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and Capital Resources
Company has financed its working capital and liquidity needs over the last several years through revenue generated by the operations
of its wholly-owned Medical Graphics Corporation subsidiary.
of April 30, 2015, the Company had cash and cash equivalents of $5.1 million and working capital of $9.8 million. During the six
months ended April 30, 2015, the Company generated $337,000 in cash from operating activities, with $692,000 provided by operations
before changes in working capital items. Accounts receivable decreased $220,000, while days sales outstanding (“DSO”),
which measures how quickly receivables are collected, increased 2 days to 70 days from October 31, 2014 to April 30, 2015. Inventory
increased by $645,000, as days of inventory on hand increased to 129 days as of April 30, 2015, 16 days more than at April 30,
2014. Accounts payable increased by $116,000. Employee compensation accruals as of April 30, 2015 were $258,000 lower than October
31, 2014 levels, reflecting the payments of accrued sales commissions and separation costs that existed on October 31, 2014.
the six months ended April 30, 2015, the Company used $409,000 in cash to purchase property, equipment and intangible assets.
The Company has no material commitments for capital expenditures for the remainder of fiscal 2015. The Company’s fiscal
2015 operating plans include additional costs to develop the Company’s next-generation software platform, including expensed
development efforts and capitalized software development costs.
Company used cash of $365,000 during the fiscal 2015 six months in financing activities, primarily resulting from loan payments
of $400,000. In addition, the Company received $65,000 from share issuances under its employee stock purchase plan, partially
offset by $25,000 of amounts paid for share withholding to support statutory minimum income tax withholding requirements on vesting
restricted share arrangements.
July 24, 2014, the Company entered into a credit agreement (“Agreement”) with BMO Harris Bank NA. The Company
and BMO Harris entered into Amendment No 1 to the Credit Agreement on January 29, 2015. The Agreement, as amended, includes a
$4.0 million term loan and a $250,000 revolving credit facility, which may also be used for the issuance of standby and
commercial letters of credit. The term loan, which bears interest at a floating rate, is payable in equal monthly principal
installments of $66,667 over a five-year period commencing August 31, 2014. The revolving credit facility has a one-year
interest rate on the term loan was 5% as of April 30, 2015 and October 31, 2014.
Agreement includes other usual and customary covenants for facilities of this nature, and requires the Company to comply with
the Agreement’s financial covenants. The Company’s failure to comply with these financial covenants, or other violations,
would constitute an event of default. In addition, in connection with the payment of any cash dividends or other shareholder distributions,
the Company must ensure that it will continue to comply with the financial covenants after the distribution. The financial covenants,
as adjusted on January 29, 2015, include the following:
1. The Company must achieve Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) of not less than
$0 in the fiscal 2015 first quarter and not less than $550,000 for the six months ending April 30, 2015.
2. Beginning in the quarter ending July 31, 2015, the following covenants will apply:
a. Total Leverage Ratio: not greater than 2.75 on July 31, 2015 and 2.50 on October 31, 2015 and thereafter.
b. Adjusted Fixed Charge Coverage Ratio: not less than 1.10 on July 31, 2015 and 1.25 on October 31, 2015 and thereafter.
April 30, 2015, the Company was in compliance with all financial and non-financial covenants under the Agreement. Because of the Company’s loss in the fourth quarter
of fiscal 2014, certain of MediSoft expenses, unless excluded from the overall formula may result in the Company not being in compliance
with the Total Leverage Ratio and Adjusted Fixed Charge Coverage Ratio as of July 31, 2015. The Company is in discussions with
its lender about an amendment or waiver of these requirements and expects to resolve this matter prior to July 31, 2015.
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Company believes that it will meet its liquidity and capital resource needs, including debt repayment requirements, over the next
twelve months through its cash flows resulting from operations and current cash and cash equivalents. In addition, the Company
has implemented a market-focused strategic plan leveraging the strength of its MGC Diagnostics/MedGraphics brand and improving
its worldwide selling and distribution capability. Pursuant to this plan, the Company acquired MediSoft SA and its subsidiaries
and will continue to review various potential strategic product and technology partners and may use some of its cash and capital
resources in the acquisition of other new technologies or businesses.
Company’s Board of Directors will continue to review and assess the Company’s capital position and working capital
and capital resource needs. If the Board determines that the Company’s capital exceeds the amount necessary to enable it
to meet its working capital and liquidity needs, as well as to retain a reasonable cushion for contingencies and strategic opportunities,
the Company will consider various options for increasing shareholder value, including, but not limited to, purchasing its own
shares in the open market and in privately negotiated transactions and or paying cash dividends. As noted above, the Company
must remain in compliance with the financial covenants on its bank facility in connection with any dividends or distributions.
discussion above contains forward-looking statements about our future financial results and business prospects that by their nature
involve substantial risks and uncertainties. You can identify these statements by the use of words such as “anticipate,”
“believe,” “estimate,” “expect,” “project,” “intend,” “plan,”
“will,” “target,” and other words and terms of similar meaning in connection with any discussion of future
operating or financial performance or business plans or prospects.
actual results may differ materially depending on a variety of factors including:
· national and worldwide economic and capital market conditions;
· continuing cost-containment efforts in our hospital, clinic and office markets;
· our ability to successfully and profitably integrate and operate our new MediSoft SA subsidiary;
· foreign exchange rate fluctuation exposure resulting from our acquisition of MediSoft SA and increased future international operations;
· uncertainty or changes in future medical reimbursement requirements;
· our ability to remain as qualified providers for group purchasing organizations ensuring continued
access to our markets;
· our ability to comply with our bank covenants;
· our ability to successfully operate our business, including successfully converting our increasing
research and development expenditures into new and improved cardiorespiratory diagnostic products and services and selling these
products and services into existing and new markets;
· our ability to complete our software development initiatives and migrate our software platform
to next-generation technology;
· our ability to maintain our cost structure at a level that is appropriate to our near to mid-term
revenue expectations, which will enable us to increase revenues and profitability as opportunities develop;
· our ability to achieve constant margins for our products and consistent and predictable operating expenses in light of variable
revenues from our clinical research customers;
· our ability to expand our international revenue through our distribution partners;
· medical device taxation related to national healthcare reform, including the current 2.3% medical device excise tax;
· our ability to successfully defend ourselves from product liability claims related to our cardiorespiratory diagnostic products
and claims associated with our prior cardiac stimulation products;
· our ability to defend our existing intellectual property and obtain protection for intellectual property we develop in the future;
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· our ability to operate our domestic and international business in compliance with Federal Food and Drug Administration and international
regulatory requirements, including obtaining and retaining approval or clearance for the medical device products we market and
· our ability to develop and maintain an effective system of internal controls and procedures and disclosure controls and procedures;
· our dependence on third-party vendors.
information with respect to the risks and uncertainties faced by the Company may be found in, and the above discussion is qualified
in its entirety by, the other risk factors that are described from time to time in the Company’s Securities and Exchange
Commission reports, including the Annual Report on Form 10-K for the year ended October 31, 2014.
3. Quantitative and Qualitative Disclosures About Market Risk.
August 1, 2014 acquisition of MediSoft SA and its subsidiaries introduced considerably more exposure to currency fluctuations,
which are reflected in the fiscal 2015 loss for the Euro-denominated intercompany instruments that are not regarded as permanent
funding. The exposure to currency on the remaining net assets of the acquired entities is reflected in accumulated other comprehensive
loss in the consolidated balance sheet. A lower US Dollar/Euro conversion rate developed since the July 2014 funding of intra-company
loans to our Belgian holding company for the August 1, 2014 acquisition of MediSoft. Further US Dollar/Euro rate reductions or
increases will result in an effect on the Company’s financial statements.
4. Controls and Procedures.
of Disclosure Controls and Procedures
with the participation of the Company’s chief executive officer, Todd M. Austin, and chief financial officer, Wesley W.
Winnekins, has evaluated the effectiveness of the design and operation of the disclosure controls and procedures, as defined in
Rules 13a-15(e) under the Securities Exchange Act of 1934, as of the end of the period covered by this report. Management has
concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be
disclosed in the reports that the Company files under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the rules and forms of the SEC and that the disclosure controls are also effective to ensure that
information required to be disclosed in the Company’s Exchange Act reports is accumulated and communicated to management,
including the chief executive officer and principal accounting officer, to allow timely decisions regarding required disclosure.
in Internal Controls
been no changes in internal control over financial reporting that occurred during the second quarter of fiscal 2015 that have
materially affected, or are reasonably likely to materially affect, the registrant’s internal control over financial reporting.
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II – OTHER INFORMATION
1. Legal Proceedings.
Company is subject to claims and lawsuits that have been filed in the ordinary course of business. From time to time, the Company
initiates lawsuits against others to enforce patents or to collect debts in the ordinary course of business. There are no known
current lawsuits or other litigation that involve the Company. Therefore, management believes that the settlement of all litigation
would not have a material effect on the results of operations or liquidity of the Company.
1A. Risk Factors.
described the most significant risk factors applicable to the Company in Part I, Item 1A “Risk Factors” of our
Annual Report on Form 10-K for the year ended October 31, 2014. We believe there have been no material changes to the risk
factors disclosed in that Annual Report on Form 10-K. Except as noted below, we believe there have been no material changes
to the risk factors disclosed in that Annual Report on Form 10-K.
The Company may need to obtain an amendment or waiver under
its credit facility to remain in compliance at July 31, 2015.
As discussed above, Management's Discussion and Analysis
– Liquidity and Capital Resources, because of the Company’s loss in the fiscal 2014 fourth quarter, certain of MediSoft
expenses, unless excluded from the overall formulas, may result in the Company not being in compliance with the Total Leverage
Ratio and Adjusted Fixed Charge Ratio as of July 31, 2015. On January 29, 2015, the Company and its lender had amended the credit
facility to remove the requirement that the Company comply with those covenants through April 30, 2015. The Company has entered
into discussions with its lender about an amendment or waiver of these restrictions and expects to resolve this matter prior to
July 31, 2015. If the Company is unable to obtain an amendment or wavier, and fails to comply with these or other covenants, the
Bank could declare a default under the credit agreement and pursue remedies, including acceleration of the indebtedness.
2. Unregistered Sales of Equity Securities and Use of Proceeds.
May 7, 2015, the Company issued 2,917 shares to its investor relations consulting firm for services rendered in fiscal 2013
and 2014. The average vested value price was $11.23, based on various goal attainment dates within the
contract period from August 1, 2013 to October 31, 2014. The Company believes the issuance was exempt under Section
4(a)(2) of the Securities Act of 1933 given the firm’s professional capacity and detailed knowledge of the Company.
3. Default Upon Senior Securities.
4. Mine Safety Disclosure.
5. Other Information.
of Chief Executive Officer pursuant to 13a-14 and 15d-14 of the Exchange Act.|
of Chief Financial Officer pursuant to 13a-14 and 15d-14 of the Exchange Act.|
pursuant to 18 U.S.C. §1350.|
following materials from our Quarterly Report on Form 10-Q for the quarter ended April
30, 2015 formatted in Extensible Business Reporting Language (XBRL): (i) Consolidated
Balance Sheets, (ii) Consolidated Statements of Comprehensive Income (Loss), (iii) Consolidated
Statements of Cash Flows, (iv) Notes to Consolidated Financial Statements and (vi) document
and entity information.|
to Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Report
on Form 10-Q shall not be deemed to be “filed” for purposes of Section 18
of the Exchange Act, or otherwise subject to the liability of that section, and shall
not be deemed part of a registration statement, prospectus or other document filed under
the Securities Act or the Exchange Act, except as shall be expressly set forth by specific
reference in such filings.|
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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.
||MGC DIAGNOSTICS CORPORATION|
|June 15, 2015
||/s/ Todd M. Austin|
||Todd M. Austin|
||Chief Executive Officer|
| June 15, 2015
||/s/ Wesley W. Winnekins|
||Wesley W. Winnekins|
||Chief Financial Officer|