MGC Diagnostics Corporation, a global medical technology company, 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, MGC Diagnostics CEO, says in a release, “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, MGC says. 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 are better understood, hospitals are taking extensive measures to extend the life of their existing equipment for as long as possible.

Austin says, “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. 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, says, “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 United States and Canada.

“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, says, “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.”