and $1,600 from equipment refinancing and the exercise of common stock options, respectively.

The Company had cash and cash equivalents of $2,577,791 at September 30, 2008. Cash provided by operating activities for the nine months ended September 30, 2008 was $3,347,051. Cash generated from operations includes net income of $1,885,078, depreciation and amortization of $1,174,050, minority interest in net income of $737,368, stock-based compensation of $203,702, a decrease in inventory of $69,457, an increase in provision for doubtful accounts of $32,524, increases in accounts payable and accrued expenses and other liabilities of $364,281 and $102,019, respectively; offset by increases in accounts receivable of $1,102,861 and prepaid expenses  and deposits and other assets of $81,478 and $8,152, respectively, and gain on disposal of property and equipment of $28,937. Cash used in investing activities was $2,314,557 and consisted of cash paid of $1,399,735 in connection with the acquisition of the assets of the Services Division, purchase of property and equipment of $331,554, cash distributions of $697,621 to members of limited liability companies, offset by contributions from new members to limited liability companies of $84,375 and proceeds from the sale of equipment of $29,978. Cash used for financing activities was $1,498,357 and consisted of payment of dividends on common stock of $1,686,095, and payments on lease and debt obligations of $942,485 and $75,667; offset by net proceeds of $1,130,890 from the private placement of Common Stock and proceeds of $75,000 from equipment refinancing. In addition, during the nine months ended September 30, 2008 we borrowed and repaid $8,172,638 under our previous revolving line of credit agreement.

We anticipate that our future liquidity requirements will arise from the need to finance our accounts receivable and inventories, and from the need to fund our current debt and lease obligations and capital expenditures. The primary sources of funding for such requirements will be cash generated from operations, borrowings under debt facilities and trade payables, and raising additional capital from the sale of equity or other securities. The Company believes that it can generate sufficient cash flow from these sources to fund its on-going operations for at least the next twelve months.

Item 3. Quantitative and Qualitative Disclosures About  Market Risk

 

Market risk is the risk of loss arising from adverse changes in market rates and prices, such as interest rates, foreign currency exchange rates and commodity prices. Our primary exposure to market risk is interest rate risk associated with our short term money market investments. The Company does not have any financial instruments held for hedging or other speculative purposes and does not invest in derivative financial instruments, interest rate swaps or other investments that alter interest rate exposure.

Item 4. Controls and Procedures

 

We maintain disclosure controls and procedures, which are designed to ensure that information required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commissions rules and forms, and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.

 

Under the supervision and with the participation of our management, including our CEO and CFO, an evaluation was performed on the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this quarterly report. Based on that evaluation, our management, including our CEO and CFO, concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

 

There were no changes in the Company’s internal controls over financial reporting during the most recently completed fiscal quarter that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.

 

 

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PART II.  OTHER INFORMATION

.

Item 1.

Legal Proceedings

See Note 4 to Notes to Condensed Consolidated Financial Statements included herein for a description of legal matters.

Item 1A.

Risk Factors

As a  Smaller Reporting Company as defined Rule 12b-2 of the Exchange Act and in item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting obligations and therefore are not required to provide the information requested by this Item 1A.

Item 2.

Changes in Securities

None.

Item 3.

Defaults Upon Senior Securities

None.

Item 4.

Submissions of Matters to a Vote of Security Holders

In the third quarter ended September 30, 2009 there were no matters submitted to a vote of security holders.

Item 5.

Other Information

None

Item 6.

Exhibits

Except for the exhibits listed below, other required exhibits have been previously filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended.

Number		Exhibit Description
10.1		Second Amendment to Credit Agreement, dated August 18, 2009*
11.1		Statement re: computation of earnings per share.  See condensed consolidated statement of operations and notes thereto.
31(a)		Rule 13a-14(a) Certification – Chief Executive Officer *
31(b)		Rule 13a-14(a) Certification – Chief Financial Officer *
32(a)		Section 1350 Certification – Chief Executive Officer *
32(b)		Section 1350 Certification – Chief Financial Officer *
99.1		Press Release, dated November 4, 2009 Re: Quarterly Results*
* Filed herewith.

 

 

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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.

 

	EMERGENT GROUP INC.
Date: November 10, 2009	By:	/s/ Bruce J. Haber
		Name: Bruce J. Haber
		Title: Chairman and Chief Executive Officer

Date: November 10, 2009	By:	/s/ William M. McKay
		Name: William M. McKay
		Title: Chief Financial Officer and Secretary

 

 

 

 

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