Attached files

file filename
EX-31.1 - EXHIBIT 31.1 - BIRNER DENTAL MANAGEMENT SERVICES INCex31_1.htm
EX-31.2 - EXHIBIT 31.2 - BIRNER DENTAL MANAGEMENT SERVICES INCex31_2.htm
EX-32.1 - EXHIBIT 32.1 - BIRNER DENTAL MANAGEMENT SERVICES INCex32_1.htm
EXCEL - IDEA: XBRL DOCUMENT - BIRNER DENTAL MANAGEMENT SERVICES INCFinancial_Report.xls


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 EXCHANGE ACT OF 1934
 
                For the quarterly period ended
March 31, 2012
 
OR
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____________________________________ to _____________________________________
 
Commission file number 0-23367

BIRNER DENTAL MANAGEMENT SERVICES, INC.
(Exact name of registrant as specified in its charter)
 
COLORADO
 
84-1307044
(State or other jurisdiction of incorporation or organization)   (IRS Employer Identification No.)
 
1777 S. HARRISON STREET, SUITE 1400    
DENVER, COLORADO
 
80210
(Address of principal executive offices)
 
(Zip Code)

(303) 691-0680
(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 x  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 issuer’s classes of common stock, as of the latest practicable date.
 
Class
 
Shares Outstanding as of May 4, 2012
Common Stock, no par value
 
1,843,490
 


 
 

 
 
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
 
PART I - FINANCIAL INFORMATION  
     
Item 1.            Financial Statements
Page
     
 
3
     
 
4
     
 
5
     
  Unaudited Condensed Consolidated Statements of Comprehensive Income for the Quarters ended March 31, 2011 and 2012 5
     
 
6
     
 
8
     
Item 2.
14
     
Item 4.
21
     
PART II - OTHER INFORMATION
 
     
Item 2.
22
     
Item 6.
23
     
 
24

 
2

 
PART I - FINANCIAL INFORMATION


BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
(UNAUDITED)

   
December 31,
   
March 31,
 
ASSETS
 
2011
   
2012
 
             
CURRENT ASSETS:
             
Cash and cash equivalents
  $ 923,878     $ 728,668  
Accounts receivable, net of allowance for doubtful accounts of $302,000 and $282,000, respectively
    2,855,726       3,329,131  
Deferred tax asset
    197,327       197,327  
Prepaid expenses and other assets
    639,116       935,662  
                 
Total current assets
    4,616,047       5,190,788  
                 
PROPERTY AND EQUIPMENT, net
    5,789,521       6,185,637  
                 
OTHER NONCURRENT ASSETS:
               
Intangible assets, net
    11,095,926       10,868,916  
Deferred charges and other assets
    165,267       162,559  
Notes receivable
    155,419       145,306  
                 
Total assets
  $ 21,822,180     $ 22,553,206  
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
                 
CURRENT LIABILITIES:
               
Accounts payable
  $ 2,111,155     $ 2,002,479  
Accrued expenses
    1,973,593       1,723,537  
Accrued payroll and related expenses
    1,731,273       2,495,908  
Income taxes payable
    115,038       272,462  
                 
Total current liabilities
    5,931,059       6,494,386  
                 
LONG-TERM LIABILITIES:
               
Deferred tax liability, net
    2,309,279       2,309,279  
Long-term debt, net of current maturities
    4,251,068       4,800,000  
Other long-term obligations
    1,504,684       1,501,264  
                 
Total liabilities
    13,996,090       15,104,929  
                 
SHAREHOLDERS' EQUITY:
               
Preferred Stock, no par value, 10,000,000 shares authorized; none outstanding
    -       -  
Common Stock, no par value, 20,000,000 shares authorized;1,837,519 and 1,848,118 shares issued and outstanding, respectively
    368,186       88,165  
Retained earnings
    7,457,904       7,360,112  
                 
Total shareholders' equity
    7,826,090       7,448,277  
                 
Total liabilities and shareholders' equity
  $ 21,822,180     $ 22,553,206  
 
 
The accompanying notes are an integral part of these financial statements.
 
 
3


BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
(UNAUDITED)

   
Quarters Ended
 
   
March 31,
 
   
2011
   
2012
 
             
REVENUE:
  $ 17,075,202     $ 16,199,687  
                 
DIRECT EXPENSES:
               
Clinical salaries and benefits
    9,712,072       9,137,850  
Dental supplies
    801,544       676,992  
Laboratory fees
    715,479       753,456  
Occupancy
    1,350,391       1,365,316  
Advertising and marketing
    577,344       675,562  
Depreciation and amortization
    618,194       649,562  
General and administrative
    1,603,838       1,209,468  
      15,378,862       14,468,206  
                 
Contribution from dental offices
    1,696,340       1,731,481  
                 
CORPORATE EXPENSES:
               
General and administrative
    1,019,061 (1)     1,167,494 (1)
Depreciation and amortization
    19,583       35,289  
                 
OPERATING INCOME
    657,696       528,698  
Interest expense, net
    24,705       22,480  
                 
INCOME BEFORE INCOME TAXES
    632,991       506,218  
Income tax expense
    246,867       197,424  
                 
NET INCOME
  $ 386,124     $ 308,794  
                 
Net income per share of Common Stock - Basic
  $ 0.21     $ 0.17  
                 
Net income per share of Common Stock - Diluted
  $ 0.20     $ 0.17  
                 
Cash dividends per share of Common Stock
  $ 0.20     $ 0.22  
                 
Weighted average number of shares of Common Stock and dilutive securities:
               
Basic
    1,852,001       1,847,024  
                 
Diluted
    1,918,207       1,859,522  
 
(1)
Corporate expense - general and administrative includes $43,019 of stock-based compensation expense pursuant to ASC Topic 718 and $81,414 related to a long-term incentive program for the quarter ended March 31, 2011 and $232,765 of stock-based compensation expense pursuant to ASC Topic 718 for the quarter ended March 31, 2012.

The accompanying notes are an integral part of these financial statements.
 
 
4


BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
(UNAUDITED)

   
Common Stock
   
Retained
   
Shareholders'
 
   
Shares
   
Amount
    Earnings     Equity  
               
 
       
BALANCES, December 31, 2011
    1,837,519     $ 368,186     $ 7,457,904     $ 7,826,090  
Common Stock options exercised
    7,178       -       -       -  
Purchase and retirement of Common Stock
    (31,459 )     (512,786 )     -       (512,786 )
LTIP restricted stock units granted
    34,880       -       -       -  
Dividends declared on Common Stock
    -       -       (406,586 )     (406,586 )
Stock-based compensation expense
    -       232,765       -       232,765  
Other comprehensive income
    -       -       -       -  
Net income, three months ended March 31, 2012
    -       -       308,794       308,794  
                                 
BALANCES, March 31, 2012
    1,848,118     $ 88,165     $ 7,360,112     $ 7,448,277  

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR QUARTERS ENDED MARCH 31,
(UNAUDITED)

   
2011
   
2012
 
Net income
  $ 386,124       308,794  
Other comprehensive income
    2,497       -  
                 
Comprehensive income
  $ 388,621     $ 308,794  

The accompanying notes are an integral part of these financial statements.
 
 
5


BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
(UNAUDITED)

   
Quarters Ended
 
   
March 31,
 
   
2011
   
2012
 
CASH FLOWS FROM OPERATING ACTIVITIES:
       
Net income
  $ 386,124     $ 308,794  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    640,064       684,851  
Stock-based compensation expense
    124,433       232,765  
Provision for doubtful accounts
    160,799       103,115  
Discontinued operations costs
    (20,152 )     -  
Changes in assets and liabilities net of effects from acquisitions:
               
Accounts receivable
    (273,543 )     (576,520 )
Prepaid expenses and other assets
    (416,276 )     (296,546 )
Deferred charges and other assets
    -       2,708  
Accounts payable
    407,385       (108,675 )
Accrued expenses
    (382,411 )     (247,990 )
Accrued payroll and related expenses
    696,713       764,635  
Income taxes payable
    657,667       157,424  
Other long-term obligations
    46,981       (3,420 )
Net cash provided by operating activities
    2,027,784       1,021,141  
                 
CASH FLOWS USED IN INVESTING ACTIVITIES:
         
Capital expenditures
    (719,547 )     (853,956 )
Notes receivable - related parties, net
    4,793       10,113  
Net cash used in investing activities
    (714,754 )     (843,843 )
                 
CASH FLOWS USED IN FINANCING ACTIVITIES:
         
Advances – line of credit
    4,373,113       6,431,364  
Repayments – line of credit
    (4,520,130 )     (5,882,432 )
Repayments – Term Loan
    (230,000 )     -  
Purchase and retirement of Common Stock
    (47,500 )     (512,786 )
Common Stock cash dividends
    (370,143 )     (408,654 )
Net cash used in financing activities
    (794,660 )     (372,508 )
                 
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    518,370       (195,210 )
CASH AND CASH EQUIVALENTS, beginning of period
    406,208       923,878  
CASH AND CASH EQUIVALENTS, end of period
  $ 924,578     $ 728,668  

The accompanying notes are an integral part of these financial statements.
 
 
6


BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

   
Quarters Ended
 
   
March 31,
 
   
2011
   
2012
 
             
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
           
             
Cash paid for interest
  $ 36,747     $ 28,066  
Cash paid for income taxes
  $ 25,000     $ 40,000  
Cash received for income taxes
  $ 435,800     $ -  
                 
NON-CASH ITEM:
               
                 
Gain recognized on interest rate swap (net of taxes)
  $ 2,497     $ -  

The accompanying notes are an integral part of these financial statements.
 
 
7


BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
March 31, 2012

(1) 
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The condensed consolidated financial statements included herein are unaudited and have been prepared by Birner Dental Management Services, Inc. (the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”).  Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures included herein are adequate to make the information presented not misleading. A description of the Company’s accounting policies and other financial information is included in the audited consolidated financial statements as filed with the SEC in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to present fairly the financial position of the Company as of March 31, 2012 and the results of operations and cash flows for the periods presented.  All such adjustments are of a normal recurring nature.  The results of operations for the quarter ended March 31, 2012 are not necessarily indicative of the results that may be achieved for a full fiscal year and cannot be used to indicate financial performance for the entire year.

(2)
SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation/Basis of Consolidation

The accompanying condensed consolidated financial statements have been prepared on the accrual basis of accounting. These financial statements present the financial position and results of operations of the Company and the dental offices (“Offices”), which are under the control of the Company.  The Offices are organized as professional corporations (“P.C.s”) and the Company provides business services to the Offices under long-term management agreements (the “Management Agreements”).  All intercompany accounts and transactions have been eliminated in the consolidation.

The Company treats Offices as consolidated subsidiaries where it has a long-term and unilateral controlling financial interest over the assets and operations of the Offices. The Company maintains control of substantially all of its Offices via the Management Agreements. The Company is a business service organization and does not engage in the practice of dentistry or the provision of dental hygiene services. These services are provided by licensed professionals. Certain key features of these arrangements either enable the Company at any time and in its sole discretion to cause a change in the shareholder of the P.C. (i.e., ''nominee shareholder'') or allow the Company to vote the shares of stock held by the owner of the P.C. and to elect a majority of the board of directors of the P.C.  The accompanying condensed consolidated statements of income reflect revenue, which is the amount billed to patients less contractual adjustments. Direct expenses consist of all the expenses incurred in operating the Offices and paid by the Company.  Under the Management Agreements, the Company assumes responsibility for the management of most aspects of the Offices' business (the Company does not engage in the practice of dentistry or the provision of dental hygiene services), including personnel recruitment and training; comprehensive administrative, business and marketing support and advice; and facilities, equipment, and support personnel as required to operate the practices.

The Company prepares its consolidated financial statements in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810, which provides for consolidation of variable interest entities (“VIEs”) of which the Company is the primary beneficiary. The Company has concluded that the P.C.s meet the definition of VIEs as defined by this standard and that the Company is the primary beneficiary of these VIEs.  This conclusion was reached because the Company has the power to direct significant activities of the VIEs and the Company is obligated to absorb losses of and/or provide rights to receive benefits from the VIEs.

Revenue

Revenue is generally recognized when services are provided and are reported at estimated net realizable amounts due from insurance companies, preferred provider and health maintenance organizations (i.e., third-party payors) and patients for services rendered, net of contractual and other adjustments.  Dental services are billed and collected by the Company in the name of the Offices.
 
 
8


Revenue under certain third-party payor agreements is subject to audit and retroactive adjustments. To the Company’s knowledge, there are no material claims, disputes or other unsettled matters that exist concerning third-party reimbursements as of March 31, 2012.

Most of the Company’s patients are insured under third-party payor agreements. The Company’s billing system generates contractual adjustments for each patient encounter based on fee schedules for the patient’s insurance plan.  The services provided are attached to the patient’s fee schedule based on the insurance the patient has at the time the service is provided.  Therefore, the revenue that is recorded by the billing system is based on insurance contractual amounts. Additionally, each patient at the time of service signs a form agreeing that the patient is ultimately responsible for the contracted fee if the insurance company does not pay the fee for any reason.

Intangible Assets

The Company's dental practice acquisitions involve the purchase of tangible and intangible assets and the assumption of certain liabilities of the acquired dental Offices. As part of the purchase price allocation, the Company allocates the purchase price to the tangible and identifiable intangible assets acquired and liabilities assumed, based on estimated fair market values. Costs of acquisition in excess of the net estimated fair value of tangible assets acquired and liabilities assumed are allocated to the Management Agreement related to the Office. The Management Agreement represents the Company's right to manage the Offices during the 40-year term of the Management Agreement. The assigned value of the Management Agreement is amortized using the straight-line method over a period of 25 years.  Amortization was approximately $227,000 and $225,000 for the quarters ended March 31, 2012 and 2011, respectively.

The Management Agreements cannot be terminated by a P.C. without cause, consisting primarily of bankruptcy or material default by the Company.

If facts and circumstances indicate that the carrying value of long-lived and intangible assets may be impaired, the Company will perform an evaluation of recoverability. If an evaluation is required, the estimated future undiscounted cash flows associated with the asset will be compared to the asset’s carrying amount to determine if a write-down to market value or discounted cash flow value is required.

Stock Options

The Company recognizes compensation expense on a straight line basis over the requisite service period of the award. Total stock-based compensation expense included in the Company’s condensed consolidated statements of income for the quarters ended March 31, 2012 and 2011 was approximately $233,000 and $124,000, respectively.  For the quarter ended March 31, 2012, stock-based compensation expense consisted of approximately $233,000 related to stock option expense.  For the quarter ended March 31, 2011, stock-based compensation expense consisted of approximately $43,000 related to stock option expense and approximately $81,000 related to restricted stock units granted under the Company’s long-term incentive program (the “LTIP”).  The LTIP was adopted by the Board of Directors on June 3, 2009 and provides for long-term performance-based cash and stock opportunities for the executive officers of the Company.  Total stock-based compensation expense was recorded as a component of corporate general and administrative expense.
 
The Black-Scholes option-pricing model was used to estimate the option fair values. The option-pricing model requires a number of assumptions, of which the most significant are expected stock price volatility, the expected pre-vesting forfeiture rate, expected dividend rate and the expected option term (the amount of time from the grant date until the options are exercised or expire). Expected volatility was calculated based upon actual historical stock price movements over the most recent periods ended March 31, 2012 equal to the expected option term. Expected pre-vesting forfeitures were estimated based on historical pre-vesting forfeitures over the most recent periods ended March 31, 2012 for the expected option term.
 
 
9

 
Recent Accounting Pronouncements
 
In May 2011, the Financial Accounting Standards Board (the “FASB) issued Accounting Standards Update (“ASU”) No. 2011-04 (ASC 2011-04), an update to ASC Topic 820, “Fair Value Measurements and Disclosures.”  This update amends current guidance to achieve common fair value measurement and disclosure requirements in U.S. GAAP and International Financial Reporting Standards.  The update also includes instances where a particular principle or requirement for measuring fair value or disclosing information about fair value measurements has changed.  ASC Update 2011-04 is effective for interim and annual periods beginning after December 15, 2011.  The adoption of ASC Update 2011-04 is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

In June 2011, the FASB issued an accounting standard update that eliminates the current option to report other comprehensive income and its components in the statement of stockholders’ equity.  Instead, an entity will be required to present items of net income and other comprehensive income in one continuous statement or in two separate but consecutive statements.  The standard is effective for fiscal years beginning after December 15, 2011.  The Company has adopted this accounting standard.  This update affects presentation and disclosure and therefore does not affect the Company’s consolidated financial position, result of operations or cash flows.

In July 2011, the FASB issued ASU No. 2011-07, Health Care Entities (Topic 954): Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Care Entities (“ASU 2011-07”).  In accordance with ASU 2011-07, an entity will be required to present its provision for doubtful accounts related to patient service revenue as a deduction from revenue, similar to contractual discounts.  Accordingly, entities patient service revenues will be reported net of both contractual discounts and its provision for doubtful accounts related to patient service revenues.  Additionally, ASU 2011-07 will require entities to make certain additional disclosures designed to help investors understand how contractual discounts and bad debts affect recorded revenue in both interim and annual financial statements.  ASU 2011-07 requires retrospective application and is effective for public companies for fiscal years beginning after December 15, 2011, and interim periods within those fiscal years.  ASU 2011-07 did not have a material effect on the Company’s consolidated financial statements.

(3)
EARNINGS PER SHARE

The Company calculates earnings per share in accordance with ASC Topic 260.

   
Quarters Ended March 31,
 
   
2011
   
2012
 
   
Net Income
   
Shares
   
Per Share
Amount
   
Net Income
   
Shares
   
Per Share
Amount
 
                                     
Basic EPS
  $ 386,124       1,852,001     $ 0.21     $ 308,794       1,847,024     $ 0.17  
                                                 
Effect of Dilutive Stock Options
    -       66,206       (0.01 )     -       12,498       -  
                                                 
Diluted EPS
  $ 386,124       1,918,207     $ 0.20     $ 308,794       1,859,522     $ 0.17  

The difference in weighted average shares outstanding between basic earnings per share and diluted earnings per share for the quarters ended March 31, 2012 and 2011 relates to the effect of 12,498 and 66,206, respectively, of dilutive shares of the Company’s Common Stock (“Common Stock”) from stock options, which are included in total shares for the diluted earnings per share calculation.  For the quarters ended March 31, 2012 and 2011, options to purchase 331,100 and 136,500 shares, respectively, of Common Stock were not included in the computation of dilutive earnings per share because their effect was anti-dilutive.

(4) 
STOCK-BASED COMPENSATION PLANS

The Company’s shareholders approved the 2005 Equity Incentive Plan (“2005 Plan”) in June 2005.  An amendment to the 2005 Plan was approved at the June 2009 annual meeting of shareholders to increase the number of authorized shares of Common Stock issuable under the 2005 Plan from 425,000 shares to 625,000 shares. The 2005 Plan provides for the grant of incentive stock options, restricted stock, restricted stock units and stock grants to employees (including officers and employee-directors) and non-statutory stock options to employees, directors and consultants.
 
 
10

 
The objectives of this plan include attracting and retaining the best personnel and providing for additional performance incentives by providing employees with the opportunity to acquire equity in the Company. As of March 31, 2012, there were 15,768 shares available for issuance under the 2005 Plan.  On March 15, 2012, the Company’s Compensation Committee granted the Chief Executive Officer options to purchase 100,000 shares at $18.39 per share, of which 50,000 are subject to shareholder approval of an amendment to the 2005 Plan which would increase the amount of shares available by 150,000.  The exercise price of the stock options issued under the 2005 Plan is equal to the market price, or market price plus 10% for shareholders who own greater than 10% of the Company, at the date of grant. These stock options expire seven years, or five years for shareholders who own greater than 10% of the Company, from the date of the grant and vest annually over a service period ranging from three to five years. The 2005 Plan is administered by a committee of two or more independent directors from the Company’s Board of Directors (the “Committee”). The Committee determines the eligible individuals to whom awards under the 2005 Plan may be granted, as well as the time or times at which awards will be granted, the number of shares subject to awards to be granted to any eligible individual, the life of any award, and any other terms and conditions of the awards in addition to those contained in the 2005 Plan. As of March 31, 2012, there were 209,268 vested options and 218,666 unvested options under the 2005 Plan.
 
The Company uses the Black-Scholes option-pricing model to estimate the fair value of each option granted with the following weighted average assumptions:
 
   
Quarters Ended
 
   
March 31,
 
Valuation Assumptions
 
2011 (5)
   
2012
 
             
Expected life (1)
    -       5.0  
Risk-free interest rate (2)
    -       0.88 %
Expected volatility (3)
    -       50 %
Expected dividend yield
    -       4.79 %
Expected Forfeiture (4)
    -       -  
 
 

(1)
The expected life, in years, of stock options is estimated based on historical experience.
(2)
The risk-free interest rate is based on U.S. Treasury bills whose term is consistent with the expected life of the stock options.
(3)
The expected volatility is estimated based on historical and current stock price data for the Company.
(4)
Forfeitures are estimated based on historical experience.
(5)
The Company did not issue any options during the quarter ended March 31, 2011.

 
11


A summary of option activity as of March 31, 2012, and changes during the quarter then ended, is presented below:
 
   
Number of
Options
   
Weighted-
Average
Exercise
Price
   
Range of
Exercise Prices
   
Weighted-
Average
Remaining
Contractual
Term (years)
   
Aggregate
Intrinsic
Value
(thousands)
 
Outstanding at December 31, 2011
    410,689     $ 18.41     $ 10.20 - $21.85       4.0     $ 219  
Granted
    50,000     $ 18.39     $ 18.39 - $18.39                  
Exercised
    32,755     $ 14.53     $ 10.20 - $17.61                  
                                         
Outstanding at March 31, 2012
    427,934     $ 18.70     $ 10.75 - $21.85       4.3     $ 294  
                                         
Exercisable at March 31, 2012
    209,268     $ 18.78     $ 10.75 - $21.85       3.1     $ 172  

The weighted average grant date fair values of options granted were $5.36 per share during the quarter ended March 31, 2012.  No stock options were granted during the quarter ended March 31, 2011.  Net cash proceeds from the exercise of stock options during the quarters ended March 31, 2012 and 2011 were $0 and $0, respectively. There was no associated income tax effect from stock options exercised during the quarters ended March 31, 2012 and 2011.  As of the date of exercise, the total intrinsic values of options exercised during quarters ended March 31, 2012 and 2011 were $131,545 and $80,915, respectively. As of March 31, 2012, there was approximately $678,000 of total unrecognized compensation expense related to non-vested stock options, which is expected to be recognized over a weighted average period of 1.73 years.

(5)
LONG-TERM INCENTIVE PROGRAM

On June 3, 2009, the Compensation Committee of the Board of Directors adopted the LTIP.  The LTIP, which operated under the 2005 Plan, provided for long-term performance-based cash and stock opportunities for the executive officers of the Company.  Details of the LTIP are as follows:

The Company’s executive officers were able to earn an aggregate of up to $1,050,000 in cash and up to 80,000 shares of Common Stock of the Company.  The Company issued restricted stock units with respect to the 80,000 shares.  Frederic W. Birner, the Company’s Chairman and Chief Executive Officer, Dennis N. Genty, the Company’s Chief Financial Officer, and Mark A. Birner, D.D.S., the Company’s President, were able to earn up to 50%, 25% and 25% of the foregoing amounts, respectively.  Of the foregoing amounts, 24%, 33% and 43% were able to be earned in each of 2009, 2010 and 2011, respectively.

The executive officers were able to earn the foregoing amounts through achievement by the Company of performance targets related to patient revenue growth, practice additions, adjusted EBITDA margin and earnings per share growth.  The executive officers were able to earn 100% of the amounts allocated to a particular year if the Company exceeded all four of the annual performance targets, 90% if the Company exceeded three of the four annual performance targets, 66.7% if the Company exceeded two of the four annual performance targets, and 0% if the Company achieved fewer than two of the four annual performance targets.  The Compensation Committee reviewed each of the performance targets annually and administered the LTIP.

All amounts vested for each executive officer on December 31, 2011.  These amounts were paid during the first quarter of 2012.
 
 
12


(6)
DIVIDENDS

The Company has declared and paid the following quarterly cash dividends.

       
April 10, 2009; July 10, 2009; October 9, 2009; January 8, 2010
    0.17  
April 9, 2010; July 9, 2010; October 8, 2010; January 14, 2011; April 8, 2011
    0.20  
July 8, 2011; October 14, 2011; January 13, 2012; April 13, 2012
    0.22  

The payment of dividends in the future is subject to the discretion of the Company’s Board of Directors, and various factors may prevent the Company from paying dividends or require the Company to reduce the dividends. Such factors include the Company’s financial position, capital requirements and liquidity, the existence of a stock repurchase program, any loan agreement restrictions, state corporate law restrictions, results of operations and such other factors that the Company’s Board of Directors may consider relevant.

(7) 
LINE OF CREDIT

On June 3, 2011, the Company amended its Second Amended and Restated Credit Agreement (the “Credit Facility”).  The amendment decreased the interest rate margins and extended the expiration of the Credit Facility from May 31, 2012 to May 31, 2013.  The Credit Facility allows the Company to borrow, on a revolving basis, an aggregate principal amount not to exceed $7.0 million at either, or a combination of, the lender’s Base Rate or at LIBOR plus a LIBOR rate margin, at the Company’s option.  The Base Rate computes interest at the higher of the lender’s “prime rate” or the Federal Funds Rate.  The amendment eliminated a .25% Base Rate margin.  The LIBOR option computes interest at the LIBOR rate as of the date such LIBOR rate loan was made plus a LIBOR rate margin of 2.0%, which is a decrease from the previous 2.5% margin.  As of March 31, 2012, the Company’s LIBOR borrowing rate was 2.24% and the Base Rate borrowing rate was 3.25%.  A commitment fee on the average daily unused amount of the revolving loan commitment during the preceding quarter is also assessed at 0.25%.  The Company may prepay any Base Rate loan at any time and any LIBOR rate loan upon not less than three business days prior written notice given to the lender, but the Company is responsible for any loss or cost incurred by the lender in liquidating or employing deposits required to fund or maintain the LIBOR rate loan.  At March 31, 2012, the Company had approximately $4.8 million outstanding and approximately $2.2 million available for borrowing under the Credit Facility.  The $4.8 million outstanding was under the LIBOR rate option.  The Credit Facility is secured by the Company’s accounts receivable and Management Agreements and requires the Company to comply with certain covenants and financial ratios.  At March 31, 2012, the Company was in full compliance with all of its covenants under the Credit Facility.

(8) 
TERM LOAN

In October 2006, the Company entered into a $4.6 million term loan (the “Term Loan”). Under the Term Loan, $2.3 million was borrowed at a fixed interest rate of 7.05% and the remaining $2.3 million was borrowed at a floating interest rate of LIBOR plus 1.5%.  The principal amount borrowed was payable quarterly in 20 equal payments of $230,000 plus interest beginning December 31, 2006.  The Term Loan matured on September 30, 2011 and was repaid in full on October 3, 2011.
 
 
13



Forward-Looking Statements
 
The statements contained in this report that are not historical in nature are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical facts, included in this report that address activities, events or developments that we expect, believe, intend or anticipate will or may occur in the future, are forward-looking statements. When used in this document, the words “estimate,” “believe,” anticipate,” “project” and similar expressions are intended to identify forward-looking statements. Forward-looking statements are inherently subject to risks and uncertainties, many of which cannot be predicted with accuracy and some of which might not even be anticipated. These forward-looking statements include statements in this Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” regarding intent, belief or current expectations of the Company or its officers with respect to the development of de novo offices or acquisition of additional dental practices (“Offices”) and the successful integration of such Offices into the Company’s network, recruitment of additional dentists, funding of the Company’s expansion, capital expenditures, payment or nonpayment of dividends and cash outlays for income taxes and other purposes.

Such forward-looking statements involve certain risks and uncertainties that could cause actual results to differ materially from anticipated results. These risks and uncertainties include regulatory constraints, changes in laws or regulations concerning the practice of dentistry or dental practice management companies, the availability of suitable new markets and suitable locations within such markets, changes in the Company’s operating or expansion strategy, the general economy of the United States and the specific markets in which the Company’s Offices are located, trends in the health care, dental care and managed care industries, as well as the risk factors set forth in Item 1A. “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, and other factors as may be identified from time to time in the Company’s filings with the Securities and Exchange Commission or in the Company’s press releases.
 
General
 
The following discussion relates to factors that have affected the results of operations and financial condition of the Company for the quarters ended March 31, 2012 and 2011. This information should be read in conjunction with the Company’s condensed consolidated financial statements and related notes thereto included elsewhere in this report.
 
Overview
 
The Company was formed in May 1995 and currently manages 64 Offices in Colorado, New Mexico and Arizona staffed by 70 general dentists and 40 specialists. The Company derives all of its revenue from its Management Agreements with professional corporations (“P.C.s”), which conduct the practice at each Office. In addition, the Company assumes a number of responsibilities when it develops a de novo Office or acquires an existing dental practice.  These responsibilities are set forth in a Management Agreement, as described below.

The Company was formed with the intention of becoming the leading provider of business services to dental practices in Colorado. The Company’s growth and success in the Colorado market led to its expansion into the New Mexico and Arizona markets. The Company’s growth strategy is to focus on greater utilization of existing physical capacity through recruiting more dentists and support staff and through development of de novo Offices and selective acquisitions.

Critical Accounting Policies
 
The Company’s critical accounting policies are set forth in its Annual Report on Form 10-K for the year ended December 31, 2011.  There have been no changes to these policies since the filing of that report.
 
Components of Revenue and Expenses
 
Revenue represents the revenue of the Offices, reported at estimated realizable amounts, received from third-party payors and patients for dental services rendered at the Offices, net of contractual and other adjustments.  Substantially all of the Company’s patients are insured under third-party payor agreements.  The Company’s billing system generates contractual adjustments for each patient encounter based on fee schedules for the patient’s insurance plan.  The services provided are attached to the patient’s fee schedule based on the insurance the patient has at the time the service is provided.  Therefore, the revenue that is recorded by the billing system is based on insurance contractual amounts.  Additionally, each patient at the time of service signs a form agreeing that the patient is ultimately responsible for the contracted fee if the insurance company does not pay the fee for any reason.
 
 
14

 
Direct expenses consist of clinical salaries and benefits paid to dentists, dental hygienist and dental assistants and the expenses incurred by the Company in connection with managing the Offices, including salaries and benefits of other employees at the Offices, supplies, laboratory fees, occupancy costs, advertising and marketing, depreciation and amortization and general and administrative expenses (including office supplies, equipment leases, management information systems and other expenses related to dental practice operations). The Company also incurs personnel and administrative expenses in connection with maintaining a corporate function that provides management, administrative, marketing, development and professional services to the Offices.

Under each of the Management Agreements, the Company provides business and marketing services at the Offices, including (i) providing capital, (ii) designing and implementing advertising and marketing programs, (iii) negotiating for the purchase of supplies, (iv) staffing, (v) recruiting, (vi) training of non-dental personnel, (vii) billing and collecting patient fees, (viii) arranging for certain legal and accounting services, and (ix) negotiating with managed care organizations. The P.C. is responsible for, among other things, (i) supervision of all dentists, dental hygienists and dental assistants, (ii) complying with all laws, rules and regulations relating to dentists, dental hygienists and dental assistants, and (iii) maintaining proper patient records. The Company has made, and intends to make in the future, loans to P.C.s to fund their acquisition of dental assets from third parties in order to comply with state dental practice laws.  Because the Company’s financial statements are consolidated with the financial statements of the P.C.s, these loans are eliminated in consolidation.

Under the typical Management Agreement, the P.C. pays the Company a management fee equal to the Adjusted Gross Center Revenue of the P.C. less compensation paid to the dentists, dental hygienists and dental assistants employed at the Office of the P.C.  Adjusted Gross Center Revenue is comprised of all fees and charges booked each month by or on behalf of the P.C. as a result of dental services provided to patients at the Office, less any adjustments for uncollectible accounts, professional courtesies and other activities that do not generate a collectible fee. The Company’s costs include all direct and indirect costs, overhead and expenses relating to the Company’s provision of management services to the Office under the Management Agreement, including (i) salaries, benefits and other direct costs of Company employees who work at the Office, (ii) direct costs of all Company employees or consultants who provide services to or in connection with the Office, (iii) utilities, janitorial, laboratory, supplies, advertising and other expenses incurred by the Company in carrying out its obligations under the Management Agreement, (iv) depreciation expense associated with the P.C.’s assets and the assets of the Company used at the Office, and the amortization of intangible asset value relating to the Office, (v) interest expense on indebtedness incurred by the Company to finance any of its obligations under the Management Agreement, (vi) general and malpractice insurance expenses, lease expenses and dentist recruitment expenses, (vii) personal property and other taxes assessed against the Company’s or the P.C.’s assets used in connection with the operation of the Office, (viii) out-of-pocket expenses of the Company’s personnel related to mergers or acquisitions involving the P.C., (ix) corporate overhead charges or any other expenses of the Company including the P.C.’s pro rata share of the expenses of the accounting and computer services provided by the Company, and (x) a collection reserve in the amount of 5.0% of Adjusted Gross Center Revenue. As a result, substantially all costs associated with the provision of dental services at the Office are borne by the Company, except for the compensation of the dentists, dental hygienists and dental assistants who work at the Office.  This enables the Company to manage the profitability of the Offices.  Each Management Agreement is for a term of 40 years.  Each Management Agreement generally may be terminated by the P.C. only for cause, which includes a material default by or bankruptcy of the Company. Upon expiration or termination of a Management Agreement by either party, the P.C. must satisfy all obligations it has to the Company.

Revenue is derived principally from fee-for-service revenue and revenue from capitated managed dental care plans. Fee-for-service revenue consists of P.C. revenue received from indemnity dental plans, preferred provider plans and direct payments by patients not covered by any third-party payment arrangement. Managed dental care revenue consists of P.C. revenue received from capitated managed dental care plans, including capitation payments and patient co-payments. Capitated managed dental care contracts are between dental benefits organizations and the P.C.s. Under the Management Agreements, the Company negotiates and administers these contracts on behalf of the P.C.s. Under a capitated managed dental care contract, the dental group practice provides dental services to the members of the dental benefits organization and receives a fixed monthly capitation payment for each plan member covered for a specific schedule of services regardless of the quantity or cost of services to the participating dental group practice obligated to provide them. This arrangement shifts the risk of utilization of these services to the dental group practice providing the dental services. Because the Company assumes responsibility under the Management Agreements for all aspects of the operation of the dental practices (other than the practice of dentistry) and thus bears all costs of the P.C.s associated with the provision of dental services at the Office (other than compensation of dentists, dental hygienists and dental assistants), the risk of over-utilization of dental services at the Office under capitated managed dental care plans is effectively shifted to the Company. In addition, dental group practices participating in a capitated managed dental care plan often receive supplemental payments for more complicated or elective procedures. In contrast, under traditional indemnity insurance arrangements, the insurance company pays whatever reasonable charges are billed by the dental group practice for the dental services provided.
 
 
15


The Company seeks to increase its revenue by increasing the patient volume at existing Offices through effective advertising and marketing programs and by adding additional specialty services.  The Company also seeks to increase revenue by opening de novo Offices and by making select acquisitions of dental practices.  The Company seeks to supplement fee-for-service revenue with revenue from contracts with capitated managed dental care plans. Although the Company’s fee-for-service business generally provides a greater margin than its capitated managed dental care business, capitated managed dental care business increases facility utilization and dentist productivity.  The relative percentage of the Company’s revenue derived from fee-for-service business and capitated managed dental care contracts varies from market to market depending on the availability of capitated managed dental care contracts in any particular market and the Company’s ability to negotiate favorable contractual terms. In addition, the profitability of capitated managed dental care revenue varies from market to market depending on the level of capitation payments and co-payments in proportion to the level of benefits required to be provided.

The Company’s policy is to collect any patient co-payments at the time the service is provided.  If the patient owes additional amounts that are not covered by insurance, Offices collect by sending monthly invoices, placing phone calls and sending collection letters.  Interest at 18% per annum is charged on all account balances greater than 60 days old.  Patient accounts receivable in excess of $50 that are over 120 days past due and that appear are not collectible are written off as bad debt and sent to an outside collections agency.

Results of Operations
 
For the quarter ended March 31, 2012, revenue decreased $876,000, or 5.1%, to $16.2 million compared to $17.1 million for the quarter ended March 31, 2011.  For the quarter ended March 31, 2012, net income decreased $77,000, or 20.0% to $309,000, or $0.17 per share, compared to $386,000, or $0.20 per share, for the quarter ended March 31, 2011.  Net income was negatively affected by an increase of $190,000 in stock-based compensation expense pursuant to ASC Topic 718.

During the quarter ended March 31, 2012, the Company generated $1.0 million of cash from operations.  During this period, the Company had capital expenditures of approximately $854,000, paid dividends of approximately $409,000 and repurchased outstanding Common Stock for $513,000 pursuant to the Company’s stock repurchase program, while increasing total bank debt by approximately $549,000.
 
 
16


The Company’s earnings before interest, taxes, depreciation, amortization and non-cash expense associated with stock-based compensation (“Adjusted EBITDA”) increased $26,000, or 1.9%, to $1.4 million for the quarter ended March 31, 2012 compared to the quarter ended March 31, 2011.  Although Adjusted EBITDA is not a GAAP measure of performance or liquidity, the Company believes that it may be useful to an investor in evaluating the Company’s ability to meet future debt service, capital expenditures and working capital requirements. However, investors should not consider this measure in isolation or as a substitute for operating income, cash flows from operating activities or any other measure for determining the Company’s operating performance or liquidity that is calculated in accordance with GAAP. In addition, because Adjusted EBITDA is not calculated in accordance with GAAP, it may not necessarily be comparable to similarly titled measures employed by other companies. A reconciliation of Adjusted EBITDA to net income is made by adding depreciation and amortization expense - Offices, depreciation and amortization expense – corporate, stock-based compensation expense, interest expense, net and income tax expense to net income as in the following table:

   
Quarters
 
   
Ended March 31,
 
   
2011
   
2012
 
RECONCILIATION OF EBITDA:
           
Net income
  $ 386,124     $ 308,794  
Add back:
               
Depreciation and amortization - Offices
    618,194       649,562  
Depreciation and amortization - Corporate
    19,583       35,289  
Stock-based compensation expense
    124,433       232,765  
Interest expense, net
    24,705       22,480  
Income tax expense
    246,867       197,424  
                 
Adjusted EBITDA
  $ 1,419,906     $ 1,446,314  

 
17


The following table sets forth the percentages of revenue represented by certain items reflected in the Company’s condensed consolidated statements of income. The information contained in the following table represents the historical results of the Company. The information that follows should be read in conjunction with the Company’s condensed consolidated financial statements and related notes thereto contained elsewhere in this report.
 
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)

   
Quarters Ended
 
   
March 31,
 
   
2011
   
2012
 
             
Revenue
    100.0 %     100.0 %
                 
Direct Expenses:
               
Clinical salaries and benefits
    56.9 %     56.4 %
Dental supplies
    4.7 %     4.2 %
Laboratory fees
    4.2 %     4.7 %
Occupancy
    7.9 %     8.4 %
Advertising and marketing
    3.4 %     4.2 %
Depreciation and amortization
    3.6 %     4.0 %
General and administrative
    9.4 %     7.5 %
      90.1 %     89.3 %
                 
Contribution from dental offices
    9.9 %     10.7 %
                 
Corporate Expenses:
               
General and administrative
    6.0 % (1)     7.2 % (1)
Depreciation and amortization
    0.1 %     0.2 %
                 
Operating income
    3.9 %     3.3 %
                 
Interest expense
    0.1 %     0.1 %
                 
Income before income taxes
    3.7 %     3.1 %
Income tax expense
    1.4 %     1.2 %
                 
Net income
    2.3 %     1.9 %
 
(1)
Corporate expenses - general and administrative includes $43,019 of stock-based compensation expense pursuant to ASC Topic 718 and $81,414 related to a long-term incentive program for the quarter ended March 31, 2011 and $232,765 of stock-based compensation expense pursuant to ASC Topic 718 for the quarter ended March 31, 2012.
 
 
18

 
Quarter Ended March 31, 2012 Compared to Quarter Ended March 31, 2011:
 
Revenue

For the quarter ended March 31, 2012, revenue decreased $876,000, or 5.1%, to $16.2 million compared to $17.1 million for the quarter ended March 31, 2011.  

Direct expenses
 
Clinical salaries and benefits. For the quarter ended March 31, 2012, clinical salaries and benefits decreased $574,000, or 5.9%, to $9.1 million compared to $9.7 million for the quarter ended March 31, 2011.  As a percentage of revenue, clinical salaries and benefits decreased to 56.4% for the quarter ended March 31, 2012 compared to 56.9% for the quarter ended March 31, 2011.
 
Dental supplies. For the quarter ended March 31, 2012, dental supplies decreased to $677,000 compared to $802,000 for the quarter ended March 31, 2011, a decrease of $125,000, or 15.5%.  As a percentage of revenue, dental supplies decreased to 4.2% for the quarter ended March 31, 2012 compared to 4.7% for the quarter ended March 31, 2011.
 
Laboratory fees. For the quarter ended March 31, 2012, laboratory fees increased to $753,000 compared to $715,000 for the quarter ended March 31, 2011, an increase of $38,000, or 5.3%.  As a percentage of revenue, laboratory fees increased to 4.7% for the quarter ended March 31, 2012 compared to 4.2% for the quarter ended March 31, 2011.
 
Occupancy. For the quarter ended March 31, 2012, occupancy expense increased $15,000, or 1.1%, to $1.4 million compared to the quarter ended March 31, 2011.  As a percentage of revenue, occupancy expense increased to 8.4% for the quarter ended March 31, 2012 compared to 7.9% for the quarter ended March 31, 2011.
 
Advertising and marketing. For the quarter ended March 31, 2012, advertising and marketing expense increased to $676,000 compared to $577,000 for the quarter ended March 31, 2011, an increase of $98,000, or 17.0%.  As a percentage of revenue, advertising and marketing expense increased to 4.2% for the quarter ended March 31, 2012 compared to 3.4% for the quarter ended March 31, 2011.  The Company adjusts its advertising and marketing in response to market conditions and its financial performance.
 
Depreciation and amortization-Offices. For the quarter ended March 31, 2012, depreciation and amortization expenses attributable to the Offices increased to $650,000 compared to $618,000 for the quarter ended March 31, 2011, an increase of $31,000, or 5.1%.  As a percentage of revenue, depreciation and amortization expenses attributable to the Offices increased to 4.0% for the quarter ended March 31, 2012 compared to 3.6% for the quarter ended March 31, 2011.

General and administrative-Offices:  For the quarter ended March 31, 2012, general and administrative expenses attributable to the Offices decreased $394,000, or 24.6%, to $1.2 million compared to $1.6 million for the quarter ended March 31, 2011.  As a percentage of revenue, general and administrative expenses decreased to 7.5% for the quarter ended March 31, 2012 compared to 9.4% for the quarter ended March 31, 2011.
 
Contribution from dental Offices
 
As a result of revenue decreasing $876,000 and direct expenses decreasing $911,000 during the quarter ended March 31, 2012, contribution from dental Offices increased $35,000, or 2.1%, to $1.7 million for the quarter ended March 31, 2012 compared to the quarter ended March 31, 2011.  As a percentage of revenue, contribution from dental Offices increased to 10.7% for the quarter ended March 31, 2012 compared to 9.9% for the quarter ended March 31, 2011.
 
Corporate expenses
 
Corporate expenses - general and administrative. For the quarter ended March 31, 2012, corporate expenses – general and administrative increased to $1.2 million compared to $1.0 million for the quarter ended March 31, 2011, an increase of $148,000 or 14.6%.  This increase is primarily attributable to increases of $190,000 related to stock-based compensation expense pursuant to ASC Topic 718, $50,000 in executive officers’ bonuses, $46,000 in social media consulting fees, and $24,000 in employee benefits, offset by a decrease of $156,000 related to expense for the long-term incentive plan for the executive officers.  As a percentage of revenue, corporate expenses - general and administrative increased to 7.2% for the quarter ended March 31, 2012 compared to 6.0% for the quarter ended March 31, 2011.
 
 
19

 
Corporate expenses - depreciation and amortization. For the quarter ended March 31, 2012, corporate expenses - depreciation and amortization increased to $35,000 compared to $20,000 for the quarter ended March 31, 2011, an increase of $16,000 or 80.2%.  As a percentage of revenue, corporate expenses – depreciation and amortization increased to 0.2% for the quarter ended March 31, 2012 compared to 0.1% for the quarter ended March 31, 2011.
 
Operating income
 
As a result of the matters discussed above, the Company’s operating income decreased by $129,000, or 19.6%, to $529,000 for the quarter ended March 31, 2012 compared to $658,000 for the quarter ended March 31, 2011.  As a percentage of revenue, operating income decreased to 3.3% for the quarter ended March 31, 2012 compared to 3.9% for the quarter ended March 31, 2011.
 
Interest expense/(income), net
 
For the quarter ended March 31, 2012, interest expense decreased to $22,000 compared to $25,000 for the quarter ended March 31, 2011, a decrease of $3,000, or 9.0%. This decrease in interest expense is attributable to lower interest rates on the Credit Facility and the Term Loan being repaid in full on October 3, 2011.  As a percentage of revenue, interest expense remained constant at 0.1% for the quarters ended March 31, 2012 and 2011.
 
Net income
 
As a result of the above, the Company’s net income was $309,000 for the quarter ended March 31, 2012 compared to net income of $386,000 for the quarter ended March 31, 2011, a decrease of $77,000 or 20.0%.  Net income for the quarter ended March 31, 2012 was net of income tax expense of $197,000 while net income for the quarter ended March 31, 2011 was net of income tax expense of $247,000. The effective tax rate remained constant at 39.0% for the quarters ended March 31, 2012 and 2011.  As a percentage of revenue, net income decreased to 1.9% for the quarter ended March 31, 2012 compared to 2.3% for the quarter ended March 31, 2011.
 
Liquidity and Capital Resources
 
The Company finances its operations and growth through a combination of cash provided by operating activities and its Credit Facility.  As of March 31, 2012, the Company had a working capital deficit of approximately $1.3 million, retained earnings of $7.4 million and a cash balance of $729,000.
 
Net cash provided by operating activities was approximately $1.0 million and $2.0 million for the quarters ended March 31, 2012 and 2011, respectively. During the 2012 period, excluding net income and after adding back non-cash items, the Company’s cash provided by operating activities consisted primarily of an increase in accounts payable and accrued expenses of approximately $408,000 and an increase in income taxes payable of approximately $157,000, offset by an increase in accounts receivable of approximately $577,000 and an increase in prepaid expenses and other assets of approximately $297,000.  During quarter ended March 31, 2011, excluding net income and after adding back non-cash items, the Company’s cash provided by operating activities consisted primarily of an increase in accounts payable and accrued expenses of approximately $722,000, an increase in income taxes payable of approximately $658,000, and an increase in other long-term obligations of approximately $47,000 offset by an increase in prepaid expenses and other assets of approximately $416,000 and an increase in accounts receivable of approximately $274,000.
 
Net cash used in investing activities was approximately $844,000 and $715,000 for the quarters ended March 31, 2012 and 2011, respectively. For the quarter ended March 31, 2012, the Company invested approximately $854,000 in capital expenditures, offset by a decrease in notes receivable of $10,000. For the quarter ended March 31, 2011, the Company invested $720,000 in capital expenditures.
 
Net cash used in financing activities was approximately $373,000 for the quarter ended March 31, 2012 and $795,000 for the quarter ended March 31, 2011. During the quarter ended March 31, 2012, net cash used in financing activities was comprised of approximately $513,000 used in the purchase and retirement of Common Stock and approximately $409,000 for the payment of dividends, offset by approximately $549,000 in advances under the Credit Facility.  During the quarter ended March 31, 2011, net cash used in financing activities was comprised of approximately $370,000 for the payment of dividends, approximately $230,000 for the repayment of the Term Loan, approximately $147,000 used to pay down the Credit Facility and approximately $48,000 used in the purchase and retirement of Common Stock. 
 
 
20


On June 3, 2011, the Company amended its Credit Facility.  The amendment decreased the interest rate margins and extended the expiration of the Credit Facility from May 31, 2012 to May 31, 2013.  The Credit Facility allows the Company to borrow, on a revolving basis, an aggregate principal amount not to exceed $7.0 million at either, or a combination of, the lender’s Base Rate or at LIBOR plus a LIBOR rate margin, at the Company’s option.  The Base Rate computes interest at the higher of the lender’s “prime rate” or the Federal Funds Rate plus a margin.  The amendment eliminated a .25% Base Rate margin.  The LIBOR option computes interest at the LIBOR rate as of the date such LIBOR rate loan was made plus a LIBOR rate margin of 2.0%, which is a decrease from the previous 2.5% margin.  As of March 31, 2012, the Company’s LIBOR borrowing rate was 2.24% and the Base Rate borrowing rate was 3.25%.  A commitment fee on the average daily unused amount of the revolving loan commitment during the preceding quarter is also assessed at 0.25%.  The Company may prepay any Base Rate loan at any time and any LIBOR rate loan upon not less than three business days prior written notice given to the lender, but the Company is responsible for any loss or cost incurred by the lender in liquidating or employing deposits required to fund or maintain the LIBOR rate loan.  At March 31, 2012, the Company had approximately $4.8 million outstanding and approximately $2.2 million available for borrowing under the Credit Facility.  The $4.8 million outstanding was under the LIBOR rate option.  The Credit Facility is secured by the Company’s accounts receivable and Management Agreements and requires the Company to comply with certain covenants and financial ratios. At March 31, 2012, the Company was in full compliance with all of its covenants under the Credit Facility.
 
As of March 31, 2012, the Company had the following debt and lease obligations:

         
Payments due by Period
 
   
Total
   
Less than
1 year
   
1-3 years
   
3-5 years
   
More than
5 years
 
                               
Debt obligations
  $ 4,800,000     $ -     $ 4,800,000     $ -     $ -  
Operating lease obligations
    11,315,049       3,561,154       5,317,752       2,383,268       52,875  
Total
  $ 16,115,049     $ 3,561,154     $ 10,117,752     $ 2,383,268     $ 52,875  

The Company believes that cash generated from operations and borrowings under its Credit Facility will be sufficient to fund its anticipated working capital needs, capital expenditures and dividend payments for at least the next 12 months. In order to meet its long-term liquidity or capital needs, the Company may issue additional equity or debt securities, subject to market and other conditions or enter into additional term loans or revolving credit facilities.  There can be no assurance that such additional financing will be available on terms acceptable to the Company or at all. The failure to obtain the funds necessary to finance its future cash requirements could adversely affect the Company’s ability to pursue its strategy and could negatively affect its operations in future periods.

 
Under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, the Company evaluated the design and operation of its disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, or the “Exchange Act”) as of March 31, 2012.  On the basis of this review, the Company’s management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2012.

There has been no change in the Company’s internal control over financial reporting during the three months ended March 31, 2012 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
 
21


PART II.  OTHER INFORMATION

 
Issuer Purchases of Equity Securities

The following chart provides information regarding Common Stock purchased by the Company during the period January 1, 2012 through March 31, 2012.

Issuer Purchases of Equity Securities

Period
 
Total Number
of Shares
Purchased
   
Average Price
Paid per Share
   
Total Number
of Shares
Purchased as
Part of
Publicly
Announced
Plans or
Programs (1)
   
Approximate
Dollar Value
of Shares That
May Yet Be
Purchased
Under the
Plans or
Programs (1)
 
January 1, 2012 through January 31, 2012
    28,700     $ 16.16       28,700     $ 234,051  
February 1, 2012 through February 29, 2012
    2,759       17.70       2,759     $ 185,215  
March 1, 2012 through March 31, 2012
    -       -       -     $ 1,000,000  
Total
    31,459     $ 16.30       31,459          
 
(1)
The Company’s stock repurchase program has been ongoing for more than five years and there are no expiration dates on any of the plans.  On March 26, 2012, the Company’s Board of Directors approved up to $1 million of stock repurchases from that date.  Common Stock repurchases may be made from time to time as the Company’s management deems appropriate.  As of March 31, 2012, the dollar value of shares that may be purchased under the stock repurchase program was approximately $1 million.
 
 
22

 
 
Exhibit
 
Number
Description of Document
   
3.1
Amended and Restated Articles of Incorporation, incorporated herein by reference to Exhibits 3.1 and 3.2 to the Company’s Registration Statement on Form S-1 (SEC File No. 333-36391), as filed with the Securities and Exchange Commission on September 25, 1997.
   
3.2
Amended and Restated Bylaws, incorporated herein by reference to Exhibit 3.3 to the Company’s Registration Statement on Form S-1 (SEC File No. 333-36391), as filed with the Securities and Exchange Commission on September 25, 1997.
   
4.1
Reference is made to Exhibits 3.1 and 3.2.
   
4.2
Specimen Stock Certificate, incorporated herein by reference to Exhibit 4.2 to the Company’s Registration Statement on Form S-1/A (SEC File No. 333-36391), as filed with the Securities and Exchange Commission on November 25, 1997.
   
Rule 13a-14(a) Certification of the Chief Executive Officer.
   
Rule 13a-14(a) Certification of the Chief Financial Officer.
   
Section 1350 Certifications of the Chief Executive Officer and the Chief Financial Officer.
   
101.INS
XBRL Instance Document *
   
101.SCH
XBRL Taxonomy Extension Schema Document*
   
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document*
   
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document*
   
101.LAB
XBRL Taxonomy Extension Label Linkbase Document*
   
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document*

*
Pursuant to Rule 406T of Regulation S-T, these Interactive Data Files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to the liability under these sections.

 
23


 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
  BIRNER DENTAL MANAGEMENT SERVICES, INC.  
     
     
Date:  May 11, 2012 By:    /s/ Frederic W.J. Birner  
  Name:    Frederic W.J. Birner  
  Title:   Chairman of the Board and Chief Executive Officer  
       (Principal Executive Officer)  
         
         
Date: May 11, 2012  By:   /s/ Dennis N. Genty   
  Name:   Dennis N. Genty  
  Title:   Chief Financial Officer, Secretary, and Treasurer  
      (Principal Financial and Accounting Officer)  
 
 
24