Form 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended September 30, 2009
or
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Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transitional period from to
Commission file number: 0-29100
eResearchTechnology, Inc.
(Exact name of registrant as specified in its charter)
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Delaware
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22-3264604 |
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(State or other jurisdiction of incorporation
or organization)
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(I.R.S. Employer Identification No.) |
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1818 Market Street |
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Philadelphia, PA
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19103 |
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(Address of principal executive offices)
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(Zip code) |
215-972-0420
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 þ No o
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 during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes o No o
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 the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
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Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as
of the latest practicable date.
The number of shares of Common Stock, $.01 par value, outstanding as of October 23, 2009, was
48,467,789.
eResearchTechnology, Inc. and Subsidiaries
INDEX
2
Part 1. Financial Information
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Item 1. |
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Financial Statements |
eResearchTechnology, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share and per share amounts)
(unaudited)
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December 31, 2008 |
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September 30, 2009 |
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Assets |
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Current Assets: |
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Cash and cash equivalents |
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$ |
66,376 |
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$ |
72,067 |
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Short-term investments |
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50 |
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50 |
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Investment in marketable securities |
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774 |
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Accounts receivable, less allowance for doubtful accounts of
$695 and $515, respectively |
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29,177 |
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16,773 |
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Prepaid income taxes |
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1,892 |
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4,266 |
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Prepaid expenses and other |
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2,885 |
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3,811 |
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Deferred income taxes |
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1,831 |
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1,899 |
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Total current assets |
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102,211 |
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99,640 |
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Property and equipment, net |
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29,639 |
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23,766 |
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Goodwill |
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34,603 |
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34,635 |
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Intangible assets |
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2,149 |
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1,737 |
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Other assets |
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520 |
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417 |
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Total assets |
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$ |
169,122 |
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$ |
160,195 |
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Liabilities and Stockholders Equity |
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Current Liabilities: |
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Accounts payable |
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$ |
3,971 |
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$ |
3,156 |
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Accrued expenses |
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8,140 |
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4,511 |
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Income taxes payable |
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2,492 |
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2,195 |
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Current portion of capital lease obligations |
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43 |
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Deferred revenues |
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12,276 |
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12,220 |
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Total current liabilities |
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26,922 |
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22,082 |
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Deferred rent |
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2,183 |
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2,413 |
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Deferred income taxes |
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1,332 |
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1,325 |
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Other liabilities |
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1,257 |
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879 |
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Total liabilities |
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31,694 |
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26,699 |
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Commitments and contingencies |
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Stockholders Equity: |
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Preferred stock $10.00 par value, 500,000 shares authorized,
none issued and outstanding |
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Common stock $.01 par value, 175,000,000 shares authorized,
59,950,257 and 60,057,392 shares issued, respectively |
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600 |
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601 |
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Additional paid-in capital |
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93,828 |
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96,539 |
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Accumulated other comprehensive loss |
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(2,716 |
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(1,677 |
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Retained earnings |
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110,479 |
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117,916 |
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Treasury stock, 8,686,868 and 11,589,603 shares at cost, respectively |
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(64,763 |
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(79,883 |
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Total stockholders equity |
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137,428 |
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133,496 |
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Total liabilities and stockholders equity |
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$ |
169,122 |
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$ |
160,195 |
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The accompanying notes are an integral part of these statements.
3
eResearchTechnology, Inc. and Subsidiaries
Consolidated Statements of Operations
(In thousands, except per share amounts)
(unaudited)
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Three Months Ended September 30, |
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Nine Months Ended September 30, |
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2008 |
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2009 |
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2008 |
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2009 |
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Net revenues: |
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EDC licenses and services |
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$ |
1,564 |
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$ |
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$ |
4,354 |
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$ |
2,501 |
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Services |
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24,184 |
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15,969 |
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75,542 |
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48,292 |
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Site support |
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8,182 |
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6,757 |
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23,179 |
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19,895 |
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Total net revenues |
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33,930 |
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22,726 |
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103,075 |
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70,688 |
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Costs of revenues: |
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Cost of EDC licenses and services |
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456 |
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1,371 |
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863 |
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Cost of services |
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9,674 |
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7,577 |
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30,126 |
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22,941 |
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Cost of site support |
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4,698 |
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3,418 |
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14,565 |
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10,523 |
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Total costs of revenues |
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14,828 |
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10,995 |
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46,062 |
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34,327 |
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Gross margin |
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19,102 |
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11,731 |
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57,013 |
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36,361 |
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Operating expenses: |
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Selling and marketing |
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3,126 |
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3,056 |
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10,259 |
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9,756 |
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General and administrative |
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4,254 |
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2,977 |
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13,728 |
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10,581 |
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Research and development |
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1,173 |
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989 |
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3,223 |
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3,131 |
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Total operating expenses |
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8,553 |
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7,022 |
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27,210 |
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23,468 |
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Operating income |
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10,549 |
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4,709 |
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29,803 |
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12,893 |
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Other income (expense), net |
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251 |
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(82 |
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922 |
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(375 |
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Income before income taxes |
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10,800 |
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4,627 |
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30,725 |
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12,518 |
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Income tax provision |
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3,870 |
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1,808 |
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11,389 |
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5,081 |
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Net income |
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$ |
6,930 |
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$ |
2,819 |
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$ |
19,336 |
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$ |
7,437 |
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Basic net income per share |
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$ |
0.14 |
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$ |
0.06 |
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$ |
0.38 |
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$ |
0.15 |
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Diluted net income per share |
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$ |
0.13 |
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$ |
0.06 |
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$ |
0.37 |
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$ |
0.15 |
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Shares used to calculate basic net income per share |
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50,856 |
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48,452 |
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50,743 |
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49,399 |
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Shares used to calculate diluted net income per share |
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52,180 |
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48,755 |
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52,085 |
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49,698 |
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The accompanying notes are an integral part of these statements.
4
eResearchTechnology, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
(unaudited)
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Nine Months Ended September 30, |
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2008 |
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2009 |
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Operating activities: |
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Net income |
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$ |
19,336 |
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$ |
7,437 |
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Adjustments to reconcile net income to net cash
provided by operating activities: |
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Gain on sale of EDC operations |
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(530 |
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Depreciation and amortization |
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12,519 |
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9,694 |
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Cost of sales of equipment |
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717 |
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93 |
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Provision for uncollectible accounts |
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60 |
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210 |
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Share-based compensation |
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1,966 |
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2,145 |
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Deferred income taxes |
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(1,151 |
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347 |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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(6,601 |
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12,516 |
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Prepaid expenses and other |
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(1,560 |
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(1,269 |
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Accounts payable |
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357 |
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(69 |
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Accrued expenses |
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(363 |
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(3,728 |
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Income taxes |
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931 |
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(2,955 |
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Deferred revenues |
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747 |
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588 |
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Deferred rent |
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(177 |
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211 |
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Net cash provided by operating activities |
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26,781 |
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24,690 |
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Investing activities: |
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Purchases of property and equipment |
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(6,966 |
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(3,567 |
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Proceeds from sales of investments |
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8,747 |
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Payment related to sale of EDC operations |
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(1,150 |
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Payments for acquisition |
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(4,964 |
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(655 |
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Net cash used in investing activities |
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(3,183 |
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(5,372 |
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Financing activities: |
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Repayment of capital lease obligations |
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(1,085 |
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(43 |
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Proceeds from exercise of stock options |
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1,502 |
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372 |
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Stock option income tax benefit |
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839 |
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134 |
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Repurchase of common stock for treasury |
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(15,120 |
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Net cash provided by (used in) financing
activities |
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1,256 |
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(14,657 |
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Effect of exchange rate changes on cash |
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(610 |
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1,030 |
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Net increase in cash and cash equivalents |
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24,244 |
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5,691 |
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Cash and cash equivalents, beginning of period |
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38,082 |
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66,376 |
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Cash and cash equivalents, end of period |
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$ |
62,326 |
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$ |
72,067 |
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The accompanying notes are an integral part of these statements.
5
eResearchTechnology, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)
Note 1. Basis of Presentation
The accompanying unaudited consolidated financial statements, which include the accounts of
eResearchTechnology, Inc. (the Company, ERT or we) and its wholly-owned subsidiaries, have
been prepared in accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) considered necessary for a fair presentation have been
included. Operating results for the nine-month period ended September 30, 2009 are not necessarily
indicative of the results that may be expected for the year ending December 31, 2009. Further
information on potential factors that could affect our financial results can be found in our Report
on Form 10-K for the year ended December 31, 2008 filed with the Securities and Exchange Commission
(SEC) and in this Form 10-Q. Subsequent events through November 6, 2009 have been evaluated for
disclosure and recognition.
Note 2. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of ERT and its
wholly-owned subsidiaries. All significant intercompany accounts and transactions have been
eliminated. Based upon managements view of our operations, we consider our business to consist of
one segment.
Reclassifications
The consolidated financial statements for prior periods have been reclassified to conform to
the current periods presentation. In particular, the revenue and cost of revenue of our former
EDC operations, which we sold on June 23, 2009 (see Note 6), have been reclassified from the
licenses and services categories to the EDC category on the consolidated statements of operations
for all periods presented. Additionally, the remaining revenues and costs of sales in licenses,
related to cardiac safety reporting and ePRO, were reclassified to the services category on the
consolidated statements of operations for all periods presented.
Use of Estimates
The preparation of financial statements in accordance with accounting principles generally
accepted in the United States requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Revenue Recognition
Our services revenues consist primarily of our services offered under our Cardiac Safety and,
to a lesser extent, ePRO solutions. Our site support revenue consists of cardiac safety equipment
rentals and sales along with related supplies and logistics management.
Services revenues consist of Cardiac Safety and ePRO services that we provide on a fee for
services basis and are recognized as the services are performed. We also provide Cardiac Safety
consulting services on a time and materials basis and recognize revenues as we perform the
services. Site support revenues are recognized at the time of sale or over the rental period.
At the time of each transaction, management assesses whether the fee associated with the
transaction is fixed or determinable and whether or not collection is reasonably assured. The
assessment of whether the fee is fixed or determinable is based upon the payment terms of the
transaction. If a significant portion of a fee is due after our normal payment terms or upon
implementation or client acceptance, the fee is accounted for as not being fixed or determinable
and revenue is recognized as the fees become due or after implementation or client acceptance has
occurred.
Collectability is assessed based on a number of factors, including past transaction history
with the client and the creditworthiness of the client. If it is determined that collection of a
fee is not reasonably assured, the fee is deferred and revenue is recognized at the time collection
becomes reasonably assured, which is generally upon receipt of cash. Under a typical contract for
Cardiac Safety services, clients pay us a portion of our fee for these services upon contract
execution as an upfront deposit, some of which is typically nonrefundable upon contract
termination. Revenues are then recognized under Cardiac Safety service contracts as the services
are performed.
6
For arrangements with multiple deliverables where the fair value of each element is known, the
revenue is allocated to each component based on the relative fair value of each element. For
arrangements with multiple deliverables where the fair value of one or more delivered elements is
not known, revenue is allocated to each component of the arrangement using the residual method
provided that the fair value of all undelivered elements is known. Fair values for undelivered
elements are based primarily upon stated renewal rates for future products or services.
We have recorded reimbursements received for out-of-pocket expenses incurred as revenue in the
accompanying consolidated financial statements.
Revenue is recognized on unbilled services and relates to amounts that are currently not
billable to the customer pursuant to contractual terms. In general, such amounts become billable
in accordance with predetermined payment schedules, but recognized as revenue as services are
performed. Amounts included in unbilled revenue are expected to be collected within one year and
are included within current assets.
Our former electronic data capture (EDC) operations are included in EDC licenses and services
revenue and include license revenue, technology consulting and training services and software
maintenance services. We recognized up-front license fee revenues under the residual method when a
formal agreement existed, delivery of the software and related documentation occurred,
collectability was probable and the license fee was fixed or determinable. We recognized monthly
and annual term license fee revenues over the term of the arrangement. Hosting service fees were
recognized evenly over the term of the service. We recognized revenues from software maintenance
contracts on a straight-line basis over the term of the maintenance contract, which was typically
twelve months. We provided consulting and training services on a time and materials basis and
recognized revenues as we performed the services. See Note 6 for additional disclosure regarding
the sale of our EDC assets.
Concentration of Credit Risk and Significant Clients
Our business depends entirely on the clinical trials that pharmaceutical, biotechnology and
medical device companies conduct. Our revenues and profitability will decline if there is less
competition in the pharmaceutical, biotechnology or medical device industries, which could result
in fewer products under development and decreased pressure to accelerate a product approval. Our
revenues and profitability will also decline if the FDA or similar agencies in foreign countries
modify their requirements in a manner that decreases the need for our solutions.
Financial instruments that potentially subject us to concentration of credit risk consist
primarily of trade accounts receivable from companies operating in the pharmaceutical,
biotechnology and medical device industries. For the nine months ended September 30, 2008 and 2009,
one client accounted for approximately 25% and 17% of net revenues, respectively. The loss of this
client could have a material adverse effect on our operations. We maintain reserves for potential
credit losses. Such losses, in the aggregate, have not historically exceeded managements
estimates.
Cash and Cash Equivalents
We consider cash on deposit and in overnight investments and investments in money market funds
with financial institutions to be cash equivalents. At the balance sheet dates, cash equivalents
consisted of investments in money market funds.
Short-term Investments and Investments in Marketable Securities
At September 30, 2009, short-term investments consisted of an auction rate security issued by
a government-sponsored agency while marketable securities consisted of common stock received from
the buyer of certain assets of our EDC operations. Available-for-sale securities are carried at
fair value, based on quoted market prices, with unrealized gains and losses reported as a separate
component of stockholders equity. We classified our short-term investment and investment in
marketable securities at December 31, 2008 and September 30, 2009 as available-for-sale. At
December 31, 2008 and September 30, 2009, unrealized gains and losses were immaterial. Realized
gains and losses during the nine months ended September 30, 2008 and 2009 were immaterial. For
purposes of determining realized gains and losses, the cost of the securities sold is based upon
specific identification.
7
Property and Equipment
We capitalize costs associated with internally developed and/or purchased software systems for
new products and enhancements to existing products that have reached the application development
stage and meet recoverability tests. These costs are included in property and equipment.
Capitalized costs include external direct costs of materials and services utilized in developing or
obtaining internal-use software, and payroll and payroll-related expenses for employees who are
directly associated with and devote time to the internal-use software project.
Amortization of capitalized software development costs is charged to costs of revenues.
Amortization of capitalized software development costs was $0.7 million for each of the three-month
periods ended September 30, 2008 and 2009 and $2.2 million for each of the nine-month periods ended
September 30, 2008 and 2009. For the nine-month periods ended September 30, 2008 and 2009, we
capitalized $1.6 million and $1.9 million, respectively, of software development costs. As of
September 30, 2009, $1.9 million of capitalized costs have not yet been placed in service and are
therefore not being amortized.
The largest component of property and equipment is cardiac safety equipment. Our clients use
the cardiac safety equipment to perform the ECG and Holter recordings, and it also provides the
means to send such recordings to ERT. We provide this equipment to clients primarily through
rentals via cancellable agreements and, in some cases, through non-recourse equipment sales. The
equipment rentals and sales are included in, or associated with, our Cardiac Safety services
agreements with our clients and the decision to rent or buy equipment is made by our clients prior
to the start of the cardiac safety study. The decision to buy rather than rent is usually
predicated upon the economics to the client based upon the length of the study and the number of
ECGs to be performed each month. The longer the study and the fewer the number of ECGs performed,
the more likely it is that the client may request to purchase cardiac safety equipment rather than
rent. Regardless of whether the client rents or buys the cardiac safety equipment, we consider the
resulting cash flow to be part of our operations and reflect it as such in our consolidated
statements of cash flows.
Our Cardiac Safety services agreements contain multiple elements. As a result, significant
contract interpretation is sometimes required to determine the appropriate accounting. In doing
so, we consider factors such as whether the deliverables specified in a multiple element
arrangement should be treated as separate units of accounting for revenue recognition purposes and,
if so, how the contract value should be allocated among the deliverable elements and when to
recognize revenue for each element. We recognize revenue for delivered elements only when the fair
values of undelivered elements are known, uncertainties regarding client acceptance are resolved
and there are no client-negotiated refund or return rights affecting the revenue recognized for
delivered elements.
The gross cost for cardiac safety equipment was $35.2 million and $35.6 million at December
31, 2008 and September 30, 2009, respectively. The accumulated depreciation for cardiac safety
equipment was $25.0 million and $29.8 million at December 31, 2008 and September 30, 2009,
respectively.
Goodwill
We carry a significant amount of goodwill. Goodwill is not amortized but is subject to an
impairment test at least annually. We perform the impairment test annually as of December 31 or
more frequently if events or circumstances indicate that the value of goodwill might be impaired.
No provisions for goodwill impairment were recorded during 2008 or during the three or nine months
ended September 30, 2009. In connection with the sale of certain assets of our EDC operations, we
allocated $0.1 million of goodwill to our EDC operations which was included in the calculation of
the gain on sale.
When it is determined that the carrying value of goodwill may not be recoverable, measurement
of any impairment will be based on a projected discounted cash flow method using a discount rate
commensurate with the risk inherent in the current business model.
The carrying value of goodwill was $34.6 million as of December 31, 2008 and September 30,
2009. During the first nine months of 2009, goodwill increased approximately $0.2 million due to
contingent payments related to the Covance Cardiac Safety Services, Inc. (CCSS) acquisition and was
offset by a decrease in goodwill due to the sale of certain assets of our EDC operations.
Contingent payments of approximately $0.2 million are included in accrued expenses at September 30,
2009. See Note 4 for additional disclosure regarding the CCSS acquisition.
Long-lived Assets
When events or circumstances so indicate, we assess the potential impairment of our long-lived
assets based on anticipated undiscounted cash flows from the assets. Such events and circumstances
include a sale of all or a significant part of the operations associated with the long-lived asset,
or a significant decline in the operating performance of the asset. If an impairment is indicated,
the amount of the impairment charge would be calculated by comparing the anticipated discounted
future cash flows to the carrying value of the long-lived asset. No impairment was indicated
during either of the nine-month periods ended September 30, 2008 or September 30, 2009.
8
Software Development Costs
Research and development expenditures related to software development are charged to
operations as incurred. We capitalize certain software development costs subsequent to the
establishment of technological feasibility. Because software development costs have not been
significant after the establishment of technological feasibility, all such costs have been charged
to expense as incurred.
Stock-Based Compensation
Accounting for Stock-Based Compensation
Costs resulting from all share-based payment transactions be recognized in the financial
statements at their fair values. The aggregate share-based compensation expense recorded in the
Consolidated Statements of Operations for the three and nine months ended September 30, 2008 was
$0.6 million and $2.0 million, respectively. The aggregate share-based compensation expense
recorded in the Consolidated Statements of Operations for the three and nine months ended September
30, 2009 was $0.6 million and $2.1 million, respectively.
Valuation Assumptions for Options Granted
The fair value of each stock option granted during the nine months ended September 30, 2008
and 2009 was estimated at the date of grant using Black-Scholes, assuming no dividends and using
the weighted-average valuation assumptions noted in the following table. The risk-free rate is
based on the U.S. Treasury yield curve in effect at the time of grant. The expected life
(estimated period of time outstanding) of the stock options granted was estimated using the
historical exercise behavior of employees. Expected volatility was based on historical volatility
for a period equal to the stock options expected life, calculated on a daily basis.
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2009 |
|
Risk-free interest rate |
|
|
2.23 |
% |
|
|
1.34 |
% |
Expected life |
|
3.5 years |
|
|
3.5 years |
|
Expected volatility |
|
|
51.50 |
% |
|
|
63.98 |
% |
The above assumptions were used to determine the weighted-average per share fair value of
$4.89 and $2.14 for stock options granted during the first nine months of 2008 and 2009,
respectively.
Equity Incentive Plans
In 1996, we adopted a stock option plan (the 1996 Plan) that authorized the grant of both
incentive and non-qualified options to acquire up to 9,450,000 shares of the Companys common
stock, which includes subsequent amendments to the 1996 Plan. Our Board of Directors determined
the exercise price of the options under the 1996 Plan. The exercise price of incentive stock
options was not below the market value of the common stock on the grant date. Incentive stock
options under the 1996 Plan expire ten years from the grant date and are exercisable in accordance
with vesting provisions set by the Board, which generally are over three to five years. No
additional options have been granted under this plan, as amended, since December 31, 2003 and no
additional options may be granted thereunder in accordance with the terms of the 1996 Plan.
In May 2003, the stockholders approved a new stock option plan (the 2003 Plan) that
authorized the grant of both incentive and non-qualified options to acquire shares of our common
stock and provided for an annual option grant of 10,000 shares to each outside director. The
Compensation Committee of our Board of Directors determines or makes recommendations to our Board
of Directors regarding the recipients of option grants, the exercise price and other terms of the
options under the 2003 Plan. The exercise price of incentive stock options may not be set below
the market value of the common stock on the grant date. Incentive stock options under the 2003
Plan expire ten years from the grant date, or at the end of such shorter period as may be
designated by the Compensation Committee, and are exercisable in accordance with vesting provisions
set by the Compensation Committee, which generally are over four years. In accordance with the
terms of the 2003 Plan, there are a total of 7,318,625 shares reserved for issuance under the 2003
Plan and there were 2,331,105 shares available for grant as of September 30, 2009. The Company
normally issues new shares to satisfy option exercises under these plans.
On April 26, 2007, the stockholders approved the adoption of the Companys Amended and
Restated 2003 Equity Incentive Plan (the 2003 Equity Plan) which included prohibition on
repricing of any stock options granted under the Plan unless the stockholders approve such
repricing and permitted awards of stock appreciation rights, restricted stock, long term
performance awards and performance shares in addition to grants of stock options. On April 29,
2009 the Board of Directors approved a revised amendment to the Plan that provides for the
inclusion of restricted stock units in addition to the other equity-based awards authorized
thereunder and eliminated the fixed option grants to outside directors.
9
Information with respect to outstanding options under our plans is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Contractual |
|
|
Intrinsic |
|
|
|
|
|
|
|
Average |
|
|
Term |
|
|
Value |
|
|
|
Shares |
|
|
Exercise Price |
|
|
(in years) |
|
|
(in thousands) |
|
Outstanding as of January 1, 2009 |
|
|
3,635,860 |
|
|
$ |
11.03 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
1,230,650 |
|
|
|
4.61 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(107,135 |
) |
|
|
3.47 |
|
|
|
|
|
|
|
|
|
Cancelled/forfeited |
|
|
(241,039 |
) |
|
|
12.36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of September 30, 2009 |
|
|
4,518,336 |
|
|
$ |
9.39 |
|
|
|
4.9 |
|
|
$ |
5,072 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable or expected to vest at
September 30, 2009 |
|
|
4,242,606 |
|
|
$ |
9.52 |
|
|
|
4.8 |
|
|
$ |
4,700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at September 30, 2009 |
|
|
2,680,136 |
|
|
$ |
10.71 |
|
|
|
4.1 |
|
|
$ |
2,593 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value
(the difference between the closing price of our common stock on the last trading day of the third
quarter of 2009 and the exercise price, multiplied by the number of in-the-money options) that
would have been received by the option holders had all option holders exercised their options on
September 30, 2009. This amount changes based on the fair market value of the Companys common
stock. The total intrinsic value of options exercised for the nine months ended September 30, 2008
and 2009 was $2.5 million and $0.3 million, respectively.
As of September 30, 2009, 2,680,136 options with a weighted average exercise price of $10.71
per share were exercisable under the 1996 Plan and the 2003 Plan.
As of September 30, 2009, there was $4.5 million of total unrecognized compensation cost
related to non-vested stock options granted under the plans. That cost is expected to be
recognized over a weighted-average period of 2.3 years.
Tax Effect Related to Stock-based Compensation Expense
Income tax effects of share-based payments are recognized in the financial statements for
those awards that will normally result in tax deductions under existing tax law. Under current
U.S. federal tax law, we receive a compensation expense deduction related to non-qualified stock
options only when those options are exercised. Accordingly, the consolidated financial statement
recognition of compensation cost for non-qualified stock options creates a deductible temporary
difference which results in a deferred tax asset and a corresponding deferred tax benefit in the
consolidated statement of operations. We do not recognize a tax benefit for compensation expense
related to incentive stock options (ISOs) unless the underlying shares are disposed of in a
disqualifying disposition. Accordingly, compensation expense related to ISOs is treated as a
permanent difference for income tax purposes. The tax benefit recognized in our Consolidated
Statement of Operations for the nine-month periods ended September 30, 2008 and 2009 related to
stock-based compensation expense was approximately $0.5 million and $0.4 million, respectively.
Note 3. Fair Value of Financial Instruments
A fair value measurement assumes that the transaction to sell an asset or transfer a liability
occurs in the principal market for the asset or liability or, in the absence of a principal market,
the most advantageous market for the asset or liability. Fair value is based upon an exit price
model.
We measure certain financial assets and liabilities at fair value on a recurring basis,
including available-for-sale securities. Available-for-sale securities as of September 30, 2009
consisted of an auction rate security, or ARS, issued by a municipality, and marketable securities
received from the buyer of certain assets of our EDC operations. The ARS is included in short-term
investments in our consolidated balance sheets. The marketable securities, which are priced at a
discount due to a restriction on trading that remains in effect until June 23, 2010, are included
in investments in marketable securities in our consolidated balance sheets. The discount on the
marketable securities is valued using an option pricing model and takes into consideration multiple
inputs including quoted prices of the securities, volatility factors and discount rates. The three
levels of the fair value hierarchy are described below:
|
|
|
Level 1
|
|
Unadjusted quoted prices in active markets for identical assets or liabilities |
|
|
|
Level 2
|
|
Unadjusted quoted prices in active markets for similar assets or liabilities, or |
|
|
|
|
|
Unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or |
|
|
|
|
|
Inputs other than quoted prices that are observable for the asset or liability |
|
|
|
Level 3
|
|
Unobservable inputs for the asset or liability |
10
The following tables represent our fair value hierarchy for financial assets (cash equivalents
and investments) measured at fair value on a recurring basis as of December 31, 2008 and September
30, 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2008 |
|
|
|
|
|
|
|
Quoted Prices |
|
|
|
|
|
|
Significant |
|
|
|
|
|
|
|
in Active Markets |
|
|
Significant Other |
|
|
Unobservable |
|
|
|
|
|
|
|
for Identical Assets |
|
|
Observable Inputs |
|
|
Inputs |
|
|
|
Total |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
Money market funds |
|
$ |
66,376 |
|
|
$ |
66,376 |
|
|
$ |
|
|
|
$ |
|
|
Auction rate securities |
|
|
50 |
|
|
|
|
|
|
|
|
|
|
|
50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
66,426 |
|
|
$ |
66,376 |
|
|
$ |
|
|
|
$ |
50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at September 30, 2009 |
|
|
|
|
|
|
|
Quoted Prices |
|
|
|
|
|
|
Significant |
|
|
|
|
|
|
|
in Active Markets |
|
|
Significant Other |
|
|
Unobservable |
|
|
|
|
|
|
|
for Identical Assets |
|
|
Observable Inputs |
|
|
Inputs |
|
|
|
Total |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
Money market funds |
|
$ |
72,067 |
|
|
$ |
72,067 |
|
|
$ |
|
|
|
$ |
|
|
Auction rate securities |
|
|
50 |
|
|
|
|
|
|
|
|
|
|
|
50 |
|
Marketable securities |
|
|
774 |
|
|
|
|
|
|
|
774 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
72,891 |
|
|
$ |
72,067 |
|
|
$ |
774 |
|
|
$ |
50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 4. Business Combination
On November 28, 2007, we completed the acquisition of Covance Cardiac Safety Services, Inc.
(CCSS) from Covance Inc. (Covance). We have included CCSSs operating results in our Consolidated
Statements of Operations from the date of the acquisition. Under the terms of the Purchase
Agreement, we purchased all of the outstanding shares of capital stock of CCSS in consideration of
an upfront cash payment of $35.2 million plus additional cash payments of up to approximately $14.0
million, based upon our potential realization of revenue from the backlog transferred and from new
contracts secured through Covances marketing activities. We have additionally incurred
approximately $1.1 million in transaction costs. Through September 30, 2009, Covance earned $5.2
million of this contingent amount, of which $3.0 million was recognized in 2007, $2.0 million in
2008 and $0.2 million in the nine months ended September 30, 2009. At September 30, 2009,
approximately $0.2 million of the contingent amount earned remained to be paid to Covance which we
recorded in accounts payable. These contingent amounts increased goodwill by $5.2 million. The
acquisition included a marketing agreement under which Covance is obligated to use us as its
provider of centralized cardiac safety solutions, and to offer these solutions to Covances
clients, on an exclusive basis, for a 10-year period, subject to certain exceptions. We expense
payments to Covance based upon a portion of the revenues we receive during each calendar year of
the 10-year term that are based primarily on referrals made by Covance under the agreement. The
agreement does not restrict our continuing collaboration with our other key CRO, Phase I units,
Academic Research Centers and other strategic partners.
11
We fully integrated the operations of CCSS into our existing operations in the quarter ended
September 30, 2008. We did so by merging CCSSs Reno, Nevada based operations into our existing
operations and closing the operations in Reno. The following table sets forth the activity and
balances of our accrued liabilities relating to severance and lease costs associated with the
closing of CCSS operations, which are included in Accrued expenses and Other liabilities on our
Consolidated Balance Sheets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease |
|
|
|
Severance |
|
|
Liability |
|
Balance at acquisition at November 28, 2007 |
|
$ |
1,165 |
|
|
$ |
900 |
|
Adjustments to previous estimates |
|
|
16 |
|
|
|
|
|
Cash payments |
|
|
(55 |
) |
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007 |
|
|
1,126 |
|
|
|
900 |
|
Additional reserve recorded |
|
|
21 |
|
|
|
|
|
Adjustments to previous estimates |
|
|
(255 |
) |
|
|
1,183 |
|
Cash payments |
|
|
(801 |
) |
|
|
(327 |
) |
|
|
|
|
|
|
|
Balance at December 31, 2008 |
|
|
91 |
|
|
|
1,756 |
|
Cash payments |
|
|
(91 |
) |
|
|
(377 |
) |
|
|
|
|
|
|
|
Balance at September 30, 2009 |
|
$ |
|
|
|
$ |
1,379 |
|
|
|
|
|
|
|
|
During the first nine months of 2008 and 2009, goodwill was increased by $2.6 million and $0.2
million, respectively. The $2.6 million was comprised of contingent payments to Covance of $2.1
million and additional transaction costs of $0.5 million. The $0.2 million was comprised of
contingent payments to Covance. Backlog is being amortized over three years on an accelerated
basis. Customer relationships are being amortized over ten years using the straight-line method
and technology was amortized over one year using the straight-line method.
Note 5. Intangible Assets
Amortization of intangible assets represents the amortization of the intangible assets from
the CCSS acquisition. The gross and net carrying amounts of the acquired intangible assets as of
December 31, 2008 and 2009 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated |
|
|
|
|
|
|
|
Accumulated |
|
|
Net Book |
|
|
Useful Life |
|
Description |
|
Gross Value |
|
|
Amortization |
|
|
Value |
|
|
(in years) |
|
Backlog |
|
$ |
1,900 |
|
|
$ |
1,269 |
|
|
$ |
631 |
* |
|
|
3 |
|
Customer Relationships |
|
|
1,700 |
|
|
|
182 |
|
|
|
1,518 |
|
|
|
10 |
|
Technology |
|
|
400 |
|
|
|
400 |
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
4,000 |
|
|
$ |
1,851 |
|
|
$ |
2,149 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated |
|
|
|
|
|
|
|
Accumulated |
|
|
Net Book |
|
|
Useful Life |
|
Description |
|
Gross Value |
|
|
Amortization |
|
|
Value |
|
|
(in years) |
|
Backlog |
|
$ |
1,900 |
|
|
$ |
1,555 |
|
|
$ |
345 |
* |
|
|
3 |
|
Customer Relationships |
|
|
1,700 |
|
|
|
308 |
|
|
$ |
1,392 |
|
|
|
10 |
|
Technology |
|
|
400 |
|
|
|
400 |
|
|
$ |
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
4,000 |
|
|
$ |
2,263 |
|
|
$ |
1,737 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
The backlog is being amortized over three years on an accelerated basis. |
The related amortization expense reflected in our consolidated statements of operations for
the three and nine months ended September 30, 2008 was $0.5 million and $1.4 million, respectively.
The related amortization expense reflected in our consolidated statements of operations for the
three and nine months ended September 30, 2009 was $0.1 million and $0.4 million, respectively.
12
Estimated amortization expense for the remaining estimated useful life of the acquired
intangible assets is as follows for the years ending December 31 (the 2009 amount represents the
amortization expense to be recognized over the last three months of the year (in thousands)):
|
|
|
|
|
|
|
Amortization of |
|
|
|
Intangible |
|
Years ending December 31, |
|
Assets |
|
2009 |
|
$ |
130 |
|
2010 |
|
|
431 |
|
2011 |
|
|
170 |
|
2012 |
|
|
170 |
|
2013 |
|
|
170 |
|
Thereafter |
|
|
666 |
|
|
|
|
|
Total |
|
$ |
1,737 |
|
|
|
|
|
Note 6. Sale of Assets
On June 23, 2009, we completed the sale of certain assets relating to our EDC operations.
Under the terms of the transaction, OmniComm Systems, Inc. issued 8.1 million shares of its common
stock and assumed certain liabilities including deferred revenue relating to our EDC operations in
exchange for our EDC assets which primarily included our EDC software, applications and fixed
assets and $1.15 million in cash we paid. During the nine months ended September 30, 2009, we
recorded a gain on the sale of these assets of $0.5 million within general and administrative
expenses in the consolidated statement of operations.
The following table includes summary consolidated statement of operations information related
to our EDC operations for the periods presented as reflected in our consolidated statements of
operations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue |
|
$ |
1,564 |
|
|
$ |
|
|
|
$ |
4,354 |
|
|
$ |
2,501 |
|
Cost of revenue |
|
|
456 |
|
|
|
|
|
|
|
1,371 |
|
|
|
863 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
1,108 |
|
|
|
|
|
|
|
2,983 |
|
|
|
1,638 |
|
Operating expenses |
|
|
261 |
|
|
|
|
|
|
|
781 |
|
|
|
(84 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
847 |
|
|
|
|
|
|
|
2,202 |
|
|
|
1,722 |
|
Income tax provision |
|
|
369 |
|
|
|
|
|
|
|
960 |
|
|
|
725 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from EDC operations |
|
$ |
478 |
|
|
$ |
|
|
|
$ |
1,242 |
|
|
$ |
997 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In addition, net revenue for the years ended December 31, 2007 and 2008 was $6.3 million and
$5.9 million, respectively, and operating income was approximately $2.7 million for each of the
years ended December 31, 2007 and 2008. Operating expenses include costs directly identified with
the EDC operations related to selling and marketing and research and development and do not include
any general and administrative costs.
Note 7. Net Income per Common Share
Basic net income per share is computed by dividing net income by the weighted average number
of shares of common stock outstanding during the period. Diluted net income per share is computed
by dividing net income by the weighted average number of shares of common stock outstanding during
the period, adjusted for the dilutive effect of common stock equivalents, which consist of stock
options. The dilutive effect of stock options is calculated using the treasury stock method.
13
The tables below set forth the reconciliation of the numerators and denominators of the basic
and diluted net income per share computations (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net |
|
|
|
|
|
|
Per Share |
|
Three Months Ended September 30, |
|
Income |
|
|
Shares |
|
|
Amount |
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income |
|
$ |
6,930 |
|
|
|
50,856 |
|
|
$ |
0.14 |
|
Effect of dilutive shares |
|
|
|
|
|
|
1,324 |
|
|
|
(0.01 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income |
|
$ |
6,930 |
|
|
|
52,180 |
|
|
$ |
0.13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income |
|
$ |
2,819 |
|
|
|
48,452 |
|
|
$ |
0.06 |
|
Effect of dilutive shares |
|
|
|
|
|
|
303 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income |
|
$ |
2,819 |
|
|
|
48,755 |
|
|
$ |
0.06 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net |
|
|
|
|
|
|
Per Share |
|
Nine Months Ended September 30, |
|
Income |
|
|
Shares |
|
|
Amount |
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income |
|
$ |
19,336 |
|
|
|
50,743 |
|
|
$ |
0.38 |
|
Effect of dilutive shares |
|
|
|
|
|
|
1,342 |
|
|
|
(0.01 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income |
|
$ |
19,336 |
|
|
|
52,085 |
|
|
$ |
0.37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income |
|
$ |
7,437 |
|
|
|
49,399 |
|
|
$ |
0.15 |
|
Effect of dilutive shares |
|
|
|
|
|
|
299 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income |
|
$ |
7,437 |
|
|
|
49,698 |
|
|
$ |
0.15 |
|
|
|
|
|
|
|
|
|
|
|
In computing diluted net income per share, options to purchase 1,295,000 and 2,926,000 shares
of common stock were excluded from the computations for the three months ended September 30, 2008
and 2009, respectively and options to purchase 1,467,000 and 3,032,000 shares of common stock were
excluded from the computations for the nine months ended September 30, 2008 and 2009, respectively.
These options were excluded from the computations because the exercise prices of such options were
greater than the average market price of our common stock during the respective period.
Note 8. Comprehensive Income
Companies are required to classify items of other comprehensive income by their nature in the
financial statements and display the accumulated balance of other comprehensive income separately
from retained earnings and additional paid-in-capital in the stockholders equity section of the
balance sheet. Our comprehensive income includes net income and unrealized gains and losses from
marketable securities and foreign currency translation as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
6,930 |
|
|
$ |
2,819 |
|
|
$ |
19,336 |
|
|
$ |
7,437 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized losses on
marketable securities |
|
|
|
|
|
|
(27 |
) |
|
|
|
|
|
|
(246 |
) |
Currency translation adjustment |
|
|
(1,270 |
) |
|
|
(561 |
) |
|
|
(1,254 |
) |
|
|
1,285 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income, net of tax |
|
$ |
5,660 |
|
|
$ |
2,231 |
|
|
$ |
18,082 |
|
|
$ |
8,476 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
Note 9. Recent Accounting Pronouncements
Effective
July 1, 2009, we adopted the new accounting standard established
by the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC). As
codified under ASC 105-10 (formerly Statement of Financial Accounting Standards (SFAS) No. 168,
The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting
Principles A Replacement of FASB Statement
No. 162), the FASB established the ASC as the single source of
authoritative GAAP recognized by the FASB to be applied by nongovernmental entities. Rules and
interpretive releases of the SEC under authority of federal securities laws are also sources of
authoritative U.S. GAAP for SEC registrants. The ASC supersedes all existing non-SEC accounting
and reporting standards. All other non-grandfathered non-SEC
accounting literature excluded from in
the ASC became non-authoritative. All references to U.S. GAAP have been updated to conform to the
ASC. The adoption of this accounting standard did not have any impact on our results of
operations or financial position.
Effective January 1, 2009, we adopted a new accounting standard regarding business
combinations issued by the FASB. As codified under ASC 805 (formerly SFAS No. 141 revised 2007,
Business Combinations), this standard requires the acquiring entity in a business combination to
recognize all the assets acquired and liabilities assumed in the transaction at fair value as of
the acquisition date. This accounting standard is effective for business combinations for which the
acquisition date is on or after the beginning of the first annual reporting period beginning on or
after December 15, 2008. The adoption of this accounting standard did not have any impact on our consolidated
financial statements.
Effective January 1, 2009, we adopted an accounting standard regarding the
determination of the useful life of intangible assets. As codified in ASC 350-30-35 (formerly FASB
Staff Position (FSP) No. 142-3, Determination of the Useful Life of Intangible Assets), this
standard amended the factors that should be considered in developing renewal or extension assumptions
used to determine the useful life of a recognized intangible asset under intangibles accounting.
The adoption of this accounting standard did not have any impact on our consolidated financial
statements.
Effective April 1, 2009, we adopted a new accounting standard regarding interim
disclosure about fair value of financial instruments. As codified under ASC 825-10-65 (formerly
FSP No. FAS 107-1 and APB 28-1, Interim Disclosure about Fair Value of Financial Instruments),
this standard amended disclosure requirements about fair value of financial instruments for interim
reporting periods of publicly traded companies as well as in annual financial statements and to
require those disclosures in summarized financial information at interim reporting periods. The
adoption of this accounting standard did not have any impact on our consolidated financial
statements.
Effective
April 1, 2009, we adopted a new accounting standard for
subsequent events. As
codified in ASC 855-10 (formerly SFAS No. 165, Subsequent
Events), this standard established general
standards of accounting for, and requires disclosure of, events that occur after the balance sheet
date but before financial statements are issued or are available to be issued. The adoption of this
accounting standard did not have a material effect on our results of operations or financial position.
Subsequent events through November 6, 2009 have been evaluated for disclosure and recognition.
In August 2009, the FASB issued a new accounting standard for measuring liabilities at fair
value accounting. As codified in ASC 820-10 (formerly Accounting Standards Update No. 2009-5,
Measuring Liabilities at Fair Value), this standard amended existing standards regarding fair value
measurements by providing additional guidance clarifying the measurement of liabilities at fair
value. The standard also clarifies that when estimating the fair value of a liability, a reporting
entity is not required to adjust to include inputs relating to the existence of transfer
restrictions on that liability. We do not anticipate that the
adoption of this accounting standard in the
fourth quarter of 2009 will have a material impact on our consolidated financial statements.
In
September 2009, the FASB issued a new accounting standard regarding revenue arrangements with
multiple deliverables. As codified in ASC 605-25 (formerly Emerging Issues Task
Force Issue No. 08-1, Revenue Arrangements with Multiple
Deliverables), this accounting standard sets
forth requirements that must be met for an entity to recognize revenue from the sale of a delivered
item that is part of a multiple-element arrangement when other items have not yet been delivered.
One of those current requirements is that there be objective and reliable evidence of the
standalone selling price of the undelivered items, which must be supported by either
vendor-specific objective evidence (VSOE) or third-party evidence (TPE).
This consensus eliminates the requirement that all undelivered elements have VSOE or TPE
before an entity can recognize the portion of an overall arrangement fee that is attributable to
items that already have been delivered. In the absence of VSOE or TPE of the standalone selling
price for one or more delivered or undelivered elements in a multiple-element arrangement, entities
will be required to estimate the selling prices of those elements. The overall arrangement fee
will be allocated to each element (both delivered and undelivered items) based on their relative
selling prices, regardless of whether those selling prices are evidenced by VSOE or TPE or are
based on the entitys estimated selling price. Application of the residual method of allocating
an overall arrangement fee between delivered and undelivered elements will no longer be permitted.
The accounting standard is effective prospectively for revenue arrangements entered into or
materially modified in fiscal years beginning on or after June 15, 2010. We are evaluating the
potential impact of these requirements on our consolidated financial statements.
15
Note 10. Income Taxes
At December 31, 2008, we had $0.5 million of unrecognized tax benefits, all of which would
affect our effective tax rate if recognized. At September 30, 2009, we had $0.2 million of
unrecognized tax benefits. We recognize interest and penalties related to unrecognized tax
benefits in income tax expense. The tax years 2004 through 2007 remain open to examination by the
major taxing jurisdictions to which we are subject.
The Company or one of its subsidiaries files income tax returns in the U.S. federal
jurisdiction, and various states and foreign jurisdictions. With few exceptions, we are no longer
subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities
for years before 2004. The Internal Revenue Service (IRS) commenced an examination of the Companys
U.S. income tax returns for 2006 through 2007 in the first quarter of 2009 that is anticipated to
be completed by the end of 2009. As of September 30, 2009, we had agreed to certain adjustments to
our research credits tax positions that the IRS proposed and $0.2 million was reclassified to taxes
payable as a result of the resolution of the audit. The adjustments did not result in a material
change to our financial position. We do not anticipate any further adjustments resulting from the
IRS examination. Additionally, we recognized a $0.1 million tax benefit related to the reversal of
a tax accrual for a previously uncertain tax position in the three
months ended September 30, 2009 as a result of a lapse of the
applicable statute of limitations.
Our effective income tax rate was 35.8% and 39.1% for the three months ended September 30,
2008 and 2009, respectively and 37.1% and 40.6% for the nine months ended September 30, 2008 and
2009, respectively.
Note 11. Related Party Transactions
Our Chairman, Dr. Morganroth, is a cardiologist who, through his wholly-owned professional
corporation, provides medical professional services to the Company and receives consulting fees as
an independent contractor. Additionally, beginning in January 2007, we entered into an arrangement
with Dr. Morganroths professional corporation, relating to Dr. Morganroths initiation of an ERT
consulting practice through the transition of his historic consulting services to us. Our
Executive Vice President and Chief Medical Officer is responsible for assigning the consulting work
to internal and external resources based upon the requirements of the engagement. In return, Dr.
Morganroths professional corporation receives a percentage fee of 80% of the net amounts we bill
for Dr. Morganroths services to our customers. We recorded revenues in connection with services
billed to customers under this consulting arrangement of approximately $0.5 million and $0.4
million in the three months ended September 30, 2008 and 2009, respectively, and $1.5 million and
$1.0 million in the nine months ended September 30, 2008 and 2009, respectively. We incurred
percentage fees under this consulting arrangement of approximately $0.4 million and $0.3 million in
the three months ended September 30, 2008 and 2009, respectively, and $1.2 million and $0.8 million
in the nine months ended September 30, 2008 and 2009, respectively. Total amounts payable incurred
under this consulting arrangement, including consulting fees and the percentage fees, approximated
$0.5 million and $0.4 million in the three months ended September 30, 2008 and 2009, respectively
and $1.5 million and $1.1 million in the nine months ended September 30, 2008 and 2009,
respectively. At September 30, 2008 and 2009, we owed $0.1 million to the professional corporation
in connection with this consulting agreement, which is included in accounts payable.
Note 12. Commitments and Contingencies
In the second quarter of 2007, we entered into a long-term strategic relationship with
Healthcare Technology Systems, Inc. (HTS), a leading authority in the research, development and
validation of computer administered clinical rating instruments. The strategic relationship
includes the exclusive licensing (subject to one pre-existing license agreement) of 57 Interactive
Voice Response (IVR) clinical assessments offered by HTS along with HTSs IVR system. We placed
the system into production in December 2007. As of September 30, 2009, we paid HTS $1.5 million
for the license and $1.0 million in advanced payments against future royalties. As of September
30, 2009, HTS earned royalties of $0.2 million, which were offset against these advanced payments.
Royalty payments will be made to HTS based on the level of revenues received from the assessments
and the IVR system. Any royalties earned by HTS will be applied against these payments. All
future payments to HTS will be solely based on royalty payments based on revenues received from
electronic patient reported outcomes (ePRO) sales.
On November 28, 2007, we completed the acquisition of CCSS. Under the terms of our agreement
to purchase CCSS, the total initial purchase consideration was $35.2 million. We may also pay
contingent consideration of up to approximately $14.0 million based upon our potential realization
of revenue from the backlog transferred and from new contracts secured through Covances marketing
activities. The period for contingent payments runs through December 31, 2010. Through September
30, 2009, Covance earned $5.2 million of this contingent amount, of which $3.0 million was
recognized in 2007, $2.0 million in the year ended December 31, 2008 and $0.2 million in the nine
months ended September 30, 2009. At September 30, 2009, approximately $0.2 million of the
contingent amount earned remained to be paid to Covance, which we recorded in accounts payable.
These contingent payments increased goodwill by $5.2 million. Under the terms of the marketing
agreement, Covance agreed to exclusively use us as its provider of centralized cardiac safety
solutions for a ten-year period, subject to certain exceptions, and we agreed to pay referral fees
on certain revenues.
16
We fully integrated the operations of CCSS into our existing operations in the third quarter
of 2008. We did so by merging CCSSs Reno, Nevada based operations into our existing operations
and closing the operations in Reno. Costs identified at the date of the acquisition as part of this
closing were estimated to be $1.2 million for severance and $0.9 million for lease costs. The
actual final
severance amount was $0.9 million. The estimated lease costs have been adjusted to $2.1
million based on further analysis in 2008. Such amounts have been recognized as a liability as of
the date of the acquisition and included in the cost of the acquisition. Other costs such as stay
pay incentive arrangements and other related period costs associated with the closing of the Reno
location were expensed in the period when such costs were incurred. The stay pay incentive
arrangements of $1.2 million were recognized as expense over the required service period of the
employees. The expense recognized for the stay pay incentive for the three and nine months ended
September 30, 2008 was $0.2 million and $1.0 million, respectively with none recognized in the
three and nine months ended September 30, 2009.
Note 13. Operating Segments / Geographic Information
We consider our business to consist of one segment as this represents managements view of our
operations. Until we closed the Reno operation in the third quarter of 2008, we operated on a
worldwide basis with three locations in the United States and one location in the United Kingdom,
which are categorized below as North America and Europe, respectively. The majority of our
revenues are allocated among our geographic segments based upon the profit split transfer pricing
methodology, and revenues are generally allocated to the geographic segment where the work is
performed.
17
Geographic information is as follows (in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2008 |
|
|
|
North |
|
|
|
|
|
|
|
|
|
America |
|
|
Europe |
|
|
Total |
|
EDC licenses and services revenues |
|
$ |
1,564 |
|
|
$ |
|
|
|
$ |
1,564 |
|
Service revenues |
|
|
19,647 |
|
|
|
4,537 |
|
|
|
24,184 |
|
Site support revenues |
|
|
5,549 |
|
|
|
2,633 |
|
|
|
8,182 |
|
|
|
|
|
|
|
|
|
|
|
Net revenues from external customers |
|
$ |
26,760 |
|
|
$ |
7,170 |
|
|
$ |
33,930 |
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
$ |
8,333 |
|
|
$ |
2,216 |
|
|
$ |
10,549 |
|
Long-lived assets |
|
$ |
22,180 |
|
|
$ |
5,165 |
|
|
$ |
27,345 |
|
Total assets |
|
$ |
147,599 |
|
|
$ |
18,726 |
|
|
$ |
166,325 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2009 |
|
|
|
North |
|
|
|
|
|
|
|
|
|
America |
|
|
Europe |
|
|
Total |
|
EDC licenses and services revenues |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Service revenues |
|
|
13,505 |
|
|
|
2,464 |
|
|
|
15,969 |
|
Site support revenues |
|
|
4,803 |
|
|
|
1,954 |
|
|
|
6,757 |
|
|
|
|
|
|
|
|
|
|
|
Net revenues from external customers |
|
$ |
18,308 |
|
|
$ |
4,418 |
|
|
$ |
22,726 |
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
$ |
4,003 |
|
|
$ |
706 |
|
|
$ |
4,709 |
|
Long-lived assets |
|
$ |
20,717 |
|
|
$ |
3,049 |
|
|
$ |
23,766 |
|
Total assets |
|
$ |
139,894 |
|
|
$ |
20,301 |
|
|
$ |
160,195 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2008 |
|
|
|
North |
|
|
|
|
|
|
|
|
|
America |
|
|
Europe |
|
|
Total |
|
EDC licenses and services revenues |
|
$ |
4,354 |
|
|
$ |
|
|
|
$ |
4,354 |
|
Service revenues |
|
|
61,761 |
|
|
|
13,781 |
|
|
|
75,542 |
|
Site support revenues |
|
|
15,455 |
|
|
|
7,724 |
|
|
|
23,179 |
|
|
|
|
|
|
|
|
|
|
|
Net revenues from external customers |
|
$ |
81,570 |
|
|
$ |
21,505 |
|
|
$ |
103,075 |
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
$ |
23,680 |
|
|
$ |
6,123 |
|
|
$ |
29,803 |
|
Long-lived assets |
|
$ |
22,180 |
|
|
$ |
5,165 |
|
|
$ |
27,345 |
|
Total assets |
|
$ |
147,599 |
|
|
$ |
18,726 |
|
|
$ |
166,325 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2009 |
|
|
|
North |
|
|
|
|
|
|
|
|
|
America |
|
|
Europe |
|
|
Total |
|
EDC licenses and services revenues |
|
$ |
2,501 |
|
|
$ |
|
|
|
$ |
2,501 |
|
Service revenues |
|
|
41,109 |
|
|
|
7,183 |
|
|
|
48,292 |
|
Site support revenues |
|
|
14,175 |
|
|
|
5,720 |
|
|
|
19,895 |
|
|
|
|
|
|
|
|
|
|
|
Net revenues from external customers |
|
$ |
57,785 |
|
|
$ |
12,903 |
|
|
$ |
70,688 |
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
$ |
11,185 |
|
|
$ |
1,708 |
|
|
$ |
12,893 |
|
Long-lived assets |
|
$ |
20,717 |
|
|
$ |
3,049 |
|
|
$ |
23,766 |
|
Total assets |
|
$ |
139,894 |
|
|
$ |
20,301 |
|
|
$ |
160,195 |
|
Note 14. Stock Repurchase
Our board of directors has authorized the repurchase of up to an aggregate of 12.5 million
shares, of which 5.0 million shares remain to be purchased as of September 30, 2009. The stock
buy-back authorization allows us, but does not require us, to purchase the authorized shares.
During the three months ended September 30, 2009, we purchased 196,016 shares of our common stock
at a cost of
$1.1 million. During the nine months ended September 30, 2009, we purchased 2,902,735 shares
of our common stock at a cost of $15.1 million. We did not purchase any shares during the nine
months ended September 30, 2008.
18
|
|
|
Item 2. |
|
Managements Discussion and Analysis of Financial Condition and Results of Operations |
Cautionary Statement for Forward-Looking Information
The following discussion and analysis should be read in conjunction with our consolidated
financial statements and the related notes to the consolidated financial statements appearing
elsewhere in this Form 10-Q. The following discussion and analysis includes forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of 1995 that reflect
our current views as to future events and financial performance with respect to our operations.
These statements can be identified by the fact that they do not relate strictly to historical or
current facts. They use words such as aim, anticipate, are confident, estimate, expect,
will be, will continue, will likely result, project, intend, plan, believe, look to
and other words and terms of similar meaning in conjunction with a discussion of future operating
or financial performance.
These statements are subject to risks and uncertainties that could cause actual results to
differ materially from those expressed or implied in the forward-looking statements. Factors that
might cause such a difference include: unfavorable economic conditions; our ability to obtain new
contracts and accurately estimate net revenues due to variability in size, scope and duration of
projects and internal issues at the sponsoring client; our ability to successfully integrate
acquisitions; competitive factors in the market for centralized Cardiac Safety services; changes in
the pharmaceutical, biotechnology and medical device industries to which we sell our solutions;
technological development; and market demand. There is no guarantee that the amounts in our backlog
will ever convert to revenue. Should the current economic conditions continue or deteriorate
further, the cancellation rates that we have historically experienced could increase. Further
information on potential factors that could affect the Companys financial results can be found in
the reports we file with the Securities and Exchange Commission.
Forward-looking statements speak only as of the date made. We undertake no obligation to
update any forward-looking statements, including prior forward-looking statements, to reflect the
events or circumstances arising after the date as of which they were made. As a result of these
risks and uncertainties, readers are cautioned not to place undue reliance on any forward-looking
statements included in this discussion or that may be made in our filings with the Securities and
Exchange Commission or elsewhere from time to time by, or on behalf of, us.
Overview
We were founded in 1977 to provide Cardiac Safety solutions to evaluate the safety of new
drugs. We provide technology and service solutions that enable the pharmaceutical, biotechnology
and medical device industries to collect, interpret and distribute cardiac safety data more
efficiently. We are a market leader in providing centralized electrocardiographic solutions
(Cardiac Safety solutions) and a provider of technology solutions that streamline the clinical
trials process by enabling our clients to evolve from traditional, paper-based methods to
electronic processing using our ePRO products and solutions.
On June 23, 2009, we completed the sale of certain assets relating to our EDC operations.
Under the terms of the transaction, OmniComm Systems, Inc. issued 8.1 million shares of common
stock and assumed certain liabilities including deferred revenue relating to our EDC operations in
exchange for our EDC assets which primarily included our EDC software, applications and fixed
assets and $1.15 million in cash we paid. During the nine months ended September 30, 2009, we
recorded a gain on the sale of these assets of $0.5 million within general and administrative
expenses in the consolidated statement of operations.
Our services revenues consist primarily of our services offered under our Cardiac Safety and,
to a lesser extent, ePRO solutions. Our site support revenue consists of cardiac safety equipment
rentals and sales along with related supplies and logistics management.
19
We offer Cardiac Safety solutions, which are utilized by pharmaceutical companies,
biotechnology companies, medical device companies, clinical trial sponsors and clinical research
organizations (CROs) during the conduct of clinical trials. Our Cardiac Safety solutions include
the collection, interpretation and distribution of electrocardiographic (ECG) data and images and
are performed during clinical trials in all phases of the clinical research process. The ECG
provides an electronic map of the hearts rhythm and structure, and is performed in most clinical
trials. Our Cardiac Safety solutions permit assessments of the safety of therapies by documenting
the occurrence of cardiac electrical change. Specific trials, such as a Thorough QTc study, focus
on the cardiac safety profile of a compound. Thorough QTc studies are comprehensive studies that
typically are of large volume and short duration and are generally required by the United States
Food and Drug Administration (FDA) under guidance issued in 2005 by the International Committee on
Harmonization (ICH E14). We also offer site support, which includes the rental and sale of cardiac
safety equipment along with related supplies and logistics management. We also offer ePRO
solutions along with proprietary clinical assessments. We offer the following products and
services on a global basis:
Cardiac Safety. Cardiac Safety solutions, including our EXPERT® technology platform, provide
for workflow-enabled cardiac safety data collection, interpretation and distribution of
electrocardiographic (ECG) data and images as well as for analysis and cardiologist
interpretation of ECGs performed on research subjects in connection with our clients clinical
trials. EXPERT® is designed specifically to address global regulatory guidance and technical
standards for digital ECG processing to include digital collection, waveform measurements and
annotations, review and output to the regulatory standard file format. Also included in
Cardiac Safety solutions is FDA XML delivery, which provides for the delivery of ECGs in a
format compliant with the United States Food and Drug Administrations XML standard for digital
ECGs. We also provide ECG equipment through rental and sales to clients to perform the ECG
recordings and give them means to send such recordings to us. A new portal product, MyStudy
Portal, is now providing sponsors and investigator sites with the ability to order supplies,
gain real time reports and respond to queries via a secure web portal in lieu of less efficient
means such as faxing and telephone calls.
Cardiac Safety Consulting. The centralization of electrocardiograms in clinical research has
become increasingly important to organizations involved in the development of new drugs.
Global regulators each apply their own slightly different interpretation of the International
Conference on Harmonization E14 guidelines and, as a result, sponsors look to their vendors to
provide key scientific input into the overall process. Our cardiac safety consulting service
aids sponsors in the development of protocol synopses, the creation and analysis of statistical
plans as well as the provision of an expert medical report with regard to the cardiac findings.
We are involved in all phases of clinical development from a consultancy point of view. We
offer this service both as a stand-alone service and integrated with our full suite of Cardiac
Safety solutions.
ePRO. Our electronic patient reported outcome (ePRO) solution is an Interactive Voice
Response (IVR) system that allows subjects to easily and quickly report data for a clinical
trial. Because it can be accessed from a standard phone, our ePRO system is cost effective
while being extremely scalable and suitable from Phase I through Phase IV. Diaries, screening,
recruitment and all clinical assessments can be completed directly by the subject without
requiring clinician involvement.
Project Assurance. We provide a full spectrum of consulting services for all of our products
that augment the study management and implementation efforts of clients in support of their
clinical research requirements.
Services revenues consist of Cardiac Safety and ePRO services that we provide on a fee for
services basis and are recognized as the services are performed. We also provide Cardiac Safety
consulting services on a time and materials basis and recognize revenues as we perform the
services. Site support revenues are recognized at the time of sale or over the rental period.
For arrangements with multiple deliverables where the fair value of each element is known, the
revenue is allocated to each component based on the relative fair values of each element. For
arrangements with multiple deliverables where the fair value of one or more delivered elements is
not known, revenue is allocated to each component of the arrangement using the residual method
provided that the fair value of all undelivered elements is known. Fair values for undelivered
elements are based primarily upon stated renewal rates for future products or services.
We have recorded reimbursements received for out-of-pocket expenses incurred as revenue in the
accompanying consolidated financial statements.
Revenue is recognized on unbilled services and relates to amounts that are currently not
billable to the customer pursuant to contractual terms. In general, such amounts become billable
in accordance with predetermined payment schedules, but recognized as revenue as services are
performed. Amounts included in unbilled revenue are expected to be collected within one year and
are included within current assets.
Our former electronic data capture (EDC) business is included in EDC licenses and services and
included license revenue, technology consulting and training services and software maintenance
services. We recognized up-front license fee revenues under the residual method when a formal
agreement existed, delivery of the software and related documentation occurred, collectability was
probable and the license fee was fixed or determinable. We recognized monthly and annual term
license fee revenues over the term of the arrangement. Hosting service fees were recognized evenly
over the term of the service. We recognized revenues from software maintenance contracts on a
straight-line basis over the term of the maintenance contract, which was typically twelve months.
We provided consulting and training services on a time and materials basis and recognized revenues
as we performed the services.
20
Cost of services includes the cost of Cardiac Safety and ePRO services. Cost of services
consists primarily of direct costs related to our centralized Cardiac Safety services and includes
wages, depreciation, amortization, fees paid to consultants and other direct operating costs. Cost
of site support consists primarily of wages, cardiac safety equipment rent and depreciation,
related supplies, cost of equipment sold, shipping expenses and other direct operating costs.
Selling and marketing expenses consist primarily of wages and incentive compensation paid to sales
personnel, travel expenses and advertising and promotional expenditures. General and
administrative expenses consist primarily of wages and direct costs for our finance,
administrative, corporate information technology, legal and executive management functions, in
addition to professional service fees and corporate insurance. Research and development expenses
consist primarily of wages paid to our product development staff, costs paid to outside consultants
and other direct costs associated with the development of our technology.
Costs of our former EDC operations included primarily wages, fees paid to outside consultants
and other direct operating costs related to our software licensing, consulting and client support
functions.
We conduct our operations through offices in the United States (U.S.) and the United Kingdom
(UK). Our international net
revenues represented approximately 21% and 18% of total net revenues for the nine months ended
September 30, 2008 and 2009, respectively. The majority of our revenues are allocated among our
geographic segments based upon the profit split transfer pricing methodology, and revenues are
generally attributed to the geographic segment where the work is performed. The profit split
methodology equalizes gross margins for each legal entity based upon its respective direct costs.
Reclassifications
The consolidated financial statements for prior periods have been reclassified to conform to
the current periods presentation. In particular, the revenue and cost of revenue of our former
EDC operations have been reclassified from the licenses and services categories to the EDC category
on the consolidated statements of operations for all periods presented. Additionally, the
remaining revenues and costs of sales in licenses, related to Cardiac safety reporting and ePRO
subscriptions, were reclassified to the services category on the consolidated statements of
operations for all periods presented as these items are relatively insignificant.
21
Results of Operations
Executive Overview
Net revenues were $22.7 million for the third quarter of 2009, a decrease of $11.2 million or
33.0% from $33.9 million in the third quarter of 2008. The year over year revenue decline was due
to a decline in transaction volumes primarily in Thorough QTc and to a lesser extent routine
studies, lower revenue from acquired backlog of Covance Cardiac Safety Services, Inc. (CCSS) as
this backlog nears completion and lower equipment sales in the third quarter of 2009 than in the
third quarter of 2008 as more customers chose to rent cardiac safety equipment. We also sold our
EDC operation in June 2009 and accordingly EDC revenue in the third quarter of 2009 was zero
compared to $1.6 million of EDC revenue in the third quarter of
2008.
Gross margin percentage in the third quarter of 2009 was 51.6% compared to 56.3% in the third
quarter of 2008. Gross margin percentage was significantly impacted
by volume and, to a lesser extent, a moderate decline in average
transaction pricing. We experienced an increase in awards of new and expanded exclusive or near-exclusive
long-term enterprise relationships with large pharmaceutical companies during the latter portion of
fiscal 2008 and also continuing into 2009, including several with whom we had very little business
in the past. In exchange for these long-term enterprise relationships with large pharmaceutical
companies, which are targeted to generate larger volumes of business, we have made selective
pricing concessions which has lowered averge transaction pricing and we believe will have the effect of lowering overall average transaction
pricing in the future as more studies performed under these agreements become active and generate
revenue. The negative
impacts of volume on the gross margin percentage compared to the prior years quarter was partially
offset by the elimination of legacy costs associated with processing the CCSS backlog during the
period we integrated the CCSS operations and lower depreciation and amortization.
Operating income for the third quarter of 2009 was $4.7 million or 20.7% of total net revenues
compared to $10.6 million or 31.1% of total net revenues in the third quarter of 2008. Total
expenses were $18.0 million in the third quarter of 2009, a decrease of $5.4 million from $23.4
million in the third quarter of 2008. Overall expenses decreased primarily to the elimination of
transition costs related to the integration of the CCSS operations which were completed in
September 2008. We also experienced lower bonus expense in 2009 consistent with our reduced
operating results and lower depreciation as some of our EDC equipment is fully depreciated and the
amortization of CCSS intangibles is declining. Our effective income tax rate for the third quarter
of 2009 was 39.1% compared to 35.8% in the third quarter of 2008.
Net income for the third quarter of 2009 was $2.8 million, or $0.06 per diluted share,
compared to $6.9 million, or $0.13 per diluted share in the third quarter of 2008.
Commencing in the fourth quarter of 2008, general business and economic conditions have
deteriorated globally. Starting in the fourth quarter of 2008, we experienced an increased focus
in our routine (Phase I IV) business, a decline in the number of Thorough QTc bookings, and a
delay in starts for certain Thorough QTc trials, and these trends have continued through fiscal
2009. We recorded a book to bill ratio of 1.9 in the third quarter ended September 30, 2009 due to
a strong increase in routine bookings, which increased 23% sequentially and 15% compared to the
third quarter a year ago. We believe the increase in routine business will provide us with a base
of business into the future; however, this business will take longer to turn into revenue. We
believe that the delays in Thorough QTc trials are related to timing as the result of the uncertain
economic environment, especially in small to midsize customers. Sponsors may delay the running of
Thorough QT trials until later in the drug development cycle, though regulatory guidance ultimately
requires that they be performed.
We have recently implemented certain cost reductions. Our operations structure
includes a high percentage of fixed costs. Higher future transaction volumes, should they occur,
may offset the impact on our gross margin percentage of any price reduction. Overall, we believe
the fundamental drivers of our core business remain positive. However, a continued weakened global
economy could have a negative impact on future results of operations.
22
The following table presents certain financial data as a percentage of total net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EDC licenses and services |
|
|
4.6 |
% |
|
|
0.0 |
% |
|
|
4.2 |
% |
|
|
3.5 |
% |
Services |
|
|
71.3 |
% |
|
|
70.3 |
% |
|
|
73.3 |
% |
|
|
68.4 |
% |
Site support |
|
|
24.1 |
% |
|
|
29.7 |
% |
|
|
22.5 |
% |
|
|
28.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of EDC licenses and services |
|
|
1.3 |
% |
|
|
0.0 |
% |
|
|
1.3 |
% |
|
|
1.2 |
% |
Cost of services |
|
|
28.5 |
% |
|
|
33.4 |
% |
|
|
29.3 |
% |
|
|
32.5 |
% |
Cost of site support |
|
|
13.9 |
% |
|
|
15.0 |
% |
|
|
14.1 |
% |
|
|
14.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs of revenues |
|
|
43.7 |
% |
|
|
48.4 |
% |
|
|
44.7 |
% |
|
|
48.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
56.3 |
% |
|
|
51.6 |
% |
|
|
55.3 |
% |
|
|
51.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing |
|
|
9.2 |
% |
|
|
13.4 |
% |
|
|
10.0 |
% |
|
|
13.8 |
% |
General and administrative |
|
|
12.5 |
% |
|
|
13.1 |
% |
|
|
13.3 |
% |
|
|
15.0 |
% |
Research and development |
|
|
3.5 |
% |
|
|
4.4 |
% |
|
|
3.1 |
% |
|
|
4.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
25.2 |
% |
|
|
30.9 |
% |
|
|
26.4 |
% |
|
|
33.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
31.1 |
% |
|
|
20.7 |
% |
|
|
28.9 |
% |
|
|
18.2 |
% |
Other income (expense), net |
|
|
0.7 |
% |
|
|
-0.3 |
% |
|
|
0.9 |
% |
|
|
-0.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
31.8 |
% |
|
|
20.4 |
% |
|
|
29.8 |
% |
|
|
17.7 |
% |
Income tax provision |
|
|
11.4 |
% |
|
|
8.0 |
% |
|
|
11.0 |
% |
|
|
7.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
20.4 |
% |
|
|
12.4 |
% |
|
|
18.8 |
% |
|
|
10.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
23
Three Months Ended September 30, 2008 Compared to Three Months Ended September 30, 2009.
The following table presents our consolidated statements of operations with product line
detail (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
|
|
|
|
2008 |
|
|
2009 |
|
|
Increase (Decrease) |
|
EDC licenses and services: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
$ |
1,564 |
|
|
$ |
|
|
|
$ |
(1,564 |
) |
|
|
(100.0 |
%) |
Costs of revenues |
|
|
456 |
|
|
|
|
|
|
|
(456 |
) |
|
|
(100.0 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
$ |
1,108 |
|
|
$ |
|
|
|
$ |
(1,108 |
) |
|
|
(100.0 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
$ |
24,184 |
|
|
$ |
15,969 |
|
|
$ |
(8,215 |
) |
|
|
(34.0 |
%) |
Costs of revenues |
|
|
9,674 |
|
|
|
7,577 |
|
|
|
(2,097 |
) |
|
|
(21.7 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
$ |
14,510 |
|
|
$ |
8,392 |
|
|
$ |
(6,118 |
) |
|
|
(42.2 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Site support: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
$ |
8,182 |
|
|
$ |
6,757 |
|
|
$ |
(1,425 |
) |
|
|
(17.4 |
%) |
Costs of revenues |
|
|
4,698 |
|
|
|
3,418 |
|
|
|
(1,280 |
) |
|
|
(27.2 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
$ |
3,484 |
|
|
$ |
3,339 |
|
|
$ |
(145 |
) |
|
|
(4.2 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
$ |
33,930 |
|
|
$ |
22,726 |
|
|
$ |
(11,204 |
) |
|
|
(33.0 |
%) |
Costs of revenues |
|
|
14,828 |
|
|
|
10,995 |
|
|
|
(3,833 |
) |
|
|
(25.8 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
19,102 |
|
|
|
11,731 |
|
|
|
(7,371 |
) |
|
|
(38.6 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing |
|
|
3,126 |
|
|
|
3,056 |
|
|
|
(70 |
) |
|
|
(2.2 |
%) |
General and administrative |
|
|
4,254 |
|
|
|
2,977 |
|
|
|
(1,277 |
) |
|
|
(30.0 |
%) |
Research and development |
|
|
1,173 |
|
|
|
989 |
|
|
|
(184 |
) |
|
|
(15.7 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
8,553 |
|
|
|
7,022 |
|
|
|
(1,531 |
) |
|
|
(17.9 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
10,549 |
|
|
|
4,709 |
|
|
|
(5,840 |
) |
|
|
(55.4 |
%) |
Other income (expense), net |
|
|
251 |
|
|
|
(82 |
) |
|
|
(333 |
) |
|
|
(132.7 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
10,800 |
|
|
|
4,627 |
|
|
|
(6,173 |
) |
|
|
(57.2 |
%) |
Income tax provision |
|
|
3,870 |
|
|
|
1,808 |
|
|
|
(2,062 |
) |
|
|
(53.3 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
6,930 |
|
|
$ |
2,819 |
|
|
$ |
(4,111 |
) |
|
|
(59.3 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents costs of revenues as a percentage of related net revenues and
operating expenses as a percentage of total net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Increase |
|
|
|
2008 |
|
|
2009 |
|
|
(Decrease) |
|
Cost of EDC licenses and services |
|
|
29.2 |
% |
|
|
N/A |
|
|
|
N/A |
|
Cost of services |
|
|
40.0 |
% |
|
|
47.4 |
% |
|
|
7.4 |
% |
Cost of site support |
|
|
57.4 |
% |
|
|
50.6 |
% |
|
|
(6.8 |
%) |
Total costs of revenues |
|
|
43.7 |
% |
|
|
48.4 |
% |
|
|
4.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing |
|
|
9.2 |
% |
|
|
13.4 |
% |
|
|
4.2 |
% |
General and administrative |
|
|
12.5 |
% |
|
|
13.1 |
% |
|
|
0.6 |
% |
Research and development |
|
|
3.5 |
% |
|
|
4.4 |
% |
|
|
0.9 |
% |
24
EDC
On June 23, 2009, we completed the sale of certain assets relating to our EDC operations.
Under the terms of the transaction, OmniComm Systems, Inc. issued 8.1 million shares of common
stock and assumed certain liabilities including deferred revenue relating to our EDC operations in
exchange for our EDC assets which primarily included our EDC software, applications and fixed
assets and $1.15 million in cash we paid.
Revenues
The decrease in services revenues was primarily due to a $6.7 million reduction in transaction
revenue related to lower volume of transactions performed in the three months ended September 30,
2009 as compared to the three months ended September 30, 2008. There was also a decrease in
average revenue per transaction that was largely due to certain lower transaction prices which
resulted in a decrease in revenue of approximately $0.8 million. Project management fees,
excluding reporting configuration revenue, decreased $0.5 million, consistent with the decreased
Cardiac Safety activity. The balance of the decrease of $0.2 million is comprised of a number of
smaller items.
Site support revenues decreased primarily due to $0.4 million of one-time billing in the
quarter ended September 30, 2008 on units rented in prior periods and to a reduction in equipment
sales of $0.4 million. The balance of the decrease is comprised of a number of smaller items
totaling $0.6 million, including a decrease in average rental rates and other one-time adjustments
in 2008.
Costs of Revenues
The decrease in the cost of services was primarily due to $1.4 million of costs recognized in
the third quarter of 2008 associated with the CCSS operations. We completed the integration of the
CCSS acquisition in the third quarter of 2008 with the complete transfer of all operating
activities from the CCSS Reno facility into our operations in Philadelphia and Peterborough.
Additionally, variable incentive compensation expense decreased $0.4 million due to reduced
accruals based on operating results. Labor costs decreased $0.3 million as a result of efficiency
initiatives realized in 2009. There was also a $0.2 million decrease in telephone and connectivity
expenses due to lower rates in 2009. A $0.1 million increase in depreciation due to systems placed
in service in 2009 and $0.1 million of other increases in expense partially offset these decreases.
The increase in the cost of services as a percentage of service revenues reflects the fact that
some of the costs do not necessarily change in direct relation with changes in revenue.
The decrease in the cost of site support, both in absolute terms and as a percentage of site
support revenues, was primarily due to a $0.7 million decrease in depreciation expense as older,
more expensive ECG equipment has become fully depreciated and a $0.3 million decrease in freight.
Additional smaller decreases totaling $0.3 million occurred in costs of equipment sold, labor and
other expenses.
Operating Expenses
The decrease in selling and marketing expenses was due primarily to a $0.3 million decrease in
incentive compensation consistent with lower levels of revenue, which was largely offset by $0.2
million in small increases in several expense items. The increase in selling and marketing
expenses as a percentage of total net revenues reflects the fact that the costs do not necessarily
change in direct relation with changes in revenue.
The decrease in general and administrative expenses was due primarily to $0.6 million of costs
recognized in the third quarter of 2008 resulting from including the administrative costs of CCSS
in 2008 for which there were no corresponding costs in the third quarter of 2009. Additionally,
variable incentive compensation expense decreased $0.5 million due to reduced accruals based on
operating results and a $0.2 million credit that reduced non-income taxes in 2009. The increase in
general and administrative expenses as a percentage of total net revenues reflects the fact that
the costs do not necessarily change in direct relation with changes in revenue.
The decrease in research and development expenses was primarily due to a $0.2 million
reduction in variable incentive compensation expense and other labor costs consistent with our
reduced operating results in 2009 and an increase of $0.2 million in the capitalization of salaries
for internal-use software projects partially offset by a $0.2 million increase in expense for
third-party consultants. The increase in research and development expenses as a percentage of
total net revenues reflects the fact that the costs do not necessarily change in direct relation
with changes in revenue.
In the three months ended September 30, 2009, other income (expense), net, consisted primarily
of foreign exchanges losses of $0.2 million partially offset by interest income of $0.1 million.
In the three months ended September 30, 2008, other income, net, consisted primarily of interest
income of $0.2 million. Foreign exchange losses were caused by dollar-denominated receivables and
deferred revenue in our UK entity that were settled at less favorable exchange rates with the
British pound sterling.
Our effective tax rate for the three months ended September 30, 2009 was 39.1% compared to
35.8% for the three months ended September 30, 2008. The effective tax rate for the three months
ended September 30, 2008 included a tax benefit of approximately $0.2 million related to the
reconciliation of the 2007 tax provision to the 2007 U.S. federal tax return and a $0.5 million tax
benefit related to the reversal of a tax accrual for a previously uncertain tax position. The
increase in the effective tax rate was also due to greater income apportionment in higher tax
jurisdictions and a reduction in certain tax credits in 2009 as compared to 2008.
25
Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2009.
The following table presents our consolidated statements of operations with product line
detail (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
|
|
|
2008 |
|
|
2009 |
|
|
Increase (Decrease) |
|
EDC licenses and services: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
$ |
4,354 |
|
|
$ |
2,501 |
|
|
$ |
(1,853 |
) |
|
|
(42.6 |
%) |
Costs of revenues |
|
|
1,371 |
|
|
|
863 |
|
|
|
(508 |
) |
|
|
(37.1 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
$ |
2,983 |
|
|
$ |
1,638 |
|
|
$ |
(1,345 |
) |
|
|
(45.1 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
$ |
75,542 |
|
|
$ |
48,292 |
|
|
$ |
(27,250 |
) |
|
|
(36.1 |
%) |
Costs of revenues |
|
|
30,126 |
|
|
|
22,941 |
|
|
|
(7,185 |
) |
|
|
(23.8 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
$ |
45,416 |
|
|
$ |
25,351 |
|
|
$ |
(20,065 |
) |
|
|
(44.2 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Site support: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
$ |
23,179 |
|
|
$ |
19,895 |
|
|
$ |
(3,284 |
) |
|
|
(14.2 |
%) |
Costs of revenues |
|
|
14,565 |
|
|
|
10,523 |
|
|
|
(4,042 |
) |
|
|
(27.8 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
$ |
8,614 |
|
|
$ |
9,372 |
|
|
$ |
758 |
|
|
|
8.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
$ |
103,075 |
|
|
$ |
70,688 |
|
|
$ |
(32,387 |
) |
|
|
(31.4 |
%) |
Costs of revenues |
|
|
46,062 |
|
|
|
34,327 |
|
|
|
(11,735 |
) |
|
|
(25.5 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
57,013 |
|
|
|
36,361 |
|
|
|
(20,652 |
) |
|
|
(36.2 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing |
|
|
10,259 |
|
|
|
9,756 |
|
|
|
(503 |
) |
|
|
(4.9 |
%) |
General and administrative |
|
|
13,728 |
|
|
|
10,581 |
|
|
|
(3,147 |
) |
|
|
(22.9 |
%) |
Research and development |
|
|
3,223 |
|
|
|
3,131 |
|
|
|
(92 |
) |
|
|
(2.9 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
27,210 |
|
|
|
23,468 |
|
|
|
(3,742 |
) |
|
|
(13.8 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
29,803 |
|
|
|
12,893 |
|
|
|
(16,910 |
) |
|
|
(56.7 |
%) |
Other income (expense), net |
|
|
922 |
|
|
|
(375 |
) |
|
|
(1,297 |
) |
|
|
(140.7 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
30,725 |
|
|
|
12,518 |
|
|
|
(18,207 |
) |
|
|
(59.3 |
%) |
Income tax provision |
|
|
11,389 |
|
|
|
5,081 |
|
|
|
(6,308 |
) |
|
|
(55.4 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
19,336 |
|
|
$ |
7,437 |
|
|
$ |
(11,899 |
) |
|
|
(61.5 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents costs of revenues as a percentage of related net revenues and
operating expenses as a percentage of total net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
Increase |
|
|
|
2008 |
|
|
2009 |
|
|
(Decrease) |
|
Cost of EDC licenses and services |
|
|
31.5 |
% |
|
|
34.5 |
% |
|
|
3.0 |
% |
Cost of services |
|
|
39.9 |
% |
|
|
47.5 |
% |
|
|
7.6 |
% |
Cost of site support |
|
|
62.8 |
% |
|
|
52.9 |
% |
|
|
(9.9 |
%) |
Total costs of revenues |
|
|
44.7 |
% |
|
|
48.6 |
% |
|
|
3.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing |
|
|
10.0 |
% |
|
|
13.8 |
% |
|
|
3.8 |
% |
General and administrative |
|
|
13.3 |
% |
|
|
15.0 |
% |
|
|
1.7 |
% |
Research and development |
|
|
3.1 |
% |
|
|
4.4 |
% |
|
|
1.3 |
% |
26
EDC
On June 23, 2009, we completed the sale of certain assets relating to our EDC operations.
During the nine months ended September 30, 2009, we recorded a gain on the sale of these assets of
$0.5 million within general and administrative expenses in the consolidated statement of
operations.
Revenues
The decrease in services revenues was primarily due to a $22.3 million reduction in
transactions performed in the nine months ended September 30, 2009 as compared to the nine months
ended September 30, 2008. There was also a decrease in average revenue per transaction that was
largely due to a heavier weighting of semi-automatic studies which carry lower transaction prices
and a decrease in average pricing for most transactions, resulting in a decrease in revenue of
approximately $2.1 million. Project management fees decreased $1.6 million, consistent with the
decreased Cardiac Safety activity. The balance of the decrease is due to a $0.3 million decrease
in Cardiac Safety consulting revenue and a number of smaller decreases totaling $1.0 million.
Site support revenues decreased primarily due to a $1.4 million decrease in equipment sales as
more customers choose to rent cardiac safety equipment and a $2.3 million decrease in rental
revenue from cardiac safety equipment due to a lower average price per unit. The lower average
price per unit is a result of planned actions that we have recently taken to improve our
competitiveness with regard to this component of our revenue. Additionally, there was a $0.5
million reduction in freight revenue due to decreased shipping activity consistent with the
decreased Cardiac Safety activity. An increase in the number of units rented and a small increase
in supplies and other revenue totaling $0.9 million partially offset these decreases.
Costs of Revenues
The decrease in the cost of services was primarily due to $6.1 million of costs recognized in
the nine months ended September 30, 2008 associated with the CCSS operations. We completed the
integration of the CCSS acquisition in the third quarter of 2008 with the complete transfer of all
operating activities from the CCSS Reno facility into our operations in Philadelphia and
Peterborough. Additionally, variable incentive compensation expense decreased $1.1 million due to
reduced accruals based on operating results, telephone and connectivity expenses decreased $0.2
million due to lower rates in 2009 and cardiac safety consulting costs decreased $0.3 million.
Partially offsetting the decrease were increases in several areas including labor costs related to
additional staff added in the second half of 2008 and market adjustments to salaries made in 2009,
increased depreciation due to systems placed in service in 2009 and other expense increases which
total $0.5 million. The increase in the cost of services as a percentage of service revenues
reflects the fact that some of the costs do not necessarily change in direct relation with changes
in revenue.
The decrease in the cost of site support, both in absolute terms and as a percentage of site
support revenues, was primarily due to a $2.2 million decrease in depreciation expense as older,
more expensive ECG equipment has become fully depreciated. Additionally there was a $0.7 million
decrease in freight, a $0.6 million decrease in the cost of equipment sold, $0.3 million of costs
associated with the Reno operations of CCSS in 2008 and $0.2 million decrease in other costs.
Operating Expenses
The decrease in selling and marketing expenses was due primarily to a $1.0 million decrease in
incentive compensation consistent with lower levels of revenue. Partially offsetting this decrease
was a $0.5 increase in consulting and marketing costs due to corporate rebranding and other planned
initiatives. The increase in selling and marketing expenses as a percentage of total net revenues
reflects the fact that the costs do not necessarily change in direct relation with changes in
revenue.
The decrease in general and administrative expenses was due primarily to $2.8 million of costs
recognized in the first nine months of 2008 resulting from including the administrative costs of
CCSS in 2008 for which there were no corresponding costs in the first nine months of 2009.
Additionally, variable incentive compensation expense decreased $0.6 million due to reduced
accruals based on operating results. Partially offsetting these decreases were severance of $0.4
million in the second quarter of 2009 related to the relocation of our customer care team from our
New Jersey location to our Philadelphia location and approximately $0.2 million increase in each of
consulting and stock option compensation expense. The gain on sale of certain assets of the EDC
operations of $0.5 million was recorded in the second quarter of 2009. The increase in general
and administrative expenses as a percentage of total net revenues reflects the fact that the costs
do not necessarily change in direct relation with changes in revenue.
The decrease in research and development expenses was primarily due to a $0.3 million
reduction in variable incentive compensation expense due to reduced accruals based on operating
results, a $0.2 million increase in the capitalization of salaries for internal-use software
projects and a $0.1 million decrease in other expenses. These increases are mostly offset by a
$0.5 million increase in expense for third-party consultants. The increase in research and
development expenses as a percentage of total net revenues reflects the fact that the costs do not
necessarily change in direct relation with changes in revenue.
27
In the nine months ended September 30, 2009, other income (expense), net, consisted primarily
of foreign exchanges losses of $0.6
million partially offset by interest income of $0.2 million. In the nine months ended
September 30, 2008, other income, net, consisted primarily of interest income of $0.8 million and
foreign exchange gains of $0.1 million. Foreign exchange losses in 2009 were caused by
dollar-denominated receivables in our UK entity that were settled at less favorable exchange rates
with the British pound sterling.
Our effective tax rate for the nine months ended September 30, 2009 was 40.6% compared to
37.1% for the nine months ended September 30, 2008. The effective tax rate for the nine months
ended September 30, 2008 included a special benefit of $0.3 million related to our determination
that a portion of our UK subsidiarys current undistributed net earnings, as well as the future net
earnings, will be permanently reinvested, a tax benefit of approximately $0.2 million related to
the reconciliation of the 2007 tax provision to the 2007 U.S. federal tax return and a $0.5 million
tax benefit related to the reversal of a tax accrual for a previously uncertain tax position.
Liquidity and Capital Resources
At September 30, 2009, we had $72.1 million of cash, cash equivalents and short-term
investments. Prior to 2008, we had historically placed our investments in municipal securities,
bonds of government sponsored agencies, certificates of deposit with fixed rates and maturities of
less than one year, and A1P1 rated commercial bonds and paper. Due to the current financial market
conditions, we have invested primarily in liquid money market funds.
For the nine months ended September 30, 2009, our operations provided cash of $24.7 million
compared to $26.8 million during the nine months ended September 30, 2008. The decrease was
primarily the result of $11.9 million of lower net income in the nine months ended September 30,
2009 as compared to the nine months ended September 30, 2008, a $3.4 million larger decrease in
accrued expenses in the nine months ended September 30, 2009 as compared to the nine months ended
September 30, 2008 which was largely the result of the payment of a greater amount in 2009 for
variable incentive compensation related to the prior years results, a $2.8 million decrease in
depreciation and amortization and a $2.4 million decrease in net income tax liabilities in the nine
months ended September 30, 2009 as compared to an immaterial decrease in the nine months ended
September 30, 2008. Changes in income taxes, including deferred income taxes, are due to the
timing and size of income tax payments and provision. The tax provision decreased in 2009 due to
lower taxable income, but at a higher effective tax rate. Partially offsetting this negative impact
on cash flow was a decrease in accounts receivable in the nine months ended September 30, 2009 of
$12.5 million as compared to an increase of $6.6 million in the nine months ended September 30,
2008 related to focused collection efforts and a decrease in revenue.
For the nine months ended September 30, 2009, our investing activities used cash of $5.4
million as compared to $3.2 million during the nine months ended September 30, 2008. We incurred
$0.7 million and $5.0 million in the first nine months of 2009 and 2008, respectively, for
contingent payments and transaction costs related to the CCSS acquisition and $1.2 million during
the nine months ended September 30, 2009 related to the sale of the EDC operations. Investment
proceeds were $8.7 million during the nine months ended September 30, 2008 with no activity during
the nine months ended September 30, 2009.
During the nine months ended September 30, 2009 and 2008, we capitalized $3.6 million and $7.0
million, respectively, of property and equipment. Included in property and equipment is $1.9
million and $1.6 million for the nine months ended September 30, 2009 and 2008, respectively, of
internal use software including software associated with the development of a data and
communications management services software product (EXPERT®) used in connection with our
centralized core cardiac safety ECG services. We capitalize certain internal use software costs.
The amortization is charged to the cost of Cardiac Safety services beginning at the time the
software is ready for its intended use. The balance of the change was due to a decrease in
purchases of ECG equipment commensurate with the decrease in revenue in the nine months ended
September 30, 2009 as compared to the nine months ended September 30, 2008.
For the nine months ended September 30, 2009, our financing activities used cash of $14.7
million compared to providing $1.3 million for the nine months ended September 30, 2008. In the
nine months ended September 30, 2009, we repurchased $15.1 million of our common stock under our
stock buy-back program. We did not purchase any of our common stock during the nine months ended
September 30, 2008.
We have a line of credit arrangement with Wachovia Bank, National Association, a Wells Fargo
Company, totaling $3.0 million which expires on June 1, 2010. To date, we have not borrowed any
amounts under our line of credit. As of September 30, 2009, we had outstanding letters of credit
of $0.5 million, which reduced our available borrowings under the line of credit to $2.5 million.
We have commitments to purchase approximately $2.8 million of private label cardiac safety
equipment from a manufacturer over a twelve-month period beginning upon completion of our user
acceptance testing, which is currently anticipated to be completed in the first quarter of 2010.
We expect to purchase this cardiac safety equipment in the normal course of business and thus this
commitment does not represent a significant commitment above our expected purchases of ECG
equipment during this period.
We expect that existing cash and cash equivalents and cash flows from operations will be
sufficient to meet our foreseeable cash needs for at least the next year. However, there may be
acquisition and other growth opportunities that require additional external financing and we may
from time to time seek to obtain additional funds from the public or private issuances of equity or
debt securities. There can be no assurance that any such acquisitions will occur or that such
financing will be available or available on terms acceptable to
us, particularly in view of current capital market uncertainty.
28
Our board of directors has authorized the repurchase of up to an aggregate of 12.5 million
shares, of which 5.0 million shares remain to be purchased as of September 30, 2009. The stock
buy-back authorization allows us, but does not require us, to purchase the authorized shares. The
purchase of the remaining shares authorized could require us to use a significant portion of our
cash, cash equivalents and investments and could also require us to seek additional external
financing. During the nine months ended September 30, 2009, we purchased 2,902,735 shares of our
common stock at a cost of $15.1 million. No shares were purchased during the nine months ended
September 30, 2008.
On November 28, 2007, we completed the acquisition of CCSS from Covance Inc. Under the terms
of our agreement to purchase CCSS, the total initial purchase consideration was $35.2 million. We
have additionally incurred approximately $1.1 million in transaction costs. We may also pay
contingent consideration of up to approximately $14.0 million based upon our potential realization
of revenue from the backlog transferred and from new contracts secured through Covances marketing
activities. The period for contingent payments runs through December 31, 2010. Through September
30, 2009, Covance earned $5.2 million of this contingent amount, of which $3.0 million was
recognized in 2007, $2.0 million in the year ended December 31, 2008 and $0.2 million in the nine
months ended September 30, 2009. At September 30, 2009, approximately $0.2 million of the
contingent amount earned remained to be paid to Covance, which we recorded in accounts payable.
These contingent payments increased goodwill by $5.2 million. Under the terms of the marketing
agreement, Covance agreed to exclusively use us as its provider of centralized cardiac safety
solutions for a ten-year period, subject to certain exceptions, and we agreed to pay referral fees
on certain revenues.
Inflation
We believe the effects of inflation and changing prices generally do not have a material
effect on our consolidated results of operations or financial condition.
|
|
|
Item 3. |
|
Quantitative and Qualitative Disclosures About Market Risk |
Our primary financial market risks include fluctuations in interest rates and currency
exchange rates.
Interest Rate Risk
We generally place our investments in money market funds, municipal securities, bonds of
government sponsored agencies, certificates of deposit with fixed rates with maturities of less
than one year and A1P1 rated commercial bonds and paper. Due to the current financial market
conditions, we have invested primarily in liquid money market funds. We will continue to monitor
conditions and look for prudent investment opportunities. We actively manage our portfolio of cash
equivalents and short-term investments, but in order to ensure liquidity, will only invest in
instruments with high credit quality where a secondary market exists. We have not held and do not
hold any derivatives related to our interest rate exposure. Due to the average maturity and
conservative nature of our investment portfolio, a sudden change in interest rates would not have a
material effect on the value of the portfolio. The impact on interest income of future changes in
investment yields will depend largely on the gross amount of our cash, cash equivalents, short-term
investments and log-term investments. See Liquidity and Capital Resources as part of
Managements Discussion and Analysis of Financial Condition and Results of Operations.
Foreign Currency Risk
We operate on a global basis from locations in the United States (U.S.) and the United Kingdom
(UK). All international net revenues and expenses are billed or incurred in either U.S. dollars or
pounds sterling. As such, we face exposure to adverse movements in the exchange rate of the pound
sterling. As the currency rate changes, translation of the statement of operations of our UK
subsidiary from the local currency to U.S. dollars affects year-to-year comparability of operating
results. We do not hedge translation risks because any cash flows from UK operations are
reinvested in the UK.
Management estimates that a 10% change in the exchange rate of the pound sterling would have
impacted the reported operating income for the nine months ended September 30, 2009 by
approximately $0.2 million.
|
|
|
Item 4. |
|
Controls and Procedures |
We carried out an evaluation, under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness
of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act
of 1934, as amended, as of the end of the period covered by this report. Based upon that
evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures as of the end of the period covered by this report were designed and
functioning effectively to provide reasonable assurance that information required to be disclosed
by the Company (including our consolidated subsidiaries) in the reports we file with or submit to
the Securities and Exchange Commission is (i) recorded, processed, summarized and reported within
the time periods specified in the Commissions rules and forms and (ii) accumulated
and communicated to our management, including our Chief Executive Officer and our Chief
Financial Officer, as appropriate to allow timely decisions regarding required disclosure. There
were no changes in our internal control over financial reporting during the quarter ended September
30, 2009 that have materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
29
Part II. Other Information
|
|
|
Item 2. |
|
Unregistered Sales of Equity Securities and Use of Proceeds |
The following table provides information regarding the stock buy-back activity during the
fiscal quarter ended September 30, 2009:
ISSUER PURCHASES OF EQUITY SECURITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(c) Total Number of |
|
|
(d) Maximum Number of |
|
|
|
|
|
|
|
|
|
|
|
Shares Purchased as Part |
|
|
Shares that May Yet Be |
|
|
|
(a) Total Number of |
|
|
(b) Average Price |
|
|
of Publicly Announced |
|
|
Purchased Under the Plans |
|
Period |
|
Shares Purchased |
|
|
Paid per Share |
|
|
Plans or Programs (1) |
|
|
or Programs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 2009 |
|
|
154,327 |
|
|
$ |
5.49 |
|
|
|
154,327 |
|
|
|
5,014,605 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 2009 |
|
|
41,689 |
|
|
$ |
5.50 |
|
|
|
41,689 |
|
|
|
4,972,916 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,972,916 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
196,016 |
|
|
|
|
|
|
|
196,016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
We originally announced a program to repurchase up to 500,000 shares on April 21, 2004,
and subsequently announced increases of $2.0 million and 10.0 million shares on October 20,
2004 and May 3, 2005, respectively. Through September 30, 2009, we have repurchased 7.5
million shares of the 12.5 million shares approved for repurchase. |
|
|
|
|
|
|
10.31 |
|
|
Amended and Restated 2003 Equity Incentive Plan, as amended.* |
|
|
|
|
|
|
31.1 |
|
|
Certification of Chief Executive Officer. |
|
|
|
|
|
|
31.2 |
|
|
Certification of Chief Financial Officer. |
|
|
|
|
|
|
32.1 |
|
|
Statement of Chief Executive Officer Pursuant to Section 1350 of Title 18 of the United States Code. |
|
|
|
|
|
|
32.2 |
|
|
Statement of Chief Financial Officer Pursuant to Section 1350 of Title 18 of the United States Code. |
|
|
|
* |
|
Management contract or compensatory plan or arrangement. |
30
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.
|
|
|
|
|
|
eResearchTechnology, Inc.
(Registrant)
|
|
Date: November 6, 2009 |
By: |
/s/ Michael J. McKelvey
|
|
|
|
Michael J. McKelvey |
|
|
|
President and Chief Executive Officer,
(Principal executive officer) |
|
|
|
|
Date: November 6, 2009 |
By: |
/s/ Keith D. Schneck
|
|
|
|
Keith D. Schneck |
|
|
|
Executive Vice President,
Chief Financial
Officer and Secretary
(Principal financial and accounting officer) |
|
31
EXHIBIT INDEX
|
|
|
|
|
Exhibit No. |
|
Exhibit |
|
|
10.31 |
|
|
Amended and Restated 2003 Equity Incentive Plan, as amended.* |
|
|
|
|
|
|
31.1 |
|
|
Certification of Chief Executive Officer. |
|
|
|
|
|
|
31.2 |
|
|
Certification of Chief Financial Officer. |
|
|
|
|
|
|
32.1 |
|
|
Statement of Chief Executive Officer Pursuant to Section 1350 of Title 18 of the United States
Code. |
|
|
|
|
|
|
32.2 |
|
|
Statement of Chief Financial Officer Pursuant to Section 1350 of Title 18 of the United States
Code. |
|
|
|
* |
|
Management contract or compensatory plan or arrangement. |
32