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| TRCR > SEC Filings for TRCR > Form 10-Q on 11-May-2009 | All Recent SEC Filings |
11-May-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 our 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 provides medical transcription services to the healthcare industry. The Company utilizes a combination of its proprietary internet-based voice and data distribution technology, third-party speech recognition technology, customer-based technology and domestic home-based and offshore medical language specialists to convert physicians' voice recordings into electronic documents.
Outlook
The U.S. economy has deteriorated significantly in recent months, stemming primarily from the disruptions in the global credit markets. The healthcare industry is generally considered to be recession resistant, but Transcend's customers are not immune to the impact of a weak economy. Restricted access to credit could hinder hospitals' ability to finance growth or ongoing operations. The decrease in the availability of consumer credit and a higher unemployment rate could impact discretionary healthcare spending by consumers. To date, Transcend has not seen any noticeable decrease in patient encounter volume among its customers. If the economy were to further deteriorate, the Company could see deterioration in collection of its accounts receivable. It is also uncertain what effect the credit crisis may have on the security of the U.S. banking system, and specifically the financial institutions where the Company's cash and cash equivalents are deposited.
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 March 31, 2009, we had goodwill and net intangible assets at carrying amounts of $7,805,000 and $1,092,000, respectively. The total of $8,897,000 represents approximately 32% of total assets as of March 31, 2009. 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.
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.
Deferred Tax Assets. As of March 31, 2009, we have net deferred tax assets of $466,000, resulting primarily from federal net operating loss carryforwards that are anticipated to be utilized during 2009. 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. SFAS 109, "Accounting for 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 SFAS No. 123R for its stock-based awards. Under SFAS No. 123R, 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 March 31, 2009 Compared to Three Months Ended March 31, 2008
Revenue increased $3.2 million, or 27%, to $14.9 million in the quarter ended March 31, 2009 compared to revenue of $11.7 million in the same period in 2008. The $3.2 million increase in revenue is attributable to revenue from new customers of $1.5 million, revenue contributed by the acquisition of Deventure of $1.2 million and increased revenue from existing customers of $0.7 million, offset by a decrease in revenue of $0.2 million from customers who terminated their contracts since the first quarter of 2008.
Direct costs increased $2.0 million, or 27%, to $9.6 million in the quarter ended March 31, 2009 compared to $7.6 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. 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 production 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 decreased to 64% in the quarter ended March 31, 2009 from 65% in the same period of 2007. The decrease in costs as a percentage of revenue was due primarily to 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, partially offset by higher direct costs as a percentage of revenue for DeVenture in the first quarter of 2009.
Gross profit increased $1.2 million or 29%, to $5.3 million in the quarter ended March 31, 2009 compared to $4.2 million in the same period in 2008. Gross profit as a percentage of revenue increased to 36% in the quarter ended March 31, 2009 compared to 35% in the same period in 2008 (see direct costs discussion).
Sales and marketing expenses increased $219,000, or 116%, to $407,000 in the quarter ended March 31, 2009 compared to $188,000 in the same period of 2008. Sales and marketing expenses as a percentage of revenue were 3% and 2% in the quarters ended March 31, 2009 and 2008, respectively. The increase in sales and marketing expense was primarily due to a strategic decision to increase the size of the sales force in 2008, resulting in the hiring of additional sales resources.
Research and development expenses increased $102,000, or 38%, to $369,000 in the quarter ended March 31, 2009 compared to $267,000 in the same period in 2008. Research and development expenses as a percentage of revenue were 2% in both the quarters ended March 31, 2009 and 2008, respectively. The increase was primarily due to an increase in consulting services and compensation-related expenses.
General and administrative expenses increased $429,000, or 32%, to $1,766,000 in the quarter ended March 31, 2009 compared to $1,337,000 in the same period in 2008. General and administrative expenses for DeVenture contributed $118,000 of the increase. Transcend incurred $65,000 of transaction costs related to acquisitions in the first quarter of 2009. The balance of the increase was due primarily to increased audit fees, employee benefits costs, and stock-based compensation expense. General and administrative expenses as a percentage of revenue were 12% and 11% in the quarters ended March 31, 2009 and March 31, 2008, respectively.
Depreciation and amortization expense was $255,000 in the quarter ended March 31, 2009 compared to $196,000 in the same period in 2008. Amortization of intangible assets resulting from the acquisition of DeVenture contributed $28,000 of the increase.
Interest and other expenses increased $24,000 to $31,000 in the quarter ended March 31, 2009 compared to $7,000 in the same period in 2008. The increase is due primarily to lower interest income on cash, related to the recent changes in the credit environment.
The income tax provision increased $138,000 to $937,000 for the three months ended March 31, 2009 compared to $799,000 in the same period in 2008. The provision increased primarily due to higher pre-tax income.
Liquidity and Capital Resources
As of March 31, 2009, the Company had cash and cash equivalents of $9.7 million, working capital of $13.8 million, availability of approximately $3.6 million on its line of credit based on eligible accounts receivable and $2.0 million available on its acquisition term loan facility (see Note 5). The Company had $569,000 of debt outstanding as of March 31, 2009.
Cash provided by operating activities was $1.9 million for the three months ended March 31, 2009 compared to $1.7 million for the three months ended March 31, 2008. The improvement was due primarily to improved profitability before income taxes, partially offset by changes in working capital.
Cash used in investing activities was $4.4 million for the three months ended March 31, 2009, compared to $185,000 for the three months ended March 31, 2008. The outflow in 2009 was due primarily to the acquisition of DeVenture for $4.25 million.
Cash used in financing activities was $76,000 for the three months ended March 31, 2009 compared to an outflow of
$1,227,000 in 2008. The outflow during 2009 consisted of note repayments of $150,000, offset by proceeds on the exercise of stock options of $74,000. In 2008, the outflow consisted of note repayments of $1,278,000, offset by proceeds of $51,000 from the exercise of stock options.
The Company anticipates that cash on hand, together with cash flow from operations and cash available under its credit facility should be sufficient for the next twelve months to finance operations, make capital investments in the ordinary course of business, and pay indebtedness when due.
Part of the growth strategy for Transcend is the completion of acquisitions. Management believes that available cash and the HFG credit facility (until expiration on December 31, 2009) together with other acquisition options, such as owner financing, are sufficient to complete small acquisitions, but insufficient for the full execution of the Company's acquisition strategy. Additional financing will be required for larger acquisitions. Transcend has not needed to access the credit markets for additional acquisition funding, and it is uncertain to what degree the Company can obtain acquisition financing should the need arise.
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