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| TRCR > SEC Filings for TRCR > Form 10-Q on 9-Nov-2009 | All Recent SEC Filings |
9-Nov-2009
Quarterly Report
This Quarterly report on Form 10-Q contains certain "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, that represent our expectations, anticipations or beliefs about future events, including our operating results, financial condition, liquidity, expenditures, and compliance with legal and regulatory requirements. For this purpose, any statements that are not statements of historical fact may be deemed to be forward-looking statements. These statements involve risks and uncertainties that could cause actual results to differ materially depending on a variety of important factors. Factors that might cause or contribute to such differences include, but are not limited to, competitive pressures, loss of significant customers, the mix of revenue, changes in pricing policies, delays in revenue recognition, lower-than-expected demand for the Company's products and services, business conditions in the integrated health care delivery network market, general economic conditions, and the risk factors detailed in Item 1A of Part II below as well as ourother current periodic, quarterly and annual reports on Forms 8-K, 10-Q and 10-K that we file with the Securities Exchange Commission ("SEC") from time to time. With respect to such forward-looking statements, we claim protection under the Private Securities Litigation Reform Act of 1995. Our SEC filings are available from us, and also may be examined at public reference facilities maintained by the SEC or, to the extent filed via EDGAR, accessed through the website of the SEC (http://www.sec.gov). In addition, factors that we are not currently aware of could harm our future operating results. You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date of this filing. We undertake no obligation to make any revisions to the forward-looking statements or to reflect events or circumstances after the date of this filing.
Overview
Transcend is the third largest medical transcription company in the United States. Currently, we serve approximately 250 customers nationwide. Our target market is the 4,900 community hospitals in the U.S., which we estimate comprises a $2.45 billion market. Our mission is to provide accurate and timely documentation of the patient/medical provider encounter at a competitive price. Service excellence is crucial to our success, and we are consistently ranked among the top medical transcription service organizations in the industry by KLAS, an independent healthcare industry research firm. Our approximately 2,000 home-based domestic medical language specialists (transcriptionists), supplemented by our offshore partners, provide high quality medical documents and fast turnaround times, resulting in high customer retention rates. We develop and utilize an array of technology to support the transcription process, including robust voice capture systems, state-of-the-art speech recognition technology, our proprietary Internet-based BeyondTXT transcription workflow platform and various customer systems. We believe we are well-positioned to benefit from the move toward electronic medical record solutions because the data and narrative content we create comprise key portions of the electronic medical record.
Outlook
The U.S. economy has deteriorated significantly since the Fall of 2008, stemming primarily from disruption in the global credit markets. If the economy were to further deteriorate, the Company could see deterioration in the financial condition of its customers and collection of its accounts receivable. The decrease in availability of consumer credit resulting from the financial crisis, as well as general unfavorable economic conditions, could cause consumers to reduce their discretionary spending, including spending for medical care. Job losses and the resulting losses of healthcare benefits could further reduce demand for healthcare services. The Company has not experienced any noticeable deterioration in accounts receivable or transcription volume to date. It is also uncertain what effect the credit crisis may have on the security of the U.S. banking system, and specifically the bank where the Company's cash and cash equivalents are deposited. This could impact our access to and cost of capital. In addition, FDIC insurance does not adequately insure deposits, and it is estimated that $2.7 million of the Company's cash and cash equivalents were not insured at September 30, 2009. In addition to the impact of the overall economic environment, the following trends and uncertainties could have a material future impact on our financial results:
• The aging of the "baby boomers" will create increased demand for healthcare services, which should in turn create increased demand for medical transcription services. Over the next 20 years, the U.S. population over the age of 65 is expected to increase from roughly 40 million to 70 million according to the U.S. Census Bureau.
• Increased adoption of electronic medical record solutions could result in greater demand for electronic documentation, including transcription of reports that are currently hand-written. Alternatively, electronic medical record solutions could reduce the demand for traditional transcription since physicians could be required to "point and click" to complete a template rather than dictate to document portions of their patient encounters. Management believes that dictation is more efficient and produces a more robust record than using only templates and we anticipate that in the future, hybrid solutions will become more common. We believe that the pace of change in the healthcare industry has increased, particularly as it relates to adoption of the electronic medical record, and expect this trend to continue. We are addressing this opportunity and risk by exploring opportunities to make the data in our reports more useful to hospitals and by exploring the opportunity to partner with firms to more deeply integrate our service offering into total documentation solutions for hospitals.
• Increased use of speech recognition technology and offshore resources in the future could result in higher profitability for the Company. At the same time, competition within the medical transcription industry, combined with use of offshore resources and speech recognition technology by our competitors, could create downward pricing pressure in the industry. The potential net impact of these two trends is difficult to predict with certainty.
• Transcend has not historically had difficulty in staffing to meet demand as we have grown. However, looking at the industry as a whole, we do not expect the domestic labor market for medical transcriptionists to grow fast enough to meet increased demand. Transcend is addressing this challenge by increasing employee productivity through the use of speech recognition technology, utilizing offshore resources and by attempting to develop a reputation as one of the best places to work in the industry. It is possible that in the future a tightening labor market could result in upward pressure on wages, but to date we have not seen evidence of this and we do not anticipate this occurring in the short-term.
• We have completed three acquisitions in 2009 which have had a material impact on our financial statements. Acquisitions involve significant risk, including integration risk and it is possible that we will not realize the anticipated benefits of the acquisitions we have made.
• Transcend has experienced annual operating losses in prior years, the most recent occurring in 2005. While the Company has increased its level of net income in recent years, there can be no assurance that operating losses will not occur in the future. Over the short term, excluding the impact of acquisitions, the variability in the Company's earnings and cash flow is mitigated by the fact that our revenue is recurring in nature and our largest expense, the cost of the transcriptionists, is variable in relation to revenue.
For a more complete understanding of trends and uncertainties relevant to Transcend, please see Item 1 "Business" of our December 31, 2008 Form 10-K, including the section titled "Industry Overview" and Item 1A "Risk Factors" to this Form 10-Q, as well as the disclosures contained elsewhere in our 2008 Form 10-K and our 2009 Forms 10-Q and 8-K and other reports and documents filed by Transcend from time to time with the SEC.
Critical Accounting Estimates which are Material to Registrant
A critical accounting estimate meets two criteria: (1) it requires assumptions about highly uncertain matters; and (2) there would be a material effect on the financial statements from either using a different, also reasonable, amount within the range of the estimate in the current period or from reasonably likely period-to-period changes in the estimate. Our critical accounting estimates are as follows:
Goodwill and Intangible Assets. As of September 30, 2009, the Company had goodwill and net intangible assets at carrying amounts of $23,786,000 and $5,579,000, respectively. The total of $29,365,000 represents 60.1% of total assets as of September 30, 2009. Management reviews goodwill and intangibles for impairment annually and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. In testing for impairment, management calculates the fair value of the reporting units to which the goodwill and intangibles relate based on the present value of estimated future cash flows. The Company operates in one reporting unit - medical transcription services. The approach utilized is dependent on a number of factors including estimates of future revenues and costs, appropriate discount rates and other variables. Management bases estimates on assumptions that are believed to be reasonable, but which are unpredictable and inherently uncertain. Therefore, future impairments could result if actual results differ from those estimates.
Intangible assets are amortized over their estimated useful lives. If the estimated useful life assumptions are shortened, the Company would record an impairment entry to recognize the change in assumptions.
Contingent Consideration Payable. In connection with the acquisitions of TRS and MDSI, the Company has recorded accruals for contingent payments in the amounts of $354,000 and $270,000, respectively as of September 30, 2009. The Company estimated the fair value of these payables as of the purchase dates of each acquisition. Topic 805 - Business Combinations requires that these estimates are remeasured to fair value at each reporting date until the contingency is resolved. These interim changes in estimated fair value, along with any differences in the final settlement, are recognized in current earnings. The maximum contingent consideration payable under the TRS asset purchase agreement is $3 million.
Deferred Tax Assets and Liabilities. As of September 30, 2009, the Company had net current deferred tax assets of $546,000, of which $310,000 relates to MDSI, and net non-current deferred tax liabilities of $1,134,000, of which $1,187,000 relates to MDSI. Deferred tax assets represent future tax benefits we expect to realize. Our ability to utilize the deferred tax benefits is dependent upon our ability to generate future taxable income. FASB ASC Topic 740-Income Taxes, requires us to record a valuation allowance against any deferred income tax benefits that we believe may not be realized. The Company estimates future taxable income to determine whether a valuation allowance is needed. Projecting our future taxable income requires us to use significant judgment regarding expected future revenues and expenses. In addition, we must assume that tax laws will not change sufficiently to materially impact the expected tax liability associated with our expected taxable income. Transcend has valuation allowances against net operating loss carryforwards in certain states in which future taxable income in those states may not be sufficient to utilize the net operating loss carryforwards in those states prior to their expiration.
Stock-Based Compensation. Effective January 1, 2006, the Company adopted the provisions of FASB ASC Topic 718- Stock Compensation for its stock-based awards. Under Stock Compensation, management makes assumptions regarding the Company's stock volatility and forfeiture rates required using the Black-Sholes-Merton option-pricing model used to calculate option compensation cost.
Three Months Ended September 30, 2009 Compared to Three Months Ended September 30, 2008
NOTE: The three months ended September 30, 2009 include only one month of MDSI operations.
Revenue increased $6.3 million, or 52%, to $18.5 million in the quarter ended September 30, 2009 compared to revenue of $12.2 million in the same period in 2008. The $6.3 million increase in revenue is attributable to revenue from new customers of $2.2 million, revenue contributed by the acquisition of TRS of $1.6 million, revenue contributed by the acquisition of DeVenture of $1.4 million, revenue contributed by the acquisition of MDSI of $1.2 million and increased revenue from existing customers of $0.5 million, offset by a decrease in revenue of $0.6 million from customers who terminated their contracts since the third quarter of 2008.
Direct costs increased $4.3 million, or 56%, to $11.9 million in the quarter ended September 30, 2009 compared to $7.6 million in the same period in 2008. Direct costs include costs attributable to compensation for transcriptionists, fees paid for speech recognition processing, telephone expenses, recruiting, management, customer service, technical support for operations, and implementation of transcription services. Transcription compensation is a variable cost based on lines transcribed or edited multiplied by specified per-line pay rates that vary by individual as well as type of work. Speech recognition processing is a variable cost based on the minutes of dictation processed. All other direct costs referred to above are semi-variable operations infrastructure costs that periodically change in anticipation of or in response to the overall level of production activity.
As a percentage of revenue, direct costs increased to 64% in the quarter ended September 30, 2009 from 63% in the same period of 2008. The increase in costs as a percentage of revenue was due primarily to a decrease in the percentage of work processed on the Company's BeyondTXT transcription platform versus other platforms from 66% in the third quarter of 2008 to 52% in the third quarter of 2009. Work processed on BeyondTXT has lower costs due to the use of speech recognition technology to produce drafts of reports which are then edited by our medical language specialists. The decrease in the percentage of BeyondTXT work is due to the impact of additional non-BeyondTXT work processed for customers from the three acquisitions completed in 2009. The percentage of BeyondTXT work is expected to decline further in the fourth quarter which will include a full three months of MDSI operations. Direct costs as a percentage of revenue were higher for the acquired businesses. In addition, implementation and support costs have grown in order to manage conversion of some acquired customers onto BeyondTXT and to support the larger customer base. Excluding the impact of acquisitions and the additional implementation and support costs to support the integration of the acquisitions, direct costs as a percentage of revenue increased slightly.
Gross profit increased $2.1 million, or 46%, to $6.6 million in the quarter ended September 30, 2009 compared to $4.5 million in the same period in 2008. Gross profit as a percentage of revenue decreased to 36% in the quarter ended September 30, 2009 compared to 37% in the same period in 2008 (see direct costs discussion).
Sales and marketing expenses increased $82,000, or 27%, to $391,000 in the quarter ended September 30, 2009 compared to $309,000 in the same period of 2008. Sales and marketing expenses as a percentage of revenue were 2% in the quarter ended September 30, 2009 compared to 3% in the third quarter of 2008 due to acquisitions that had lower sales and marketing costs. The increase in sales and marketing expense was primarily due to an increase in commissions on sales and increased fees paid to group purchasing organizations.
Research and development expenses increased $152,000, or 66%, to $382,000 in the quarter ended September 30, 2009 compared to $230,000 in the same period in 2008. Research and development expenses as a percentage of revenue were 2% in both the quarters ended September 30, 2009 and 2008. The increase was primarily due to an increase in compensation-related expenses and increases in hardware and software maintenance costs related to information technology initiatives.
General and administrative expenses increased $991,000, or 67%, to $2.5 million in the quarter ended September 30, 2009 compared to $1.5 million in the same period in 2008. General and administrative expenses for DeVenture, TRS and MDSI collectively contributed $419,000 of the increase. Transcend incurred $84,000 of transaction costs related to acquisitions in the third quarter of 2009. The balance of the increase was due primarily to increased compensation, contract services, employee benefits costs, and stock-based compensation expense. General and administrative expenses as a percentage of revenue were 13% and 12% in the quarters ended September 30, 2009 and 2008, respectively.
Depreciation and amortization expense was $357,000 in the quarter ended September 30, 2009 compared to $208,000 in the same period in 2008, an increase of $149,000. Amortization of intangible assets resulting from the acquisitions of DeVenture,TRS and MDSI contributed $111,000 of the increase. The remainder was due to growth in depreciable assets.
Interest and other expenses increased $129,000 to $116,000 of net expense in the quarter ended September 30, 2009 compared to $13,000 of net income in the same period in 2008. The increase is due primarily to the write-off of $60,000 of prepaid costs related to the early termination of the HFG facility and the DCOA promissory note and lower interest income on cash due to lower cash balances.
The income tax provision increased $202,000 to $1.0 million for the three months ended September 30, 2009 compared to $826,000 for the same period in 2008. The provision increased primarily due to higher pre-tax income and a slightly higher effective tax rate of 35.9% for the quarter ended September 30, 2009 compared to 35.8% for the quarter ended September 30, 2008.
Nine Months Ended September 30, 2009 Compared to Nine Months Ended September 30, 2008
NOTE: The nine months ended September 30, 2009 include only one month of MDSI operations.
Revenue increased $14.5 million, or 40%, to $50.4 million in the nine months ended September 30, 2009 compared to revenue of $35.9 million in the same period in 2008. The $14.5 million increase in revenue is attributable to revenue from new customers of $5.8 million, revenue contributed by the acquisition of DeVenture of $3.9 million, revenue contributed by the acquisition of TRS of $3.4 million, revenue contributed by the acquisition of MDSI of $1.2 million and increased revenue from existing customers of $1.7 million, offset by a decrease in revenue of $1.5 million from customers who terminated their contracts since the third quarter of 2008.
Direct costs increased $9.6 million, or 42%, to $32.4 million in the nine months ended September 30, 2009 compared to $22.8 million in the same period in 2008. Direct costs include costs attributable to compensation for transcriptionists, recruiting, management, customer service, technical support for operations, fees paid for speech recognition processing, telephone expenses and implementation of transcription services. Transcriptionist compensation is a variable cost based on lines transcribed or edited multiplied by specified per-line pay rates that vary by individual as well as type of work. Speech recognition processing is a variable cost based on the minutes of dictation processed. All other direct costs referred to above are semi-variable production infrastructure costs that periodically change in anticipation of or in response to the overall level of production activity.
Direct costs were 64% of revenue in both the nine months ended September 30, 2009 and 2008. Costs as a percentage of revenue remained flat due primarily to higher direct costs as a percentage of revenue for acquired businesses offset by the cost savings that resulted from the increased use of speech recognition technology integrated into the Company's BeyondTXT platform and the use of offshore transcription resources. Although the 2009 acquisitions did not materially impact direct costs as a percent of revenue for the nine months ended September 30, 2009, the Company expects the impact of MDSI's higher cost as a percent of revenue to have a greater impact beginning in the fourth quarter of 2009.
Gross profit increased $5.0 million, or 38%, to $18.0 million in the nine months ended September 30, 2009 compared to $13.1 million in the same period in 2008. Gross profit as a percentage of revenue remained at 36% in both the nine months ended September 30, 2009 and 2008 (see direct costs discussion).
Sales and marketing expenses increased $446,000, or 56%, to $1.2 million in the nine months ended September 30, 2009, compared to $798,000 in the same period of 2008. Sales and marketing expenses as a percentage of revenue were 2% in both the nine month periods ended September 30, 2009 and 2008. The size of the sales force increased to five employees in 2009 from four employees in 2008. The increase in sales and marketing expense is primarily due to increases in compensation and commissions, increased fees paid to group purchasing organizations and increased advertising and marketing efforts.
Research and development expenses increased $352,000, or 46%, to $1.1 million in the nine months ended September 30, 2009 compared to $763,000 in the same period in 2008. Research and development expenses as a percentage of revenue were 2% in both the nine-month periods ended September 30, 2009 and 2008. The increase is primarily due to increases in compensation, contract services and hardware and software maintenance costs related to information technology initiatives.
General and administrative expenses increased $2.2 million, or 51%, to $6.4 million in the nine months ended September 30, 2009 compared to $4.2 million in the same period in 2008. General and administrative expenses for DeVenture, TRS and MDSI collectively contributed $863,000 of the increase. Transcend incurred $250,000 of transaction costs related to acquisitions in the nine months ended September 30, 2009. The remaining increase is due primarily to increases in compensation costs, contract services, and stock compensation expense. General and administrative expenses as a percentage of revenue were 13% in the nine months ended September 30, 2009 compared to 12% for the nine-months ended September 30, 2008.
Depreciation and amortization expense increased $316,000, or 52%, to $921,000 in the nine months ended September 30, 2009 compared to $605,000 in the same period in 2008. Amortization of intangible assets resulting from businesses acquired in 2009 contributed $172,000 of the increase. The remainder was due to growth in depreciable assets.
Interest and other expenses increased $174,000 to $177,000 of net expense in the nine months ended September 30, 2009 compared to $3,000 of net expense in the same period in 2008. The increase is due primarily to the write-off of $60,000 in prepaid costs related to the early termination of the HFG facility and the DCOA promissory note and reduced interest income due to lower rates and lower cash balances.
The income tax provision increased $619,000 to $3.0 million for the nine months ended September 30, 2009 compared to $2.4 million for the same period in 2008. The provision increased primarily due to higher pre-tax income and a higher effective tax rate of 36.7% for the nine months ended September 30, 2009 compared to 35.8% for the nine months ended September 30, 2008.
Liquidity and Capital Resources
As of September 30, 2009, the Company had cash and cash equivalents of $7.2
million, working capital of $6.1 million, and availability of approximately $5.0
million on its line of credit based on eligible accounts receivable (see Note
7). The Company had $9.1 million of debt outstanding as of September 30, 2009.
Cash provided by operating activities was $5.6 million for the nine months ended September 30, 2009 compared to $7.1 million for the nine months ended September 30, 2008. The decrease was due primarily to use of available net operating loss carryforwards in 2008 that were fully utilized in 2009 and changes in working capital, offset by improved profitability before income taxes.
Cash used in investing activities was $18.4 million for the nine months ended September 30, 2009, compared to $741,000 for the nine months ended September 30, 2008. The outflow in 2009 was due primarily to the acquisitions of DeVenture for $4.4 million, TRS for $4.5 million and MDSI for $8.8 million.
Cash provided by financing activities was $7.7 million for the nine months ended September 30, 2009 compared to cash used in financing activities of $1.3 million in the same period in 2008. The cash provided during 2009 consisted of the tax benefit for share-based payments of $ 1.2 million, the proceeds on the exercise of stock options of $184,000, and the proceeds of borrowing of $7.0 million, offset by note repayments of $664,000. In 2008, the outflow consisted of note repayments of $1.3 million, offset by proceeds of $61,000 from the exercise of stock options.
The Company anticipates that cash on hand, together with cash flow from operations should be sufficient for the next twelve months to finance operations, make capital investments in the ordinary course of business, pay contingent amounts related to previous acquisitions, and pay indebtedness when due.
Part of the growth strategy for Transcend is the completion of acquisitions. Management believes that available cash and the Regions credit facility together with other acquisition options, such as seller financing, are only sufficient to complete small acquisitions. Additional financing will be required for larger acquisitions. Transcend recently filed a "shelf" registration statement with the SEC. If it is declared effective, the Company may offer equity, debt, convertible equity or debt, or warrants, or a combination, to the public to raise additional capital, which would provide financing for larger acquisitions. Management believes, based on current information, that the Company can obtain acquisition financing should the need arise. There can be no assurance that funding will be available when needed.
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