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BDMS > SEC Filings for BDMS > Form 10-K on 28-Mar-2014All Recent SEC Filings

Show all filings for BIRNER DENTAL MANAGEMENT SERVICES INC

Form 10-K for BIRNER DENTAL MANAGEMENT SERVICES INC


28-Mar-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

General

The following discussion and analysis relates to factors that have affected the consolidated results of operations and financial condition of the Company for the three years ended December 31, 2013. Reference is made to the Company's consolidated financial statements and related notes thereto included elsewhere in this Annual Report. This discussion and analysis contains forward-looking statements. Discussions containing such forward-looking statements may be found in the material set forth below and under Item 1, "Business," Item 5, "Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities" as well as in this Annual Report generally. Investors and prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties. Actual events or results may differ materially from those discussed in the forward-looking statements as a result of various factors, including, without limitation the risk factors set forth in Item 1A, "Risk Factors." The Company undertakes no obligation to publicly update or revise any forward-looking statements as a result of new information, future events or otherwise. See "Forward-Looking Statements".

Overview

The Company was formed as a Colorado corporation in May 1995, and currently provides dental practice management services to 66 Offices in Colorado, New Mexico and Arizona staffed by 75 dentists and 39 specialists. The Company has acquired 45 practices (seven of which were consolidated into existing Offices and one that was closed) and opened 33 de novo Offices (two of which were consolidated into existing Offices and two that were closed). During December 2012, the Company consolidated the specialty dental services of one of its acquired Denver, Colorado Offices into two other Offices and subsequently closed this Office. During 2013, the Company opened two de novo Offices. The first de novo Office opened in July 2013 and the second de novo Office opened in December 2013. During December 2013, the Company consolidated the dental services of one of its de novo Offices into another Office and subsequently closed this Office. During the year ended December 31, 2013, the Company also completed remodels and/or relocations of two of its Offices and converted eight additional Offices to digital radiography. The Company derives all of its revenue from its Management Agreements with the P.C.s. In addition, the Company assumes a number of responsibilities when it acquires a new practice or develops a de novo Office, which are set forth in the Management Agreement, as described below. The Company expects to expand in existing markets primarily by enhancing the operating performance of its existing Offices, by developing de novo Offices and by making acquisitions.

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


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

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

Revenue is derived principally from fee-for-service revenue and revenue from capitated managed dental care plans. Fee-for-service revenue consists of P.C. revenue received from indemnity dental plans, preferred provider plans and direct payments by patients not covered by any third-party payment arrangement. Managed dental care revenue consists of P.C. revenue received from capitated managed dental care plans, including capitation payments and patient co-payments. Capitated managed dental care contracts are between dental benefits organizations and the P.C.s. Under the Management Agreements, the Company negotiates and administers these contracts on behalf of the P.C.s. Under a capitated managed dental care contract, the dental group practice provides dental services to the members of the dental benefits organization and receives a fixed monthly capitation payment for each plan member covered for a specific schedule of services regardless of the quantity or cost of services to the participating dental group practice obligated to provide them. This arrangement shifts the risk of utilization of these services to the dental group practice providing the dental services. Because the Company assumes responsibility under the Management Agreements for all aspects of the operation of the dental practices (other than the practice of dentistry) and thus bears all costs of the P.C.s associated with the provision of dental services at the Office (other than compensation of dentists, dental hygienists and dental assistants), the risk of over-utilization of dental services at the Office under capitated managed dental care plans is effectively shifted to the Company. In addition, dental group practices participating in a capitated managed dental care plan often receive supplemental payments for more complicated or elective procedures. In contrast, under traditional indemnity insurance arrangements, the insurance company pays whatever reasonable charges are billed by the dental group practice for the dental services provided. See Item 1. "Business - Payor Mix."

The Company seeks to increase its fee-for-service revenue by increasing the patient volume at existing Offices through effective advertising and marketing programs, adding additional specialty services, by opening de novo Offices and by making select acquisitions of dental practices. The Company seeks to supplement this 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.


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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% APR is charged on all account balances greater than 60 days old. Patient accounts receivable in excess of $50 that are over 120 days and that appear are not collectible are written off as bad debt and sent to an outside collections agency.

Results of Operations

The Company has grown primarily through the ongoing development of a dense dental practice network and the implementation of its dental practice management model. Revenue was $63.1 million in 2011, $62.4 million in 2012 and $64.1 million in 2013. Contribution from the dental Offices was $5.6 million in 2011, $5.8 million in 2012 and $4.9 million in 2013. Net income was $1.6 million in 2011, $807,000 in 2012 and $89,000 in 2013. The years ended December 31, 2011 and 2013 were favorably impacted by the remeasurement and subsequent write down of contingent liabilities by $830,000 and $196,000, respectively, which the Company recognized as other income.

For the year ended December 31, 2013, revenue increased to $64.1 million compared to $62.4 million for the year ended December 31, 2012, an increase of $1.8 million or 2.8%.

During 2013, the Company opened two de novo Offices. One Office, which is located in the Loveland, Colorado market, opened in July 2013. The second de novo Office, which is located in the Monument, Colorado market, opened in December 2013. During December 2013, the Company consolidated the dental services of one of its Denver, Colorado Offices into another Office and subsequently closed this Office.

For the year ended December 31, 2013, the Company generated $4.3 million of cash from operations. During this period, the Company had capital expenditures of approximately $5.0 million, paid dividends of approximately $1.6 million and increased total bank debt by approximately $1.6 million. The Company's outstanding bank debt increased because of the Company's development of de novo Offices and its commitment to upgrading its existing Offices through extensive remodels and/or Office relocations and its continued commitment to converting its Offices to digital radiography.

For the year ended December 31, 2012, revenue decreased to $62.4 million compared to $63.1 million for the year ended December 31, 2011, a decrease of $766,000 or 1.2%. For the year ended December 31, 2012, revenue was negatively impacted by the general weakness in the Company's markets, which resulted in patients accepting less expensive treatment plans relative to the same period of 2011.


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The Company's earnings before interest, taxes, depreciation, amortization and non-cash expense associated with stock-based compensation ("Adjusted EBITDA") decreased $805,000 or 16.0% to $4.2 million for the year ended December 31, 2013 from $5.0 million for the year ended December 31, 2012. Adjusted EBITDA increased $120,000 or 2.4% to $5.0 million for the year ended December 31, 2012 from $4.9 million for the year ended December 31, 2011. Although Adjusted EBITDA is not a GAAP measure of performance or liquidity, the Company believes that it may be useful to an investor in evaluating the Company's ability to meet future debt service, capital expenditures and working capital requirements. However, investors should not consider these measures in isolation or as a substitute for operating income, cash flows from operating activities or any other measure for determining the Company's operating performance or liquidity that is calculated in accordance with GAAP. In addition, because Adjusted EBITDA is not calculated in accordance with GAAP, it may not necessarily be comparable to similarly titled measures employed by other companies. A reconciliation of Adjusted EBITDA to net income can be made by adding depreciation and amortization expense - Offices, depreciation and amortization expense - corporate, stock-based compensation expense, interest expense, net, and income tax expense to net income and subtracting the change in fair value of contingent liabilities and gain from early extinguishment of debt as in the table below.

                                                              Years Ended December 31,
                                                        2011            2012            2013

RECONCILIATION OF ADJUSTED EBITDA:
Net income                                           $ 1,615,327     $   807,264     $    89,173
Add back:
Depreciation and amortization - Offices                2,505,957       2,838,582       3,448,707
Depreciation and amortization - corporate                122,217         161,693         200,431
Stock-based compensation expense                         335,076         600,936         467,028
Interest expense, net                                     80,920         104,147         100,647
Income tax expense                                     1,065,472         502,066         121,960
Less:
Change in fair value of contingent liabilities          (830,000 )             -        (196,000 )
Gain from early extinguishment of debt                         -               -         (22,059 )

Adjusted EBITDA                                      $ 4,894,969     $ 5,014,688     $ 4,209,887

At December 31, 2013, the Company's total assets of $24.4 million included $9.3 million of identifiable intangible assets related to the Management Agreements. At that date, the Company's total shareholders' equity was $5.9 million. The Company's retained earnings as of December 31, 2013 were approximately $5.1 million and the Company had a working capital deficit on that date of approximately $1.7 million. During 2013, the Company had capital expenditures of $5.0 million and paid out approximately $1.6 million in dividends to its shareholders. Between December 31, 2012 and December 31, 2013, total bank debt outstanding increased by approximately $1.6 million. The Company's outstanding bank debt increased because of the Company's commitment to upgrading its existing Offices through extensive remodels and/or Office relocations and its continued commitment to converting its Offices to digital radiography. During the year ended December 31, 2013, the Company opened two de novo Offices, completed remodels and/or relocations on two of its offices and converted eight additional Offices to digital radiography.

The Company's revenue from capitated managed dental care plans (including revenue associated with co-payments) was 19.4% of total revenue in 2013, compared with 19.9% in 2012 and 19.2% in 2011.


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The following table sets forth the percentages of revenue represented by certain items reflected in the Company's Consolidated Statements of Income. The information that follows should be read in conjunction with the Company's consolidated financial statements and related notes thereto.

                                                        Years Ended December 31,
                                                  2011            2012            2013

Revenue                                            100.0 %         100.0 %         100.0 %

Direct Expenses:
Clinical salaries and benefits                      56.5 %          56.8 %          59.5 %
Dental supplies                                      4.3 %           4.3 %           4.4 %
Laboratory fees                                      4.5 %           5.0 %           4.8 %
Occupancy                                            8.5 %           8.9 %           9.1 %
Advertising and marketing                            4.2 %           3.2 %           1.7 %
Depreciation and amortization                        4.0 %           4.6 %           5.4 %
General and administrative                           9.0 %           7.9 %           7.4 %
                                                    91.1 %          90.7 %          92.4 %
Contribution from dental offices                     8.9 %           9.3 %           7.6 %

Corporate Expenses:
General and administrative                           5.6 %  (1)      6.7 %  (1)      7.2 %
Depreciation and amortization                        0.2 %           0.3 %           0.3 %
Operating income                                     3.1 %           2.3 %           0.1 %
Other income
Change in fair value of contingent liabilities       1.3 %           0.0 %           0.3 %
Gain from early extinguishment of debt               0.0 %           0.0 %           0.0 %

Interest (expense), net                            ( 0.1 )%        ( 0.2 )%        ( 0.2 )%

Income before income taxes                           4.2 %           2.1 %           0.3 %
Income tax expense                                   1.7 %           0.8 %           0.2 %

Net income                                           2.6 %           1.3 %           0.1 %

(1) Corporate expense - general and administrative includes $335,076 of stock-based compensation expense pursuant to ASC Topic 718 for the year ended December 31, 2011, $600,936 of stock-based compensation expense pursuant to ASC Topic 718 for the year ended December 31, 2012 and $467,028 of stock-based compensation expense pursuant to ASC Topic 718 for the year ended December 31, 2013.


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Year Ended December 31, 2013 Compared to Year Ended December 31, 2012

Revenue

Revenue increased to $64.1 million for the year ended December 31, 2013 compared to $62.4 million for the year ended December 31, 2012, an increase of $1.8 million or 2.8%. Approximately $678,000 of the increase in revenue can be attributed to four de novo Offices, two that opened during the fourth quarter of 2012, one that opened during the third quarter of 2013 and one that opened during the fourth quarter of 2013.

Direct Expenses

Clinical salaries and benefits. Clinical salaries and benefits increased to $38.2 million for the year ended December 31, 2013 compared to $35.4 million for the year ended December 31, 2012, an increase of $2.8 million or 7.8%. There were increases of $968,000 in dentist wages, $505,000 in administration wages, $467,000 in hygienist wages, $321,000 in assistant wages, $203,000 in health insurance expenses and $136,000 in payroll taxes. Of the $2.8 million increase, approximately $747,000 can be attributed to the four new Offices, which accounted for $331,000 in dentist wages, $115,000 in administration wages, $78,000 in hygienist wages, $81,000 in assistant wages, $53,000 in payroll taxes and $30,000 in health insurance during the year ended December 31, 2013. Additionally, the increase in clinical salaries and benefits is partially related to the increase in revenue as most of the dentists in the Offices are compensated based on revenue. As a percentage of revenue, clinical salaries and benefits increased to 59.5% in 2013 from 56.8% in 2012.

Dental supplies. Dental supplies increased to $2.8 million for the year ended December 31, 2013 compared to $2.7 million for the year ended December 31, 2012, an increase of $106,000 or 3.9%. The increase in dental supplies is primarily related to the four new Offices, which accounted for an additional $100,000 of dental supplies during the year ended December 31, 2013. As a percentage of revenue, dental supplies increased to 4.4% in 2013 from 4.3% in 2012.

Laboratory fees. Laboratory fees remained constant at $3.1 million for the years ended December 31, 2013 and 2012. As a percentage of revenue, laboratory fees decreased to 4.8% in 2013 from 5.0% in 2012.

Occupancy. Occupancy expenses increased to $5.8 million for the year ended December 31, 2013 from $5.5 million for the year ended December 31, 2012, an increase of $273,000 or 4.9%. The four new Offices accounted for an additional $194,000 of occupancy expense during the year ended December 31, 2013. The increase in occupancy expense was also caused by an increase of $56,000 in repair and maintenance expenses at the 62 Offices open during each full year. As a percentage of revenue, occupancy expenses increased to 9.1% in 2013 from 8.9% in 2012.

Advertising and marketing. Advertising and marketing expenses decreased to $1.1 million for the year ended December 31, 2013 from $2.0 million for the year ended December 31, 2012, a decrease of $936,000 or 46.4%. The decrease in advertising and marketing expenses is primarily attributable to decreases of $706,000 in television advertising, $227,000 in radio advertising and $112,000 in print advertising, offset by an increase of $159,000 in social media and internet advertising. The four new Offices accounted for an additional $52,000 of advertising and marketing expenses. As a percentage of revenue, advertising and marketing expenses decreased to 1.7% in 2013 from 3.2% in 2012. The Company adjusts its advertising and marketing in response to market conditions and its financial performance.

Depreciation and amortization. Depreciation and amortization expenses incurred at the Offices increased to $3.4 million for the year ended December 31, 2013 from $2.8 million for the year ended December 31, 2012, an increase of $610,000 or 21.5%. The increase in depreciation and amortization expenses is a result of the Company's ongoing efforts to upgrade the capital assets and tenant improvements in certain of the Company's Offices. See "Liquidity and Capital Resources." The four new Offices accounted for an additional $244,000 of depreciation and amortization expenses during the year ended December 31, 2013. As a percentage of revenue, depreciation and amortization expenses increased to 5.4% in 2013 from 4.6% in 2012.

General and administrative. General and administrative expenses attributable to the Offices decreased to $4.8 million for the year ended December 31, 2013 from $4.9 million for the year ended December 31, 2012, a decrease of $160,000 or 3.2%. This decrease in general and administrative expenses is attributable to decreases of $187,000 in bad debt expense and $66,000 in recruiting and relocation expense at the 62 Offices open during each full year. The four new Offices accounted for an additional $91,000 in general and administrative expenses. As a percentage of revenue, Office general and administrative expenses decreased to 7.4% in 2013 from 7.9% in 2012.


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Contribution from Dental Offices

Contribution from dental Offices provides an indication of the level of earnings generated from the operations of the Offices to cover corporate expenses, interest expense and income taxes. As a result of revenue increasing $1.8 million and direct expenses increasing $2.6 million, contribution from dental Offices decreased to $4.9 million for the year ended December 31, 2013 from $5.8 million for the year ended December 31, 2012, a decrease of $884,000 or 15.3%. As a percentage of revenue, contribution from dental Offices decreased to 7.6% in 2013 from 9.3% in 2012.

Corporate Expenses

Corporate expenses - general and administrative. Corporate expenses - general and administrative increased to $4.6 million for the year ended December 31, 2013 from $4.2 million for the year ended December 31, 2012, an increase of $397,000 or 9.4%. This increase is attributable to increases of $331,000 in corporate wages, $96,000 in professional fees, $87,000 in recruiting expense and $45,000 in executive officers' bonuses, offset by decreases of $134,000 related to stock-based compensation expense pursuant to ASC Topic 718 and $117,000 in social media consulting fees. As a percentage of revenue, corporate expenses - general and administrative increased to 7.2% in 2013 compared to 6.7% in 2012.

Corporate expenses - depreciation and amortization. Corporate expenses - depreciation and amortization increased to $200,000 for the year ended December 31, 2013 from $162,000 for the year ended December 31, 2012, an increase of $39,000 or 24.0%. This increase is attributable to the further development of the Company's website and other phone and information technology equipment added . . .

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