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| HTRN > SEC Filings for HTRN > Form 10-Q on 6-Nov-2009 | All Recent SEC Filings |
6-Nov-2009
Quarterly Report
Forward-Looking Statements
The statements contained in this report that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements regarding our expectations, hopes, intentions or strategies regarding the future. You should not place undue reliance on forward-looking statements. All forward-looking statements included in this report are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements. It is important to note that our actual results could differ materially from those in the forward-looking statements. In addition to any risks and uncertainties specifically identified below and in the text surrounding forward-looking statements in this report, you should review the risk factors described in our most recent Annual Report on Form 10-K and other filings with the Securities and Exchange Commission, for factors that could cause our actual results to differ materially from those presented.
Statements that are predictive in nature, that depend upon or refer to future events or conditions, or that include words such as "will", "would", "should", "plans", "likely", "expects", "anticipates", "intends", "believes", "estimates", "thinks", "may", and similar expressions, are forward-looking statements. The following important factors, in addition to those referred to above, could affect the future results of the health care industry in general, and us in particular, and could cause those results to differ materially from those expressed in such forward-looking statements:
• uncertainties in our establishing or maintaining relationships with physicians and hospitals;
• the impact of current and future laws and governmental regulations;
• uncertainties inherent in third party payors' attempts to limit health care coverages and levels of reimbursement;
• the effects of competition and technological changes;
• the availability (or lack thereof) of acquisition or combination opportunities; and
• general economic, market or business conditions.
Segment Reporting
In the fourth quarter of 2008, our Medical Products division relocated from Kennesaw, Georgia to our corporate headquarters in Austin, Texas. Concurrent with this relocation, we made certain changes within our Medical Products management team so that these operations now report to the President of our Urology Services operations. After making these changes, we redesigned our internal financial reporting materials provided to our chief operating decision maker, as well as our executive management team. As of the first quarter of 2009, we do not have any operating segments, except our Urology Services operations, that meet the quantitative requirements of ASC 280, Segment Reporting ("ASC 280"), (formerly Statement of Financial Accounting Standards ("SFAS") 131, Disclosures about Segments of an Enterprise and Related Information).
General
We provide healthcare services and medical devices, primarily to the urology community.
Lithotripsy services. We provide lithotripsy services, which is a medical procedure where a device called a lithotripter transmits high energy shockwaves through the body to break up kidney stones. Our lithotripsy services are provided principally through limited partnerships and other entities that we manage, which use lithotripters. In 2008, physicians who are affiliated with us used our lithotripters to perform approximately 50,000 procedures in the U.S. We do not render any medical services. Rather, the physicians do.
We have two types of contracts, retail and wholesale, that we enter into in providing our lithotripsy services. Retail contracts are contracts where we contract with the hospital and private insurance payors. Wholesale contracts are contracts where we contract only with the hospital. The two approaches functionally differ in that, under a retail contract, we generally bill for the entire non-physician fee for all patients other than governmental pay patients, for which the hospital bills the non-physician fee. Under a wholesale contract, the hospital generally bills for the entire non-physician fee for all patients. In both cases, the billing party contractually bears the costs associated with the billing service, including pre-certification, as well as non-collection. The non-billing party is generally entitled to its fees regardless of whether the billing party actually collects the non-physician fee. Accordingly, under the wholesale contracts where we are the non-billing party, the hospital generally receives a greater proportion of the total non-physician fee to compensate for its billing costs and collection risk. Conversely, under the retail contracts where we generally provide the billing services and bear the collection risk, we receive a greater portion of the total non-physician fee.
Although the non-physician fee under both retail and wholesale contracts varies widely based on geographical markets and the identity of the third party payor, we estimate that nationally, on average, our share of the non-physician fee was roughly $2,100, respectively, for each of the first nine months of 2009 and 2008. At this time, we do not anticipate a material shift between our retail and wholesale arrangements, or a material change in our share of the non-physician fee.
As the general partner of limited partnerships or the manager of other types of entities, we also provide services relating to operating our lithotripters, including scheduling, staffing, training, quality assurance, regulatory compliance, and contracting with payors, hospitals, and surgery centers.
Prostate treatment services. We provide treatments for benign and cancerous conditions of the prostate. In treating benign prostate disease, we deploy three technologies: (1) photo-selective vaporization of the prostate ("PVP"), (2) trans-urethral needle ablation ("TUNA"), and (3) trans-urethral microwave therapy ("TUMT") in certain partnerships. All three technologies apply an energy source which reduces the size of the prostate gland. For treating prostate and other cancers, we use a procedure called cryosurgery, a process which uses lethal ice to destroy tissue such as tumors for therapeutic purposes. In April 2008, we acquired Advanced Medical Partners, Inc. ("AMPI"), which significantly expanded our cryosurgery partnership base. In July 2009, we acquired Endocare, Inc. ("Endocare"), which manufactures both the medical devices and related consumables utilized by our cryosurgery operations, and also provides cryosurgery treatments. Our prostate treatment services are provided principally by us using equipment that we lease from limited partnerships and other entities that we manage. Benign prostate disease and cryosurgery cancer treatment services are billed in the same manner as our lithotripsy services under either retail or wholesale contracts. We also provide services relating to operating the equipment, including scheduling, training, quality assurance, regulatory compliance, and contracting.
Radiation therapy services. We provide image guided radiation therapy ("IGRT") technical services for cancer treatment centers. Our IGRT technical services may relate to providing the technical (non-physician) personnel to operate a physician practice group's IGRT equipment, leasing IGRT equipment to a physician practice group, providing services related to helping a physician practice group establish an IGRT treatment center, or managing an IGRT treatment center.
Anatomical pathology services. We also provide anatomical pathology services primarily to the urology community. We have one pathology lab located in Georgia, Claripath Laboratories, that provides laboratory detection and diagnosis services to urologists throughout the United States. In addition, in July 2008, we acquired Uropath LLC, which managed pathology laboratories located at Uropath sites for physician practice groups located in Texas, Florida and Pennsylvania. Through Uropath, we continue to manage in-office pathology labs for practice groups and provide pathology services to physicians and practice groups with our lab equipment and personnel at our Uropath laboratory sites.
Medical products manufacturing, sales and maintenance. We, through our Endocare acquisition, manufacture and sell medical devices focused on minimally invasive technologies for tissue and tumor ablation through cryoablation, which is the use of lethal ice to destroy tissue, such as tumors, for therapeutic purposes. We develop and manufacture devices for the treatment of prostate and renal cancers and we believe that our proprietary technologies have broad applications across a number of markets, including the ablation of tumors in the lung and liver and palliative intervention (treatment of pain associated with metastases). We also manufacture the related spare parts and consumables.
We also sell and maintain lithotripters and related spare parts and consumables. We are the exclusive U.S. distributor of the Revolix branded laser.
Revenue Recognition
We recognize revenue primarily from the following sources:
• Fees for urology treatments . A substantial majority of our revenue is derived from fees related to lithotripsy treatments performed using our lithotripters. For lithotripsy and prostate treatment services, we, through our partnerships and other entities, facilitate the use of our equipment and provide other support services in connection with these treatments at hospitals and other health care facilities. The professional fee payable to the physician performing the procedure is generally billed and collected by the physician. We recognize revenue for these services when the services are provided. IGRT technical services are billed monthly and the related revenues are recognized as the related services are provided.
• Fees for managing the operation of our lithotripters and prostate treatment devices. Through our partnerships and otherwise directly by us, we provide services related to operating our lithotripters and prostate treatment equipment and receive a management fee for performing these services.
• Fees for maintenance services . We provide equipment maintenance services to our partnerships as well as outside parties. These services are billed either on a time and material basis or at a fixed contractual rate, payable monthly, quarterly, or annually. Revenues from these services are recorded when the related maintenance services are performed.
• Fees for equipment sales, consumable sales and licensing applications . We manufacture and sell medical devices focused on minimally invasive technologies for tissue and tumor ablation through cryosurgery, and their related consumables. We also sell and maintain lithotripters and manufacture and sell consumables related to the lithotripters. We distribute the Revolix laser and consumables related to the laser. With respect to some lithotripter sales, in addition to the original sales price, we receive a licensing fee from the buyer of the lithotripter for each patient treated with such lithotripter. In exchange for this licensing fee, we provide the buyer of the lithotripter with certain consumables. All the sales for equipment and consumables are recognized when the related items are delivered. Revenues from licensing fees are recorded when the patient is treated. In some cases, we lease certain equipment to our partnerships as well as third parties. Revenues from these leases are recognized on a monthly basis or as procedures are performed.
• Fees for anatomical pathology services . We provide anatomical pathology services primarily to the urology community. Revenues from these services are recorded when the related laboratory procedures are performed.
Recent Developments
We continue to look at strategic acquisition opportunities and believe conditions in the market favor our strong financial position, national platform of urologist relationships, and diversification within the urologist services space.
On July 27, 2009, we completed our acquisition of Endocare, pursuant to the Agreement and Plan of Merger ("Merger Agreement"), dated as of June 7, 2009, among us, HT Acquisition, Inc., a wholly-owned subsidiary of ours, and Endocare. Endocare is a medical device company focused on developing, manufacturing and selling cryoablation products which have the potential to assist physicians in improving and extending life by use in the treatment of cancer and other tumors. In accordance with the terms and conditions of the Merger Agreement, Endocare shareholders had the option to receive the following consideration for each share of Endocare common stock they owned: (i) $1.35 in cash, without interest, or (ii) 0.7764 of a share of our common stock, in each case subject to proration. In the acquisition, we paid approximately $4.2 million in cash and issued approximately 7.3 million shares of our common stock to acquire Endocare.
Critical Accounting Policies and Estimates
Management has identified the following critical accounting policies and estimates:
Impairments of goodwill and other intangible assets are both a critical accounting policy and estimate that require judgment and are based on assumptions of future operations. We are required to test for impairments at least annually or if circumstances change that would reduce the fair value of a reporting unit below its carrying value. We test for impairment of goodwill during the fourth quarter. Prior to 2009 we had two reporting units, urology services and medical products. The fair value of each reporting unit was estimated using a combination of the income, or discounted cash flows, approach and the market approach, which utilizes comparable companies' data. Because we have recognized goodwill based solely on our controlling interest, the fair value of each reporting unit also relates only to our controlling interest. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test compares the implied fair value of the reporting unit's goodwill with the carrying value of that goodwill. If the carrying amount of the reporting unit's goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. That is, the fair value of the reporting unit is allocated to all of the assets and liabilities of that unit as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid to acquire the reporting unit. Both the income approach and the market approach require significant assumptions to determine the fair value of each reporting unit. The significant assumptions used in the income approach include estimates of our future revenues, profits, capital expenditures, working capital requirements, operating plans, industry data, and other relevant factors. The significant assumptions utilized in the market approach include the determination of appropriate market comparables, the estimated multiples of revenue, EBIT and EBITDA a willing buyer is likely to pay, and the estimated control premium a willing buyer is likely to pay. For a discussion of our 2008 and 2007 goodwill impairments and the specific assumptions used in the income and market approaches in the 2008 and 2007 analyses, see footnote C to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2008.
A second critical accounting policy and estimate which requires judgment of management is the estimated allowance for doubtful accounts and contractual adjustments. We have based our estimates on historical collection amounts, current contracts with payors, current changes of the facts, and circumstances relating to these matters and certain negotiations with related payors.
A third critical accounting policy is consolidation of our investments in partnerships or limited liability companies ("LLCs") where we, as the general partner or managing member, exercise effective control, even though our ownership is less than 50%. The consolidated financial statements include our accounts, our wholly-owned subsidiaries, and entities more than 50% owned and limited partnerships or LLCs where we, as the general partner or managing member, exercise effective control, even though our ownership is less than 50%. The related governing agreements provide us with broad powers. The other parties do not participate in the management of the entity and do not have the substantial ability to remove us. Investment in entities in which our investment is less than 50% ownership and we do not have significant control are accounted for by the equity method if ownership is between 20%-50%, or by the cost method if ownership is less than 20%. We have reviewed each of the underlying agreements and determined we have effective control; however, if it was determined this control did not exist, these investments would be reflected on the equity method of accounting. Although this would change individual line items within our consolidated financial statements, it would have no effect on our net income and/or total stockholders' equity.
Nine months ended September 30, 2009 compared to the nine months ended September 30, 2008
Our total revenues for the nine months ended September 30, 2009 increased $13,746,000 as compared to the same period in 2008. Revenues from our lithotripsy business increased $1,292,000 for the first nine months of 2009 as compared to the same period in 2008, and revenues from our prostate business increased $3,414,000 for the first nine months of 2009 as compared to the same period in 2008. Prostate revenues from our AMPI operations were a significant driver of the increased prostate revenues in 2009, as we acquired AMPI in April 2008. Lithotripsy revenues on a same store basis in 2009 were consistent with revenues from the same period in 2008. Manufacturing and consumable revenues for the period ending September 30, 2009 increased $1,714,000 from the same period in 2008. This increase is entirely driven by sales to external customers from our new Endocare subsidiary. Contract service revenues increased $152,000 in the first nine months of 2009 over the same period in 2008. Revenues from our laboratory operations increased $3,330,000 for the nine months ended September 30, 2009 as compared to the same period in 2008. This increase resulted primarily from our Uropath operations, as we acquired Uropath in July 2008. Our IGRT operations resulted in $3,491,000 of increased revenues in 2009 primarily from our Ocean acquisition in late 2008.
Our cost of revenues increased $10,758,000 (20%) in the first nine months of
2009 as compared to the same period in 2008. The primary causes of this increase
relate to: 1) increased cost of revenues attributable to our AMPI and IGRT
operations totaling $3,512,000 due to a full nine months of operations in 2009,
2) increased costs related to our lab operations totaling $3,773,000 related
primarily to a full nine months of Uropath activities, and 3) our new Endocare
subsidiary's operations, the costs from which have totaled $4,347,000 since we
acquired Endocare. Approximately $2.6 million of Endocare's costs of revenue
related to incremental cost of goods sold from our write up of Endocare's
inventory to fair value as part of our purchase accounting. Our selling, general
and administrative costs for the nine months ended September 30, 2009 increased
$2,520,000 over the same period in 2008. This increase was primarily driven by
acquisition costs related to our Endocare acquisition, which are now required to
be expensed when incurred.
Net income attributable to noncontrolling interest for the nine month period ended September 30, 2009 increased $1,161,000 compared to the same period in 2008, as a result of increases in income at our existing partnerships and from having a full nine months of activity from our AMPI partnerships. Noncontrolling interest in our AMPI operations increased $794,000 in the first nine months of 2009 as compared to the same period in 2008.
Provision for income taxes in the first nine months of 2009 increased $237,000 compared to the same period in 2008 although our taxable net income during the same periods significantly decreased. Our income tax expense for 2009 reflects $1,967,000 of expense even though we have a loss for financial statement purposes because we recorded a full valuation allowance for all deferred tax assets since we are in a cumulative loss position for the last three years due to non-cash goodwill impairments recorded in prior years. For the next several years, we will only be an alternative minimum tax payer as we will utilize our existing net operating loss carryforwards to offset any current taxes payable.
Three months ended September 30, 2009 compared to the three months ended September 30, 2008
Our total revenues for the three months ended September 30, 2009 increased $2,512,000 as compared to the same period in 2008 primarily driven by revenues of $2,675,000 from our new Endocare subsidiary. Revenues from our lithotripsy business decreased $409,000 (1%) for the third quarter of 2009 as compared to the same period in 2008, and revenues from our prostate business decreased $672,000 in the third quarter of 2009 as compared to the same period in 2008. Prostate revenues from cryosurgery treatments decreased $470,000 for the quarter ended September 30, 2009 and were the primary driver of the total decrease in prostate revenues in the quarter. Revenues from our cryo operations have been consistent for the last three quarters. Litho procedure revenues on a same store basis were down 2.6% in 2009 as compared to the same period in 2008. Manufacturing and consumable revenues for the period ended September 30, 2009 increased $1,802,000 from the same period in 2008. This increase is entirely driven by sales to external customers from our new Endocare subsidiary. Contract service revenues remained consistent in the third quarter of 2009 with the same period in 2008. Revenues from our laboratory operations increased $652,000 in the period ended September 30, 2009 over the same period in 2008. This increase resulted primarily from our Uropath operations, which had increased revenues of $520,000 in the third quarter of 2009 as compared with the same period in 2008. Our IGRT operations resulted in $1,116,000 of increased revenues in 2009 primarily from our Ocean acquisition in late 2008.
Our cost of revenues increased $2,498,000 (12.5%) in the third quarter of 2009 as compared to the same period in 2008. The primary causes of this increase relate to the cost of revenues attributable to our new Endocare subsidiary, the costs from which totaled $4,347,000, our IGRT operations the costs from which increased $671,000, and our lab operations, which had increased costs totaling $634,000 in the third quarter of 2009, $722,000 of which was attributable to our new Uropath operations. Approximately $2.6 million of Endocare's costs related to incremental cost of goods sold from our write up of Endocare's inventory as part of our purchase accounting. Offsetting these increases, we had approximately $1,387,000 in cost savings in our cryosurgery operations primarily related to lower consumable costs, which is consistent with lower revenues, and significant synergies from eliminating duplicate AMPI corporate functions. Our selling, general and administrative costs for the quarter ended September 30, 2009 increased $2,690,000 over the same period in 2008. This increase was primarily driven by acquisition costs related to our Endocare acquisition, which are now required to be expensed when incurred, as well as approximately $1.5 million in increased costs for Endocare's sales and marketing efforts.
Net income attributable to noncontrolling interest for the three month period ended September 30, 2009 decreased $1,080,000 compared to the same period in 2008, primarily related to a decrease in income at one of our existing partnerships combined with repurchases of noncontrolling interests.
Provision for income taxes in the third quarter of 2009 increased $459,000 compared to the same period in 2008 although our taxable net income during the same periods significantly decreased. Our income tax expense for 2009 reflects $1,348,000 of expense even though we have a loss for financial statement purposes because we recorded a full valuation allowance for all deferred tax assets since we are in a cumulative loss position for the last three years due to non-cash goodwill impairments recorded in prior years. For the next several years, we will only be an alternative minimum tax payer as we will utilize our existing net operating loss carryforwards to offset any current taxes payable.
Liquidity and Capital Resources
Cash Flows
Our cash and cash equivalents were $11,154,000 and $22,854,000 at September 30, 2009 and December 31, 2008, respectively. Beginning in 2009, our subsidiaries began distributing available cash on a monthly basis, after establishing reserves for estimated capital expenditures and working capital. Prior to 2009, they generally distributed all of their available cash quarterly, which lead to an accumulated cash balance at the end of each quarter. For the periods ended September 30, 2009 and 2008, our subsidiaries distributed cash of approximately $47,103,000 and $42,797,000, respectively, to noncontrolling interest holders.
Cash provided by our operating activities, after noncontrolling interest, was $44,312,000 for the period ended September 30, 2009 and $51,305,000 for the period ended September 30, 2008. From 2008 to 2009, fee and other revenue collected increased by $15,042,000 due primarily to increased revenues from our acquisitions as well as timing of the collections of accounts receivable. Cash paid to employees, suppliers of goods and others increased by $11,542,000 in 2009. This fluctuation is primarily attributable to increased operating expenses from our acquisitions and timing of payments. Cash paid for acquisition related costs totaled $9,922,000 in 2009, primarily related to our Endocare acquisition. . . .
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