Attached files
file | filename |
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EX-32.1 - Conmed Healthcare Management, Inc. | v201734_ex32-1.htm |
EX-32.2 - Conmed Healthcare Management, Inc. | v201734_ex32-2.htm |
EX-31.2 - Conmed Healthcare Management, Inc. | v201734_ex31-2.htm |
EX-31.1 - Conmed Healthcare Management, Inc. | v201734_ex31-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
(Mark
One)
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT
OF 1934.
|
For the
quarterly period ended September 30, 2010
OR
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT
OF 1934.
|
For the
transition period
from
to
Commission
File Number:
0-27554
Conmed
Healthcare Management, Inc.
(Exact
name of registrant as specified in its charter)
Delaware
|
42-1297992
|
|
(State
or other jurisdiction of
incorporation
or organization)
|
(I.R.S.
Employer Identification No.)
|
7250
Parkway Dr., Suite 400
Hanover,
MD
|
21076
|
|
(Address
of principal executive offices)
|
(Zip
Code)
|
(410)
567-5520
|
|
(Registrant’s
telephone number, including area code)
|
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
YES x NO
o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files).
YES o NO
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
Accelerated filer o
|
Accelerated
filer o
|
Non-Accelerated
filer o
|
Smaller
reporting company x
|
(Do not
check if a smaller reporting company)
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
YES o NO
x
Indicate
the number of shares outstanding of each of the registrant’s classes of common
stock, as of the latest practicable date:
Number of Shares Outstanding
|
|
Class
|
November 11, 2010
|
Common
Stock, $0.0001 par value per share
|
12,835,319
|
CONMED
HEALTHCARE MANAGEMENT, INC.
TABLE
OF CONTENTS
Page
|
||
PART
I. FINANCIAL
INFORMATION
|
||
ITEM
1. FINANCIAL STATEMENTS (UNAUDITED)
|
1
|
|
Consolidated
Balance Sheets
|
||
September
30, 2010 and December 31, 2009
|
1
|
|
Consolidated
Statements of Operations
|
||
For
the three and nine months ended September 30, 2010 and
2009
|
2
|
|
Consolidated
Statements of Cash Flows
|
||
For
the nine months ended September 30, 2010 and 2009
|
3
|
|
Consolidated
Statements of Shareholders’ Equity
|
||
For
the nine months ended September 30, 2010
|
4
|
|
Notes
to Consolidated Financial Statements
|
5
|
|
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
|
11
|
|
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
19
|
|
ITEM
4(T). CONTROLS AND PROCEDURES
|
19
|
|
PART
II. OTHER
INFORMATION
|
||
ITEM
1. LEGAL PROCEEDINGS
|
20
|
|
ITEM
1A. RISK FACTORS
|
20
|
|
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
|
20
|
|
ITEM
3. DEFAULTS UPON SENIOR SECURITIES
|
20
|
|
ITEM
4. RESERVED
|
20
|
|
ITEM
5. OTHER INFORMATION
|
20
|
|
ITEM
6. EXHIBITS
|
20
|
|
SIGNATURES
|
21
|
i
PART
1. FINANCIAL INFORMATION
ITEM
1.
|
FINANCIAL
STATEMENTS
|
CONMED
HEALTHCARE MANAGEMENT, INC.
CONSOLIDATED
BALANCE SHEETS
September 30,
2010
(unaudited)
|
December 31,
2009
|
|||||||
ASSETS
|
||||||||
CURRENT
ASSETS
|
||||||||
Cash
and cash equivalents
|
$ | 13,008,470 | $ | 11,056,143 | ||||
Accounts
receivable
|
2,960,259 | 2,278,074 | ||||||
Prepaid
expenses
|
226,638 | 865,261 | ||||||
Deferred
taxes
|
111,000 | 102,000 | ||||||
Total
current assets
|
16,306,367 | 14,301,478 | ||||||
PROPERTY
AND EQUIPMENT, NET
|
594,814 | 605,578 | ||||||
DEFERRED
TAXES
|
1,377,000 | 1,381,000 | ||||||
OTHER
ASSETS
|
||||||||
Service
contracts acquired, net
|
585,250 | 984,000 | ||||||
Non-compete
agreements, net
|
286,560 | 436,667 | ||||||
Goodwill
|
6,263,705 | 6,263,705 | ||||||
Deposits
|
11,549 | 11,549 | ||||||
Total
other assets
|
7,147,064 | 7,695,921 | ||||||
$ | 25,425,245 | $ | 23,983,977 | |||||
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
||||||||
CURRENT
LIABILITIES
|
||||||||
Accounts
payable
|
$ | 2,231,517 | $ | 1,489,498 | ||||
Accrued
expenses
|
3,866,770 | 4,146,940 | ||||||
Taxes
payable
|
434,383 | 550,000 | ||||||
Deferred
revenue
|
827,637 | 1,018,645 | ||||||
Total
current liabilities
|
7,360,307 | 7,205,083 | ||||||
DERIVATIVE
FINANCIAL INSTRUMENTS
|
658,147 | 1,299,450 | ||||||
SHAREHOLDERS’
EQUITY
|
||||||||
Preferred
stock, no par value; authorized 5,000,000 shares; issued and outstanding
zero shares as of September 30, 2010 and December 31, 2009
|
— | — | ||||||
Common
stock, $0.0001 par value, authorized 40,000,000 shares; issued and
outstanding 12,632,593 and 12,629,572 shares as of September 30, 2010 and
December 31, 2009, respectively
|
1,263 | 1,263 | ||||||
Additional
paid-in capital
|
38,584,383 | 37,829,900 | ||||||
Accumulated
deficit
|
(21,178,855 | ) | (22,351,719 | ) | ||||
Total
shareholders' equity
|
17,406,791 | 15,479,444 | ||||||
$ | 25,425,245 | $ | 23,983,977 |
See
Notes to Unaudited Financial Statements
Page - 1
-
CONMED
HEALTHCARE MANAGEMENT, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS (UNAUDITED)
For the Nine
Months Ended
September 30,
2010
|
For the Nine
Months Ended
September 30,
2009
|
For the Three
Months Ended
September 30,
2010
|
For the Three
Months Ended
September 30,
2009
|
|||||||||||||
Service
contract revenue
|
$ | 44,881,099 | $ | 38,775,309 | $ | 15,390,976 | $ | 13,643,317 | ||||||||
HEALTHCARE
EXPENSES:
|
||||||||||||||||
Salaries,
wages and employee benefits
|
25,435,552 | 22,138,330 | 8,729,743 | 7,900,235 | ||||||||||||
Medical
expenses
|
9,301,119 | 7,248,420 | 3,289,376 | 2,485,024 | ||||||||||||
Other
operating expenses
|
1,540,391 | 1,388,780 | 598,863 | 524,950 | ||||||||||||
Total
healthcare expenses
|
36,277,062 | 30,775,530 | 12,617,982 | 10,910,209 | ||||||||||||
Gross
profit
|
8,604,037 | 7,999,779 | 2,772,994 | 2,733,108 | ||||||||||||
Selling
and administrative expenses
|
6,067,251 | 5,774,101 | 2,076,918 | 2,014,378 | ||||||||||||
Depreciation
and amortization
|
814,940 | 1,627,951 | 215,241 | 387,392 | ||||||||||||
Total
operating expenses
|
6,882,191 | 7,402,052 | 2,292,159 | 2,401,770 | ||||||||||||
Operating
income
|
1,721,846 | 597,727 | 480,835 | 331,338 | ||||||||||||
OTHER
INCOME (EXPENSE)
|
||||||||||||||||
Interest
income
|
72,385 | 61,127 | 27,025 | 16,547 | ||||||||||||
Interest
(expense)
|
— | (7,991 | ) | — | (819 | ) | ||||||||||
Gain
(loss) on fair value of derivatives
|
358,633 | (1,688,623 | ) | 406,012 | 755,650 | |||||||||||
Total
other income (expense)
|
431,018 | (1,635,487 | ) | 433,037 | 771,378 | |||||||||||
Income
(loss) before income taxes
|
2,152,864 | (1,037,760 | ) | 913,872 | 1,102,716 | |||||||||||
Income
tax expense
|
980,000 | 402,000 | 366,700 | 249,000 | ||||||||||||
Net
income (loss)
|
$ | 1,172,864 | $ | (1,439,760 | ) | $ | 547,172 | $ | 853,716 | |||||||
EARNINGS
(LOSS) PER COMMON SHARE
|
||||||||||||||||
Basic
|
$ | 0.09 | $ | (0.11 | ) | $ | 0.04 | $ | 0.07 | |||||||
Diluted
|
$ | 0.06 | $ | (0.11 | ) | $ | 0.01 | $ | 0.01 | |||||||
WEIGHTED-AVERAGE
SHARES OUTSTANDING
|
||||||||||||||||
Basic
|
12,630,716 | 12,546,754 | 12,631,919 | 12,606,699 | ||||||||||||
Diluted
|
14,246,996 | 12,546,754 | 14,255,523 | 14,183,486 |
See
Notes to Unaudited Financial Statements
Page - 2
-
CONMED
HEALTHCARE MANAGEMENT, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Nine
Months Ended
September 30,
2010
|
For the Nine
Months Ended
September 30,
2009
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES
|
||||||||
Net
income (loss)
|
$ | 1,172,864 | $ | (1,439,760 | ) | |||
Adjustments
to reconcile net income (loss) to net cash provided by operating
activities
|
||||||||
Depreciation
|
207,493 | 151,951 | ||||||
Amortization
|
607,447 | 1,476,000 | ||||||
Amortization
of long-term customer agreement
|
43,750 | — | ||||||
Stock-based
compensation
|
465,516 | 475,597 | ||||||
(Gain)
loss on fair value of derivatives
|
(358,633 | ) | 1,688,623 | |||||
Deferred
income taxes
|
(5,000 | ) | (377,000 | ) | ||||
Changes
in working capital components
|
||||||||
(Increase)
in accounts receivable
|
(682,185 | ) | (462,016 | ) | ||||
Decrease
in prepaid expenses
|
638,623 | 114,820 | ||||||
(Increase)
in deposits
|
— | (275 | ) | |||||
Increase
in accounts payable
|
742,019 | 120,886 | ||||||
Increase
(decrease) in accrued expenses
|
(280,170 | ) | 766,590 | |||||
Increase
(decrease) in income taxes payable
|
(115,617 | ) | 220,860 | |||||
Increase
(decrease) in deferred revenue
|
(191,008 | ) | 374,888 | |||||
Net
cash provided by operating activities
|
2,245,099 | 3,111,164 | ||||||
CASH
FLOWS FROM INVESTING ACTIVITIES
|
||||||||
Purchase
of property and equipment
|
(151,801 | ) | (273,178 | ) | ||||
Stock
Purchase of CMHS, LLC
|
— | (9,161 | ) | |||||
Asset
purchase
|
(147,268 | ) | — | |||||
Net
cash (used in) investing activities
|
(299,069 | ) | (282,339 | ) | ||||
CASH
FLOWS FROM FINANCING ACTIVITIES
|
||||||||
Payments
on line of credit
|
— | (100,000 | ) | |||||
Payments
on loans
|
— | (93,782 | ) | |||||
Proceeds
from exercise of stock options
|
6,297 | 12,000 | ||||||
Net
cash provided by (used in) financing activities
|
6,297 | (181,782 | ) | |||||
Net
increase in cash and cash equivalents
|
1,952,327 | 2,647,043 | ||||||
CASH
AND CASH EQUIVALENTS
|
||||||||
Beginning
|
11,056,143 | 7,472,140 | ||||||
Ending
|
$ | 13,008,470 | $ | 10,119,183 | ||||
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION
|
||||||||
Cash
payments for interest
|
$ | — | $ | 7,991 | ||||
Income
taxes paid
|
1,100,617 | 558,140 |
See
Notes to Unaudited Financial Statements
Page - 3
-
CONMED
HEALTHCARE MANAGEMENT, INC.
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)
Preferred
Stock
|
Common
Stock
|
Additional Paid-
in Capital
|
Accumulated
Deficit
|
Total
|
||||||||||||||||
Balance
at December 31, 2009
|
$ | — | $ | 1,263 | $ | 37,829,900 | $ | (22,351,719 | ) | $ | 15,479,444 | |||||||||
Net
Income
|
— | — | — | 1,172,864 | 1,172,864 | |||||||||||||||
Stock
option expense
|
— | — | 465,516 | — | 465,516 | |||||||||||||||
Exercise
of stock options
|
— | — | 6,297 | — | 6,297 | |||||||||||||||
Amended
warrants removing embedded feature of equity-linked financial
instrument
|
— | — | 282,670 | — | 282,670 | |||||||||||||||
Balance
at September 30, 2010
|
$ | — | $ | 1,263 | $ | 38,584,383 | $ | (21,178,855 | ) | $ | 17,406,791 |
See
Notes to Unaudited Financial Statements
Page - 4
-
CONMED
HEALTHCARE MANAGEMENT, INC.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1.
|
Basis
of Presentation
|
The
accompanying unaudited consolidated financial statements of Conmed Healthcare
Management, Inc. (together with its consolidated subsidiaries, “Conmed”, the
“Company”, “we”, “us”, or “our”, unless otherwise specified or the context
otherwise requires) contained herein have been prepared pursuant to the rules
and regulations of the Securities and Exchange Commission (the “SEC”) for
interim reporting requirements of Form 10-Q and Rule 8-03 of Regulation S-X.
Accordingly, the financial information and disclosures normally included in the
financial statements prepared annually in accordance with accounting principles
generally accepted in the United States of America (“GAAP”) have been condensed
or omitted. Readers of this report should, therefore, refer to the consolidated
financial statements and notes included in our Annual Report on Form 10-K for
the year ended December 31, 2009, filed with the SEC on March 25,
2010.
In the
opinion of management, all adjustments (consisting of normal and recurring
adjustments) which are considered necessary to fairly present our financial
position and our results of operations as of and for these periods have been
made.
Our
interim results of operations for the three and nine months ended September 30,
2010 are not necessarily indicative of the results of operations to be expected
for a full year.
In
January 2010, we purchased approximately $45,000 and $102,000 of fixed assets
and intangible assets, respectively, from a small mobile imaging company to
expand the base of services that we provide to our customers, as such services
were previously subcontracted. This acquisition did not have a
material impact on our financial position or results of operations and therefore
additional proforma information has not been presented.
NOTE
2.
|
New
Accounting Standards
|
In
January 2010, the Financial Accounting Standards Board (“FASB”) issued
Accounting Standards Update No. 2010-06, Improving Disclosures about Fair Value
Measurements. The update provides amendments to FASB Accounting
Standards Codification 820-10, Fair Value, which requires
entities to disclose separately the amounts of significant transfers in and out
of Level 1 and Level 2 fair value measurements and describe the reasons for the
transfers. In addition, the update requires entities to present
separately information about purchases, sales, issuances and settlements in the
reconciliation for fair value measurements using significant unobservable inputs
(Level 3). The disclosures related to Level 1 and Level 2 fair value
measurements became effective for us in 2010 and the disclosures related to
Level 3 fair value measurements are effective for us in 2011. The
update requires new disclosures and will have no impact on our consolidated
financial position, results of operations or cash flows.
NOTE
3.
|
Common
Stock Options
|
The Board
of Directors has adopted, and our stockholders have approved, the 2007 Stock
Option Plan, as amended (the “2007 Plan”). On May 25, 2010, the 2007 Plan was
amended to increase the total number of shares available from 2,350,000 to
3,100,000. The 2007 Plan provides for the grant of incentive stock
options, nonqualified stock options and restricted stock units. The 2007 Plan is
administered by the independent members of the Board of Directors, which has the
authority and discretion to determine: the persons to whom the options will be
granted; when the options will be granted; the number of shares subject to each
option; the price at which the shares subject to each option may be purchased;
and when each option will become exercisable. The options generally vest over
three to four years and expire no later than ten years from the date of
grant.
During
the nine months ended September 30, 2010 and 2009, we recorded stock-based
compensation expense totaling $465,516 and $475,597, respectively, and
during the three months ended September 30, 2010 and 2009, we recorded
stock-based compensation expense totaling $161,579 and $151,328,
respectively.
During
the nine months ended September 30, 2010, options were granted to purchase
258,500 shares of common stock at an average exercise price of $3.21 per share
and an average grant date fair value of $2.07 per
share. Additionally, during the nine months ended September 30, 2010,
options to purchase 28,083 shares of common stock were forfeited, options to
purchase 1,750 shares of common stock were cancelled, options to purchase 3,021
shares of common stock were exercised at an average exercise price of $2.08 per
share and, as of September 30, 2010, 852,166 shares remain available for
grant.
Page - 5
-
As of
September 30, 2010, stock-based compensation expense not yet recognized in
income totaled $889,795, which is expected to be recognized over a
weighted-average remaining period of 1.11 years.
NOTE
4.
|
Common
Stock Warrants
|
Pre-Acquisition
Warrants
In
connection with the acquisition of Conmed, Inc. on January 26, 2007, we issued
warrants to purchase an aggregate of 250,000 shares of common stock to warrant
holders of the Company’s predecessor exercisable at $0.30 per
share. The warrants vested immediately and expire on October 23,
2010. These warrants were exercised on a net share basis subsequent to quarter
end and prior to expiration.
Investor
Warrants
In
connection with the acquisition of Conmed, Inc. on January 26, 2007, we issued
to investors warrants to purchase an aggregate of 1,500,000 shares of common
stock, exercisable at $0.30 per share and warrants to purchase an aggregate of
500,000 shares of common stock, exercisable at $2.50 per share. The
warrants vested immediately and expire March 13, 2012.
Placement
Agent Warrants
In
connection with the acquisition of Conmed, Inc. on January 26, 2007, we issued
to Maxim Group LLC, our exclusive placement agent, a warrant to purchase 300,000
shares of common stock, exercisable at $2.75 per share. The warrants
vested immediately and expire January 26, 2012.
Consultant
Warrants
In
connection with the purchase of all of the assets of Emergency Medicine
Documentation Consultants, P.C., a provider of medical services in northwest
Oregon, in 2008, we issued warrants to two consultants to purchase an aggregate
of 80,000 shares of common stock at an exercise price of $1.85 per share. The
warrants vested immediately and expire February 28, 2013.
Summary
The
following table summarizes the warrant activity for the nine months ended
September 30, 2010:
Pre-Acquisition
Warrants
|
Investor
Warrants
@ $0.30
per share
|
Investor
Warrants
@ $2.50
per share
|
Placement
Agent
Warrants
|
Consultant
Warrants
|
Total
|
|||||||||||||||||||
Exercise
price
|
$ | 0.30 | $ | 0.30 | $ | 2.50 | $ | 2.75 | $ | 1.85 | $ | 1.32 | ||||||||||||
Warrants
outstanding as of December 31, 2009
|
223,000 | 813,000 | 496,667 | 300,000 | 80,000 | 1,912,667 | ||||||||||||||||||
Warrants
exercised
|
— | — | — | — | — | — | ||||||||||||||||||
Warrants
outstanding as of September 30, 2010
|
223,000 | 813,000 | 496,667 | 300,000 | 80,000 | 1,912,667 |
The
following table summarizes the warrant activity for the nine months ended
September 30, 2009:
Pre-Acquisition
Warrants
|
Investor
Warrants
@ $0.30
per share
|
Investor
Warrants
@ $2.50
per share
|
Placement
Agent
Warrants
|
Consultant
Warrants
|
Total
|
|||||||||||||||||||
Exercise
price
|
$ | 0.30 | $ | 0.30 | $ | 2.50 | $ | 2.75 | $ | 1.85 | $ | 1.25 | ||||||||||||
Warrants
outstanding as of December 31, 2008
|
225,000 | 980,000 | 500,000 | 300,000 | 80,000 | 2,085,000 | ||||||||||||||||||
Warrants
exercised
|
2,000 | 167,000 | 3,333 | — | — | 172,333 | ||||||||||||||||||
Warrants
outstanding as of September 30, 2009
|
223,000 | 813,000 | 496,667 | 300,000 | 80,000 | 1,912,667 |
Page - 6
-
NOTE
5.
|
Fair
Value of Warrants
|
As a
result of adopting derivative accounting for certain warrants which contain a
strike price adjustment feature, effective January 1, 2009, 1,705,000 of our
then issued and outstanding common stock purchase warrants previously treated as
equity were no longer afforded equity treatment. These common stock
purchase warrants do not trade in an active securities market, and as such, we
estimate the fair value of these warrants using the Black-Scholes option pricing
model and all changes in the fair value of these warrants are recognized
currently in earnings until such time as the warrants are exercised, amended or
expire.
Investor
Warrants @ $0.30 per share
Black-Scholes assumptions
|
September 30, 2010
|
December 31, 2009
|
||||||
Expected
life (years)
|
1.1 | 1.5 | ||||||
Expected
volatility
|
30.80 | % | 79.59 | % | ||||
Risk-free
interest rate
|
0.3 | % | 1.4 | % | ||||
Expected
dividend yield
|
0.0 | % | 0.0 | % |
Investor
Warrants @ $2.50 per share
Black-Scholes assumptions
|
September 30, 2010
|
December 31, 2009
|
||||||
Expected
life (years)
|
1.1 | 1.5 | ||||||
Expected
volatility
|
30.80 | % | 79.59 | % | ||||
Risk-free
interest rate
|
0.3 | % | 1.4 | % | ||||
Expected
dividend yield
|
0.0 | % | 0.0 | % |
The
following tables summarize the warrant activity subject to fair value accounting
for the nine months ended September 30, 2010:
Investor
Warrants @
$0.30 per
share
|
Investor
Warrants @
$2.50 per
share
|
Total
|
||||||||||
Warrants
outstanding subject to fair value accounting as of December 31,
2009
|
221,430 | 496,667 | 718,097 | |||||||||
Warrants
exercised
|
— | — | — | |||||||||
Warrants
amended
|
90,000 | — | 90,000 | |||||||||
Warrants
outstanding subject to fair value accounting as of September 30,
2010
|
131,430 | 496,667 | 628,097 |
Investor
Warrants @
$0.30 per
share
|
Investor
Warrants @
$2.50 per
share
|
Total
|
||||||||||
Fair
value of warrants outstanding as of December 31, 2009
|
$ | 615,280 | $ | 684,170 | $ | 1,299,450 | ||||||
Realized
loss on warrants
|
32,590 | — | 32,590 | |||||||||
Unrealized
(gain) on warrants
|
(16,798 | ) | (374,425 | ) | (391,223 | ) | ||||||
Fair
value of warrants transferred to equity upon amendment
|
(282,670 | ) | — | (282,670 | ) | |||||||
Fair
value of warrants exercised
|
— | — | — | |||||||||
Fair
value of warrants outstanding as of September 30, 2010
|
$ | 348,402 | $ | 309,745 | $ | 658,147 |
Page - 7
-
The
following tables summarize the warrant activity subject to fair value accounting
for the three months ended September 30, 2010:
Investor
Warrants @
$0.30 per
share
|
Investor
Warrants @
$2.50 per
share
|
Total
|
||||||||||
Warrants
outstanding subject to fair value accounting as of June 30,
2010
|
221,430 | 496,667 | 718,097 | |||||||||
Warrants
exercised
|
— | — | — | |||||||||
Warrants
amended
|
90,000 | — | 90,000 | |||||||||
Warrants
outstanding subject to fair value accounting as of September 30,
2010
|
131,430 | 496,667 | 628,097 |
Investor
Warrants @
$0.30 per
share
|
Investor
Warrants @
$2.50 per
share
|
Total
|
||||||||||
Fair
value of warrants outstanding as of June 30, 2010
|
$ | 665,530 | $ | 681,299 | $ | 1,346,829 | ||||||
Realized
loss on warrants
|
32,590 | — | 32,590 | |||||||||
Unrealized
(gain) on warrants
|
(67,048 | ) | (371,554 | ) | (438,602 | ) | ||||||
Fair
value of warrants transferred to equity upon amendment
|
(282,670 | ) | — | (282,670 | ) | |||||||
Fair
value of warrants exercised
|
— | — | — | |||||||||
Fair
value of warrants outstanding as of September 30, 2010
|
$ | 348,402 | $ | 309,745 | $ | 658,147 |
As of
September 30, 2010, we had outstanding warrants to purchase an aggregate of
1,912,667 shares of common stock, of which warrants to purchase 628,097 shares
of common stock were subject to derivative accounting for warrants, at an
average exercise price of $2.04, and we have reserved shares of our common stock
for issuance in connection with the potential exercise thereof.
NOTE
6.
|
Fair
Value Measurements
|
The
Company is required to disclose the fair value measurements required by the fair
value measurement guidance. The derivative financial instruments
recorded at fair value in the balance sheets as of September 30, 2010 and
December 31, 2009 are categorized based upon the level of judgment associated
with the inputs used to measure their fair value.
The
following tables summarize the financial liabilities measured at fair value on a
recurring basis segregated by the level of valuation inputs within the fair
value hierarchy utilized to measure fair value:
As of September 30, 2010
|
||||||||||||||||
Total
|
Quoted prices in
active markets for
identical assets
(Level 1)
|
Significant other
observable inputs
(Level 2)
|
Significant
unobservable
inputs
(Level 3)
|
|||||||||||||
Derivative
financial instruments
|
$ | 658,147 | $ | — | $ | — | $ | 658,147 |
Page - 8
-
As of December 31, 2009
|
||||||||||||||||
Total
|
Quoted prices in
active markets for
identical assets
(Level 1)
|
Significant other
observable inputs
(Level 2)
|
Significant
unobservable
inputs
(Level 3)
|
|||||||||||||
Derivative
financial instruments
|
$ | 1,299,450 | $ | — | $ | — | $ | 1,299,450 |
Equity-linked
financial instruments consist of stock warrants issued by the Company that
contain a strike price adjustment feature. In accordance with
derivative accounting for warrants, we calculated the fair value of warrants
using the Black-Scholes option pricing model and the assumptions used are
described in Note 5, “Fair Value of Warrants”. During the nine months
ended September 30, 2010, we recognized a $391,223 unrealized gain and a $32,590
realized loss, and during the nine months ended September 30, 2009, we
recognized a $1,632,695 unrealized loss and a $55,927 realized loss related to
the change in fair value of the financial instruments which is included in Other
Income (Expense) on the Statement of Operations.
The
following table reflects the activity for liabilities measured at fair value
using Level 3 inputs for the nine months ended September 30:
2010
|
2009
|
|||||||
Balance
as of January 1
|
$ | 1,299,450 | $ | 2,766,150 | ||||
Transfers
into level 3
|
— | — | ||||||
Transfers
out of level 3
|
(282,670 | ) | (290,968 | ) | ||||
Sales
of equity-linked financial instruments
|
— | (442,937 | ) | |||||
Realized
loss related to the change in fair value
|
32,590 | 55,927 | ||||||
Unrealized
(gain) loss related to the change in fair value
|
(391,223 | ) | 1,632,695 | |||||
Balance
as of September 30
|
$ | 658,147 | $ | 3,720,867 |
Page - 9
-
NOTE
7.
|
Earnings
Per Share
|
The
following table sets forth the computation of basic and diluted earnings
per-share:
For the Nine
Months Ended
September 30,
2010
|
For the Nine
Months Ended
September 30,
2009
|
For the Three
Months Ended
September 30,
2010
|
For the Three
Months Ended
September 30,
2009
|
|||||||||||||
Numerator:
|
||||||||||||||||
Net
income (loss) for basic earnings per share
|
$ | 1,172,864 | $ | (1,439,760 | ) | $ | 547,172 | $ | 853,716 | |||||||
Subtractions:
|
||||||||||||||||
Change
in fair value of derivatives
|
(358,633 | ) | — | (406,012 | ) | (755,650 | ) | |||||||||
Net
income (loss) for diluted earnings per share
|
$ | 814,231 | $ | (1,439,760 | ) | $ | 141,160 | $ | 98,066 | |||||||
Denominator:
|
||||||||||||||||
Weighted-average
basic shares outstanding
|
12,630,716 | 12,546,754 | 12,631,919 | 12,606,699 | ||||||||||||
Assumed
conversion of dilutive securities
|
||||||||||||||||
Stock
options
|
481,713 | — | 500,329 | 418,134 | ||||||||||||
Warrants
|
1,134,567 | — | 1,123,275 | 1,158,653 | ||||||||||||
Potentially
dilutive common shares
|
1,616,280 | — | 1,623,604 | 1,576,787 | ||||||||||||
Denominator
for diluted earnings per share – Adjusted weighted average
shares
|
14,246,996 | 12,546,754 | 14,255,523 | 14,183,486 | ||||||||||||
Earnings
(loss) per common share:
|
||||||||||||||||
Basic
|
$ | 0.09 | $ | (0.11 | ) | $ | 0.04 | $ | 0.07 | |||||||
Diluted
|
$ | 0.06 | $ | (0.11 | ) | $ | 0.01 | $ | 0.01 |
Common
stock warrants and options outstanding totaling 446,500 and 3,947,938 shares are
not included in diluted earnings per common share for the nine months ended
September 30, 2010 and 2009, respectively, as they would have an antidilutive
effect on earnings per common share.
NOTE
8.
|
Income
Tax Matters
|
Our
effective tax rate was 45.5% during the nine months ended September 30, 2010,
which differs from the expected tax rate of 39.0% primarily due to permanent
differences related to stock-based compensation and derivatives related to
warrants. The change in our effective tax rate from prior periods is
primarily due to the relation of our taxable income relative to pre-tax
income. We recorded income tax expense of $980,000 and $402,000 for
the nine months ended September 30, 2010 and 2009, respectively. We
recorded income tax expense of $366,700 and $249,000 for the three months ended
September 30, 2010 and 2009, respectively.
Page - 10
-
ITEM
2.
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
Information included in this section
and elsewhere in this Quarterly Report on Form 10-Q contains forward-looking
statements regarding the business, operations and financial condition of Conmed
Healthcare Management, Inc. (together with its consolidated subsidiaries, the
“Company”, “we”, “us”, or “our” unless otherwise specified or the context
otherwise requires) within the meaning of Section 27A of the Securities Act of
1933, as amended and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). This information may involve known and unknown
risks, uncertainties and other factors which may cause our actual results,
performance or achievements to be materially different from our future results,
performance or achievements expressed or implied by any forward-looking
statements. Forward-looking statements, which involve assumptions and describe
our future plans, strategies and expectations, and other statements that are not
historical facts, are generally identifiable by use of the words "may," "will,"
"should," "expect," "anticipate," "estimate," "believe," "intend," “plan,”
“potential” or "project" or the negative of these words or other variations on
these words or comparable terminology. These forward-looking statements are
based on assumptions that may be incorrect, and there can be no assurance that
these projections included in these forward-looking statements will come to
pass. Our actual results could differ materially from those expressed or implied
by the forward-looking statements as a result of various factors. We caution you
not to place undue reliance on these forward-looking statements. Such
forward-looking statements relate only to events as of the date on which the
statements are made. These forward-looking statements involve certain risks and
uncertainties that are subject to change based on various factors (many of which
are beyond the Company's control) including, without limitation, the Company's
ability to increase revenue and to continue to obtain new contracts; the
incurrence of start-up costs associated with new contracts; contract renewals
and extensions; inflation exceeding the Company’s projection of the inflation
rate of cost of services under multi-year contracts; the ability to obtain
bonds; decreases in occupancy levels or disturbances at detention centers;
malpractice litigation; the ability to utilize third party administrators for
out-of-facility care; compliance with laws and government regulations, including
those relating to healthcare; investigation and auditing of our contracts by
government agencies; competition; termination of contracts due to lack of
government appropriations; material adverse changes in economic and industry
conditions in the healthcare market; negative publicity regarding the provision
of correctional healthcare services; dependence on key personnel and the ability
to hire skilled personnel; influence of certain stockholders; increases in
healthcare costs; insurance; completion and integration of future acquisitions;
public company obligations; limited liability of directors and officers; the
Company’s ability to meet the NYSE Amex continued listing standards; and stock
price volatility. We undertake no obligation to update any forward-looking
statements, whether as a result of new information, future events or otherwise,
even if experience or future changes make it clear that any projected results or
events expressed or implied therein will not be realized. You are advised,
however, to consult any further disclosures we make in future public statements
and press releases. More detailed information about us
and the risk factors that may affect the realization of forward-looking
statements is set forth in our filings with the Securities and Exchange
Commission (the “SEC”), including our Annual Report on Form 10-K for the year
ended December 31, 2009, filed with the SEC on March 25, 2010. Investors and
security holders are urged to read this document free of charge on the SEC's web
site at www.sec.gov.
General
We
provide healthcare services to county and municipal detention centers across the
United States. As a result of the Supreme Court decision in Estelle v. Gamble
(1976), all individuals held against their will are required to be provided with
community standard healthcare. Under this requirement, correctional institutions
are required to provide healthcare services for their inmates. We are a
specialist in the provision of these services, having provided correctional
healthcare services since 1984. We began providing correctional
healthcare services in the State of Maryland, and currently serve county and
municipal correctional facilities in thirty-seven counties in seven
states: Arizona, Kansas, Maryland, Oklahoma, Oregon, Virginia and
Washington. Our services have expanded to include mental health, pharmacy and
out-of-facility healthcare services.
Critical
Accounting Policies
The
discussion and analysis of our financial condition and results of operations are
based upon our condensed consolidated financial statements. These condensed
consolidated financial statements have been prepared following the requirements
of accounting principles generally accepted in the United States (“GAAP”) for
interim periods and require us to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. On an ongoing basis, we
evaluate our estimates, including those related to revenue recognition and
related medical expense accruals and amortization and potential impairment of
intangible assets and goodwill and stock-based compensation expense. As these
are condensed consolidated financial statements, one should also read expanded
information about our critical accounting policies and estimates provided in
Item 7, “Management’s Discussion and Analysis of Financial Condition and Results
of Operations”, included in our Annual Report on Form 10-K for the year ended
December 31, 2009, filed with the SEC on March 25, 2010. There have been no
material changes to our critical accounting policies and estimates from the
information provided in our Form 10-K for the year ended December 31,
2009.
Page - 11
-
Recently
Adopted Accounting Standards
In
January 2010, the Financial Accounting Standards Board (“FASB”) issued
Accounting Standards Update No. 2010-06, Improving Disclosures about Fair Value
Measurements. The update provides amendments to FASB Accounting
Standards Codification 820-10, Fair Value, which requires
entities to disclose separately the amounts of significant transfers in and out
of Level 1 and Level 2 fair value measurements and describe the reasons for the
transfers. In addition, the update requires entities to present
separately information about purchases, sales, issuances and settlements in the
reconciliation for fair value measurements using significant unobservable inputs
(Level 3). The disclosures related to Level 1 and Level 2 fair value
measurements became effective for us in 2010 and the disclosures related to
Level 3 fair value measurements are effective for us in 2011. The
update requires new disclosures and will have no impact on our consolidated
financial position, results of operations or cash flows.
Results
of Operations
Three
Months Ended September 30, 2010 compared to Three Months Ended September 30,
2009
The
following discussion of financial results is derived from unaudited financial
statements for the three months ended September 30, 2010 and 2009.
Three Months Ended
September 30, 2010
|
Three Months Ended
September 30, 2009
|
|||||||||||||||
Amount
|
%
of
Revenue
|
Amount
|
%
of
Revenue
|
|||||||||||||
Service
contract revenue
|
$ | 15,390,976 | 100.0 | % | $ | 13,643,317 | 100.0 | % | ||||||||
HEALTHCARE
EXPENSES:
|
||||||||||||||||
Salaries,
wages and employee benefits
|
8,729,743 | 56.7 | % | 7,900,235 | 57.9 | % | ||||||||||
Medical
expenses
|
3,289,376 | 21.4 | % | 2,485,024 | 18.2 | % | ||||||||||
Other
operating expenses
|
598,863 | 3.9 | % | 524,950 | 3.8 | % | ||||||||||
Total
healthcare expenses
|
12,617,982 | 82.0 | % | 10,910,209 | 80.0 | % | ||||||||||
Gross
profit
|
2,772,994 | 18.0 | % | 2,733,108 | 20.0 | % | ||||||||||
OPERATING
EXPENSES:
|
||||||||||||||||
Selling
and administrative expenses
|
2,076,918 | 13.5 | % | 2,014,378 | 14.8 | % | ||||||||||
Depreciation
and amortization
|
215,241 | 1.4 | % | 387,392 | 2.8 | % | ||||||||||
Total
operating expenses
|
2,292,159 | 14.9 | % | 2,401,770 | 17.6 | % | ||||||||||
Operating
income
|
480,835 | 3.1 | % | 331,338 | 2.4 | % | ||||||||||
OTHER
INCOME (EXPENSE)
|
||||||||||||||||
Interest
income
|
27,025 | 0.2 | % | 16,547 | 0.1 | % | ||||||||||
Interest
(expense)
|
— | 0.0 | % | (819 | ) | 0.0 | % | |||||||||
Gain
on fair value of derivatives
|
406,012 | 2.6 | % | 755,650 | 5.5 | % | ||||||||||
Total
other income
|
433,037 | 2.8 | % | 771,378 | 5.7 | % | ||||||||||
Income
before income taxes
|
913,872 | 5.9 | % | 1,102,716 | 8.1 | % | ||||||||||
Income
tax expense
|
366,700 | 2.4 | % | 249,000 | 1.8 | % | ||||||||||
Net
income
|
$ | 547,172 | 3.6 | % | $ | 853,716 | 6.3 | % |
Page - 12
-
Summary
Net
revenue from medical services provided primarily to correctional institutions
for the three months ended September 30, 2010 and 2009, was $15,390,976 and
$13,643,317, respectively, which represents an increase of $1,747,659 or 12.8%.
Net income was $547,172 or 3.6% of revenue, compared to net income of $853,716,
or 6.3% of revenue, for the three months ended September 30, 2010 and 2009,
respectively, which represented a decrease in net income of
$306,544.
Revenue
The
addition of service contracts signed with new jurisdictions since July 1, 2009
accounted for $1,438,746 or 82.3% of the increase in revenue for the three
months ended September 30, 2010 compared to the same period for the prior
year. These jurisdictions are as follows: Clark County, WA; Garrett
County, MD; Kittitas County, WA; Pima County (Juvenile), AZ; and Roanoke City,
VA. Revenue improvement totaling $109,479, or 6.3% of the increase,
resulted primarily from expansion of the services provided under a number of our
existing contracts in which we were providing services prior to July 1, 2009.
Price increases related to existing service requirements totaled ($3,935), or
(0.2)% of the revenue increase, and was the result of $178,354 in price
increases offset by repricings under the two year amendment to the Pima County
contract which began on July 1, 2010. The remainder of revenue improvement,
$203,369 or 11.6% of the increase, was the result of other volume related
activities, primarily associated with an increase in stop/loss reimbursements
due to higher out of facility medical expenditures in excess of stop/loss limits
which are billed back to the client and was partially offset by revenue
adjustments related to lower inmate populations at certain
facilities.
Healthcare
Expenses
Salaries
and employee benefits
Salaries
and employee benefits for healthcare employees were $8,729,743 or 56.7% of
revenue for the three months ended September 30, 2010, compared to $7,900,235 or
57.9% of revenue for the three months ended September 30, 2009. The increase in
spending for salaries and employee benefits of $829,508, or 10.5%, is due
primarily to the addition of new healthcare employees required to support the
staffing requirements for our new medical service contracts as detailed above.
The decrease in salaries and employee benefits as a percentage of revenue is due
to a change in the mix of expense for salaries and benefits. In addition to
providing staffing services, the new service contracts primarily include
responsibility for medical services both in and out of the facility, as well as
pharmacy services, resulting in a lower ratio of salaries and employee benefits
to revenue.
Medical
expenses
Medical
expenses for the three months ended September 30, 2010 and 2009 were $3,289,376,
or 21.4% of revenue, and $2,485,024, or 18.2% of revenue, respectively, which
represented an increase of $804,352 or 32.4%. The increase in spending for
medical expenses in absolute dollars primarily reflects increases related to new
contracts for medical services both in and out of the facility plus higher
expenditures for pharmacy services. The increase in spending as a percentage of
revenue results, in part, from the new service contracts added since July 1,
2009 that are primarily full service contracts and, as a result, included a
higher proportion of medical expense when compared to existing
contracts. Additionally, two of our existing service contracts
experienced higher than normal hospitalization charges which partially exceeded
stop/loss limits and these charges were billed back to those
clients. Expenses for providing pharmacy services for existing
service contracts increased due to increases in pharmaceutical prices as well as
an increase in HIV treatment expenditures compared to the prior
period.
Other
operating expenses
Other
operating expenses were $598,863, or 3.9% of revenue, for the three months ended
September 30, 2010, compared to $524,950, or 3.8% of revenue, for the three
months ended September 30, 2009. The increase of $73,913 in spending is
primarily related to an increase in legal, consulting and business development
fees, which were partially offset by a decrease in recruiting
expense.
Operating
Expenses
Selling
and administrative expenses
Selling
and administrative expenses for the three months ended September 30, 2010 and
2009 were $2,076,918, or 13.5% of revenue, and $2,014,378, or 14.8% of revenue,
respectively. The increased expenditure of $62,540 primarily reflects an
increased investment in additional management and administrative personnel
required to support new contracts and services added since July 1, 2009, which
was partially offset by decreases in accounting fees, travel expenses, business
development fees, consulting and legal fees. The reduction in
spending as a percentage of revenue resulted from improved economies of scale as
selling and administrative expenses continue to grow at a slower pace than
revenue. Stock-based compensation for the three months ended
September 30, 2010 and 2009 was $161,579 and $151,328,
respectively.
Page - 13
-
Depreciation
and amortization
Depreciation
and amortization primarily reflects the amortization of intangible assets
related to the acquisition of Conmed, Inc. in January 2007, the purchase of
medical service contracts from Emergency Medicine Documentation Consultants,
P.C. (“EMDC”) in February 2008 and the acquisition of Correctional Mental Health
Services, LLC (“CMHS”) in November 2008. Amortization of service contracts
acquired was $80,000, or 0.5% of revenue, for the three months ended September
30, 2010, compared to $230,000, or 1.7% of revenue, for the three months ended
September 30, 2009. The decrease primarily reflects a decrease in amortization
expense as certain individual service contracts acquired have become fully
amortized. Amortization of non-compete agreements was $68,668, or
0.4% of revenue, for the three months ended September 30, 2010, compared to
$96,000, or 0.7% of revenue, for the three months ended September 30, 2009.
Depreciation expense increased to $66,573 for the three months ended September
30, 2010 compared to $61,392 for the prior year period due primarily to capital
expenditures associated with purchases of vehicles and medical equipment which
was partially offset by lower computer depreciation as certain assets have been
fully depreciated.
Interest
income
Interest
income was $27,025 for the three months ended September 30, 2010 compared to
$16,547 for the same period in 2009. Higher average cash balances and increased
short-term interest rates during the three months ended September 30, 2010
account for the increased interest income compared to the same period in
2009.
Interest
expense
Interest
expense for the three months ended September 30, 2010 decreased to $0 compared
to $819 in the same period in 2009.
Gain
(loss) on fair value of derivatives
As a
result of adopting derivative accounting for certain warrants which contain
a strike price adjustment feature effective January 1, 2009, 1,705,000 of
our then issued and outstanding common stock purchase warrants previously
treated as equity were no longer afforded equity treatment and as a result they
are now recorded as a liability based on fair value estimates. These
common stock purchase warrants do not trade in an active securities market, and
as such, we estimate the fair value of these warrants using the Black-Scholes
option pricing model and all changes in the fair value of these warrants will be
recognized currently in earnings until such time as the warrants are exercised,
amended or expire.
During
the three months ended September 30, 2010 and 2009, we recognized a $438,602 and
a $719,930 unrealized gain, respectively. The decreased gain of
$281,328 was primarily the result of our stock price decreasing $0.35 during the
three months ended September 30, 2010 compared to a $0.50 decrease in stock
price during the three months ended September 30, 2009. Additionally,
there were 813,000 fewer warrants subject to fair value accounting during the
three months ended September 30, 2010 compared to the three months ended
September 30, 2009, primarily due to the amendment of certain warrant agreements
to remove the provisions that resulted in liability treatment subsequent to
September 30, 2009.
During
the three months ended September 30, 2010, no warrants were exercised and
warrants to purchase 90,000 shares of common stock were amended and are now
treated as equity. As of September 30, 2010, we had outstanding
warrants subject to derivative accounting to purchase an aggregate of 628,097
shares of common stock. During the three months ended September 30,
2009, warrants to purchase 15,333 shares of common stock were exercised by
cashless exercise and as a result, a total of 11,893 shares of common stock were
issued. During the three months ended September 30, 2009, warrants to
purchase 91,570 shares of common stock were amended and have since been treated
as equity. As of September 30, 2009, we had outstanding warrants
subject to derivative accounting to purchase an aggregate of 1,441,097 shares of
common stock.
The
following table summarizes the change in fair value for the three months ended
September 30:
Page - 14
-
2010
|
2009
|
|||||||
Fair
value of warrants outstanding as of June 30
|
$ | 1,346,829 | $ | 4,817,102 | ||||
Realized
(gain) loss on warrants
|
32,590 | (35,720 | ) | |||||
Unrealized
(gain) on warrants
|
(438,602 | ) | (719,930 | ) | ||||
Fair
value of warrants transferred to equity upon amendment
|
(282,670 | ) | (290,969 | ) | ||||
Fair
value of warrants exercised
|
— | (49,616 | ) | |||||
Fair
value of warrants outstanding as of September 30
|
$ | 658,147 | $ | 3,720,867 |
See Note
5, “Fair Value of Warrants”, for additional information on the warrant activity
subject to fair value accounting for the three months ended September 30,
2010.
Income
tax expense
Our
effective tax rate was 40.1% during the three months ended September 30, 2010
which differs from the expected tax rate of 39.0% primarily due to permanent
differences related to stock-based compensation and derivatives related to
warrants. The change in our effective tax rate from prior periods is
primarily due to the relation of our taxable income relative to pre-tax
income. We recorded income tax expense of $366,700 and $249,000 for
the three months ended September 30, 2010 and 2009, respectively.
Nine
Months Ended September 30, 2010 compared to Nine Months Ended September 30,
2009
The
following discussion of financial results is derived from unaudited financial
statements for the nine months ended September 30, 2010 and 2009.
Nine Months Ended
September 30, 2010
|
Nine Months Ended
September 30, 2009
|
|||||||||||||||
Amount
|
%
of
Revenue
|
Amount
|
%
of
Revenue
|
|||||||||||||
Service
contract revenue
|
$ | 44,881,099 | 100.0 | % | $ | 38,775,309 | 100.0 | % | ||||||||
HEALTHCARE
EXPENSES:
|
||||||||||||||||
Salaries,
wages and employee benefits
|
25,435,552 | 56.7 | % | 22,138,330 | 57.1 | % | ||||||||||
Medical
expenses
|
9,301,119 | 20.7 | % | 7,248,420 | 18.7 | % | ||||||||||
Other
operating expenses
|
1,540,391 | 3.4 | % | 1,388,780 | 3.6 | % | ||||||||||
Total
healthcare expenses
|
36,277,062 | 80.8 | % | 30,775,530 | 79.4 | % | ||||||||||
Gross
profit
|
8,604,037 | 19.2 | % | 7,999,779 | 20.6 | % | ||||||||||
OPERATING
EXPENSES:
|
||||||||||||||||
Selling
and administrative expenses
|
6,067,251 | 13.5 | % | 5,774,101 | 14.9 | % | ||||||||||
Depreciation
and amortization
|
814,940 | 1.8 | % | 1,627,951 | 4.2 | % | ||||||||||
Total
operating expenses
|
6,882,191 | 15.3 | % | 7,402,052 | 19.1 | % | ||||||||||
Operating
income
|
1,721,846 | 3.8 | % | 597,727 | 1.5 | % | ||||||||||
OTHER
INCOME (EXPENSE)
|
||||||||||||||||
Interest
income
|
72,385 | 0.2 | % | 61,127 | 0.2 | % | ||||||||||
Interest
(expense)
|
— | 0.0 | % | (7,991 | ) | (0.0 | )% | |||||||||
Gain
(loss) on fair value of derivatives
|
358,633 | 0.8 | % | (1,688,623 | ) | (4.4 | )% | |||||||||
Total
other income (expense)
|
431,018 | 1.0 | % | (1,635,487 | ) | (4.2 | )% | |||||||||
Income
(loss) before income taxes
|
2,152,864 | 4.8 | % | (1,037,760 | ) | (2.7 | )% | |||||||||
Income
tax expense
|
980,000 | 2.2 | % | 402,000 | 1.0 | % | ||||||||||
Net
income (loss)
|
$ | 1,172,864 | 2.6 | % | $ | (1,439,760 | ) | (3.7 | )% |
Page - 15
-
Summary
Net
revenue from medical services provided primarily to correctional institutions
for the nine months ended September 30, 2010 and 2009, was $44,881,099 and
$38,775,309, respectively, which represents an increase of $6,105,790, or 15.7%.
Net income was $1,172,864, or 2.6% of revenue, compared to a net loss of
$1,439,760, or 3.7% of revenue, for the nine months ended September 30, 2010 and
2009, respectively, which represented an increase in net income of
$2,612,624.
Revenue
The
addition of service contracts signed with new jurisdictions since January 1,
2009 accounted for $4,737,434, or 77.6% of the increase in revenue, for the nine
months ended September 30, 2010 compared to the same period for the prior
year. These jurisdictions are as follows: Clark County, WA; Coos
County, OR; Creek County, OK; Garrett County, MD; Kittitas County, WA; Pima
County (Juvenile), AZ; Roanoke City, VA; Washington County, MD; and Western
Virginia Regional Jail, VA. Revenue improvement totaling $881,291, or
14.4% of the increase, resulted primarily from expansion of the services
provided under a number of our existing contracts in which we were providing
services prior to January 1, 2009. Price increases related to existing service
requirements totaled $506,488, or 8.3% of the revenue increase. The increase in
revenue was partially offset by $(19,423), or (0.3)% of revenue, which was the
result of decreases in other volume related activities, primarily associated
with lower inmate populations at certain facilities partially offset by an
increase in stop/loss reimbursements due to higher out of facility medical
expenditures in excess of stop/loss limits which are billed back to
clients.
Healthcare
Expenses
Salaries
and employee benefits
Salaries
and employee benefits for healthcare employees were $25,435,552, or 56.7% of
revenue, for the nine months ended September 30, 2010, compared to $22,138,330,
or 57.1% of revenue, for the nine months ended September 30, 2009. The increase
in spending for salaries and employee benefits of $3,297,222, or 14.9%, is due
primarily to the addition of new healthcare employees resulting from new
business. Approximately 78.6% of the increase related to new healthcare
employees required to support the staffing requirements for our new medical
service contracts as detailed above. Additional services related to previously
existing medical service contracts, as well as cost-of-living and wage and
benefit adjustments for existing employees accounted for the remainder of the
increase.
Medical
expenses
Medical
expenses for the nine months ended September 30, 2010 and 2009 were $9,301,119,
or 20.7% of revenue, and $7,248,420, or 18.7% of revenue, respectively, which
represented an increase of $2,052,699, or 28.3%. The increase in spending for
medical expenses in absolute dollars primarily reflects increases related to new
contracts for medical services both in and out of the facility plus increased
expenditures for pharmacy services. The increase in spending as a percentage of
revenue results, in part, from the new service contracts added since January 1,
2009 that are primarily full service contracts and, as a result, included a
higher proportion of medical expense when compared to existing
contracts. In addition, out of facility hospital expenses were higher
than the prior year, reflecting a return to normal spending levels, due to lower
than normal hospitalization days in the first six months of
2009. Additionally, expenses for providing pharmacy services for
existing service contracts increased due to increases in pharmaceutical prices
as well as an increase in HIV treatment expenditures compared to the prior
period.
Other
operating expenses
Other
operating expenses were $1,540,391, or 3.4% of revenue, for the nine months
ended September 30, 2010, compared to $1,388,780, or 3.6% of revenue, for the
nine months ended September 30, 2009. The increase of $151,611 in spending is
primarily related to the increase in the number of inmates served as a result of
the new service contracts and reflects increased spending for consulting fees,
professional liability insurance, business development fees and travel expenses
partially offset by a reduction in employment advertising and recruiting
expense.
Operating
Expenses
Selling
and administrative expenses
Selling
and administrative expenses for the nine months ended September 30, 2010 and
2009 were $6,067,251, or 13.5% of revenue, and $5,774,101, or 14.9% of revenue,
respectively. The increased expenditure of $293,150 primarily reflects
investment in management and administrative personnel required to support new
contracts and services added since January 1, 2009, as well as increases in
consulting fees and corporate advertising which were partially offset by lower
accounting fees, legal fees, business development fees and rent
expense. The reduction in spending as a percentage of revenue
reflects improved economies of scale as selling and administrative expenses
continue to grow at a slower pace than revenue. Stock-based
compensation for the nine months ended September 30, 2010 and 2009 was $465,516
and $475,597, respectively.
Page - 16
-
Depreciation
and amortization
Depreciation
and amortization primarily reflects the amortization of intangible assets
related to the acquisition of Conmed, Inc. in January 2007, the purchase of
medical service contracts from EMDC in February 2008 and the acquisition of CMHS
in November 2008. Amortization of service contracts acquired was $372,000, or
0.8% of revenue, for the nine months ended September 30, 2010, compared to
$1,187,000, or 3.1% of revenue, for the nine months ended September 30, 2009.
The decrease primarily reflects lower amortization expense as certain individual
service contracts acquired have become fully amortized. Amortization
of non-compete agreements was $235,447, or 0.5% of revenue, for the nine months
ended September 30, 2010, compared to $289,000, or 0.7% of revenue, for the nine
months ended September 30, 2009. Depreciation expense increased to $207,493 for
the nine months ended September 30, 2010 compared to $151,951 for the prior year
period reflecting capital expenditures associated with vehicle purchases as well
as purchases of medical equipment at various facilities.
Interest
income
Interest
income was $72,385 for the nine months ended September 30, 2010 compared to
$61,127 for the same period in 2009. Average cash balances were higher during
the nine months ended September 30, 2010 compared to the nine months ended
September 30, 2009, however the marginally higher interest income in 2010
reflects reduced short-term interest rates during the period.
Interest
expense
Interest
expense for the nine months ended September 30, 2010 decreased to $0 compared to
$7,991 in the same period in 2009.
Gain
(loss) on fair value of derivatives
As a
result of adopting derivative accounting for certain warrants which contain a
strike price adjustment feature effective January 1, 2009, 1,705,000 of our then
issued and outstanding common stock purchase warrants previously treated as
equity were no longer afforded equity treatment and as a result they are now
recorded as a liability based on fair value estimates. These common
stock purchase warrants do not trade in an active securities market, and as
such, we estimate the fair value of these warrants using the Black-Scholes
option pricing model and all changes in the fair value of these warrants will be
recognized currently in earnings until such time as the warrants are exercised,
amended or expire.
During
the nine months ended September 30, 2010 and 2009, we recognized a $391,223
unrealized gain and a $1,632,695 unrealized loss, respectively. The
decreased expense of $2,023,918 was primarily the result of our stock price
decreasing $0.12 during the nine months ended September 30, 2010 compared to a
$1.15 stock price increase during the nine months ended September 30,
2009. Additionally, there were 813,000 fewer warrants subject to fair
value accounting during the nine months ended September 30, 2010 compared to the
nine months ended September 30, 2009, primarily due to the amendment of certain
warrant agreements to remove the provisions that resulted in liability treatment
subsequent to September 30, 2009.
During
the nine months ended September 30, 2010, no warrants were exercised and
warrants to purchase 90,000 shares of common stock were amended and are now
treated as equity. As of September 30, 2010, we had outstanding
warrants subject to derivative accounting to purchase an aggregate of 628,097
shares of common stock. During the nine months ended September 30,
2009, warrants to purchase 40,000 shares of common stock were exercised
generating $12,000 of net proceeds and warrants to purchase 132,333 shares of
common stock were exercised by cashless exercise and as a result, a total of
155,783 shares of common stock were issued. As of September 30, 2009,
we had outstanding warrants subject to derivative accounting to purchase an
aggregate of 1,441,097 shares of common stock.
The
following table summarizes the change in fair value for the nine months ended
September 30:
2010
|
2009
|
|||||||
Fair
value of warrants outstanding as of January 1
|
$ | 1,299,450 | $ | 2,766,150 | ||||
Realized
loss on warrants
|
32,590 | 55,927 | ||||||
Unrealized
(gain) loss on warrants
|
(391,223 | ) | 1,632,695 | |||||
Fair
value of warrants transferred to equity upon amendment
|
(282,670 | ) | (290,968 | ) | ||||
Fair
value of warrants exercised
|
— | (442,937 | ) | |||||
Fair
value of warrants outstanding as of September 30
|
$ | 658,147 | $ | 3,720,867 |
Page - 17
-
See Note
5, “Fair Value of Warrants”, for additional information on the warrant activity
subject to fair value accounting for the nine months ended September 30,
2010.
Income
tax expense
Our
effective tax rate was 45.5% during the nine months ended September 30, 2010
which differs from the expected tax rate of 39.0% primarily due to permanent
differences related to stock-based compensation and derivatives related to
warrants. The change in our effective tax rate from prior periods is
primarily due to the relation of our taxable income relative to pre-tax
income. We recorded income tax expense of $980,000 and $402,000 for
the nine months ended September 30, 2010 and 2009, respectively.
Liquidity
and Capital Resources
Financing
is generally provided by funds generated from our operating
activities.
Cash
Flow for the nine months ended September 30, 2010 compared to the nine months
ended September 30, 2009
Cash as
of September 30, 2010 and September 30, 2009 was $13,008,470 and $10,119,183,
respectively. We believe that our existing cash balances and
anticipated cash flows from future operations will be sufficient to meet our
normal operating requirements and liquidity needs for at least the next twelve
months.
Cash
Flows from Operating Activities
Cash flow
from operations for the nine months ended September 30, 2010 totaled $2,245,099,
reflecting a net income of $1,172,864 plus $960,573 in adjustments for non-cash
expenses such as amortization of intangible assets of $607,447, amortization of
long-term customer agreement of $43,750, stock-based compensation of $465,516,
change in fair value of warrants of ($358,633), depreciation of $207,493 and
deferred income taxes of ($5,000). Changes in working capital
components provided $111,662, reflective of an increase in accounts payable of
$742,019 and a decrease in prepaid expenses of $638,623 partially offset by an
increase in accounts receivable of $682,185 and decreases in accrued expenses of
$280,170, deferred revenue of $191,008 and income taxes payable of
$115,617. The increase in accounts payable was primarily from the
receipt of medical expense invoices which were previously estimated in accrued
expenses as well as the timing of vendor payments in relation to quarter
end. The decrease in prepaid expenses resulted primarily from a
reduction in prepaid professional liability insurance. We prepaid our
annual professional liability insurance policy premium in October 2009 and we
expense the prepaid amounts ratably during the annual policy period of October
through September. The increase in accounts receivable resulted
primarily from new medical service contracts added in 2010 as well as increased
receivables for stop/loss reimbursements due to higher out of facility medical
expenditures in excess of stop/loss limits. The decrease in accrued
expenses resulted primarily from the receipt of medical expense invoices that
are now recorded in accounts payable, a decrease in accrued wages covering seven
less days as compared to the accrual at December 31, 2009 and a reduction in
corporate accrued expenses which were partially offset by increases in accruals
for employee benefits for paid time off and health
insurance. Deferred revenue decreased primarily as a result of a
reduction in advance customer payments received prior to quarter
end. The decrease in income taxes payable resulted primarily from the
payment of scheduled estimated taxes partially offset by accruals of estimated
taxes payable.
Cash flow
from operations for the nine months ended September 30, 2009 totaled
$3,111,164. The net loss of $1,439,760 was offset by $3,415,171 in
adjustments for non-cash expenses such as the change in fair value of
derivatives of $1,688,623, amortization of $1,476,000, stock-based compensation
of $475,597 and deferred income taxes of $377,000. Changes in working
capital components generated an additional $1,135,753, reflective of increases
in accounts payable of $120,886, accrued expenses of $766,590, income taxes
payable of $220,860 and deferred revenue of $374,888, as well as a decrease in
prepaid expenses of $114,820 partially offset by an increase in accounts
receivable of $462,016. The increase in accounts payable resulted
primarily from the timing of vendor payments in relation to quarter
end. The increase in accrued expenses resulted primarily from the
addition of new healthcare employees required to support the increased staffing
requirements from our new medical service contracts in addition to the wage
accrual covering eight additional days as compared to December 31, 2008
partially offset by a reduction in accrued medical expenses. The
increase in income taxes payable resulted primarily from our increased estimate
of taxable income, resulting in taxes payable in excess of scheduled estimated
tax payments. The increase in deferred revenue resulted primarily
from an increase in advance customer payments for services to be provided in the
future. The decrease in prepaid expenses resulted primarily from a
reduction in prepaid professional liability insurance as September is the end of
the primary policy period. The increase in accounts receivable
resulted primarily from new medical service contracts added in
2009.
Cash
Flows from Investing Activities
Cash flow
used in investing activities for the nine months ended September 30, 2010 used
$299,069. Purchases of property and equipment used $151,801 primarily
for purchases of vehicles, computers and medical equipment. The
purchase of all of the assets of a small mobile imaging company used
$147,268.
Page - 18
-
Cash flow
from investing activities for the nine months ended September 30, 2009 used
$282,339, primarily for purchases of vehicles, computers and medical
equipment.
Cash
Flows from Financing Activities
Cash flow
from financing activities for the nine months ended September 30, 2010 generated
cash of $6,297 related to the proceeds from the exercise of stock
options.
Cash flow
from financing activities for the nine months ended September 30, 2009 used cash
of $181,782. Payments on the line of credit were $100,000 and
payments on loans were $93,782 which were partially offset by proceeds from
warrant exercises of $12,000.
Loans
As of
September 30, 2010, we had no outstanding loans.
Off
Balance Sheet Arrangements
We are
required to provide performance and payment guarantee bonds to county
governments under certain contracts. As of September 30, 2010, we have three
performance bonds totaling $8,095,675 and two payment bonds for $2,891,925,
totaling $10,987,600. The surety issuing the bonds has recourse against our
assets in the event the surety is required to honor the bonds.
Contractual
Obligations
The
following table presents our expected cash requirements for contractual
obligations outstanding as of September 30, 2010:
Total
|
Current
|
2 – 3
Years
|
4 – 5 Years
|
Thereafter
|
||||||||||||||||
Equipment
Leases
|
$ | 197,065 | $ | 73,244 | $ | 87,547 | $ | 36,274 | $ | — | ||||||||||
Automobile
Leases
|
18,398 | 17,604 | 794 | — | — | |||||||||||||||
Office
Space Leased
|
360,222 | 164,032 | 196,190 | — | — | |||||||||||||||
Total
Contractual Cash Obligations
|
$ | 575,685 | $ | 254,880 | $ | 284,531 | $ | 36,274 | $ | — |
Effects
of Inflation
We do not
believe that inflation and changing prices over the past three years have had a
significant impact on our revenue or results of operations.
Potential
Future Service Contract Revenue
As of
September 30, 2010, we have entered into 60 agreements with county governments
to provide medical and healthcare services primarily to county and municipal
correctional facilities. Most of these contracts are for multiple years and
include option renewal periods which are, in all cases, at the county's option.
The original terms of the contracts are from one to nine years. These medical
and mental healthcare service contracts have potential future service contract
revenue of $176 million as of September 30, 2010, with a weighted-average term
of 3.7 years including option renewal periods, of which approximately $57
million relates to the initial contract period and approximately $119 million
relates to the option renewal periods.
ITEM
3.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
The
information in this Item is not required to be provided by Smaller Reporting
Companies pursuant to Regulation S-K.
ITEM
4(T).
|
CONTROLS
AND PROCEDURES
|
Evaluation of Disclosure Controls
and Procedures. Under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer,
we evaluated the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the
Exchange Act) as of the end of the period covered by this report. Based upon
that evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures as of the end of the
period covered by this report were effective such that the information required
to be disclosed by us in reports filed under the Exchange Act is
(i) recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms and (ii) accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding
disclosure.
Changes in Internal Control over
Financial Reporting. During the most recently completed fiscal quarter,
there has been no change in our internal control over financial reporting that
has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
Page - 19
-
PART
II. OTHER INFORMATION
ITEM
1.
|
LEGAL
PROCEEDINGS
|
There are
no material changes in the legal proceedings pending against us.
ITEM
1A.
|
RISK
FACTORS
|
The
information in this Item is not required to be provided by Smaller Reporting
Companies.
ITEM
2.
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
|
None
ITEM
3.
|
DEFAULTS
UPON SENIOR SECURITIES
|
None
ITEM
4.
|
RESERVED
|
ITEM
5.
|
OTHER
INFORMATION
|
None
ITEM
6.
|
EXHIBITS
|
10.1
|
Retirement
Agreement dated as of July 1, 2010 by and between the Company and Howard
M. Haft, M.D. (executed on July 20, 2010) (incorporated by reference to
the Company’s Current Report on Form 8-K filed on July 23,
2010).
|
|
31.1
|
Section
302 Certification of Principal Executive Officer
|
|
31.2
|
Section
302 Certification of Principal Financial Officer
|
|
32.1
|
Section
906 Certification of Principal Executive Officer
|
|
32.2
|
Section
906 Certification of Principal Financial
Officer
|
Page - 20
-
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Conmed
Healthcare Management, Inc.
|
|
November
12, 2010
|
|
By /s/ Richard W. Turner
|
|
Richard
W. Turner, Ph.D.
|
|
Chairman
and Chief Executive Officer
|
|
(principal
executive officer)
|
November
12, 2010
|
|
By /s/ Thomas W. Fry
|
|
Thomas
W. Fry
|
|
Chief
Financial Officer and Secretary
|
|
(principal
financial officer and principal accounting
officer)
|
Page - 21
-