Conmed second quarter net revenue increases 13.0% to $16.7 million

Conmed Healthcare Management, Inc. (NYSE Amex: CONM) today announced financial results for the three- and six-month periods ended June 30, 2011. Highlights of and subsequent to the second quarter include:

• Net revenue increased 13.0% to $16.7 million as compared with $14.7 million in the second quarter of 2010.
• Gross profit was $3.0 million, compared to $2.9 million in the second quarter of 2010.
• Operating expenses were $3.0 million as compared to $2.3 million in the second quarter of 2010, primarily due to $364,000 in Merger-related expense and a $350,000 non-recurring accrual for sales taxes.
• Operating income was $0.03 million, compared to $0.7 million in the second quarter of 2010.
• Net loss was $0.1 million, or ($0.01) per basic and diluted share, compared to net income of $0.3 million, or $0.03 per basic and $0.02 per diluted share, in the second quarter of 2010.
• The Company generated $0.5 million in positive net cash flow from operations in the second quarter of 2011.
• Cash and cash equivalents were $14.6 million at June 30, 2011.
• Three new multi-year contract awards:
  • Ocean County, New Jersey, valued at $17.1 million over the five-year term, effective July 1, 2011.
  • Worcester County, Maryland, valued at $650,000 during the initial one-year term, effective July 1, 2011.
  • Newport News, Virginia, valued at $13.6 million over the full ten-year term, effective August 1, 2011
• On July 11, 2011, Conmed entered into a definitive merger agreement to be acquired by Ayelet Investments LLC for $3.85 per share in cash.

Dr. Richard Turner, Chairman and Chief Executive Officer stated, "Just after the quarter closed, we announced our intent to be acquired by Ayelet Investments for $3.85 per share in cash. Our Board of Directors believes this is a fair valuation for the Company, and has unanimously approved the transaction, which was the culmination of an extensive seven-month strategic options process. With stockholder approval, CONMED will go forward as a private company."

Second Quarter Financial Results

Net revenue for the three months ended June 30, 2011, increased 13.0% to $16.7 million from $14.7 million in the second quarter of 2010. The addition of service contracts signed with new jurisdictions since April 1, 2010 accounted for $2,012,035 or 104.9% of the increase in revenue for the three months ended June 30, 2011 compared to the same period for the prior year. Revenue improvement also resulted from expansion of the services provided under a number of our existing contracts in which we were providing services prior to April 1, 2010. Revenues also increased as a result of price increases offset by the repricing under the two year extension amendment to the Pima County contract which began on July 1, 2010. Also, partially offsetting the revenue increases above were decreases in other volume related activities associated with lower inmate populations at certain facilities. Additionally, stop/loss reimbursements decreased reflecting lower out-of-facility medical expenditures in excess of stop/loss limits which are billed back to clients.

Total healthcare expenses for the quarter ended June 30, 2011, were $13.6 million compared to $11.8 million in the same period for the prior year. Spending for salaries and employee benefits increased by $963,803, or 11.4%, due primarily to the addition of new healthcare employees required to support the staffing requirements for our new medical service contracts. The decrease in salaries and employee benefits as a percentage of revenue is due to a change in the mix of expense for salaries and benefits. In addition to providing staffing services, the new service contracts include responsibility for medical services both in and out of the facility, as well as pharmacy services, resulting in a lower ratio of salaries and employee benefits to revenue.

Gross profit increased to $3.0 million for the three months ended June 30, 2011 from $2.9 million in the same period for the prior year, while gross margin declined from 19.9% for the three months ended June 30, 2010 to 18.1% for the three months ended June 30, 2011 due primarily to the repricing renewal under the Pima County extension amendment, lower margins associated with the new contract wins and increased expenditures for out-of-facility patient care partially offset by lower pharmacy expenditures.

Selling and administrative expenses were $2.8 million in the second quarter of 2011 compared to $2.0 million in the second quarter of 2010. The increased expenditure reflects a non-recurring $350,000 accrual for sales taxes, plus approximately $364,000 of merger-related expense, as well as an increased investment in additional management and administrative personnel required to support new contracts and services added since April 1, 2010. These increases were partially offset by decreases in business development fees, equity based compensation, recruiting, and legal fees.

Depreciation and amortization was approximately $160,000 in the second quarter of 2011 compared to approximately $280,000 in the 2010 period. The decrease primarily reflects a reduction in amortization expense as certain individual service contracts acquired have become fully amortized, offset in part by an increase in depreciation expense related to capital expenditures associated with purchases of vehicles and medical equipment, offset by lower computer depreciation as certain assets have become fully depreciated.

As a result, total operating expenses were $3.0 million in the second quarter of 2011 compared to $2.3 million in the second quarter of 2010. Operating expenses as a percentage of revenue increased 260 basis points to 18.0% from 15.4% in the same period for the prior year.

Conmed reported operating income of approximately $26,000 in the second quarter of 2011, compared to approximately $661,000 in the same period for the prior year.

Net loss was approximately $139,000, or ($0.01) per basic and diluted share, compared to net income of approximately $342,000, or $0.03 per basic and $0.02 per diluted share, in the same period for the prior year. During the second quarter net loss included a $225,723, adjustment to reflect the change in fair value of derivatives (outstanding warrants) as required under Derivative Accounting for Warrants that are Indexed to an Entity's Own Stock. The increased unrealized loss was primarily the result of a $0.38 increase in our stock price from March 31, 2011 to June 30, 2011.

Year-to-Date Financial Results

Net revenue for the six months ended June 30, 2011 increased 11.8%, or $3.5 million, to $33.0 million, compared to $29.5 million for the same period for the prior year. The addition of service contracts signed with new jurisdictions since January 1, 2010 accounted for $4.0 million, or 113.7%, of the revenue increase. Total healthcare expenses for the six months ended June 30, 2011 were $27.0 million compared to $23.7 million in the same period for the prior year. For the six months ended June 30, 2011, gross profit increased 3.0% to $6.0 million, representing 18.2% gross margin, compared to gross profit of $5.8 million, or 19.8% gross margin, in the same period for the prior year.

Total operating expenses were $5.2 million, or 15.7% of revenue for the six months ended June 30, 2011 compared to $4.6 million, or 15.6% of revenue for the year-ago period. Conmed's operating income was $0.8 million for the six months ended June 30, 2011 compared to $1.2 million in the same period for the prior year. Net income was approximately $254,000 or $0.02 per basic and diluted share, compared to net income of $626,000 or $0.05 per basic and $0.04 per diluted share, in the 2010 period.

For the first six months of 2011, adjusted EBITDA was $1.4 million compared to $2.1 million in the same period for the prior year.

During the six months ended June 30, 2011 and 2010, we recognized an unrealized loss of $355,467 and $47,379, respectively, to reflect the loss on fair value of derivatives (outstanding warrants) as required under derivative accounting for warrants that are indexed to an entity's own stock. The increased unrealized loss in the second quarter of 2011 was primarily the result of a $0.60 increase in our stock price from December 31, 2010 to June 30, 2011.

Cash and Equivalents

The Company generated $0.5 million in operating cash flow in the quarter ended June 30, 2011. Cash and cash equivalents were $14.6 million at June 30, 2011, compared to $13.3 million at December 31, 2010.

Stockholders' equity increased to $19.1 million at June 30, 2011, compared to $18.2 million at December 31, 2010. Days Sales Outstanding (DSO) as of June 30, 2011, was approximately 16.2 days. The Company remains debt-free.

During the six months ended June 30, 2011, warrants to purchase 37,334 shares of common stock were exercised generating $93,335 of net proceeds and warrants to purchase 337,583 shares of common stock were exercised by cashless exercise and as a result, a total of 112,310 shares of common stock were issued. Additionally, stock options to purchase 83,334 shares of common stock were exercised generating $167,501 of net proceeds during the six months ended June 30, 2011.

Source: Conmed Healthcare Management, Inc.