MGC Diagnostics Corporation Reports 2014 Third Quarter Operating Results

SAINT PAUL, Minn., Sept. 9, 2014 /PRNewswire/ -- MGC Diagnostics Corporation (NasdaqCM: MGCD), a global medical technology company, today reported financial results for the third quarter ended July 31, 2014.

Third Quarter Fiscal 2014 Overview:

• Revenue was $1.3 million lower than third quarter 2013 - $6.6 million compared to $7.9 million respectively;
• Net loss was $(889,000), or $(0.21) per diluted share, which included $616,000 of MediSoft acquisition costs, compared to net income of $652,000, or $0.16 per diluted share in the 2013 third quarter;
• Service revenue increased 23% to $1.6 million, compared to the 2013 third quarter;
• Deferred revenue at the end of the 2014 third quarter, including current and long-term deferred revenue, was $6.0 million, compared to $4.8 million in last year’s third quarter;
• Backlog at the end of the third quarter was $1.2 million, an increase of 63% from $709,000 at the end of the 2013 third quarter and an increase of 113% from $542,000 at the end of the 2014 second quarter;
• Balance sheet includes $15.4 million in cash and cash equivalents and $17.5 million of working capital; and
• Net operating loss carry forwards at October 31, 2013, were approximately $13.0 million that may be used to offset a portion of the Company’s future tax liability.

Todd M. Austin, Chief Executive Officer of MGC Diagnostics, said, “The medical device market continues to be challenging as hospitals, our primary target market, continue to postpone capital equipment orders until they have a more definitive view of the unpredictable regulatory environment and uncertainty of reimbursement rates under the Affordable Care Act (“ACA”). While it has been a difficult year, we continue to take proactive steps to position the Company for future profitable growth.”

Industry research predicts that sales of respiratory diagnostic equipment will experience flat to 3% annual growth for the foreseeable future. This lower growth rate is primarily attributed to the uncertainties of reimbursement rates under the ACA, which are resulting in hospitals postponing purchases of capital equipment until they better understand how the shift from a “fee for service” to a “cost-containment” model will affect their reimbursement rates, operating models and cash flow. Until the reimbursement process and regulatory environment is better understood, hospitals are taking extensive measures to extend the life of their existing equipment for as long as possible.

Mr. Austin continued, “While our domestic customers work through the financial impact of the ACA model, we have made progress toward expanding our global strategy. Our recent acquisition of MediSoft, based in Sorrines, Belgium, expanded and strengthened our global, competitive position. (Please see acquisition press release for more details: MGC Diagnostics Corporation Completes Acquisition of MediSoft SA) MediSoft is a highly- recognized brand in Europe with a long history of innovation and quality. It has developed market-driven, quality products with the appropriate price and feature sets for the European and emerging markets. It also has built a highly-efficient manufacturing facility that will improve our ability to fulfill increasing international demand.”

Matt Margolies, MGC Diagnostics President and head of Global Sales and Marketing, said, “We are developing opportunities in adjacent respiratory diagnostic markets that leverage our current cardio-respiratory business model. Sleep diagnostics is a perfect example of a rapidly growing market that shares a common sales channel and contact point with our cardio-respiratory business. During the third quarter, we entered into a strategic partnership with Neurovirtual USA to exclusively market and distribute their best-in-class sleep apnea diagnostic products, SleepVirtual BWII PSG and BWIII PSG, in the U.S. and Canada.”

Mr. Margolies continued, “We are now well-positioned both domestically and internationally in chronic cardio-respiratory disease states, including COPD, asthma and sleep apnea diagnostics. While the capital equipment market adjusts to the ACA, we will increase our efforts to grow recurring service and supplies revenue, both of which produce a gross margin in the range of 65% to 70%. Growing recurring revenue will enable us to partially offset the loss of revenue we are experiencing in selling our diagnostic equipment.”

Wes Winnekins, Chief Operating and Chief Financial Officer of MGC Diagnostics, said, “In light of the slowdown in capital equipment purchasing, we have initiated a process to right-size our expense infrastructure to achieve profitability at current revenue levels. Excluding the transaction costs to acquire MediSoft of $616,000 for the third quarter and $954,000 for the nine months ended July 31, 2014, we realized a loss of $273,000 for the quarter and a slight profit of $130,000 for the first nine months. We, along with our shareholders, expect better financial performance, so we are actively examining all aspects of our business during the fourth quarter to ensure that we achieve our profitability objectives for fiscal year 2015 and beyond.”

Other financial results for the third quarter include:

• Third quarter fiscal 2014 revenue decreased to $6.6 million from $7.9 million in the 2013 third quarter.
• Domestic 2014 third quarter sales were $5.6 million compared to $6.3 million in the 2013 third quarter, while international sales were $1.0 million compared to $1.6 million for last year’s third quarter. The decrease in international sales is primarily attributed to economic challenges in many Latin American markets that have limited our ability to extend credit terms to customers.
• Third quarter Group Purchasing Organization (“GPO”) sales were $3.7 million, compared to $4.3 million in the prior year’s third quarter.
• Third quarter 2014 competitive conversions totaled 10 sales resulting in $620,000 of recognized revenue, compared to 28 sales resulting in $1.3 million in recognized revenue in the 2013 third quarter.
• Equipment, supplies and accessories sales were $5.0 million compared to $6.6 million in the 2013 third quarter. Service revenues increased 23% to $1.6 million in the 2014 third quarter, compared to $1.3 million in the 2013 third quarter.
• The Attachment Rate, which tracks the sale of extended service contracts at the point of new equipment sales, increased to 37% for the fiscal 2014 third quarter, compared to 26% for the same period last year.
• Gross margin increased slightly to 55.7%, compared to 55.4% for the 2013 third quarter, primarily due to revenue mix as our service revenue comprised a greater percentage of revenue in the 2014 third quarter. Gross margin for equipment, supplies and accessories decreased slightly to 51.8% for the 2014 third fiscal quarter, compared to 52.3% for the prior year’s third quarter. Gross margin for services decreased to 67.5% for the quarter, compared to 70.8% for the prior year’s quarter, due to an increase in service time and parts replacement to maintain equipment at hospitals that are trying to extend the life of their equipment instead of buying new equipment.
• Third quarter 2014 general and administrative expenses totaled $1.7 million, or 26.2% of revenue, compared to $973,000, or 12.3% of revenue in the comparable quarter last year. Included in the 2014 third quarter general and administrative expenses are expenses in the amount of $616,000 related to the acquisition of MediSoft. Sales and marketing expenses were $2.0 million, or 30.3% of revenue, compared to $2.2 million, or 27.1% of revenue, in the 2013 third quarter.
• Research and development expenses were $750,000, or 11.4% of revenue, compared to $591,000, or 7.5% of revenue in last year’s third quarter as the Company continues to improve and expand its product offerings.
• Third quarter 2014 operating loss was $(817,000), including the one-time transaction costs for the MediSoft acquisition, compared to operating income of $669,000 in the 2013 third quarter. For the 2014 third quarter, the Company reported a net loss of $(889,000), or $(0.21) per diluted share, compared to net income of $652,000, or $0.16 per diluted share, in the 2013 third quarter.
• At July 31, 2014, the Company had cash and cash equivalents of $15.4 million, which includes $4.0 million of debt financing the Company secured on July 24, 2014 to acquire MediSoft on August 1, 2014.
• The Company expects the MediSoft acquisition to be accretive beginning with its fiscal year 2015 results, and that the potential value of the combined company synergies from 2015 to 2017 is expected to equal the total cash consideration the Company paid to acquire MediSoft.

Net Operating Loss Carry Forward
At October 31, 2013, the Company had federal net operating loss carry forwards of approximately $13.0 million, not subject to IRC annual limitations on use. These loss carry forwards will expire in years 2018 through 2032.

Conference Call
The Company has scheduled a conference call for Tuesday, September 9, 2014, at 4:30 p.m. ET to discuss its financial results for the third quarter of fiscal year 2014.

Participants can dial (877) 317-6789 or (412) 317-6789 to access the conference call, or listen via a live Internet webcast on the Company’s website at www.mgcdiagnostics.com. A replay of the conference call will be available by dialing (877) 344-7529 or (412) 317-0088, confirmation code 10051727, through September 16, 2014. A webcast replay of the conference call will be accessible on the Company’s website at www.mgcdiagnostics.com for 90 days.

About MGC Diagnostics
MGC Diagnostics Corporation (NasdaqCM: MGCD), is a global medical technology company dedicated to cardiorespiratory health solutions. The Company, through its subsidiaries Medical Graphics Corporation and MediSoft SA, develops, manufactures and markets non-invasive diagnostic systems. This portfolio of products provides solutions for disease detection, integrated care, and wellness across the spectrum of cardiorespiratory healthcare. The Company’s products are sold internationally through distributors and in the United States through a direct sales force targeting heart and lung specialists located in hospitals, university-based medical centers, medical clinics, physicians’ offices, pharmaceutical companies, medical device manufacturers, and clinical research organizations (CROs). For more information about MGC Diagnostics, visit www.mgcdiagnostics.com.

Cautionary Statement Regarding Forward-Looking Statements

From time to time, in reports filed with the Securities and Exchange Commission, in press releases, and in other communications to shareholders or the investing public, MGC Diagnostics Corporation may make forward-looking statements concerning possible or anticipated future financial performance, business activities or plans that include the words “believes,” “expects,” “anticipates,” “intends” or similar expressions. For these forward-looking statements, the Company claims the protection of the safe harbor for forward-looking statements contained in federal securities laws. These forward-looking statements are subject to a number of factors, risks and uncertainties, including those disclosed in our periodic filings with the SEC, that could cause actual performance, activities or plans after the date the statements are made to differ significantly from those indicated in the forward-looking statements. For a list of these factors, see the sections entitled “Risk Factors” and “Cautionary Note Regarding Forward Looking Statements”, in the Company’s Form 10-K for the year ended October 31, 2013, and any updates in subsequent filings on Form 10-Q or Form 8-K under the Securities Exchange Act of 1934.