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| BTEL.OB > SEC Filings for BTEL.OB > Form 10-Q on 13-Nov-2009 | All Recent SEC Filings |
13-Nov-2009
Quarterly Report
Cautionary Statement
Statements included or incorporated by reference in this Quarterly Report on Form 10-Q which are not historical in nature are identified as "forward looking statements" for the purposes of the safe harbor provided by Section 27A of the Securities Act of 1933, as amended. Biotel cautions readers that forward looking statements, including, without limitation, those relating to our future business prospects, revenues, working capital, liquidity, capital needs, interest costs and income, are subject to certain risks and uncertainties that could cause actual results to differ materially from those indicated in the forward looking statements. The risks and uncertainties include, but are not limited to, economic conditions, product demand and industry capacity, competitive products and pricing, manufacturing efficiencies, new product development and market acceptance, the regulatory and trade environment and other risks indicated in filings with the Securities and Exchange Commission.
Critical Accounting Policies
The consolidated financial statements of Biotel include the accounts of Biotel Inc. and its wholly-owned subsidiaries, Braemar, Inc. and Agility Centralized Research Services, Inc. (collectively, "Biotel"), which are all located in the United States. Significant intercompany accounts and transactions are eliminated in consolidation.
Management uses estimates and assumptions in preparing financial statements, including those assumed in computing the allowance for doubtful receivable accounts, inventory valuation allowances and warranty reserves and deferred income tax valuation allowances. Those estimates and assumptions may affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities, and reported revenues and expenses. Actual results may vary from these estimates.
At times Biotel maintains bank deposits in excess of federally insured limits. Management monitors the soundness of these financial institutions and believes Biotel's risk is negligible.
Biotel sells its products to customers on credit in the ordinary course of business. A customer's credit history is reviewed and must meet certain standards before credit is extended. Biotel establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information.
Biotel charges the costs of advertising, except for costs associated with direct response advertising, to operating expenses as incurred. The costs of direct response advertising are capitalized and amortized over the period during which future benefits are expected to be received.
Inventories are valued at lower of cost (using the average and first-in first-out cost methods) or market. The Company has on order a significant inventory of raw materials with long lead times that may be in excess of the amount needed due to the reduced level of sales of its wireless products as a result of the terminated merger agreement with CardioNet, Inc. (see Overview below and Part II. Item 1. Legal Proceedings). In the event the Company continues to experience a reduced level of sales for its wireless products, the book value of a portion of this inventory, which could be significant, may need to be reduced due to obsolescence.
Property, equipment and leasehold improvements are recorded at cost. Depreciation is calculated using the straight-line method over estimated useful lives of three to five years for equipment, seven years for furniture and fixtures and two to five years for leasehold improvements, which represents the terms of the original leases.
Goodwill is accounted for in accordance with SFAS No. 142, Goodwill and Other Intangible Assets. Goodwill is deemed to have an indefinite useful life and is not amortized but is subject to impairment tests performed at least annually. During fiscal 2009 and 2008, Biotel performed the required impairment tests of goodwill and determined the recorded goodwill had not been impaired.
We routinely warrant our recorders against defects in material and workmanship for one year. Supplies, accessories and repairs typically carry no warranty to 90-days warranty, depending on the item. An accrual is provided for estimated future claims. Such accruals are based on historical experience and management's estimate of the level of future claims.
Revenues from product sales are recognized at date of shipment.
Amounts billed to customers for service contracts are recognized as income over the term of the agreements, and the associated costs are recognized as incurred.
Research and development costs are charged to operations as incurred. These costs are for proprietary research and development activities that are expected to contribute to the Company's future profitability.
Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes. Deferred taxes relate primarily to differences between financial and income tax reporting for the basis of inventory, accounts receivable, property and equipment, and accrued liabilities. The deferred tax accounts represent future tax return consequences of those differences, which will either be deductible or taxable when the assets and liabilities are recovered or settled. Deferred taxes may also be recognized for operating losses that are available to offset future taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.
Biotel considers all highly liquid short term investments purchased with an original maturity of three months or less to be cash equivalents.
Overview
Biotel has been implementing a strategy to expand its base of operations among medical companies who seek to outsource strategic items provided by various Biotel companies. From its operating subsidiaries, Biotel supplies an array of products and services to provide for the research, development, testing, and manufacturing needs of its customers.
Biotel subsidiaries, Braemar, Inc. and Agility Centralized Research Services, Inc., sell medical devices, technology and research services to medical companies. They design, manufacture, and test 24- and 48-hour Holter recorders, 30-day ECG event recorders, tissue extraction components and flow control devices; provide 24/7 clinical ECG research services and internet technologies; complete FDA, CE and other regulatory testing; and develop, test and manufacture other custom medical devices. These subsidiaries form a base of products and services which we believe are attractive to medical device and pharmaceutical companies, allowing accelerated and improved research, development, testing and manufacturing operations for our customers.
Biotel subsidiary, Braemar, Inc., through its Columbia, South Carolina facility which was formerly Advanced Biosensor, sells maintenance services, Holter recorders and event recorders manufactured by Braemar, diagnostic Holter software provided by others and Holter supplies to hospitals and clinics.
Following the announcement of Biotel's planned merger with CardioNet, Inc. (see Part II. Item 1. Legal Proceedings), many of our customers made other plans for the purchase of wireless products they had intended to purchase from us. We expect that many of these customers will not purchase their future requirements for wireless products from us notwithstanding the termination of the merger agreement. We are not forecasting major national customers for our Fusion MCT products and will market Fusion and ER920W devices to regional scanning services. While Biotel is hopeful for a strong market for its Fusion MCT and ER920W wireless devices, the prospective regional customers presently have a minimal market share in this business sector. Regional scanning services do not have the purchasing power of national scanning services, but they maintain strong relationships with their end users. Because of the patchwork of reimbursement pricing among Medicare local carriers, some regional customers may prefer ER920W wireless event recorders while others prefer Fusion products. Following a strong fiscal year 2009 selling ER920W devices to a major customer, Biotel is expecting diminished wireless sales activity in the current fiscal year. Furthermore, Medicare has recently announced that event recorder reimbursement will diminish 7% and Holter reimbursement will diminish 16% in 2010. This may place downward pressure on pricing and sales of our traditional non-wireless product lines. Agility's business has diminished due to fewer contracted atrial fibrillation clinical trials, the principal source of Agility's revenues. Agility is incurring operating losses but has won new arrhythmia clinical research business projected to begin in June, 2010.
Results of Operations
Three Months ended September 30, 2009
Biotel's net revenues for the three months ended September 30, 2009, were $3,263,000, 3.0% more than net revenues of $3,168,000 for the three months ended September 30, 2008. This increase was the result of strong sales of medical devices during the first quarter of fiscal 2010. Sales of Holter products and fluid management products were strong in the first quarter of fiscal 2010. Sales of event recorders were 28.2% less in the first quarter of fiscal year 2009 versus the first quarter of 2008. Sales of Braemar wireless arrhythmia monitors are expected to diminish versus fiscal year 2009 as a result of certain actions as required to publicly announce the merger agreement and by the terms of the merger agreement between Biotel and CardioNet, Inc., that was subsequently terminated by CardioNet (see Part II. Item 1. Legal Proceedings). Additionally, two major customers issued purchase orders for wireless and event recorder products in the period following announcement of the merger agreement. These orders appear to have been last time buy opportunities for such customers, and the purchases propelled sales revenues through the first quarter just ended. These orders have been substantially filled, revenues are expected to diminish, and Biotel does not project profitability through the remainder of the fiscal year.
Gross profit was $1,297,000 for the quarter ended September 30, 2009, 10.5% less than the gross profit of $1,449,000 for the first quarter of fiscal year 2009. Gross profit decreased as a result of product mix. Gross profit margin declined to 39.7% for the three months ended September 30, 2009 compared to 45.7% for the three months ended September 30, 2008. Cost of sales and service increased to $1,967,000 (60.3% of sales) for the three months ended September 30, 2009, compared to $1,719,000 (54.3% of sales) for the first quarter of fiscal year 2009. The increase in cost of sales and service was a result of the higher sales volume and product mix in the first quarter of fiscal 2010. Cost of sales and service as a percentage of revenue increased, primarily due to product mix.
Selling, general and administrative expenses of $666,000 (20.4% of sales) for the three months ended September 30, 2009 increased from $583,000 (18.4% of sales) for the three months ended September 30, 2008. Selling, general and administrative expenses were higher in the first quarter of fiscal 2010 primarily because of legal expense incurred as a result of activities surrounding the merger agreement between Biotel and CardioNet, Inc. signed on April 2, 2009, and subsequently terminated by CardioNet. We expect a higher level of legal expenses to continue for the next several quarters. In view of current business projections, we have made non-personnel expense cuts and reduced personnel by six employees. These combined reductions have a projected annual savings of $600,000. Selling expenses include salaries, commissions, benefits, travel expenses and other selling expenses.
Research and development expenditures for the first quarter of fiscal year 2010 were $407,000, an increase of 11.2% compared to $366,000 in the first quarter of fiscal year 2009. Research and development expenses in the first quarter of fiscal year 2010 included expenditures for development of new wireless products addressing MCT patient procedures. MCT procedures allow patients to be remotely monitored with alarms for up to 30 days, carry higher reimbursement in the United States and are believed to provide a higher diagnostic yield than traditional telephone event monitoring approaches. Biotel expects research and development investment in fiscal 2010 to be comparable to prior year levels as the Company addresses developing markets in Holter, event recording and wireless arrhythmia management.
No interest expense was incurred in the three-month period ended September 30, 2009, compared to interest expense of $565 for the three months ended September 30, 2008.
Net earnings of $128,000 were posted for the first quarter of fiscal year 2010, versus net earnings of $328,000 in the first quarter of fiscal year 2009. The decrease in net earnings was primarily the result of the decrease in gross profit margin and increase in research and development and legal expenses in the first three months of fiscal 2010. We expect to continue to incur a significant level of legal expenses during the next twelve months.
Off-Balance Sheet Arrangements
Biotel does not have any off-balance sheet financing arrangements.
Liquidity and Capital Resources
Working capital increased to $4,360,000 at September 30, 2009, compared to $4,197,000 at June 30, 2009. The increase in working capital is largely the result of the Company's continued profitability.
Cash and cash equivalents were $1,553,000 at September 30, 2009, compared to $1,160,000 at June 30, 2009. The ratio of current assets to current liabilities ("current ratio") was 4.72 to one at September 30, 2009 and 3.97 to one at June 30, 2009.
Accounts receivable decreased to $1,837,000 at September 30, 2009, versus $2,202,000 at June 30, 2009, as a result of strong collections in September, 2009. To the extent that credit terms are extended to customers, Biotel's cash position is diminished and debt may be required to supplement cash flows. Accordingly, Biotel attempts to make timely collections from its customers in accordance with credit terms, extend credit only to credit worthy customers with a strong payment history, and to keep credit terms as short as is practicable.
During the first quarter of fiscal year 2010, $60,000 was used for capital expenditures, compared with $110,000 in the first quarter of fiscal year 2009. Biotel primarily invests in molds, tooling and fixtures for custom components used in its product lines. Levels of capital investment are expected to vary from year to year.
Inventory decreased to $1,560,000 as of September 30, 2009 versus $1,878,000 as of June 30, 2009. The level of inventory decreased as less material was purchased due to an anticipated decline in sales over the next several months as a result of the terminated merger agreement. Biotel's subsidiaries manage inventories to provide safety stock and product flow for customers while controlling the amount of inventory.
Current liabilities decreased to $1,171,000 at September 30, 2009, compared to $1,415,000 on June 30, 2009, as a result of the decrease in income taxes payable.
Biotel has long term liabilities consisting of deferred taxes payable totaling $329,000. Biotel has no long term debt.
As of September 30, 2009, stockholders' equity had increased to $5,788,000 from $5,659,000 at June 30, 2009. The increase in stockholders' equity was a result of the Company's continued profitability.
Management believes that present cash balances, internally generated funds and its credit line should provide sufficient working capital to meet present and projected needs for the coming 12 months. There is no assurance that Biotel will be successful in obtaining additional working capital if more is required.
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