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HASCO MEDICAL, INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
[September 02, 2014]

HASCO MEDICAL, INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.


(Edgar Glimpses Via Acquire Media NewsEdge) Results of Operations The results of operations presented on a historical comparative basis require consideration in the nature of the change in business activity and the acquisition of business entities in 2012. Any such comparison requires a careful examination of the change in the nature of the Company's business activity in conjunction with numerical comparisons of quarter-to-quarter results.



The following table provides an overview of certain key factors of our results of continuing operations for the three months ended June 30, 2014 as compared to June 30, 2013: Three Months Ended June 30, 2014 2013 Net revenues $ 23,992,175 $ 18,710,324 Cost of sales 18,869,736 14,373,055 Operating expenses: Selling and marketing 1,017,177 1,091,839 General and administrative 3,329,271 2,571,446 Amortization and depreciation 287,855 274,822 Total operating expenses 4,634,303 3,938,107 Income from operations 488,136 399,162 Total other income (193,553 ) (43,941 ) Provision for income taxes 88,557 17,012 Net income from continuing operations $ 206,026 $ 338,209 Other Key Indicators: Three Months Ended June 30, 2014 2013 Cost of sales as a percentage of revenues 78.6% 76.8% Gross profit margin 21.4% 23.2% General and administrative expenses as a 13.9% 13.7% percentage of revenues Total operating expenses as a percentage of 19.3% 21.0% revenues The following table provides comparative data regarding the source of our net revenues in each of these periods: Three Months ended June 30, 2014 2013 Product Sales $ 19,656,944 $ 14,806,794 Rental Revenue 312,593 273,133 Service and other 4,022,638 3,630,397 Total Net Revenues $ 23,992,175 $ 18,710,324 Three Months ended June 30, 2014 and 2013 Net Revenues For the three months ended June 30, 2014, we reported revenues of $23,992,175 as compared to revenues of $18,710,324 for the three months ended June 30, 2013, an increase of $5,281,851 or approximately 28.2%. The increase is due to the increase in private pay business for van sales and the acquisition of Auto Mobility Sales.

Product sales for the three months ended June 30, 2014 and 2013 amounted to $19,656,944 and $14,806,794, respectively, an increase of $4,850,150 or 32.8%.


Rental revenue for the three months ended June 30, 2014 and 2013 amounted to $312,593 and $273,133, respectively, an increase of $39,460 or 14.4%. Service and other revenue for the three months ended June 30, 2014 and 2013 amounted to $4,022,638 and $3,630,397, respectively, an increase of $392,241 or 10.8%.

These increases were due to the increase in private pay business for van sales and the acquisition of Auto Mobility Sales. We do not anticipate any significant price increases in 2014.

- 16 - -------------------------------------------------------------------------------- Product sales comprise approximately 81.9% of the Company's sales for the three months ended June 30, 2014 compared to 79.1% in the same period of 2013.

Cost of Sales Our cost of sales consists of products purchased for resale, and service parts and labor. For the three months ended June 30, 2014, cost of sales was $18,869,736, or approximately 78.6% of revenues, compared to $14,373,055, or approximately 76.8% of revenues, for the three months ended June 30, 2013. The overall increase of cost of sales for our Modified Mobility Vehicle operations is due to the increase in revenue.

We have a single vendor that represents 52% of our Cost of Sales. Our relationship with this vendor is excellent and we do not anticipate any change in the status of that relationship. Should there be any such change; management believes that substantially similar products are available from other competitive vendors at terms that will not have a substantial effect on our financial condition.

Gross Profit Overall gross profit percentage decreased to 21.4% for the three months ended June 30, 2014 from 23.2 % for the three months ended June 30, 2013 due to more competitive pricing in the market place.

Total Operating Expense Total operating expenses decreased as a percentage of revenues to 19.4% for the three months ended June 30, 2014 from 21.0% for the three months ended June 30, 2013. These changes include: Selling and Marketing Expense. For the three months ended June 30, 2014, selling and marketing costs were $1,017,177 and $1,091,839 for the three months ended June 30, 2013. The decrease was due to the decrease in marketing, advertising and print advertising programs initiatives, primarily in the Modified Mobility Vehicle operations.

General and Administrative Expense. For the three months ended June 30, 2014, general and administrative expenses were $3,329,271 as compared to $2,571,446 for the three months ended June 30, 2013, an increase of $757,825. The increase is due to the additional rent and professional fees associated with the acquisition of business entities in 2013, additional personnel associated with the acquisition of Auto Mobility Sales, and additions of staff in the accounting and sales departments as well as fully staffing the locations with management and sales personnel. The Company also incurred several one-time, non-recurring expenses that amounted to approximately $110,000 for the quarter ended June 30, 2014.

Depreciation and Amortization Expense. For the three months ended June 30, 2014, depreciation and amortization expense amounted to $287,855 as compared to $274,822 for the three months ended June 30, 2013, an increase of $13,033. This increase is due to the additions to leased vehicles.

Income from Continuing Operations We reported income from continuing operations of $206,026 for the three months ended June 30, 2014 as compared to income from continuing operations of $338,209 for the three months ended June 30, 2013.

Other Income (Expense) Other Income (Expense) for the three months ended June 30, 2014 amounted to $(193,553) compared to $(43,941) for the three months ended June 30, 2013. This increase in expense is due to a higher volume of floor plan activity and a larger leased fleet for rental sales. Other income and expense consists of Other Income and Interest Expense.

Other Income consists primarily of discounts earned and totaled $54,996 for the three months ended June 30, 2014 and $131,876 for the three months ended June 30, 2013. The decrease is due to less volume discounts earned for the three months.

Interest expense for the three months ended June 30, 2014 amounted to $(248,549) as compared to $(175,817) for the three months ended June 30, 2013, a increase of $72,732. This increase is due to the additional debt and capital lease obligations the Company has incurred in the acquisition of the Auto Mobility subsidiary and the increase in volume on the GE floor plan agreement.

- 17 - -------------------------------------------------------------------------------- Net Income Our net income was $260,253 for the three months ended June 30, 2014 compared to net income of $250,682 for the three months ended June 30, 2013.

Assets and Liabilities Assets were $31,493,424 as of June 30, 2014. Assets consisted of cash of $550,507, accounts receivable of $7,300,778, inventory of $13,382,571, current portion of notes receivable of $23,329, prepaid expense of $597,472, short-term deferred tax asset of $402,475, long-term deferred tax asset of $149,204, property and equipment of $2,217,218, intangible assets of $6,191,972, long term notes receivable of $101,289, and other non-current assets of $576,609.

Liabilities were $28,330,917 as of June 30, 2014. Liabilities consisted primarily of accounts payable of $2,748,078, cash overdraft of $97,196, customer deposits and deferred revenue of $384,187, line of credit of $2,045,025, notes payable - floor plan of $13,824,838, obligation under capital leases short term of $419,900, current portion of notes payable of $386,148, related party short-term notes payable of $349,410, long-term capital leases of $1,129,758, long-term notes payable of $3,883,142, related party long-term notes payable of $1,768,375, and other current liabilities of $1,294,860.

Stockholders' Equity Stockholders' equity was $3,162,507 as of June 30, 2014. Stockholder's equity consisted primarily of shares issued for acquisitions, fundraising, employee compensation, and settlement of services totaling $7,760,224, offset primarily by the deficit of $4,597,717 at June 30, 2014.

The results of operations presented on a historical comparative basis require consideration in the nature of the change in business activity and the acquisition of business entities in 2013 and 2012. Any such comparison requires a careful examination of the change in the nature of the Company's business activity in conjunction with numerical comparisons of year-to-year results.

The following table provides an overview of certain key factors of our results of continuing operations for the six months ended June 30, 2014 as compared to June 30, 2013: Six Months Ended June 30, 2014 2013 Net revenues $ 44,546,448 $ 33,665,834 Cost of sales 34,194,764 25,890,537 Operating expenses: Selling and marketing 1,970,701 2,009,339 General and administrative 6,681,031 5,058,349 Amortization and depreciation 561,588 574,164 Total operating expenses 9,213,320 7,641,852 Income from operations 1,138,364 133,445 Total other income (expense) (483,476 ) (106,828 ) Provision for (benefit from) income taxes 258,966 (194,175 ) Net income from continuing operations $ 395,922 $ 220,792 Other Key Indicators: Six Months Ended June 30, 2014 2013 Cost of sales as a percentage of revenues 76.8% 76.9% Gross profit margin 23.2% 23.1% General and administrative expenses as a 15.0% 15.0% percentage of revenues Total operating expenses as a percentage of 20.7% 22.7% revenues - 18 - -------------------------------------------------------------------------------- The following table provides comparative data regarding the source of our net revenues in each of these periods: Six Months ended June 30, 2014 2013 Product Sales $ 36,113,894 $ 26,662,233 Rental Revenue 557,598 547,201 Service and other 7,874,956 6,456,400 Total Net Revenues $ 44,546,448 $ 33,665,834 Six Months ended June 30, 2014 and 2013 Net Revenues For the six months ended June 30, 2014, we reported revenues of $44,546,448 as compared to revenues of $33,665,834 for the six months ended June 30, 2013, an increase of $10,880,614 or approximately 32.3%. The increase is due to the increase in private pay business for van sales and the acquisition of Auto Mobility Sales.

Product sales for the six months ended June 30, 2014 and 2013 amounted to $36,113,894 and $26,662,233, respectively, an increase of $9,451,661 or 35.4%.

Rental revenue for the six months ended June 30, 2014 and 2013 amounted to $557,598 and $547,201, respectively, an increase of $10,397 or 1.9%. Service and other revenue for the six months ended June 30, 2014 and 2013 amounted to $7,874,956 and $6,456,400, respectively, an increase of $1,418,556 or 22.0%.

These increases were due to the increase in private pay business for van sales and the acquisition of Auto Mobility Sales. We do not anticipate any significant price increases in 2014.

Product sales comprise approximately 81.1% of the Company's sales for the six months ended June 30, 2014 compared to 79.2% in the same period of 2013.

Cost of Sales Our cost of sales consists of products purchased for resale, and service parts and labor. For the six months ended June 30, 2014, cost of sales was $34,194,764, or approximately 76.8% of revenues, compared to $25,890,537, or approximately 76.9% of revenues, for the six months ended June 30, 2013. The overall increase of cost of sales for our Modified Mobility Vehicle operations is due to the increase in revenue.

We have a single vendor that represents 53% of our Cost of Sales. Our relationship with this vendor is excellent and we do not anticipate any change in the status of that relationship. Should there be any such change; management believes that substantially similar products are available from other competitive vendors at terms that will not have a substantial effect on our financial condition.

Gross Profit Overall gross profit percentage increased to 23.2% for the six months ended June 30, 2014 from 23.1 % for the six months ended June 30, 2013 due to the greater buying power and utilization of capacity in service.

Total Operating Expense Total operating expenses decreased as a percentage of revenues to 20.7% for the six months ended June 30, 2014 from 22.7% for the six months ended June 30, 2013. These changes include: Selling and Marketing Expense. For the six months ended June 30, 2014, selling and marketing costs were $1,970,701 and $2,009,339 for the six months ended June 30, 2013. The decrease was due to the decrease in marketing, advertising and print advertising programs initiatives, primarily in the Modified Mobility Vehicle operations.

General and Administrative Expense. For the six months ended June 30, 2014, general and administrative expenses were $6,681,031 as compared to $5,058,349 for the six months ended June 30, 2013, an increase of $1,622,682. The increase is due to the additional rent and professional fees associated with the acquisition of business entities in 2013, additional personnel associated with the acquisition of Auto Mobility Sales, and additions of staff in the accounting and sales departments as well as fully staffing the locations with management and sales personnel. The Company also incurred several one-time, non-recurring expenses that amounted to approximately $110,000 for the quarter ended June 30, 2014.

- 19 - -------------------------------------------------------------------------------- Depreciation and Amortization Expense. For the six months ended June 30, 2014, depreciation and amortization expense amounted to $561,588 as compared to $574,164 for the six months ended June 30, 2013, a decrease of $12,576.

Income from Continued Operations We reported income from operations of $395,922 for the six months ended June 30, 2014 as compared to income from operations of $220,792 for the six months ended June 30, 2013.

Other Income (Expense) Other Income (Expense) for the six months ended June 30, 2014 amounted to $(483,476) compared to $(106,828) for the six months ended June 30, 2013. Other income and expense consists of Other Income and Interest Expense.

Other Income consists of discounts earned and totaled $37,156 for the six months ended June 30, 2014 and $262,566 for the six months ended June 30, 2013.

Interest expense for the six months ended June 30, 2014 amounted to $(520,632) as compared to $(369,394) for the six months ended June 30, 2013, an increase of $151,238. This increase is due to the additional debt and capital lease obligations the Company has incurred in the acquisition of the Auto Mobility subsidiary and the increase in volume on the GE floor plan agreement.

Net Income Our net income was $454,600 for the six months ended June 30, 2014 compared to net income of $51,991 for the six months ended June 30, 2013.

Liquidity and Capital Resources General - Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations and otherwise operate on an ongoing basis. The following table provides an overview of certain selected balance sheet comparisons between June 30, 2014 and December 31, 2013: June 30, December 31, $ % 2014 2013 Change Change Working capital surplus $ 707,490 $ 341,302 $ 366,188 107.3 Cash 550,507 150,313 400,195 266.2 Accounts receivable, net 7,300,778 6,182,680 1,118,098 18.1 Inventory 13,382,571 11,572,060 1,810,511 15.6 Total current assets $ 22,257,132 $ 18,823,065 $ 3,434,067 18.2 Property and equipment, net 2,217,218 2,141,212 76,006 3.5 Intangible assets, net 6,191,972 6,214,034 (22,062 ) (0.4 ) Total assets $ 31,493,424 $ 27,932,480 $ 3,560,944 ) 12.7 Accounts payable and accrued liabilities $ 2,748,078 $ 1,849,702 $ 898,376 48.6 Cash overdraft 97,196 175,572 (78,376 ) (44.6 ) Customer deposits and deferred revenue 384,187 388,433 (4,246 ) (1.1 ) Line of credit 2,045,025 2,303,143 (258,118 ) (11.2 ) Note Payable - Floor Plan 13,824,838 12,174,639 1,650,199 13.6 Current portion of capital leases 419,900 366,658 53,242 14.5 Notes payable-current 386,148 376,685 9,463 2.5 Notes payable, related party-current 349,410 353,008 (3,598 ) (1.0 ) Total current liabilities $ 21,549,642 $ 18,481,763 $ 3,067,879 16.6 Capital lease obligations long term 1,129,758 817,828 311,930 38.1 Notes payable-long term 3,883,142 4,075,802 (192,660 ) (4.7 ) Notes payable, related party-long term 1,768,375 1,947,214 (178,839 ) (9.2 ) Total liabilities $ 28,330,917 $ 25,322,607 $ 3,008,310 11.9 Accumulated deficit (4,597,717 ) (5,052,317 ) 454,600 (9.0 ) Stockholders' equity $ 3,162,507 $ 2,609,873 $ 552,634 21.2 - 20 - -------------------------------------------------------------------------------- Overall, we had an increase in cash flows of $400,194 in the six months ending June 30, 2014 resulting from cash used in operating activities of $328,912, offset partially by cash used in investing activities of $84,902, and cash provided by financing activities of $814,008.

The following is a summary of our cash flows provided by (used in) operating, investing, and financing activities during the periods indicated: Six Months Ended June 30, 2014 2013 Cash at beginning of period $ 150,313 $ 850,391 Net cash provided by (used in) operating activities (328,912 ) 789,422 Net cash provided by investing activities (84,902 ) 21,328 Net cash provided by (used in) financing activities 814,008 (592,891 ) Cash at end of period $ 550,507 $ 1,068,250 Net cash used in operating activities was $328,912 for the six months ended June 30, 2014. For the six months ended June 30, 2014, we had net income of $454,600, non-cash items such as depreciation and amortization expense of $561,892, stock-based compensation of $53,608, loss on disposal of property and equipment of $14,723 and change in deferred tax asset of $10,718, offset partially by the gain on the disposal of business entity of $93,859 and the changes in operating assets and liabilities of $1,319,876. The changes in operating assets and liabilities were primarily due to increases in accounts receivable of $1,118,098, inventory of $1,842,741, prepaid expenses of $92,653, accounts payable and accrued expenses of $898,376 and other current liabilities of $800,937 offset partially by the decreases in customer deposits and deferred revenue of $4,246 and other assets of $28,356 Net cash provided by operating activities was $789,422 for the six months ended June 30, 2013. For the six months ended June 30, 2013, we had net income of $51,991, non-cash items such as depreciation and amortization expense of $607,269, stock-based compensation of $4,000; and changes in operating assets and liabilities of $126,162. The changes in operating assets and liabilities were primarily due to increases in inventory of $623,205, deferred tax asset of $297,633, prepaid expenses of $392,921, accounts payable and accrued expenses of $410,318, and other current liabilities of $342,852, offset partially by the decreases in accounts receivable of $1,043,274, other assets of $14,282, and customer deposits and deferred revenue of $370,805.

Net cash used investing activities for the six months ended June 30, 2014 was $84,902 which consists primarily of purchases of fixed assets. This compares to net cash provided by investing activities of $21,328 for the six months ended June 30, 2013.

Net cash provided by financing activities for the six months ended June 30, 2014 was $814,008. This consisted of net draws and repayments on our line of credit of $258,118, principal payments under capital lease obligations of $178,489, repayments of related party notes payable of $140,011, cash overdraft of 78,376, and repayments on our notes payable of $183,197, offset partially by net draws and repayments on our floor plan of $1,650,199, and the proceeds from issuance of common stock of $2,000.

Net cash used in financing activities for the six months ended June 30, 2013 was $592,891. This consisted of net draws and repayments on our line of credit of $2,810,190, repayments on our notes payable of $250,569, principal payments under capital lease obligations of $408,298, and repayments of related party notes payable of $83,749, offset partially by net draws and repayments on our floor plan of $2,957,915, and the proceeds from sale of common stock of $2,000.

At June 30, 2014 we had a working capital surplus (current assets in excess of current liabilities) of $707,490 and accumulated deficit of $(4,597,717).

Financing - We believe our current working capital position, together with our expected future cash flows from operations will be adequate to fund our operations in the ordinary course of business, anticipated capital expenditures, debt and floor plan payment requirements, and other contractual obligations for at least the next twelve months. However, this belief is based upon many assumptions and is subject to numerous risks (see "Risk Factors"), and there can be no assurance that we will not require additional funding in the future.

- 21 - -------------------------------------------------------------------------------- As we attempt to expand and develop our operations, there exists a potential for net negative cash flows from future operations in amounts not now determinable, and we may be required to obtain additional financing in support of these plans.

We have and expect to continue to have substantial capital expenditures and working capital needs. We expect that the additional financing will (if available) take the form of a private placement of equity, bank borrowings and seller-financed acquisitions, although we may be constrained to obtain additional debt financing in lieu thereof. We are maintaining an on-going effort to consolidate sources of additional funding, without which we may not be able to continue our expansion efforts. There are no assurances that we will be able to obtain or continue adequate financing. If we are able to obtain and continue our required financing, future operating results depend upon a number of factors that are outside such financing considerations.

Vehicle Floorplans and Lines of Credit - Vehicle floorplans and line of credit reflect the amounts borrowed to finance the purchase of specific new and, to a lesser extent, used vehicle inventories with our corresponding manufacturers.

Changes in our vehicle floorplan and credit lines are reported in the financing cash flow section. Below is a listing of our gross usage and payments on the company's floorplan and credit lines for the six months ended June 30, 2014 and 2013: For the six months ended June 30, 2014: Net Usage Facility Additions Payments Inc (Dec) Floor plan $ 25,938,133 $ 24,287,934 $ 1,650,199 Line of credit 1,195,614 1,453,732 (258,118 ) Total $ 27,133,747 $ 25,741,666 $ 1,392,081 For the six months ended June 30, 2013: Net Usage Facility Additions Payments Inc (Dec) Floor plan $ 16,151,600 $ 13,193,685 $ 2,957,915 Line of credit 540,000 3,350,190 (2,810,190 ) Total $ 16,691,600 $ 16,543,875 $ 147,725 Contractual Obligations and Off-Balance Sheet Arrangements Contractual Obligations With reference to SEC Regulation S-K Item 303(d), tables summarizing our contractual obligations are not required.

Off-balance Sheet Arrangements The Company's management considers all liabilities stated on the financial statement contained herein disclose all liabilities and potential liabilities in every material respect. We have not entered into any derivative contracts that are indexed to our shares and classified as stockholder's equity or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk in support to such activity. We do not have any determinable or variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.

Recently Issued Accounting Pronouncements From time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies that are adopted by the Company as of the specified effective date. Unless otherwise discussed, we believe that the impact of recently issued standards that are not yet effective will not have a material impact on our financial position or results of operations upon adoption.

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