---

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended

September 30, 2015

 

OR

☐	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

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 ☒ No ☐

 

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):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

 

---

BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES

INDEX TO FORM 10-Q

 

PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements	Page
	Unaudited Condensed Consolidated Balance Sheets as of December 31, 2014 and September 30, 2015	3
	Unaudited Condensed Consolidated Statements of Operations for the Quarters and Nine Months Ended September 30, 2014 and 2015	4
	Unaudited Condensed Consolidated Statement of Shareholders’ Equity for the Nine Months Ended September 30, 2015	5
	Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2014 and 2015	6
	Notes to Unaudited Condensed Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
Item 4.	Controls and Procedures	25
PART II - OTHER INFORMATION
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	25
Item 6.	Exhibits	26
Signatures		27

 

BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

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

 

BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

(1)

Corporate expense - general and administrative includes $62,765 of stock-based compensation expense pursuant to ASC Topic 718 and $338,861 of severance compensation expense for the quarter ended September 30, 2014 and $42,075 of stock-based compensation expense pursuant to ASC Topic 718 for the quarter ended September 30, 2015.

(2)

Corporate expense - general and administrative includes $232,800 of stock-based compensation expense pursuant to ASC Topic 718 and $338,861 of severance compensation expense for the nine months ended September 30, 2014 and $169,338 of stock-based compensation expense pursuant to ASC Topic 718 for the nine months ended September 30, 2015.

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

 

BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY

(UNAUDITED)

 

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

 

BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

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

 

BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

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

 

BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

September 30, 2015

(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, 2014.

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 September 30, 2015 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 and nine months ended September 30, 2015 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

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 operations 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 is generally recognized when services are provided and is 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.

 

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 September 30, 2015.

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.

A note receivable was created as part of a dental Office acquisition, of which approximately $96,000 in principal amount was outstanding at September 30, 2015.  The note has equal monthly principal and interest amortization payments and a maturity date of October 31, 2018.  The note bears interest at 6%, which is accrued monthly.  If the note is uncollectible, an allowance for doubtful accounts will be created.  There was no allowance for doubtful accounts for the note as of September 30, 2015 or December 31, 2014.

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 $211,000 and $221,000 for the quarters ended September 30, 2015 and 2014, respectively.  Amortization was approximately $634,000 and $671,000 for the nine months ended September 30, 2015 and 2014, 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.  There were no impairment write-downs associated with the Company’s long-lived and intangible assets during the quarters ended September 30, 2015 and 2014.

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 operations for the quarters ended September 30, 2015 and 2014 was approximately $42,000 and $63,000 respectively, related to stock options.  Total stock-based compensation expense included in the Company’s condensed consolidated statements of operations for the nine months ended September 30, 2015 and 2014 was approximately $169,000 and $233,000 respectively, related to stock options.  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 September 30, 2015 equal to the expected option term. Expected pre-vesting forfeitures were estimated based on historical pre-vesting forfeitures over the most recent periods ended September 30, 2015 for the expected option term.

 

In May 2014, FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606).  This update will establish a comprehensive revenue recognition standard for virtually all industries in GAAP.  ASU 2014-09 will change the amount and timing of revenue and cost recognition, implementation, disclosures and documentation.  In August 2015, the FASB issued ASU No. 2015-14, which deferred the effective date of ASU 2014-09 until annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period.  ASU No. 2014-09 may be adopted under the full retrospective method or simplified transition method.  Entities are permitted to adopt the revenue standard early, beginning with annual reporting periods after December 15, 2016.  The Company plans to adopt ASU 2014-09 beginning January 1, 2018 and is currently evaluating the impact these changes will have on its condensed consolidated financial statements. 

In August 2014, FASB issued ASU No. 2014-15, Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.  The new standard requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued.  ASU 2014-15 is effective for fiscal years beginning after December 15, 2016.  ASU 2014-15 is not expected to have a material effect on the Company’s condensed consolidated financial statements. 

In January 2015, the FASB issued new accounting guidance eliminating from current accounting guidance the concept of extraordinary items, which, among other things, required an entity to segregate extraordinary items considered to be unusual and infrequent from the results of ordinary operations and show the item separately in the income statement, net of tax, after income from continuing operations. This guidance is effective for public entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. Adoption of this guidance is not expected to have a significant impact on the Company’s condensed consolidated financial statements.

In April 2015, the FASB issued an accounting update simplifying the presentation of debt issuance costs and requiring that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The update did not affect the recognition and measurement guidance for debt issuance costs. This guidance is effective for public entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. Adoption of this guidance is not expected to have a significant impact on the Company’s condensed consolidated financial statements.

(3)	EARNINGS/(LOSS) PER SHARE

The Company calculates earnings/(loss) per share (“EPS”) in accordance with ASC Topic 260.

For the quarters ended September 30, 2015 and 2014, options to purchase 456,148 and 407,343 shares, respectively, of the Company’s common stock (“Common Stock”) were not included in the computation of diluted EPS because their effect was anti-dilutive.

 

For the nine months ended September 30, 2015 and 2014, options to purchase 456,491 and 385,263 shares, respectively, of Common Stock were not included in the computation of diluted EPS because their effect was anti-dilutive.

(4)	STOCK-BASED COMPENSATION PLANS

The Company’s shareholders approved the 2005 Equity Incentive Plan (as amended, “2005 Plan”) in June 2005.  The 2005 Plan terminated on March 17, 2015.  The 2005 Plan provided for the grant of incentive stock options, restricted stock, restricted stock units and stock grants to eligible employees (including officers and employee-directors) and non-statutory stock options to eligible employees, directors and consultants.  As of September 30, 2015, there were 251,666 vested options and 193,000 unvested options granted under the 2005 Plan that remained outstanding in accordance with their terms and there were no shares available for issuance under the 2005 Plan due to its termination.

The Company’s shareholders approved the 2015 Equity Incentive Plan (“2015 Plan”) on June 9, 2015.  The 2015 Plan replaces the 2005 Plan.  The maximum number of shares of Common Stock that may be delivered to participants and their beneficiaries under the 2015 Plan is 200,000.  The 2015 Plan provides for the grant of incentive stock options, stock appreciation right awards, restricted stock awards, stock unit awards and other stock-based awards to eligible recipients.  The objectives of the 2015 Plan are to attract and retain the best possible candidates for positions of responsibility and provide for additional performance incentives by providing eligible employees with the opportunity to acquire equity in the Company.  The 2015 Plan is administered by a committee of two or more outside directors from the Company’s Board of Directors (the “Committee”). The Committee determines the eligible individuals to whom awards under the 2015 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 term of the award, vesting terms and conditions and any other terms and conditions of the grant in addition to those contained in the 2015 Plan.  Each grant under the 2015 Plan will be confirmed by and subject to the terms of an award agreement.  As of September 30, 2015, there were 11,000 unvested options granted under the 2015 Plan and 189,000 shares available for issuance under the 2015 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:

---

⁽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.

A summary of option activity as of September 30, 2015, and changes during the nine months then ended, is presented below:

The weighted average grant date fair values of options granted were $1.81 per share and $3.28 per share during the nine months ended September 30, 2015 and 2014, respectively.  Net cash proceeds from the exercise of stock options during the nine months ended September 30, 2015 and 2014 were approximately $8,000 and $64,500, respectively.  The associated income tax effect from stock options exercised during the nine months ended September 30, 2015 and 2014 was approximately $(5,000) and $11,000, respectively.  As of the date of exercise, the total intrinsic value of options exercised during the nine months ended September 30, 2015 and 2014 was approximately $11,000 and $67,000, respectively.  As of September 30, 2015, there was approximately $241,000 of total unrecognized compensation expense related to non-vested stock options, which is expected to be recognized over a weighted average period of 2.10 years.

 

(5)

DIVIDENDS

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

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.

(6)	LINE OF CREDIT

On September 13, 2013, the Company entered into a Credit Agreement with Compass Bank, which was amended on February 12, 2014, August 8, 2014 and August 12, 2015 (the “Credit Facility”).  The Credit Facility allows the Company to borrow, on a revolving basis, an aggregate principal amount not to exceed $12.0 million.  Interest is computed at either the lender’s prime rate or at LIBOR plus 1.40% (increased from 1.15% by the August 12, 2015 amendment) in effect from time to time at the Company’s option.  As of September 30, 2015, the Company’s LIBOR borrowing rate was 1.61% and the prime rate borrowing rate was 3.25%.  A commitment fee on the average daily unused amount of the revolving loan commitment is also assessed at a rate of 0.25% per annum, and is payable quarterly in arrears.  At September 30, 2015, the Company had approximately $10.4 million LIBOR rate borrowings outstanding and approximately $1.6 million available for borrowing under the Credit Facility.  The Credit Facility is collateralized by substantially all of the assets of the Company.  The Credit Facility requires the Company to comply with certain affirmative and negative covenants, including maintaining (i) a debt-to-EBITDA ratio of no more than 3.00 to 1.00 (increased from 2.05 to 1.00 by the August 12, 2015 amendment) for the year ending December 31, 2015, and 2.50 to 1.00 (increased from 2.00 to 1.00 by the August 12, 2015 amendment) for the twelve months ending June 30, 2016, and (ii) a fixed charge coverage ratio of not less than 1.25 to 1.00.  At September 30, 2015, the Company was in compliance with the Credit Facility covenants.  The loan matures on September 13, 2016, and as a result the principal amount outstanding is reported in current liabilities on the Company’s condensed consolidated balance sheet as of September 30, 2015.  The Company has commenced discussions with Compass Bank to refinance the Credit Facility or extend its maturity date. Failure of the Company to refinance the Credit Facility, extend its maturity date, or obtain other bank financing by September 30, 2016 would have a material adverse effect on the Company. 

 

(7)	DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

ASC Topic 825, ''Disclosures About Fair Value of Financial Instruments,'' requires disclosure about the fair value of financial instruments. Carrying amounts for all financial instruments included in current assets and current liabilities approximate estimated fair values due to the short maturity of those instruments. The fair values of the Company's long-term debt are based on similar rates currently available to the Company.  The Company believes the book value approximates fair value for the notes receivable.

The Company follows ASC Topic 820, “Fair Value Measurements and Disclosures,” which defines fair value, establishes a framework for using fair value to measure assets and liabilities, and expands disclosures about fair value measurements.  The statement establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available.  Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company.  Unobservable inputs are inputs that reflect the Company’s assumptions of what market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.  The hierarchy is broken down into three levels based on the reliability of the inputs as follows:

 

 

Level 3:

Unobservable pricing inputs that are generally less observable from objective sources, such as discounted cash flow models or valuations.

ASC Topic 820 requires financial assets and liabilities to be classified based on the lowest level of input that is significant to the fair value measurement.  The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels. There were no transfers between the fair value hierarchy levels during the quarters ended September 30, 2015 and 2014.

The following table represents the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of December 31, 2014 and September 30, 2015 by level within the fair value hierarchy:

 

As part of an Office acquisition completed in 2009, the Company recorded contingent liabilities to recognize an estimated amount to be paid as part of the acquisition agreement.  These contingent liabilities are recorded at estimated fair values as of the date of acquisition, are payable beginning after four years from the acquisition date and are calculated at a multiple of the then trailing twelve-months operating cash flows.  The Company remeasures the contingent liability to fair value each reporting date until the contingency is resolved.  Any changes to the fair value are recognized into the income statement when determined.  As of September 30, 2015, approximately $421,000 of contingent liabilities were recorded on the consolidated balance sheets in other long-term obligations.

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 fact, 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, 2014, 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 and nine months ended September 30, 2015 and 2014. 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 68 Offices in Colorado, New Mexico and Arizona staffed by 77 general dentists and 33 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, 2014.  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.

Direct expenses consist of clinical salaries and benefits paid to dentists, dental hygienists 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 on 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. 

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 selective 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 90 days old.  Patient accounts receivable that are over 120 days past due and that appear to not be collectible are written off as bad debt, and those in excess of $100 are sent to an outside collections agency.

 

 

Revenue in the third quarter of 2015, particularly during the month of September, was especially soft this year.  The Company believes that dentist transition contributed to this decrease.  Lower revenue was a primary driver of the decline in Adjusted EBITDA in the quarter along with $118,000 of negative EBITDA from the Company’s two most recently opened de novo Offices, which opened in October 2014 and in September 2015.  Since the beginning of the fourth quarter of 2012, the Company has opened seven de novo Offices: in Tucson, Arizona and in Erie, Colorado in the fourth quarter of 2012; in Loveland, Colorado in July 2013; in Monument, Colorado in December 2013; in Fort Collins, Colorado in May 2014; in Scottsdale, Arizona in October 2014; and in Albuquerque, New Mexico in September 2015.  The Company has leased space for an additional de novo Office in Commerce City, Colorado, which is anticipated to open by January 2016.  The Company’s de novo Offices typically take a period of time after opening before they generate positive Adjusted EBITDA.

In response to the quarter’s results, the Company has taken the following actions:

·

In all of its markets, the Company has begun the process of becoming credentialed to accept Medicare or Medicaid, and in some cases both, in selected Offices.  This is a potential revenue source that the Company has not previously accessed.

·

In late October, the Company eliminated 26 support employees in its dental Offices and restructured or suspended certain bonus programs, which the Company expects will result in expense savings in excess of $100,000 per month.

·

For the balance of 2015 and at least the first two quarters of 2016, the Company is suspending television advertising. This is expected to result in $40,000 to $60,000 in monthly expense savings as compared to the third quarter of 2015, when television ads were running during those months.  The Company regularly adjusts its advertising and marketing expenditures in response to market conditions and performance in individual markets and does not expect the reduction in advertising to have an adverse effect on revenue in those markets.

·

The Company has leased space for an additional de novo Office in Commerce City, Colorado, which is anticipated to open by January 2016. The Company does not intend to open any additional de novo Offices in 2016.  Instead, it will focus on gaining profitability in its most recently opened Offices, filling excess capacity in existing facilities, and paying down bank debt.

For the nine months ended September 30, 2015, revenue decreased $989,000, or 2.0%, to $48.8 million compared to $49.8 million for the nine months ended September 30, 2014.  The Company believes that dentist transition contributed to this decrease.  Adjusted EBITDA decreased $194,000, or 5.8%, to $3.1 million for the nine months ended September 30, 2015 compared to $3.3 million for the nine months ended September 30, 2014.  Of the $194,000 decline in Adjusted EBITDA from the nine months ended September 30, 2014 to the nine months ended September 30, 2015, $133,000 is related to three of the Company’s most recently opened de novo Offices, which opened in May 2014, October 2014 and in September 2015.  For the nine months ended September 30, 2015, net loss decreased $83,000 to $(330,000), or $(0.18) per share, compared to $(413,000), or $(0.22) per share, for the nine months ended September 30, 2014.

During the first nine months of 2015, the Company generated $2.3 million of cash from operations.  During this period, the Company had capital expenditures of approximately $1.6 million, paid dividends of approximately $1.2 million and increased total bank debt by approximately $564,000.

 

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 loss is made by adding depreciation and amortization expense - Offices, depreciation and amortization expense – Corporate, stock-based compensation expense, interest expense, net, income tax benefit, severance compensation expense and Office consolidation expense to net loss as in the following table:

 

 

The following table sets forth the percentages of revenue represented by certain items reflected in the Company’s condensed consolidated statements of operations. 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 OPERATIONS

 (UNAUDITED)

 

(1)

Corporate expense - general and administrative includes $62,765 of stock-based compensation expense pursuant to ASC Topic 718 and $338,861 of severance compensation expense for the quarter ended September 30, 2014 and $42,075 of stock-based compensation expense pursuant to ASC Topic 718 for the quarter ended September 30, 2015.

(2)

Corporate expense - general and administrative includes $232,800 of stock-based compensation expense pursuant to ASC Topic 718 and $338,861 of severance compensation expense for the nine months ended September 30, 2014 and $169,338 of stock-based compensation expense pursuant to ASC Topic 718 for the nine months ended September 30, 2015.

 

Quarter Ended September 30, 2015 Compared to Quarter Ended September 30, 2014:

Revenue

For the quarter ended September 30, 2015, revenue decreased $248,000, or 1.5%, to $15.9 million compared to $16.1 million for the quarter ended September 30, 2014.  Two de novo Offices, which opened during the fourth quarter of 2014 and the third quarter of 2015, accounted for an increase of $114,000 in revenue during the quarter ended September 30, 2015 compared to the quarter ended September 30, 2014.

Direct expenses

Clinical salaries and benefits. For the quarter ended September 30, 2015, clinical salaries and benefits decreased to $9.5 million compared to $9.6 million for the quarter ended September 30, 2014, a decrease of $152,000, or 1.6%.  Clinical salaries and benefits decreased $275,000 at the 66 Offices open during each full quarter while the two de novo Offices accounted for an additional $123,000 of clinical salaries and benefits during the quarter ended September 30, 2015.  As a percentage of revenue, clinical salaries and benefits remained constant at 59.9% for the quarters ended September 30, 2015 and  2014.

Dental supplies. For the quarter ended September 30, 2015, dental supplies decreased to $763,000 compared to $776,000 for the quarter ended September 30, 2014, a decrease of $14,000, or 1.8%.  Dental supplies decreased $20,000 at the 66 Offices open during each full quarter while the two de novo Offices accounted for an additional $6,000 of dental supplies during the quarter ended September 30, 2015.  As a percentage of revenue, dental supplies remained constant at 4.8% for the quarters ended September 30, 2015 and 2014.

Laboratory fees. For the quarter ended September 30, 2015, laboratory fees increased to $852,000 compared to $797,000 for the quarter ended September 30, 2014, an increase of $55,000, or 6.9%.  Laboratory fees increased $50,000 at the 66 Offices open during each full quarter while the two de novo Offices accounted for an additional $5,000 of laboratory fees during the quarter ended September 30, 2015.   As a percentage of revenue, laboratory fees increased to 5.4% for the quarter ended September 30, 2015 compared to 5.0% for the quarter ended September 30, 2014.

Occupancy. For the quarters ended September 30, 2015 and 2014, occupancy expense remained constant at $1.5 million.  Occupancy expense decreased $49,000 at the 66 Offices open during each full quarter while the two de novo Offices accounted for an additional $51,000 of occupancy expense during the quarter ended September 30, 2015.   As a percentage of revenue, occupancy expense increased to 9.6% for the quarter ended September 30, 2015 compared to 9.4% for the quarter ended September 30, 2014.

Advertising and marketing. For the quarter ended September 30, 2015, advertising and marketing expenses increased to $327,000 compared to $209,000 for the quarter ended September 30, 2014, an increase of $118,000, or 56.3%.  There were increases of $115,000 in television advertising expenses and $45,000 in radio advertising expenses, offset by a decrease of $66,000 in yellow page advertising expenses.  The two de novo Offices accounted for an additional $13,000 of advertising and marketing expenses during the quarter ended September 30, 2015.  As a percentage of revenue, advertising and marketing expenses increased to 2.1% for the quarter ended September 30, 2015 compared to 1.3% for the quarter ended September 30, 2014.  The Company regularly adjusts its advertising and marketing expenditures in response to market conditions and performance in individual markets.

Depreciation and amortization-Offices.  For the quarter ended September 30, 2015, depreciation and amortization expenses attributable to the Offices decreased $42,000, or 3.8%, to $1.1 million compared to the quarter ended September 30, 2014.  At the 66 Offices open during each full quarter, there were decreases of $67,000 in depreciation expenses and $9,000 in amortization expenses, while the two de novo Offices accounted for an additional $34,000 of depreciation expenses during the quarter ended September 30, 2015.  As a percentage of revenue, depreciation and amortization expenses attributable to the Offices decreased to 6.7% for the quarter ended September 30, 2015 compared to 6.9% for the quarter ended September 30, 2014.

General and administrative-Offices.  For the quarter ended September 30, 2015, general and administrative expenses attributable to the Offices increased to $1.4 million compared to $1.3 million for the quarter ended September 30, 2014, an increase of $46,000, or 3.5%.  The increase in general and administrative expenses is primarily attributable to the two de novo Offices, which accounted for an increase of $30,000 of general and administrative expenses during the quarter ended September 30, 2015.  Additionally, there were increases of approximately $20,000 in recruiting and relocation expenses and $16,000 in equipment repairs and maintenance, offset by a decrease of $19,000 in professional fees, at the 66 Offices open during each full quarter.  As a percentage of revenue, general and administrative expenses increased to 8.5% for the quarter ended September 30, 2015 compared to 8.1% for the quarter ended September 30, 2014.

 

Contribution from dental Offices

As a result of revenue decreasing $248,000 and direct expenses increasing $12,000 during the quarter ended September 30, 2015, contribution from dental Offices decreased $260,000, or 34.5%, to $495,000 for the quarter ended September 30, 2015 compared to $755,000 for the quarter ended September 30, 2014.  As a percentage of revenue, contribution from dental Offices decreased to 3.1% for the quarter ended September 30, 2015 compared to 4.7% for the quarter ended September 30, 2014.

Corporate expenses

Corporate expenses - general and administrative. For the quarter ended September 30, 2015, corporate expenses – general and administrative decreased to $780,000 compared to $1.3 million for the quarter ended September 30, 2014, a decrease of $548,000, or 41.3%.  This decrease is attributable to decreases of $339,000 in severance compensation expense, $141,000 in corporate wages, $38,000 in rent expense and $21,000 related to stock-based compensation pursuant to ASC Topic 718.  As a percentage of revenue, corporate expenses - general and administrative decreased to 4.9% for the quarter ended September 30, 2015 compared to 8.2% for the quarter ended September 30, 2014.

Corporate expenses - depreciation and amortization. For the quarter ended September 30, 2015, corporate expenses - depreciation and amortization increased to $63,000 compared to $56,000 for the quarter ended September 30, 2014, an increase of $6,000.  As a percentage of revenue, corporate expenses – depreciation and amortization increased to 0.4% for the quarter ended September 30, 2015 compared to 0.3% for the quarter September 30, 2014.

Operating loss

As a result of the matters discussed above, the Company’s operating loss decreased by $281,000, or 44.8%, to $(347,000) for the quarter ended September 30, 2015 compared to $(629,000) for the quarter ended September 30, 2014.  As a percentage of revenue, operating loss decreased to (2.2)% for the quarter ended September 30, 2015 compared to (3.9)% for the quarter ended September 30, 2014.

Interest expense, net

For the quarter ended September 30, 2015, interest expense decreased to $24,000 compared to $31,000 for the quarter ended September 30, 2014, a decrease of $7,000, or 22.8%.  As a percentage of revenue, interest expense remained constant at 0.2% for the quarter ended September 30, 2015 and 2014.

Net loss

As a result of the above, the Company’s net loss was $(227,000) for the quarter ended September 30, 2015 compared to net loss of $(403,000) for the quarter ended September 30, 2014, a decrease of $176,000.  Net loss for the quarter ended September 30, 2015 was net of income tax benefit of $(145,000), while net loss for the quarter ended September 30, 2014 was net of income tax benefit of $(257,000).  The effective income tax rate remained constant at 39.0% for the quarters ended September 30, 2015 and 2014.  As a percentage of revenue, net loss decreased to (1.4)% for the quarter ended September 30, 2015 compared to (2.5)% for the quarter ended September 30, 2014.

Nine Months Ended September 30, 2015 Compared to Nine Months Ended September 30, 2014:

Revenue

For the nine months ended September 30, 2015, revenue decreased $989,000, or 2.0%, to $48.8 million compared to $49.8 million for the nine months ended September 30, 2014.  Three de novo Offices, which opened during the second quarter of 2014, the fourth quarter of 2014 and the third quarter of 2015, accounted for an increase of $731,000 in revenue during the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014.

Dental supplies. For the nine months ended September 30, 2015, dental supplies increased $32,000, or 1.4%, to $2.3 million compared to $2.2 million for the nine months ended September 30, 2014.  The three de novo Offices accounted for an additional $38,000 of dental supplies for the nine months ended September 30, 2015, while dental supplies decreased $6,000 at the 65 Offices open during each full nine months.  As a percentage of revenue, dental supplies increased to 4.6% for the nine months ended September 30, 2015 compared to 4.5% for the nine months ended September 30, 2014.

Laboratory fees. For the nine months ended September 30, 2015, laboratory fees increased $23,000 to $2.5 million compared to the nine months ended September 30, 2014.   The three de novo Offices accounted for an additional $45,000 of laboratory fees for the nine months ended September 30, 2015, while laboratory fees decreased $22,000 at the 65 Offices open during each full nine months.  As a percentage of revenue, laboratory fees increased to 5.2% for the nine months ended September 30, 2015 compared to 5.0% for the nine months ended September 30, 2014.

Occupancy. For the nine months ended September 30, 2015 and 2014, occupancy expense remained constant at $4.4 million.  Occupancy expense decreased $187,000 at the 65 Offices open during each full nine months while the three de novo Offices accounted for an additional $184,000 for the nine months ended September 30, 2015.  As a percentage of revenue, occupancy expense increased to 9.1% for the nine months ended September 30, 2015 compared to 8.9% for the nine months ended September 30, 2014.

Advertising and marketing. For the nine months ended September 30, 2015, advertising and marketing expense increased to $708,000 compared to $678,000 for the nine months ended September 30, 2014, an increase of $29,000 or 4.3%.  There were decreases of $181,000 in yellow page advertising expenses and $33,000 in internet advertising expenses, offset by increases of $163,000 in television advertising expenses and $47,000 in radio advertising expenses.  The three de novo Offices accounted for an additional $9,000 of advertising and marketing expenses during the nine months ended September 30, 2015.  As a percentage of revenue, advertising and marketing expense increased to 1.5% for the nine months ended September 30, 2015 compared to 1.4% for the nine months ended September 30, 2014.  The Company adjusts its advertising and marketing expenditures from time to time in response to market conditions and performance in individual markets.

Depreciation and amortization-Offices.  For the nine months ended September 30, 2015, depreciation and amortization expenses attributable to the Offices increased to $3.3 million compared to $3.1 million for the nine months ended September 30, 2014, an increase of $158,000 or 5.1%.  The three de novo Offices accounted for an additional $161,000 of depreciation and amortization expenses during the nine months ended September 30, 2015.  At the 65 Offices open during each full nine month period, there was an increase of $34,000 in depreciation expenses, offset by a decrease of $37,000 in amortization expenses.  As a percentage of revenue, depreciation and amortization expenses attributable to the Offices increased to 6.7% for the nine months ended September 30, 2015 compared to 6.2% for the nine months ended September 30, 2014.

General and administrative-Offices.  For the nine months ended September 30, 2015, general and administrative expenses attributable to the Offices decreased to $3.9 million compared to $4.1 million for the nine months ended September 30, 2014, a decrease of $203,000 or 4.9%.  The decrease in general and administrative expenses is attributable to decreases of $120,000 in bad debt expense, $67,000 in professional fees, $26,000 in office supplies and $25,000 in sales and use taxes at the 65 Offices open during each full nine month period.  The three de novo Offices accounted for $54,000 of general and administrative expenses during the nine months ended September 30, 2015.  As a percentage of revenue, general and administrative expenses decreased to 8.0% for the nine months ended September 30, 2015 compared to 8.3% for the nine months ended September 30, 2014.

Contribution from dental Offices

As a result of revenue decreasing $989,000 and direct expenses decreasing $280,000 during the nine months ended September 30, 2015, contribution from dental Offices decreased to $2.5 million for the nine months ended September 30, 2015 compared to $3.3 million for the nine months ended September 30, 2014, a decrease of $709,000, or 21.8%. As a percentage of revenue, contribution from dental Offices decreased to 5.2% for the nine months ended September 30, 2015 compared to 6.5% for the nine months ended September 30, 2014.

 

Corporate expenses

Corporate expenses - general and administrative. For the nine months ended September 30, 2015, corporate expenses – general and administrative decreased to $2.8 million compared to $3.7 million for the nine months ended September 30, 2014, a decrease of $840,000 or 22.8%.  The decrease is attributable to decreases of $424,000 in corporate wages, $342,000 in severance compensation expense and $63,000 related to stock-based compensation pursuant to ASC Topic 718.  As a percentage of revenue, corporate expenses - general and administrative decreased to 5.8% for the nine months ended September 30, 2015 compared to 7.4% for the nine months ended September 30, 2014.

Corporate expenses - depreciation and amortization. For the nine months ended September 30, 2015, corporate expenses - depreciation and amortization increased $7,000, or 4.2%, to $175,000 compared to $167,000 for the nine months ended September 30, 2014.  As a percentage of revenue, corporate expenses – depreciation and amortization increased to 0.4% for the nine months ended September 30, 2015 compared to 0.3% for the nine months ended September 30, 2014.

Operating loss

As a result of the decrease in contribution from dental Offices and the decrease in corporate expenses discussed above, the Company’s operating loss decreased by $124,000 to $(466,000) for the nine months ended September 30, 2015 compared to $(590,000) for the nine months ended September 30, 2014.  As a percentage of revenue, operating loss decreased to (1.0)% for the nine months ended September 30, 2015 compared to (1.2)% for the nine months ended September 30, 2014.

Interest expense, net

For the nine months ended September 30, 2015, interest expense, net decreased to $75,000 compared to $86,000 for the nine months ended September 30, 2014, a decrease of $11,000 or 13.2%.  As a percentage of revenue, interest expense, net remained constant at 0.2% for the nine months ended September 30, 2015 and 2014.

Net loss

As a result of the above, the Company’s net loss was $(330,000) for the nine months ended September 30, 2015 compared to net loss of $(413,000) for the nine months ended September 30, 2014, a decrease of $83,000.  As a percentage of revenue, net loss decreased to (0.7)% for the nine months ended September 30, 2015 compared to (0.8)% for the nine months ended September 30, 2014.  Net loss for the nine months ended September 30, 2015 was net of income tax benefit of $(211,000), while net loss for the nine months ended September 30, 2014 was net of income tax benefit of $(264,000). The effective income tax rate was constant at 39.0% for the nine months ended September 30, 2015 and 2014.

Liquidity and Capital Resources

The Company finances its operations and growth through a combination of cash provided by operating activities and bank credit facilities.  As of September 30, 2015, the Company had a working capital deficit of approximately $12.6 million, largely caused by the borrowings outstanding under the Credit Facility becoming current as discussed below, retained earnings of $985,000 and a cash balance of $315,000.

On September 13, 2013, the Company entered into a Credit Agreement with Compass Bank, which was amended on February 12, 2014, August 8, 2014 and August 12, 2015 (the “Credit Facility”).  The Credit Facility allows the Company to borrow, on a revolving basis, an aggregate principal amount not to exceed $12.0 million.  Interest is computed at either the lender’s prime rate or at LIBOR plus 1.40% (increased from 1.15% by the August 12, 2015 amendment) in effect from time to time at the Company’s option.  As of September 30, 2015, the Company’s LIBOR borrowing rate was 1.61% and the prime rate borrowing rate was 3.25%.  A commitment fee on the average daily unused amount of the revolving loan commitment is also assessed at a rate of 0.25% per annum, and is payable quarterly in arrears.  At September 30, 2015, the Company had approximately $10.4 million LIBOR rate borrowings outstanding and approximately $1.6 million available for borrowing under the Credit Facility.  The Credit Facility is collateralized by substantially all of the assets of the Company.  The Credit Facility requires the Company to comply with certain affirmative and negative covenants, including maintaining (i) a debt-to-EBITDA ratio of no more than 3.00 to 1.00 (increased from 2.05 to 1.00 by the August 12, 2015 amendment) for the year ending December 31, 2015, and 2.50 to 1.00 (increased from 2.00 to 1.00 by the August 12, 2015 amendment) for the twelve months ending June 30, 2016, and (ii) a fixed charge coverage ratio of not less than 1.25 to 1.00.  At September 30, 2015, the Company was in compliance with the Credit Facility covenants.  The loan matures on September 13, 2016, and as a result the principal amount outstanding is reported in current liabilities on the Company’s condensed consolidated balance sheet as of September 30, 2015.  The Company has commenced discussions with Compass Bank to refinance the Credit Facility or extend its maturity date.  Failure of the Company to refinance the Credit Facility, to extend its maturity date, or obtain other bank financing would have a material adverse effect on the Company and its operations.

Net cash provided by operating activities was approximately $2.3 million and $3.0 million for the nine months ended September 30, 2015 and 2014, respectively.  During the nine months ended September 30, 2015, excluding net loss and after adding back non-cash items, the Company’s cash provided by operating activities consisted of an increase in income taxes payable of approximately $234,000, offset by an increase in accounts receivable of approximately $740,000, a decrease in accounts payable and accrued expenses of approximately $297,000, an increase in prepaid expenses and other assets of approximately $136,000 and a decrease in other long-term obligations of approximately $65,000.  During the nine months ended September 30, 2014, excluding net loss and after adding back non-cash items, the Company’s cash provided by operating activities consisted of increases of approximately $717,000 in income taxes payable, $152,000 in accounts payable and accrued expenses and $22,000 in other long-term obligations, offset by increases of approximately $634,000 in accounts receivable and $201,000 in prepaid expenses and other assets.

Net cash used in investing activities was approximately $1.6 million and $4.3 million for the nine months ended September 30, 2015 and 2014, respectively.  For the nine months ended September 30, 2015, the Company invested approximately $1.6 million in capital expenditures, including approximately $864,000 for two de novo Offices that opened in September 2015 and that is expected to open by January 2016, offset by a decrease in notes receivable of $21,000 and proceeds from the sale of assets of $5,000.  For the nine months ended September 30, 2014, the Company invested approximately $4.3 million in capital expenditures, including approximately $1.7 million related to remodels and/or relocations of three of its Offices, $1.2 million for two de novo Offices and $1.1 million related to six Offices that were converted to digital radiography, offset by a decrease in notes receivable of $20,000 and proceeds from the sale of assets of $19,000.

Net cash used in financing activities was approximately $660,000 for the nine months ended September 30, 2015 and net cash provided by financing activities was approximately $1.1 million for the nine months ended September 30, 2014.  During the nine months ended September 30, 2015, net cash used in financing activities was comprised of approximately $1.2 million for the payment of dividends, offset by approximately $564,000 in advances under the Credit Facility.  During the nine months ended September 30, 2014, net cash provided by financing activities was comprised of approximately $2.2 million in advances under the Credit Facility, $65,000 in proceeds from the exercise of Common Stock options and $11,000 from the tax benefit of Common Stock options exercised, offset by approximately $1.2 million for the payment of dividends.

As of September 30, 2015, the Company had the following debt and lease obligations:

The Company has leased space for an additional de novo Office.  The Office, which is located in Commerce City, Colorado, is expected to open by January 2016.  The Company anticipates it will require approximately $600,000 in capital expenditures to fully equip the de novo Office, of which approximately $130,000 had been spent as of September 30, 2015.  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, debt service requirements 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 September 30, 2015.  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 September 30, 2015.

There has been no change in the Company’s internal control over financial reporting during the three months ended September 30, 2015 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

Issuer Purchases of Equity Securities

 

The Company did not purchase any shares of its Common Stock during the period of July 1, 2015 through September 30, 2015.  The Company’s stock repurchase program has been ongoing for more than ten years and there are no expiration dates on any of the plans.  Common Stock repurchases may be made from time to time as the Company’s management deems appropriate.  As of September 30, 2015, the dollar value of shares that may be purchased under the stock repurchase program was approximately $885,000.

 

 

* Furnished herewith. 

 

SIGNATURES

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.

 

---