UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2009.
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ___________
Commission file number 1-33323
PHC, INC.
(Exact name of registrant as specified in its charter)
Massachusetts | 04-2601571 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) | |
200 Lake Street, Suite 102, Peabody MA | 01960 | |
(Address of principal executive offices) | (Zip Code) |
978-536-2777
(Registrant’s telephone number)
_____________________________________________________________________________________________
Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes X No___
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ___ No ___
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer _________ | Accelerated filer | ___ | ||
Non accelerated filer _________ | Smaller reporting company | _X_ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ____ No X
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Number of shares outstanding of each class of common equity as of November 4, 2009:
Class A Common Stock | 18,980,630 | |||
Class B Common Stock | 775,021 |
PHC, Inc. | ||||
PART I. | FINANCIAL INFORMATION | Page | ||
Item 1. | Condensed Consolidated Financial Statements (unaudited) | 3-12 | ||
Condensed Consolidated Balance Sheets – September 30, 2009 and June 30, 2009 | 3 | |||
Condensed Consolidated Statements of Operations - Three months ended September 30, 2009 and September 30, 2008 | 4 | |||
Condensed Consolidated Statements of Cash Flows– Three months ended September 30, 2009 and September 30, 2008 | 5 | |||
Notes to Condensed Consolidated Financial Statements – September 30, 2009 | 6-12 | |||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 13 | ||
Item 3. | Quantitative and Qualitative Disclosure About Market Risk | 19 | ||
Item 4. | Controls and Procedures | 20 | ||
PART II. | OTHER INFORMATION | |||
Item 6. | Exhibits | 27 | ||
Signatures |
2
PART I. FINANCIAL INFORMATION | ||||
Item 1. Financial Statements | ||||
PHC, INC. AND SUBSIDIARIES | ||||
CONDENSED CONSOLIDATED BALANCE SHEETS | ||||
September 30, | June 30, | |||
2009 | 2009 | |||
(unaudited) | ||||
ASSETS | ||||
Current assets: | ||||
Cash and cash equivalents | $ | 1,741,696 | $ | 3,199,344 |
Accounts receivable, net of allowance for doubtful accounts of $2,616,886 at September 30, 2009 and $2,430,618 at June 30, 2009 | 7,511,963 | 6,315,693 | ||
Other receivables- third party | 41,300 | 170,633 | ||
Prepaid expenses | 454,013 | 441,945 | ||
Prepaid income taxes | 271,674 | 33,581 | ||
Other receivables and advances | 1,434,488 | 674,357 | ||
Deferred income tax asset – current | 923,625 | 923,625 | ||
Total current assets | 12,378,759 | 11,759,178 | ||
Restricted cash | 512,197 | 512,197 | ||
Accounts receivable, non-current | 8,115 | 35,000 | ||
Other receivables | 29,169 | 55,627 | ||
Property and equipment, net | 4,699,529 | 4,687,110 | ||
Deferred income tax asset – non-current | 1,902,354 | 1,902,354 | ||
Deferred financing costs, net of amortization of $473,073 and $436,440 at September 30, 2009 and June 30, 2009 | 299,168 | 335,801 | ||
Goodwill | 969,098 | 969,098 | ||
Other assets | 2,383,901 | 2,435,628 | ||
Total assets | $ | 23,182,290 | $ | 22,691,993 |
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||
Current liabilities: | ||||
Accounts payable | $ | 1,703,435 | $ | 1,375,436 |
Current maturities of long-term debt | 800,515 | 652,837 | ||
Revolving credit note | 926,124 | 863,404 | ||
Current portion of obligations under capital leases | 106,245 | 103,561 | ||
Accrued payroll, payroll taxes and benefits | 1,297,299 | 1,570,639 | ||
Accrued expenses and other liabilities | 1,560,545 | 1,461,499 | ||
Total current liabilities | 6,394,163 | 6,027,376 | ||
Long-term debt, net of current maturities | 327,351 | 488,426 | ||
Obligations under capital leases | 104,807 | 132,368 | ||
Total liabilities | 6,826,321 | 6,648,170 | ||
Stockholders’ equity: | ||||
Preferred Stock, 1,000,000 shares authorized, none issued or outstanding | -- | -- | ||
Class A common stock, $.01 par value, 30,000,000 shares authorized, 19,858,034 and 19,840,793 shares issued at September 30, 2009 and June 30, 2009, respectively | 198,580 | 198,408 | ||
Class B common stock, $.01 par value, 2,000,000 shares authorized, 775,021 and 775,080 issued and outstanding at September 30, 2009 and June 30, 2009, respectively, each convertible into one share of Class A common stock | 7,750 | 7,751 | ||
Additional paid-in capital | 27,755,969 | 27,667,597 | ||
Treasury stock, 626,541 and 626,541 shares of Class A common stock at September 30, 2009 and June 30, 2009, respectively, at cost | (1,125,707) | (1,125,707) | ||
Accumulated deficit | (10,480,623) | (10,704,226) | ||
Total stockholders’ equity | 16,355,969 | 16,043,823 | ||
Total liabilities and stockholders’ equity | $ | 23,182,290 | $ | 22,691,993 |
See Notes to Condensed Consolidated Financial Statements
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PHC, INC. AND SUBSIDIARIES | |||||
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS | |||||
(Unaudited) | |||||
Three Months Ended | |||||
September 30, | |||||
2009 | 2008 | ||||
Revenues: | |||||
Patient care, net | $ | 11,767,668 | $ | 10,559,496 | |
Contract support services | 879,760 | 1,132,409 | |||
Total revenues | 12,647,428 | 11,691,905 | |||
Operating expenses: | |||||
Patient care expenses | 6,438,563 | 6,158,157 | |||
Cost of contract support services | 727,477 | 827,779 | |||
Provision for doubtful accounts | 472,973 | 445,814 | |||
Administrative expenses | 4,652,517 | 4,694,974 | |||
Total operating expenses | 12,291,530 | 12,126,724 | |||
Income (loss) from operations | 355,898 | (434,819) | |||
Other income (expense): | |||||
Interest income | 32,374 | 51,269 | |||
Other income | 49,356 | 30,854 | |||
Interest expense | (80,593) | (81,642) | |||
Total other income, net | 1,137 | 481 | |||
Income (loss) before for income taxes | 357,035 | (434,338) | |||
Income tax (benefit) provision | 133,431 | (39,419) | |||
Income (loss) from continuing operations | 223,604 | (394,919) | |||
Income from discontinued operations – net of tax | |||||
provision of $39,419 | -- | 62,216 | |||
Net income (loss) applicable to common shareholders | $ | 223,604 | $ | (332,703) | |
Basic net income (loss) per common share | |||||
Continuing operations | $ | 0.01 | $ | (0.02) | |
Discontinued operations | 0.00 | 0.00 | |||
$ | 0.01 | $ | (0.02) | ||
Basic weighted average number of shares outstanding | 19,997,549 | 20,178,087 | |||
Diluted net income (loss) per common share | |||||
Continuing operations | 0.01 | $ | (0.02) | ||
Discontinued operations | 0.00 | 0.00 | |||
$ | 0.01 | $ | (0.02) | ||
Diluted weighted average number of shares outstanding | 20,141,989 | 20,178,087 |
See Notes to Condensed Consolidated Financial Statements.
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PHC, INC. AND SUBSIDIARIES |
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS |
(Unaudited) |
For the Three Months Ended September 30, | ||||
2009 | 2008 | |||
Cash flows from operating activities: | ||||
Net income (loss) | 223,604 | (332,703) | ||
Net income from discontinued operations | -- | 62,216 | ||
Net income (loss) from continuing operations | $ | 223,604 | $ | (394,919) |
Adjustments to reconcile net income (loss) to net cash used in operating activities: | ||||
Depreciation and amortization | 301,926 | 263,936 | ||
Non-cash interest expense | 36,633 | 43,011 | ||
Earnings of unconsolidated subsidiary | (22,143) | (14,203) | ||
Non-cash stock based compensation | 60,709 | 2,133 | ||
Provision for doubtful accounts | 472,973 | 445,814 | ||
Changes in: | ||||
Accounts receivable and other receivable | (2,264,986) | (1,334,094) | ||
Prepaid expenses, prepaid income taxes and other current assets | (250,161) | 26,452 | ||
Other assets | 9,079 | (133,829) | ||
Accounts payable | 327,999 | 514,167 | ||
Accrued expenses and other liabilities | (174,294) | 222,288 | ||
Net cash used in continuing operations | (1,278,661) | (359,244) | ||
Net cash used in discontinued operations | -- | (310,275) | ||
Net cash used in operations | (1,278,661) | (669,519) | ||
Cash flows from investing activities: | ||||
Acquisition of property and equipment | (249,556) | (486,522) | ||
Equity investment in unconsolidated subsidiary | 18,288 | 38,100 | ||
Net cash used in investing activities of continuing operations | (231,268) | (448,422) | ||
Net cash used in investing activities of discontinued operations | -- | (33,188) | ||
Net cash used in investing activities | (231,268) | (481,610) | ||
Cash flows from financing activities: | ||||
Revolving debt, net | 62,720 | 142,502 | ||
Principal payments on long-term debt | (38,274) | (67,294) | ||
Proceeds from issuance of common stock, net | 27,835 | 15,778 | ||
Purchase of treasury stock | -- | (59,560) | ||
Net cash provided by financing continuing operations | 52,281 | 31,426 | ||
Net cash used in financing discontinued operations | -- | (192,268) | ||
Net cash provided by (used in) financing activities | 52,281 | (160,842) | ||
Net decrease in cash and cash equivalents continuing operations | (1,457,648) | (776,240) | ||
Net decrease in cash and cash equivalents discontinued operations | -- | (535,731) | ||
Net decrease in cash and cash equivalents | (1,457,648) | (1,311,971) | ||
Beginning cash and cash equivalents | 3,199,344 | 3,142,226 | ||
Ending cash and cash equivalents | $ | 1,741,696 | $ | 1,830,255 |
SUPPLEMENTAL CASH FLOW INFORMATION: | ||||
Cash paid during the period for: | ||||
Interest | $ | 43,960 | $ | 52,957 |
Income taxes | 351,525 | 127,860 |
See Notes to Condensed Consolidated Financial Statements
5
PHC, INC. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
September 30, 2009
Note A - The Company
PHC, Inc. (“PHC” or the “Company”) is incorporated in the Commonwealth of Massachusetts. The Company is a national healthcare company which operates subsidiaries specializing in behavioral health services including the treatment of substance abuse, which includes alcohol and drug dependency and related disorders and the provision of psychiatric services. The Company also operates help lines for employee assistance programs, call centers for state and local programs and provides management, administrative and online behavioral health services. The Company primarily operates under three business segments:
Behavioral health treatment services, including two substance abuse treatment facilities: Highland Ridge Hospital, located in Salt Lake City, Utah, which also treats psychiatric patients, and Mount Regis Center, located in Salem, Virginia, and eleven psychiatric treatment locations which include Harbor Oaks Hospital, a 73-bed psychiatric hospital located in New Baltimore, Michigan, Detroit Behavioral Institute, a 66-bed residential facility in Detroit Michigan, a 55-bed psychiatric hospital in Las Vegas, Nevada and eight outpatient behavioral health locations (one in New Baltimore, Michigan operating in conjunction with Harbor Oaks Hospital, four in Las Vegas, Nevada as Harmony Healthcare and three locations operating as Pioneer Counseling Center in the Detroit, Michigan metropolitan area);
Call center and help line services (contract services), including two call centers, one operating in Midvale, Utah and one in Detroit, Michigan. The Company provides help line services through contracts with major railroads and a call center contract with Wayne County, Michigan. The call centers both operate under the brand name Wellplace; and
Behavioral health administrative services, including delivery of management and administrative and online services. The parent company provides management and administrative services for all of its subsidiaries and online services for its behavioral health treatment subsidiaries and its call center subsidiaries. It also provides behavioral health information through its website, Wellplace.com.
Note B - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the accounting principles generally accepted in the United States of America for interim financial information and in accordance with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The balance sheet at June 30, 2009 has been derived from the audited consolidated balance sheet at that date. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three months ended September 30, 2009 are not necessarily indicative of the results that may be expected for the year ending June 30, 2010. The accompanying financial statements should be read in conjunction with the June 30, 2009 consolidated financial statements and footnotes thereto included in the Company’s 10-K, as amended, filed on October 5, 2009.
Estimates and assumptions
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Such estimates include patient care billing rates, realizability of receivables from third-party payors, rates for Medicare and Medicaid and the realization of deferred tax benefits.
Revenue Recognition
The Company bills for its inpatient behavioral healthcare services upon discharge and for its outpatient facilities daily. In all cases, the charges are contractually adjusted at the time of billing using adjustment factors based on agreements or contracts with the insurance carriers and the specific plans held by the individuals. This method may still require additional adjustment based on ancillary services provided and deductibles and copays due from the individuals which are estimated at the time of admission based on information received from the individual. Adjustments to these estimates are recognized as adjustments to revenue during the period identified, usually when payment is received.
The Company’s policy is to collect estimated co-payments and deductibles at the time of admission. Payments are made by way of cash, check or credit card. If the patient does not have sufficient resources to pay the estimated co-payment in advance, the Company’s policy is to allow payment to be made in three installments - one third due upon admission, one third due upon discharge and the balance due 30 days after discharge. At times the patient is not physically or mentally stable enough
6
to comprehend or agree to any financial arrangement. In this case, the Company will make arrangements with the patient once his or her condition is stabilized. At times, this situation will require the Company to extend payment arrangements beyond the three payment method previously outlined. Whenever extended payment arrangements are made, the patient, or the individual who is financially responsible for the patient, is required to sign a promissory note to the Company, which includes interest on the balance due.
Prior to the sale of the Company’s research division, pharmaceutical study revenue was recognized only after a pharmaceutical study contract was awarded and the patient was selected and accepted based on study criteria and billable units of service were provided. Where a contract required completion of the study by the patient, no revenue was recognized until the patient completed the study program. All revenues and receivables from our research division were derived from pharmaceutical companies with no related bad debt allowance. The results of operations for the research division are shown as discontinued operations on the accompanying statements of operations.
Contract support service revenue is a result of fixed fee contracts to provide telephone support. Revenue for these services is recognized ratably over the service period. All revenues and receivables from our contract services division are based on a prorated monthly allocation of the total contract amount and usually paid within 30 days of the end of the month.
Note C- Stock Based Compensation
The Company has three active stock plans: a stock option plan, an employee stock purchase plan and a non-employee directors’ stock option plan.
The stock option plan provides for the issuance of a maximum of 1,900,000 shares of Class A common stock of the Company pursuant to the grant of incentive stock options to employees or nonqualified stock options to employees, directors, consultants and others whose efforts are important to the success of the Company. Subject to the provisions of this plan, the compensation committee of the Board of Directors has the authority to select the optionees and determine the terms of the options including: (i) the number of shares, (ii) option exercise terms, (iii) the exercise or purchase price (which in the case of an incentive stock option will not be less than the market price of the Class A common stock as of the date of grant), (iv) type and duration of transfer or other restrictions and (v) the time and form of payment for restricted stock upon exercise of options.
The employee stock purchase plan provides for the purchase of Class A common stock at 85 percent of the fair market value at specific dates, to encourage stock ownership by all eligible employees. A maximum of 500,000 shares may be issued under this plan.
The non-employee director’s stock option plan provides for the grant of nonstatutory stock options automatically at the time of each annual meeting of the Board. Under the plan a maximum of 350,000 shares may be issued. Each outside director is granted an option to purchase 20,000 shares of Class A common stock annually at the fair market value on the date of grant, vesting 25% immediately and 25% on each of the first three anniversaries of the grant and expiring ten years from the grant date.
The Company follows the provisions of FASB ASC 718 –“Compensation – Stock Compensation” (“ASC 718”). Under the provisions of ASC 718, the Company recognizes the fair value of stock compensation in net income (loss), over the requisite service period of the individual grantees, which generally equals the vesting period. All of the Company’s stock compensation is accounted for as an equity instrument and there have been no liability awards granted. Any income tax benefit related to stock compensation will be shown under the financing section of the Statement of Cash Flows. Based on the Company’s historical voluntary turnover rates for individuals in the positions who received options in the period, there was no forfeiture rate assumed. It is assumed these options will remain outstanding for the full term of issue. Under the true-up provisions of ASC 718, a recovery of prior expense will be recorded if the actual forfeiture is higher than estimated.
Under the provisions of ASC 718, the Company recorded $60,709 and $33,782 of stock-based compensation on its consolidated condensed statement of operations for the three months ended September 30, 2009 and 2008. In addition, the Company recorded a recovery of previously charged compensation of $47,797 for the three months ended September 30, 2008.
The Company had the following activity in its stock option plans for the three months ended September 30, 2009:
Number | Weighted-Average | Intrinsic Value | ||||
Of | Exercise Price | At | ||||
Shares | Per Share | September 30, 2009 | ||||
Balance – June 30, 2009 | 1,554,250 | $ | 1.99 | |||
Granted | -- | -- | ||||
Exercised | -- | -- | ||||
Expired | -- | -- | ||||
Balance – September 30, 2009 | 1,554,250 | $ | 1.99 | $ | 66,795 | |
Exercisable | 985,059 | $ | 2.07 | $ | 64,301 |
7
There were no options exercised during the three months ended September 30, 2009.
The following summarizes the activity of the Company’s stock options that have not vested for the three months ended September 30, 2009.
Number | Weighted- Average | ||||
Of Shares | Fair Value | ||||
Non-vested at July 1, 2009 | 569,191 | $ | .67 | ||
Granted | -- | -- | |||
Expired | -- | -- | |||
Vested | -- | $ | -- | ||
Non-vested at September 30, 2009 | 569,191 | $ | .67 |
The compensation cost related to the fair value of these shares of approximately $213,734 will be recognized as these options vest over the next three years.
The Company utilizes the Black-Scholes valuation model for estimating the fair value of the stock compensation granted. There were no options granted under the stock option plans for the three months ended September 30, 2009 or September 30, 2008.
Note D- Discontinued Operations
During the quarter ended March 31, 2009, the Company sold the assets of its research division, Pivotal Research Centers, Inc. (“Pivotal”), a Delaware corporation, for $3,000,000, to Premier Research International, LLC (“Premier”) a Delaware limited liability company. The other parties to the Agreement included Premier Research Arizona, LLC, a Delaware limited liability company and wholly-owned subsidiary of Premier, and Pivotal Research Centers, LLC, an Arizona limited liability company. See the Company’s current report on Form 8-K filed with the Securities and Exchange Commission on March 16, 2009 for additional details regarding this transaction.
The following table summarizes the discontinued operations for the periods presented:
For the three months ended September 30, | ||||||
2009 | 2008 | |||||
Revenue | $ | -- | $ | 1,295,453 | ||
Operating expenses | $ | -- | $ | 1,193,818 | ||
Income before taxes | $ | -- | $ | 101,635 | ||
Provision for taxes | $ | -- | $ | 39,419 | ||
Net income from discontinued operations | $ | -- | $ | 62,216 |
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Note E – Business Segment Information
The Company’s behavioral health treatment services have similar economic characteristics, services, patients and clients. Accordingly, all behavioral health treatment services are reported on an aggregate basis under one segment. The Company’s segments are more fully described in Note A above. Residual income and expenses from closed facilities are included in the administrative services segment. The following summarizes the Company’s segment data:
Treatment Services | Discontinued Operations | Contract Services | Administrative Services | Eliminations | Total | |||||||
For the three months ended September 30, 2009 | ||||||||||||
Revenue–external Customers | $ | 11,767,668 | $ | -- | $ | 879,760 | $ | -- | $ | -- | $ | 12,647,428 |
Revenues – intersegment | 827,160 | -- | -- | 1,249,998 | (2,077,158) | -- | ||||||
Segment net income (loss) | 1,298,774 | -- | 152,310 | (1,227,480) | -- | 223,604 | ||||||
Capital expenditures | 171,655 | -- | 6,522 | 71,379 | -- | 249,556 | ||||||
Depreciation & amortization | 215,185 | -- | 23,503 | 63,238 | -- | 301,926 | ||||||
Interest expense | 38,287 | -- | - | 42,306 | -- | 80,593 | ||||||
Income tax expense | -- | -- | -- | 133,431 | -- | 133,431 | ||||||
Identifiable assets | 14,515,387 | -- | 1,198,461 | 7,468,442 | -- | 23,182,290 | ||||||
Goodwill and intangible assets | 969,098 | -- | -- | -- | -- | 969,098 | ||||||
For the three months ended September 30, 2008 | ||||||||||||
�� | ||||||||||||
Revenue–external Customers | $ | 10,559,496 | $ | -- | $ | 1,132,409 | $ | -- | $ | -- | $ | 11,691,905 |
Revenues – intersegment | 688,450 | -- | -- | 1,353,700 | (2,042,150) | -- | ||||||
Segment net income (loss) | 351,798 | 62,216 | 304,666 | (1,051,383) | -- | (332,703) | ||||||
Capital expenditures | 474,449 | -- | 3,863 | 8,210 | -- | 486,522 | ||||||
Depreciation & amortization | 192,303 | -- | 26,402 | 45,231 | -- | 263,936 | ||||||
Interest expense | 40,816 | -- | - | 40,826 | -- | 81,642 | ||||||
Income tax benefit | -- | -- | -- | (39,419) | -- | (39,419) | ||||||
At June 30, 2009 | ||||||||||||
Identifiable assets | 13,010,748 | -- | 478,925 | 9,202,320 | -- | 22,691,993 | ||||||
Goodwill and intangible assets | 969,098 | -- | -- | -- | -- | 969,098 |
Note F - Recent accounting pronouncements |
Recently Issued Standards
In June 2009, the Financial Accounting Standards Board (“FASB”) issued ASC 810-10-05, an amendment to the accounting and disclosure requirements for the consolidation of variable interest entities (“VIEs”). This amendment requires an enterprise to perform a qualitative analysis when determining whether or not it must consolidate a VIE. The amendment also requires an enterprise to continuously reassess whether it must consolidate a VIE. Finally, an enterprise will be required to disclose significant judgments and assumptions used to determine whether or not to consolidate a VIE. This amendment is effective for financial statements issued for annual periods beginning after November 15, 2009, and for interim periods within the first annual period. The Company is currently evaluating the impact of this amendment on its consolidated financial statements.
9
Recently Adopted Standards
In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Standards”. This Statement identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with GAAP in the United States (the “GAAP hierarchy”). This Statement establishes the FASB Accounting Standards Codification™ (“Codification”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. This Codification standard (FASB ASC Topic 105 on generally accepted accounted principles) was adopted on June 28, 2009. This change impacted disclosure references only and had no effect on the Company’s financial position or its results of operations.
Effective July 1, 2009, the Company adopted the provisions of ASC 815-40-15 (EITF Issue No. 07-05), “Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock”, which addresses the accounting for certain instruments as derivatives under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”. Under this new pronouncement, specific guidance is provided regarding requirements for an entity to consider embedded features as indexed to the entity’s own stock. The adoption of ASC 815-40-15 did not have any impact on our financial position, results of operations or cash flows.
Effective July 1, 2009, the Company adopted the provisions of ASC 470-20-25 (FASB Staff Position APB 14-1), “Accounting for Convertible Debt Instruments That May Be Settled In Cash upon Conversion” (Including Partial Cash Settlement). ASC 470-20-25 specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. This ASC should be applied retrospectively for all periods presented. The adoption of ASC 470-20-25 did not have any impact on our financial position, results of operations or cash flows.
Effective July 1, 2009, the Company adopted the provisions of ASC 808-10-10 (EITF Issue No. 07-01), “Accounting for Collaborative Arrangements Related to the Development and Commercialization of Intellectual Property”. The EITF concluded that a collaborative arrangement is one in which the participants are actively involved and are exposed to significant risks and rewards that depend on the ultimate commercial success of the endeavor. Revenues and costs incurred with third parties in connection with collaborative arrangements would be presented gross or net based on the criteria in ASC 605-45-05 (EITF Issue No. 99-19), “Reporting Revenue Gross as a Principal versus Net as an Agent,” and other accounting literature. Payments to or from collaborators would be evaluated and presented based on the nature of the arrangement and its terms, the nature of the entity’s business, and whether those payments are within the scope of other accounting literature. The nature and purpose of collaborative arrangements are to be disclosed along with the accounting policies and the classification and amounts of significant financial statement amounts related to the arrangements. Activities in the arrangement conducted in a separate legal entity should be accounted for under other accounting literature; however required disclosure under ASC 808-10-10 applies to the entire collaborative agreement. This Issue is to be applied retrospectively to all periods presented for all collaborative arrangements existing as of the effective date. The adoption of ASC 808-10-10 did not have any impact on our current or prior consolidated results of operations, financial condition or cash flows.
Effective July 1, 2009, the Company adopted the provisions of ASC 810-10-65 (SFAS No. 160), “Non-controlling Interests in Consolidated Financial Statements — an Amendment of Accounting Research Bulletin (ARB) No. 51”. This statement amends ARB No. 51 to establish accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a non-controlling interest in a subsidiary is an ownership interest in the consolidated entity and should therefore be reported as equity in the consolidated financial statements. The statement also establishes standards for presentation and disclosure of the non-controlling results on the consolidated statement of operations. The adoption of ASC 810-10-65 did not have a material impact on our financial position, results of operations or cash flows.
Effective July 1, 2009, the Company adopted the provisions of ASC 805-10-10 (SFAS No. 141-R), “Business Combinations”. This statement replaces SFAS No. 141, but retains the fundamental requirements in SFAS No. 141 that the acquisition method of accounting be used for all business combinations. This statement requires an acquirer to recognize and measure the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree at their fair values as of the acquisition date. The statement requires acquisition costs and any restructuring costs associated with the business combination to be recognized separately from the fair value of the business combination. ASC 805-10-10 establishes requirements for recognizing and measuring goodwill acquired in the business combination or a gain from a bargain purchase as well as disclosure requirements designed to enable users to better interpret the results of the business combination. Early adoption of this statement was not permitted. The adoption of ASC 805-10-10 will impact our financial position, results of operations and cash flows to the extent we conduct acquisition-related activities and/or consummate business combinations.
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Effective July 1, 2009, Company adopted the provisions of ASC 805-20-25 (FSP 141-R-1), “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies”. This ASC amends and clarifies SFAS No. 141-R, “Business Combinations”, to address application issues on initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. Early adoption of this statement was not permitted. The impact of adopting ASC 805-20-25 on our consolidated financial statements will depend on the economic terms of any future business combinations.
Note G –Income Taxes
FASB ASC 740, “Income Taxes” (“ASC 740”), prescribes a comprehensive model for the financial statement recognition, measurement, presentation, and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. The Company adopted the provisions of ASC 740 on July 1, 2007. ASC 740 required that a change in judgment related to prior years’ tax positions be recognized in the quarter of the change. As a result of the implementation of ASC 740, the Company recognized no material adjustment in the liability for unrecognized tax benefits.
We recognize interest and penalties related to uncertain tax positions in general and administrative expense. As of September 30, 2009, we have not recorded any provisions for accrued interest and penalties related to uncertain tax positions.
Tax years 2005-2008 remain open to examination by the major taxing authorities to which we are subject.
Note H – Restricted Cash
During the quarter ended December 31, 2008, certain litigation involving the Company and a terminated employee was resolved through binding arbitration. As a result of this arbitration, the Arbitrator awarded the employee approximately $410,000. In the calculation of the amount awarded, the Company believes the Arbitrator erroneously took into consideration an employment agreement that was not in question and not terminated by the Company. Based on this miscalculation, the Company’s attorney recommended an appeal, which the Company has initiated. Since the Company’s attorney expects a favorable outcome, no provision has been made for this judgment in the accompanying financial statements; however, the Company has placed $512,197 in escrow as required by the courts. This amount is shown as restricted cash on the accompanying balance sheet.
Note I -Basic and diluted income (loss) per share:
Income (loss) per share is computed by dividing the income applicable to common shareholders by the weighted average number of shares of both classes of common stock outstanding for each fiscal year. Class B common stock has additional voting rights. All dilutive common stock equivalents are included in the calculation of diluted earnings per share. For the three months ended September 30, 2009, all dilutive common stock equivalents were included in the calculation of diluted earnings per share using the treasury stock method; however, since the Company experienced a net loss for the three months ended September 30, 2008, no additional common stock equivalents related to options or warrants were included since they would have been anti-dilutive.
The weighted average number of common shares outstanding used in the computation of earnings (loss) per share is summarized as follows:
Three months ended | |||||
September 30, | |||||
2009 | 2008 | ||||
Weighted average shares | |||||
outstanding – basic | 19,997,549 | 20,178,087 | |||
Employee stock options | 144,440 | -- | |||
Warrants | -- | -- | |||
Weighted average shares | |||||
outstanding – fully diluted | 20,141,989 | 20,178,087 |
The following table summarizes securities outstanding as of September 30, 2009 and 2008, but not included in the calculation of diluted net earnings per share because such shares are antidilutive:
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Three months ended | ||||
September 30, | ||||
2009 | 2008 | |||
Employee stock options | 835,250 | 1,236,875 | ||
Warrants | 343,000 | 328,000 | ||
Total | 1,178,250 | 1,564,875 | ||
Note J –Subsequent events:
The Company evaluated subsequent events through November 12, 2009, which is the date these financial statements were available for issue, and did not find any reportable subsequent events.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
In addition to historical information, this report contains statements relating to future events or our future results. These statements are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Act of 1934, as amended (the “Exchange Act”) and are subject to the Safe Harbor provisions created by the statute. Generally words such as “may”, “will”, “should”, “could”, “anticipate”, “expect”, “intend”, “estimate”, “plan”, “continue”, and “believe” or the negative of or other variation on these and other similar expressions identify forward-looking statements. These forward-looking statements are made only as of the date of this report. We do not undertake to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise. Forward-looking statements are based on current expectations and involve risks and uncertainties and our future results could differ significantly from those expressed or implied by our forward-looking statements.
Overview
The Company presently provides behavioral health care services through two substance abuse treatment centers, two psychiatric hospitals, a residential treatment facility and eight outpatient psychiatric centers (collectively called "treatment facilities"). The Company’s revenue for providing behavioral health services through these facilities is derived from contracts with managed care companies, Medicare, Medicaid, state agencies, railroads, gaming industry corporations and individual clients. The profitability of the Company is largely dependent on the level of patient census and the payor mix at these treatment facilities. Patient census is measured by the number of days a client remains overnight at an inpatient facility or the number of visits or encounters with clients at outpatient clinics. Payor mix is determined by the source of payment to be received for each client being provided billable services. The Company’s administrative expenses do not vary greatly as a percentage of total revenue but the percentage tends to decrease slightly as revenue increases. The Company’s internet operation, Behavioral Health Online, Inc., continues to provide behavioral health information through its web site at Wellplace.com but its primary function is Internet technology support for the subsidiaries and their contracts. As such, the expenses related to Behavioral Health Online, Inc. are included as corporate expenses. In March 2009, the Company completed the sale of the assets of its research division, Pivotal Research Centers, Inc. As such, the results of operations for this division are shown as discontinued operations on the accompanying statements of operations. (See the Company’s current report on Form 8-K filed with the U. S. Securities and Exchange Commission on March 16, 2009 for additional information regarding the sale of Pivotal).
The healthcare industry is subject to extensive federal, state and local regulation governing, among other things, licensure and certification, conduct of operations, audit and retroactive adjustment of prior government billings and reimbursement. In addition, there are on-going debates and initiatives regarding the restructuring of the health care system in its entirety. The extent of any regulatory changes and their impact on the Company’s business is unknown. The previous administration put forth proposals to mandate equality in the benefits available to those individuals suffering from mental illness (The Parity Act). This Act is now law and the target date for implementation is January 1, 2010. This legislation will improve access to the Company’s programs but its total effect on behavioral health providers has not yet been assessed. Managed care has had a profound impact on the Company's operations, in the form of shorter lengths of stay, extensive certification of benefits requirements and, in some cases, reduced payment for services. The current economic conditions continue to challenge the Company’s profitability through increased uninsured patients in our fee for service business and increased utilization in our capitated business.
Critical Accounting Policies
The preparation of our financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. On an on-going basis, we evaluate our estimates and assumptions, including but not limited to those related to revenue recognition, accounts receivable reserves, income tax valuation allowances, and the impairment of goodwill and other intangible assets. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Revenue recognition and accounts receivable:
Patient care revenues and accounts receivable are recorded at established billing rates or at the amount realizable under agreements with third-party payors, including Medicaid and Medicare. Revenues under third-party payor agreements are subject to examination and contractual adjustment, and amounts realizable may change due to periodic changes in the regulatory environment. Provisions for estimated third party payor settlements are provided in the period the related services are rendered. Differences between the amounts provided and subsequent settlements are recorded in operations in the year of settlement. Amounts due as a result of cost report settlements is recorded and listed separately on the consolidated balance sheets as “Other
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receivables”. The provision for contractual allowances is deducted directly from revenue and the net revenue amount is recorded as accounts receivable. The allowance for doubtful accounts does not include the contractual allowances.
The Company currently has three “at-risk” contracts. The contracts call for the Company to provide for all of the inpatient and outpatient behavioral health needs of the insurance carrier’s enrollees in Nevada for a fixed monthly fee per member per month. Revenues are recorded monthly based on this formula and the expenses related to providing the services under these contracts are recorded as incurred. The Company provides most of the care directly and, through utilization review, monitors closely, and pre-approves all inpatient and outpatient services not provided directly. The contracts are considered “at-risk” because the payments to third-party providers for services rendered could equal or exceed the total amount of the revenue recorded.
All revenues reported by the Company are shown net of estimated contractual adjustment and charity care provided. When payment is made, if the contractual adjustment is found to have been understated or overstated, appropriate adjustments are made in the period the payment is received in accordance with FASB ASC 94-605-35 – Estimated and Final Settlements Under Rate Setting Systems. Net contractual adjustments recorded in the three months ended September 30, 2009 for revenue booked in prior years resulted in an increase in net revenue of approximately $12,450. Net contractual adjustments recorded in fiscal 2009 for revenue booked in prior years resulted in an increase in net revenue for the year of approximately $59,200.
A Medicare cost report settlement in the amount of $129,333 was received during the three months ended September 30, 2009. This settlement, although payment was received, is currently subject to review, therefore no revenue has been recorded. During the fiscal year ended June 30, 2009, no third party cost report settlements were expected or received; however, the Company sent a required Medicare settlement payment of approximately $170,000 based on desk review of the 2008 cost report. This settlement, although paid, is currently on appeal and is expected to be recouped; therefore, no settlement expense has been recorded.
Our accounts receivable systems are capable of providing an aging based on responsible party or payor. This information is critical in estimating our required allowance for bad debts. Below is revenue by payor for the three months ended September 30, 2009 and 2008 and the fiscal year ended June 30, 2009 and the accounts receivable aging information as of September 30, 2009 and June 30, 2009, for our treatment services segment.
Net Revenue by Payor (in thousands) | |||||||||||
For the Three Month | For the Fiscal Year | ||||||||||
Ended September 30, | Ended June 30, | ||||||||||
2009 | 2008 | 2009 | |||||||||
$ | % | $ | % | $ | % | ||||||
Private Pay | $ | 835 | 7 | $ | 538 | 5 | $ | 2,224 | 5 | ||
Commercial | 7,885 | 67 | 7,142 | 68 | 29,553 | 70 | |||||
Medicare | 436 | 4 | 306 | 3 | 1,027 | 2 | |||||
Medicaid | 2,612 | 22 | 2,573 | 24 | 9,796 | 23 | |||||
Net Revenue | $ | 11,768 | $ | 10,559 | $ | 42,600 |
Accounts Receivable Aging (Net of allowance for bad debts- in thousands)
September 30, 2009
Over | Over | Over | Over | Over | Over | Over | |||
Payor | Current | 30 | 60 | 90 | 120 | 150 | 270 | 360 | Total |
Private Pay | $ 53 | $ 197 | $ 140 | $ 119 | $ 89 | $232 | $ 58 | $ 151 | $ 1,039 |
Commercial | 2,580 | 1,175 | 256 | 160 | 71 | 157 | 4 | 41 | 4,444 |
Medicare | 80 | 24 | 1 | 4 | 1 | 21 | -- | -- | 131 |
Medicaid | 1,509 | 127 | 97 | 48 | 41 | 67 | -- | 17 | 1,906 |
Total | $ 4,222 | $ 1,523 | $ 494 | $ 331 | $ 202 | $ 477 | $ 62 | $ 209 | $7,520 |
June 30, 2009
Over | Over | Over | Over | Over | Over | Over | |||
Payor | Current | 30 | 60 | 90 | 120 | 150 | 270 | 360 | Total |
Private Pay | $ 102 | $ 123 | $ 114 | $ 139 | $ 139 | $283 | $ 45 | $ 214 | $ 1,159 |
Commercial | 2,161 | 981 | 226 | 181 | 70 | 111 | 4 | 41 | 3,775 |
Medicare | 49 | -- | 5 | -- | 2 | -- | -- | -- | 56 |
Medicaid | 1,110 | 157 | 26 | 32 | 16 | 18 | -- | 2 | 1,361 |
Total | $ 3,422 | $ 1,261 | $ 371 | $ 352 | $ 227 | $ 412 | $ 49 | $ 257 | $ 6,351 |
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The Company’s days sales outstanding (“DSO”) are significantly different for each type of service and each facility based on the payors for each service. Overall, the DSO for the combined operations of the Company were 64 days for the three months ended September 30, 2009 and 62 days the fiscal year ended June 30, 2009. The table below shows the DSO by segment for the same periods.
Treatment | Contract | |||
Period Ended | Services | Services | ||
09/30/2009 | 55 | 128 | ||
06/30/2009 | 52 | 51 |
Contract Services DSO’s fluctuate dramatically by the delay in payment of a few days for any of our large contracts. A delay in payment from our major contract with Wayne County was experienced at September 30, 2009 when payment was processed for May through September in October 2009. This timing delay was expected in conjunction with fiscal year end of Michigan.
Prior to the sale of the Company’s research division, pharmaceutical study revenue was recognized only after a pharmaceutical study contract was awarded and the patient was selected and accepted based on study criteria and billable units of service were provided. Where a contract required completion of the study by the patient, no revenue was recognized until the patient completed the study program. All revenues and receivables from our research division were derived from pharmaceutical companies with no related bad debt allowance. The results of operations for the research division are shown as discontinued operations on the accompanying statements of operations.
Contract support service revenue is a result of fixed fee contracts to provide telephone support. Revenue for these services is recognized ratably over the service period. Revenues and receivables from our contract services division are based on a prorated monthly allocation of the total contract amount and usually paid within 30 days of the end of the month.
Allowance for doubtful accounts:
The provision for bad debts is calculated based on a percentage of each aged accounts receivable category beginning at 0-5% on current accounts and increasing incrementally for each additional 30 days the account remains outstanding until the account is over 300 days outstanding, at which time the provision is 80-100% of the outstanding balance. These percentages vary by facility based on each facility’s experience in and expectations for collecting older receivables. The Company compares this required reserve amount to the current “Allowance for doubtful accounts” to determine the required bad debt expense for the period. This method of determining the required “Allowance for doubtful accounts” has historically resulted in an allowance for doubtful accounts of 20% or greater of the total outstanding receivables balance.
Income Taxes:
The Company follows the liability method of accounting for income taxes, as set forth in ASC 740. ASC 740 prescribes an asset and liability approach, which requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of the assets and liabilities. The Company’s policy is to record a valuation allowance against deferred tax assets unless it is more likely than not that such assets will be realized in future periods. During fiscal 2009, the Company recorded a tax expense from continuing operations of $65,764. For the quarter ended September 30, 2009, the company recorded an estimated tax expense of $133,431 based on net income and projected net income for the fiscal year.
In accordance with ASC 740, we may establish reserves for tax uncertainties that reflect the use of the comprehensive model for the recognition and measurement of uncertain tax positions. Tax authorities periodically challenge certain transactions and deductions reported on our income tax returns. We do not expect the outcome of these examinations, either individually or in the aggregate, to have a material adverse effect on our financial position, results of operations, or cash flows.
Valuation of Goodwill and Other Intangible Assets
Goodwill and other intangible assets are initially created as a result of business combinations or acquisitions. The Company makes significant estimates and assumptions, which are derived from information obtained from the management of the acquired businesses and the Company’s business plans for the acquired businesses in determining the value ascribed to the assets acquired. Critical estimates and assumptions used in the initial valuation of goodwill and other intangible assets include, but are not limited to: (i) future expected cash flows from services to be provided, (ii) customer contracts and relationships, and (iii) the acquired market position. These estimates and assumptions may be incomplete or inaccurate because unanticipated events and circumstances may occur. If estimates and assumptions used to initially value goodwill and intangible assets prove to be inaccurate, ongoing reviews of the carrying values of such goodwill and intangible assets may indicate impairment which will require the Company to record an impairment charge in the period in which the Company identifies the impairment.
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In the fiscal year ended June 30, 2009, the Company recorded an impairment loss on the intangible assets of the Company’s research segment of $1,500,000 based on the annual review and valuation of intangible assets. The fair value was determined using a combination of approaches including a trading multiple, an acquisition multiple and the income approach.
Results of Operations
The following table illustrates our consolidated results of operations for the three months ended September 30, 2009 and 2008 (in thousands):
For the Three Months Ended | ||||||||||
September 30, | ||||||||||
2009 | 2008 | |||||||||
(in thousands) | ||||||||||
Statements of | ||||||||||
Operations Data: | Amount | % | Amount | % | ||||||
Revenue | $ | 12,647 | 100.0 | $ | 11,692 | 100.0 | ||||
Cost and Expenses: | ||||||||||
Patient care expenses | 6,439 | 50.9 | 6,158 | 52.7 | ||||||
Contract expenses | 727 | 5.8 | 827 | 7.0 | ||||||
Provision for bad debts | 473 | 3.7 | 446 | 3.8 | ||||||
Administrative expenses | 4,652 | 36.8 | 4,695 | 40.2 | ||||||
Interest expense | 81 | 0.6 | 82 | 0.7 | ||||||
Other (income) expenses, net | (82) | (0.6) | (82) | (0.7) | ||||||
Total expenses | 12,290 | 97.2 | 12,126 | 103.7 | ||||||
Income (loss) before income taxes | 357 | 2.8 | (434) | (3.7) | ||||||
Income tax (benefit) provision | 133 | 1.1 | (39) | (0.3) | ||||||
Income (loss) from continuing operations | 224 | 1.7 | (395) | (3.4) | ||||||
Discontinued operations | -- | -- | 62 | 0.5 | ||||||
Net income (loss) | $ | 224 | 1.7 | $ | (333) | (2.8) |
Results of Operations
Total net revenue from operations increased 8.2% to $12,647,428 for the three months ended September 30, 2009 from $11,691,905 for the three months ended September 30, 2008.
Net patient care revenue increased 11.4% to $11,767,668 for the three months ended September 30, 2009 from $10,559,496 for the three months ended September 30, 2008. This increase in revenue is due primarily to the increased census at Seven Hills Hospital in Las Vegas and the increased beds and census at Capstone in Detroit. These increases were partially offset by the reduction in beds at Harbor Oaks to facilitate the remodeling of the former adjudicated unit to accommodate the new chemical dependency program which opened in September 2009.
Two key indicators of profitability of inpatient facilities are patient days, or census, and payor mix. Patient days is the product of the number of patients times length of stay. Increases in the number of patient days result in higher census, which coupled with a more favorable payor mix (more patients with higher paying insurance contracts or paying privately) will usually result in higher profitability. Therefore, patient census and payor mix are monitored very closely.
Contract support services revenue provided by Wellplace decreased 22.3% to $879,760 for the three months ended September 30, 2009 compared to $1,132,409 for the three months ended September 30, 2008 due to the expiration of the Company’s smoking cessation contract with a government contractor in September 2008. The Company expects to increase this revenue through new contracts for EAP (Employee Assistance Programs) and new Smoking Cessation Programs.
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Patient care expenses in our treatment centers increased 4.6% to $6,438,563 for the three months ended September 30, 2009 from $6,158,157 for the three months ended September 30, 2008. This increase in expenses is due to increased beds and census at Seven Hills Hospital in Las Vegas and Capstone Academy in Detroit and higher utilization under the capitated contracts with the majority of the increases in expenses directly related to the patient care expenses. Payroll and service related expenses increased 9.9% to $4,894,050 for the three months ended September 30, 2009 from $4,454,829 for the same period a year ago. Payroll tax expenses increased 14.7% to $302,476 for the three months ended September 30, 2009 from $263,640 for the same period a year ago. Contract expenses related to the capitated contracts decreased 1.0% to $1,213,090 for the three months ended September 30, 2009 from $1,225,925 for the same period a year ago. Food expenses increased 6.7% to $266,031 for the three months ended September 30, 2009 from $249,346 for the same period a year ago. All of these increases are a result of increased census at Seven Hills and Capstone. Pharmacy expense decreased 25.2% to $177,044 for the three months ended September 30, 2009 from $236,838 for the same period a year ago as we continue to look for effective alternatives that are less expensive in our formulary and the least expensive suppliers.
Contract support services expenses decreased 12.1% to $727,477 for the three months ended September 30, 2009 from $827,779 for the three months ended September 30, 2008. This decrease primarily due to reduction in the expenses related to the previously mentioned smoking cessation contract which expired in September 2008.
Administrative expenses decreased 0.9% to $4,652,517 for the quarter ended September 30, 2009 from $4,694,974 for the quarter ended September 30, 2008. This minimal decrease is a primarily due to the stabilization of expenses at our new facilities. Casual labor expenses decreased 68.5% to $10,256 for the quarter ended September 30, 2009 from $32,584 for the same period a year ago. Administrative payroll increased 12.0%. to $1,505,677 for the quarter ended September 30, 2009 from $1,344,573 for the same period a year ago. In addition Fees and License expense decreased 62.6% to $33,263 for the quarter ended September 30, 2009 from $89,012 for the same period a year ago. Rent expense decreased 6.5% to $882,358 for the three months ended September 30, 2009 from $943,251 for the same period a year ago due to the elimination of the DBI space at the Detroit Medical Center. Travel expenses also decreased as telecommunications are being used more frequently instead of site visits.
Provision for doubtful accounts increased 6.1% to $472,973 for the three months ended September 30, 2009 from $445,814 for the three months ended September 30, 2008. The Company’s policy is to maintain reserves based on the age of its receivables. This increase in the provision for doubtful accounts is largely attributable to the increase in receivables related to Seven Hills.
Interest income decreased 36.9% to $32,374 for the three months ended September 30, 2009 from $51,269 for the three months ended September 30, 2008. This decrease is a result of lower balances in investment accounts as a result of the delay in payment of our contract receivables and less interest being charged on patient accounts.
Other income / expense increased 60.0% to $49,356 for the three months ended September 30, 2009 from $30,854 for the three months ended September 30, 2008. This increase is primarily due to the earnings of the Company’s investments in unconsolidated subsidiaries.
Interest expense decreased 1.3% to $80,593 for the three months ended September 30, 2009 from $81,642 for the three months ended September 30, 2008. This decrease is primarily due to the general decrease in interest rates as the interest rate on all of our long term debt is tied to the Prime rate.
Since the Company has returned to profitability and projects continued profitability for the fiscal year, the Company recorded a provision for income taxes of $133,431 for the three months ended September 30, 2009 as compared to a tax benefit $39,419 for the same period last year. If tax estimates are found to be high or low, adjustments will be made in the period of the determination.
There are no trends that the Company expects will have a material impact on the Company’s revenues or net income.
Liquidity and Capital Resources
The Company’s net cash used in operating activities was $1,278,661 for the three months ended September 30, 2009 compared to $669,519 for the three months ended September 30, 2008. Cash flows used in operations in the three months ended September 30, 2009 consists of net income of $223,604 plus depreciation and amortization of $301,926, non–cash interest expense of $36,633, non-cash stock based compensation of $60,709, non-cash earnings from the unconsolidated subsidiary of $22,143, the provision for doubtful accounts of $472,973, an increase in accounts receivable of $2,264,986, an increase in prepaid expenses of $250,161, a decrease in accrued expenses and other liabilities of $174,294 offset by a decrease in other assets of $9,079 and an increase in accounts payable of $327,999.
Cash used in investing activities in the three months ended September 30, 2009 consisted of $249,556 in capital expenditures and $18,288 in cash distribution from our unconsolidated subsidiary investment compared to $486,522 in capital expenditures, $38,100 in cash distribution from our unconsolidated subsidiary investment and cash used in discontinued operations of $33,188 during the same period last year.
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Cash provided by financing activities of $52,281 in the three months ended September 30, 2009 was the result of proceeds from the issuance of common stock under the employee stock purchase plan of $27,835, an increase in the Company’s revolving credit line of $62,720 and repayment of $38,274 on the Company’s long-term debt compared to $59,560 used to purchase treasury stock, $142,502 increase in the Company’s revolving credit line, $52,294 reduction in long term debt, $15,000 paid for financing cost and $15,778 in proceeds from the issuance of employee stock purchase plan shares and cash used in discontinued operations of $192,268 during the same period last year.
A significant factor in the liquidity and cash flow of the Company is the timely collection of its accounts receivable. As of September 30, 2009, accounts receivable from patient care, net of allowance for doubtful accounts, increased 18.4% to $7,520,078 from $6,350,693 on June 30, 2009. This increase is a result of increased revenue from Seven Hills Hospital and Capstone Academy. The Company monitors increases in accounts receivable closely and, based on the aging of the receivables outstanding, is confident that the increase is not indicative of a payor problem. Over the years, we have increased staff, standardized some procedures for determining insurance eligibility and collecting receivables and established a more aggressive collection policy. The increased staff has allowed the Company to concentrate on current accounts receivable and resolve any issues before they become uncollectible. The Company’s collection policy calls for earlier contact with insurance carriers with regard to payment, use of fax and registered mail to follow-up or resubmit claims and earlier employment of collection agencies to assist in the collection process. Our collectors will also seek assistance through every legal means, including the State Insurance Commissioner’s office, when appropriate, to collect claims. In light of the current economy the Company has redoubled its efforts to collect accounts early. The Company will continue to closely monitor reserves for bad debt based on potential insurance denials and past difficulty in collections.
The Company experienced a delay in collections from one of our contracts of approximately $1,200,000 which was paid in full subsequent to quarter end.
Contractual Obligations
The Company’s future minimum payments under contractual obligations related to capital leases, operating leases and term notes as of September 30, 2009 are as follows (in thousands):
YEAR ENDING | OPERATING | |||||||||||
September 30, | TERM NOTES | CAPITAL LEASES | LEASES | TOTAL* | ||||||||
Principal | Interest | Principal | Interest | |||||||||
2010 | $ | 801 | $ | 15 | $ | 106 | $ | 17 | $ | 3,292 | $ | 4,231 |
2011 | 232 | 11 | 105 | 6 | 3,006 | 3,360 | ||||||
2012 | 52 | 6 | -- | -- | 2,909 | 2,967 | ||||||
2013 | 43 | 2 | -- | -- | 2,581 | 2,626 | ||||||
2014 | -- | -- | -- | -- | 2,450 | 2,450 | ||||||
Thereafter | -- | -- | -- | -- | 9,013 | 9,013 | ||||||
Total | $ | 1,128 | $ | 34 | $ | 211 | $ | 23 | $ | 23,251 | $ | 24,647 |
* Total does not include the amount due under the revolving credit note of $926,124. This amount represents accounts receivable funding as described below and is shown as a current note payable in the accompanying financial statements.
In October 2004, the Company entered into a revolving credit, term loan and security agreement with CapitalSource Finance, LLC to replace the Company’s primary lender and provide additional liquidity. Each of the Company’s material subsidiaries is a co-borrower under the agreement. This agreement was amended on June 13, 2007 to increase the amount available under the term loan, extend the term, decrease the interest rates and modify the covenants based on the Company’s current financial position. The agreement now includes a term loan in the amount of $3,000,000, with a balance of $935,000 at September 30, 2009, and an accounts receivable funding revolving credit agreement with a maximum loan amount of $3,500,000 and a current balance of $926,124. In conjunction with this refinancing, the Company paid $32,500 in commitment fees and approximately $53,000 in legal fees and issued a warrant to purchase 250,000 shares of Class A Common Stock at $3.09 per share valued at $456,880. The relative fair value of the warrants was recorded as deferred financing costs and is being amortized over the period of the loan as additional interest.
The term loan note carries interest at prime plus .75%, but not less than 6.25%, with twelve monthly reductions in available credit of $50,000 beginning July 1, 2007 and increasing to $62,500 on July 1, 2009 until the expiration of the loan. As of September 30, 2009, the Company had $677,500 available under the term loan.
The revolving credit note carries interest at prime (3.25% at September 30, 2009) plus 0.25%, but not less than 4.75% paid through lockbox payments of third party accounts receivable. The revolving credit term is three years, renewable for two
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additional one-year terms. The balance on the revolving credit agreement as of September 30, 2009 was $926,124. For additional information regarding this transaction, see the Company’s current report on form 8-K filed with the Securities and Exchange Commission on October 22, 2004. The balance outstanding as of September 30, 2009 for the revolving credit note is not included in the above table. The average interest rate paid on the revolving credit loan, which includes the amortization of deferred financing costs related to the financing of the debt, was 7.82%.
This agreement was amended on June 13, 2007 to modify the terms of the agreement. Advances are available based on a percentage of accounts receivable and the payment of principal is payable upon receipt of proceeds of the accounts receivable. The amended term of the agreement is for two years, automatically renewable for two additional one year terms. Upon expiration, all remaining principal and interest are due. The revolving credit note is collateralized by substantially all of the assets of the Company’s subsidiaries and guaranteed by PHC. Availability under this agreement is based on eligible accounts receivable and fluctuates with the accounts receivable balance and aging.
On February 5, 2009, the Company signed the first amendment to the amended and restated revolving credit term loan and security agreement as outlined above, to increase availability under its revolving credit line for six months or until the Pivotal sale was complete (the “overline”). The interest rate on the overline was Prime plus 3.25% with an origination fee of $25,000. In addition to increasing the availability for borrowing as noted above, it provided for additional availability of $200,000 as part of this short-term borrowing. This overline was paid in full from operations prior to the closing of Pivotal.
In addition to the above overline, during the quarter ended March 31, 2009, the Company’s Board of Directors voted by unanimous written consent to allow short-term borrowing from related parties up to a maximum of $500,000, with an annual interest rate of 12% and a 2% origination fee. The Company utilized this funding during the March 31, 2009 quarter for a total of $275,000. This amount was paid in full in March 2009.
Off Balance Sheet Arrangements
The Company has no off-balance-sheet arrangements that have or are reasonably likely to have a current or future effect on the Company's financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to the Company.
Litigation
The Company is subject to various claims and legal action that arise in the ordinary course of business. In the opinion of management, the Company is not currently a party to any proceeding that would have a material adverse affect on its financial condition or results of operations.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
The market price of our common stock could be volatile and fluctuate significantly in response to various factors, including:
· | Differences in actual and estimated earnings and cash flows; |
· | Operating results differing from analysts’ estimates; |
· | Changes in analysts’ earnings estimates; |
· | Quarter-to-quarter variations in operating results; |
· | Changes in market conditions in the behavioral health care industry; |
· | Changes in general economic conditions; and |
· | Fluctuations in securities markets in general. |
Financial Risk
· | Our interest expense is sensitive to changes in the general level of interest rates. With respect to our interest-bearing liabilities, all of our long-term debt outstanding is subject to rates at prime plus .25% and prime plus .75%, which makes interest expense fluctuate with changes in the prime rate. On this debt, each 25 basis point increase or decrease in the prime rate will affect an annual increase or decrease in interest expense of approximately $2,200; however, the prime rate is currently lower than the base interest rate of 4.50% therefore the Prime rate would have to increase 1.25% before there would be any interest expense increase. |
· | Failure to meet targeted revenue projections could cause us to be out of compliance with covenants in our debt agreements requiring a waiver from our lender. A waiver of the covenants may require our lender to perform additional audit procedures to assure the stability of their security which could require additional fees. |
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Operating Risk
o | Aging of accounts receivables could result in our inability to collect receivables. As our accounts receivable age and become uncollectible our cash flow is negatively impacted. Our accounts receivable from patient accounts (net of allowance for bad debts) were $7,520,078 at September 30, 2009, $6,350,693 at June 30, 2009 and $6,474,733 at June 30, 2008. As we expand, we will be required to seek payment from a larger number of payors and the amount of accounts receivable will likely increase. We have focused on better accounts receivable management through increased staff, standardization of some procedures for collecting receivables and a more aggressive collection policy in order to keep the change in receivables consistent with the change in revenue. We have also established a reserve policy, allowing greater amounts of reserves as accounts age from the date of billing. If the amount of receivables, which eventually become uncollectible, exceeds such reserves, we could be materially adversely affected. The following chart represents our Accounts Receivable and Allowance for Doubtful Accounts at September 30, 2009 and June 30, 2009, respectively, and Bad Debt Expense for the three months ended September 30, 2009 and the year ended June 30, 2009: |
Accounts | Allowance for | ||||||
Receivable | doubtful accounts | Bad Debt Expense | |||||
September 30, 2009 | $ | 10,136,964 | $ | 2,616,886 | $ | 472,973 | |
June 30, 2009 | 8,781,311 | 2,430,618 | 1,637,738 |
o | The Company relies on contracts with more than ten clients to maintain patient census at its inpatient facilities and the loss of any of such contracts would impact our ability to meet our fixed costs. We have entered into relationships with large employers, health care institutions and labor unions to provide treatment for psychiatric disorders, chemical dependency and substance abuse in conjunction with employer-sponsored employee assistance programs. The employees of such institutions may be referred to us for treatment, the cost of which is reimbursed on a per diem or per capita basis. Approximately 25% of our total revenue is derived from these clients. No one of these large employers, health care institutions or labor unions individually accounts for 10% or more of our consolidated revenues, but the loss of any of these clients would require us to expend considerable effort to replace patient referrals and would result in revenue losses and attendant loss in income. |
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified within the SEC’s Rules and Forms, and that such information is accumulated and communicated to our management to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management was necessarily required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Our management does not expect that our disclosure controls or our internal controls over financial reporting will prevent all error and fraud. A control system, no matter how well conceived and operated, can provide only reasonable assurance that the objectives of a control system are met. Further, any control system reflects limitations on resources and the benefits of a control system must be considered relative to its costs. These limitations also include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of a control. A design of a control system is also based upon certain assumptions about potential future conditions and over time controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected.
At the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures to meet the criteria referred to above. Based on the foregoing, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective.
Change in Internal Controls
During the three months ended September 30, 2009, there were no changes in our internal controls or in other factors that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 6. Exhibits
Exhibit List
Exhibit No. | Description | |
31.1 | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2 | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1 | Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
PHC, Inc. | |||
Registrant | |||
Date: November 12, 2009 | /s/ Bruce A. Shear_____________ | ||
Bruce A. Shear | |||
President | |||
Chief Executive Officer |
Date: November 12, 2009 | /s/ Paula C. Wurts_____________ | ||
Paula C. Wurts | |||
Treasurer | |||
Chief Financial Officer |
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