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LCAV > SEC Filings for LCAV > Form 10-Q on 8-May-2014All Recent SEC Filings

Show all filings for LCA VISION INC

Form 10-Q for LCA VISION INC


8-May-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Information included in this Quarterly Report on Form 10-Q contains forward-looking statements that involve potential risks and uncertainties. Actual results could differ materially from those discussed herein. Factors that could cause or contribute to such differences include, but are not limited to, those discussed herein and those discussed in our Annual Report on Form 10-K for the year ended December 31, 2013. Readers are cautioned not to place undue reliance on these forward-looking statements that speak only as of the date thereof.

We file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (SEC) under the Exchange Act. These reports and other information filed by us may be read and copied at the Public Reference Room of the SEC, 100 F Street N.E., Washington, D.C. 20549. Information may be obtained about the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website (www.sec.gov) that contains reports, proxy and information statements and other information about issuers that we file electronically with the SEC.

This Management's Discussion and Analysis section provides an overview of our financial condition as of March 31, 2014, and the results of operations for the three months ended March 31, 2014 and 2013. This discussion should be read in conjunction with our Condensed Consolidated Financial Statements and the accompanying Notes, as well as our Annual Report on Form 10-K for the year ended December 31, 2013. Results of interim periods may not be indicative of the results for subsequent periods or the full year.

Overview

Key financial highlights for the three months ended March 31, 2014 include (all comparisons are with the same period of 2013):

? Revenues were $25.5 million, down 9.8% from $28.3 million; adjusted revenues declined 8.9% to $25.5 million from $27.9 million. ? Procedure volume declined 8.4% to 14,898 from 16,272.
? Average adjusted revenue per procedure declined to $1,709 from $1,717, due primarily to a $500-off price promotion in the 2014 quarter.
? Medical professional and license fees were $5.8 million compared with $6.7 million. The decrease is due to lower procedure volume and favorable per-procedure fee negotiations with a key vendor in the second quarter of 2013.
? Vision center direct costs were $10.1 million in both periods with increases in rent and bad debt expense in 2014 offset by reductions in laser maintenance and state and local taxes.
? General and administrative expense decreased by $220,000 to $2.9 million from $3.1 million, due primarily to lower employee-related costs. ? Marketing and advertising expense of $6.0 million decreased by $612,000.
Marketing cost per eye was $400, compared with $404.
? Depreciation expense decreased slightly to $490,000 from $556,000, due to slightly lower capital expenditures.
? Operating loss was $344,000 compared with operating profit of $1.0 million.
Adjusted operating loss was $407,000 compared with adjusted operating income of $691,000. Operating loss and adjusted operating loss for the first quarter of 2014 reflected lower procedure volume and revenues, transaction costs of $598,000 related to the merger agreement with PhotoMedex, partially offset by other expense reductions. The first quarter of 2013 included $219,000 of restructuring charges related to relocating the patient call center. ? Net loss was $151,000, or $0.01 per share, compared with net income of $1.2 million, or $0.06 per share.
? Cash and investments were $29.8 million as of March 31, 2014, compared with $28.7 million as of December 31, 2013.

We derive substantially all of our revenues from the delivery of laser vision correction procedures performed in our U.S. vision centers. Our revenues, therefore, depend on our volume of procedures, and are impacted by a number of factors, including the following:

? General economic conditions and consumer confidence and discretionary spending levels,

? Our ability to generate customers through our arrangements with vision plans, direct-to-consumer advertising, word-of-mouth referrals, and our partner network relationships,


? The availability of patient financing,

? Government mandated limits on flexible spending accounts,

? Our ability to manage equipment and operating costs, and

? The impact of competitors and discounting practices in our industry.

Other factors that impact our revenues include:

? Deferred revenue from the sale, prior to June 15, 2007, of separately priced acuity programs, and

? Our mix of procedures among the different types of laser technology.

Because our revenues are a function of the number of laser vision correction procedures performed and the pricing for these services, and many of our costs are fixed, our vision centers have a relatively high degree of operating leverage. As a result, our level of procedure volume can have a significant impact on our level of profitability. The following table details the total number of procedures performed at our vision centers. Total procedure volume includes laser vision correction, intraocular and implantable collamer lens procedures.

                   2014         2013
First quarter      14,898       16,272
Second quarter          -       12,994
Third quarter           -       11,932
Fourth quarter          -       12,033
Year               14,898       53,231

As of March 31, 2014, we operated 60 LasikPlus® vision centers in the United States: 51 full-service LasikPlus® fixed-site laser vision corrections centers and nine LasikPlus® satellite centers. We include in the 60 vision centers four vision centers owned and operated by ophthalmologists who license our trademarks. The satellite vision centers perform pre-operative and post-operative exams, providing added convenience for patients who live considerable distances from our full-service LasikPlus® vision centers in that market. We have also been working to establish and expand a partner network of eye care professionals to share patients who desire to have laser vision correction and other refractive surgeries.

We have provided both adjusted revenues and operating losses as a means of measuring performance that adjusts for the non-cash impact of accounting for separately priced extended warranties which we offered prior to June 15, 2007. We believe the adjusted information better reflects operating performance and therefore is more meaningful to investors. A reconciliation of revenues and operating losses reported in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") is provided below (dollars in thousands).

                                             Three Months Ended March 31,
                                               2014                 2013
Revenues
Reported U.S. GAAP                        $       25,531       $       28,304
Adjustments
Amortization of prior deferred revenue               (70 )               (369 )
Adjusted revenues                         $       25,461       $       27,935


Operating (loss) income
Reported U.S. GAAP                        $         (344 )     $        1,023
Adjustments
Amortization of prior deferred revenue               (70 )               (369 )
Amortization of prior professional fees                7                   37
Adjusted operating (loss) income          $         (407 )     $          691


Results of Operations for the Three Months Ended March 31, 2014 Compared to the Same Period in 2013

Revenues

In the first quarter of 2014, revenues decreased by $2.8 million, or 9.8%, to $25.5 million from $28.3 million in the first quarter of 2013. Procedure volume decreased 8.4% to 14,898 in the first quarter of 2014 from 16,272 in the first quarter of 2013. The adjusted average reported revenue per procedure, which excludes the impact of deferring revenue from separately priced extended warranties, decreased to $1,709 in the first quarter of 2014 from $1,717 in the first quarter of 2013, but increased from $1,704 in the fourth quarter of 2013. The components of the revenue change include (dollars in thousands):

Decrease in revenue from lower procedure volume                       $     (2,359 )

Impact from decrease in average procedure price, adjusted for
revenue deferral                                                              (115 )

Change in deferred revenue                                                    (299 )

Decrease in revenues                                                  $     (2,773 )

The decrease in procedure volume during the first quarter was driven, in part, by inclement weather during the quarter which disrupted our operations and negatively impacted procedure volume as demonstrated by 100 closed days or partially closed days among a number of our vision centers. Additionally, our results were negatively impacted by the timing of our price promotions and changes in marketing compared with last year.

Operating costs and expenses

Our operating costs and expenses include:

? Medical professional and license fees, including per procedure fees for the ophthalmologists performing laser vision correction and other services, and per procedure license fees paid to the equipment suppliers of our excimer and femtosecond lasers,

? Direct costs of services, including the salary component of physician compensation for certain physicians employed by us, staff compensation, facility costs of operating laser vision correction centers, equipment lease and maintenance costs, medical malpractice insurance costs, surgical supplies, financing charges for third-party patient financing, and other costs related to revenues,

? General and administrative costs, including corporate headquarters and patient communication center staff expense, and other overhead costs,

? Marketing and advertising costs, and

? Depreciation of equipment and leasehold improvements.

Medical professional and license fees

Medical professional and license fees in the first quarter of 2014, totaling $5.8 million, decreased by $0.9 million, or 14.0% from the first quarter of 2013. The decrease is due to lower procedure volume and favorable per-procedure fee negotiations with a key vendor in the second quarter of 2013. The amortization of the deferred medical professional fees attributable to the sale of separately priced extended warranties in prior years was $7,000 in the first quarter of 2014 and $37,000 in the first quarter of 2013.

Direct costs of services

Direct costs of services were substantially unchanged in the first quarter of 2014 at $10.1 million. Bad debt expense increased $287,000 due to a shift in patient receivables to longer-term plans, as well as the prior year's including a favorable adjustment due to improved collection experience, and rent expense increased primarily as a result of additional satellite centers. These increases were offset by favorable laser maintenance, sales tax, employee costs and finance fees, due to lower procedure volume and continued cost control.

General and administrative

General and administrative expenses decreased in the first quarter of 2014 by $220,000, or 7%, from the first quarter of 2013, due primarily to reductions in employee costs.

Marketing and advertising

Marketing and advertising expenses in the first quarter of 2014 decreased by $612,000, or 9.3%, from the first quarter of 2013. These expenses were 23.3% of revenues in the first quarter of 2014, compared to 23.2% during the same period of 2013. Due to lower procedure volume, adjusted marketing cost per eye, excluding spending on our cataract expansion initiatives, increased slightly to $398 in the first quarter of 2014 compared to $396 in the same period of 2013. Spending was delayed in the first quarter of 2014 due to an expiring promotion from the fourth quarter of 2013. We adjust our marketing spend levels continuously in an attempt to align spending levels with consumer demand. We are continuing to work to develop more efficient marketing techniques and expand local initiatives as a means to attract patients. Our future operating profitability will depend in large part on the success of our efforts in this regard.


Depreciation

Depreciation expense decreased in the first quarter of 2014 by approximately $66,000, or 11.9%, to $490,000 from $556,000 in the first quarter of 2013, due largely to reduced capital expenditures beginning in 2009 and prior period impairment charges and disposals of property and equipment as a result of closed vision centers.

Transaction costs

Transaction costs in the first quarter of 2014 were $598,000 compared to zero in the first quarter of 2013. Transaction costs included professional and regulatory fees incurred in connection with our anticipated merger with PhotoMedex.

Restructuring charges

During the first quarter of 2014 we recorded $6,000 in favorable adjustments to prior estimates in costs related to the relocation of our patient communication center. The first quarter of 2013 included $219,000 of restructuring charges related to relocating the patient call center.

Gain on sale of assets

No assets were sold at a gain or loss in the first quarter of 2014. Gain on sale of assets was $6,000 in the first quarter of 2013.

Non-operating income and expenses

Net investment income and other in the first quarter of 2014 increased $5,000.

Income taxes

Income tax expense for the first quarter of 2014 and 2013 included the interest on unrecognized tax benefits and state taxes in certain jurisdictions.

Liquidity and Capital Resources



At March 31, 2014, we held $29.8 million in cash and cash equivalents and
short-term investments, an increase of $1.1 million from $28.7 million at
December 31, 2013. Our cash flows from operating, investing, and financing
activities, as reflected in the Condensed Consolidated Statements of Cash Flows,
are summarized as follows (dollars in thousands):

                                                               Three Months Ending
                                                                    March 31,
                                                             2014               2013
Cash provided by (used in):
Operating activities                                     $       1,818      $     (1,029 )
Investing activities                                               (76 )           2,680
Financing activities                                              (464 )            (231 )
Net effect of exchange rate changes on cash and cash
equivalents                                                       (145 )             (97 )
Net increase in cash and cash equivalents                $       1,133      $      1,323

Cash provided by operating activities was $1.8 million for the three months ended March 31, 2014 compared to cash used in operating activities of $1.0 million for the same period of 2013. The increase in cash from operating activities was a result of positive changes in working capital, offset partially by decreased earnings of $1.4 million in the three months ended March 31, 2014 compared with 2013. We continue to closely manage working capital with particular focus on ensuring timely collection of outstanding patient receivables and the management of our trade payable obligations. Efforts have continued regarding cost control and cash conservation in order to maintain efficiencies in many discretionary areas.

At March 31, 2014, working capital amounted to $19.8 million compared to $20.4 million at December 31, 2013. Liquid assets (cash and cash equivalents, short-term investments and accounts receivable) amounted to 200.5% of current liabilities at March 31, 2014, compared to 186.1% at December 31, 2013.


We continue to offer our own patient financing. As of March 31, 2014, we had $4.4 million in patient receivables, net of allowance for doubtful accounts, which was an increase of $230,000, or 5.5% from December 31, 2013. In 2014, the amount of revenue internally financed has remained unchanged compared to 2013 at approximately 7% of gross revenues. We continually monitor the allowance for doubtful accounts and will adjust our lending criteria or require greater down payments if our experience indicates it is necessary. However, our ability to collect patient accounts depends, in part, on overall economic conditions. Bad debt expense was approximately 1.5% of revenue for the three months ended March 31, 2014 and less than 1% for the three months ended March 31, 2013.

In 2013, we agreed to purchase for $2.3 million our excimer lasers previously leased from one of our vendors, with payment terms of 36 months at an interest rate of 3.5%. Our outstanding debt balance was $1.7 million at March 31, 2014. Our loan agreement contains no financial covenants and is secured by the lasers purchased.

As of March 31, 2014, the majority of our cash and investment portfolio is comprised of cash and cash equivalents due to the low investment yields in the current market.

We opened one satellite vision center and terminated our agreement with one ophthalmologist who licensed our trademarks during the three months ended March 31, 2014. We opened five satellite vision centers and three licensed vision centers during 2013. Capital expenditures for the three months ended March 31, 2014 and 2013 were $80,000 and $135,000, respectively.

Critical Accounting Estimates

There have been no material changes in the critical accounting policies described in Management's Discussion and Analysis in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013.

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