Get Started for Free Contexxia identifies hard-to-find pieces of information in SEC filings. No more highlighters, no more redlining, no more poring over huge documents. NxStage Medical, Inc. (1333170) 10-Q published on Nov 07, 2018 at 4:48 pm
Reporting Period: Sep 29, 2018
System One hardware sales to dialysis clinic customers in the home market are made under the depot service model whereby equipment requiring service is picked up and a replacement device is shipped to the site of care. Accordingly, we recognize upfront fees received from equipment transactions as revenue on a straight-line basis over the term of our remaining service obligation, which generally range between 5 and 7 years, and direct costs relating to the delivered equipment are classified in deferred cost of revenues and amortized over the same expected period as the related revenue. Beginning in the third quarter of 2018, we entered into a long-term licensing arrangement with one of our customers. Under this new arrangement, a number of this customer’s previously purchased units were converted to a license arrangement in order to extend access to the service pool under the service depot model for a period beyond the initial contractual period. The customer agreed to pay up-front the fees related to this multiyear license. This amount is reflected as an increase in accounts receivable and deferred revenue as of the end of the period, and the amount in deferred revenue will be amortized on a straight line basis over the term. Disposable products sales are recognized in accordance with the contract terms.
In the third quarter 2018, events and circumstances have indicated that certain long-lived tangible assets in the Services segment may not be recoverable. Therefore, a recoverability test was performed at the center level by comparing the carrying value of each center to its estimated future undiscounted cash flows, within the initial lease term (which is the equivalent to the depreciable life of the centers' most significant asset, its leasehold improvements). As of September 30, 2018, our expected non-discounted future cash flows for the majority of our centers indicated such carrying amounts were expected to be recovered. We recorded an impairment charge during the second quarter of 2018 of $0.1 million in cost of revenue to write-down certain center level assets within our Services segment.
For several years, we have focused on operating and financial improvements. During the three and nine months ended September 30, 2018, these efforts resulted in revenues for both periods increasing by 11% to $108.1 million and $322.4 million, respectively, versus the prior year comparable periods with sales in the home and critical care markets principally driving the growth. Our financial results for the third quarter 2018 also represent the first quarter of profitable operations since inception. Driving continued improvements will remain an area of focus in 2018 and beyond within our products business. At the same time, we expect operating losses in our Services segment to have a negative impact, along with costs related to the proposed Merger, on our total operating performance in the near term.
General and administrative expenses decreased by $3.2 million, or 26%, and $1.6 million, or 5%, for the three and nine months ended September 30, 2018, respectively, versus the prior year comparable period, respectively. The decrease was primarily due to lower professional service fees and other costs incurred in connection with the proposed merger. We recognized $0.4 million and $2.0 million of expenses incurred in connection with the proposed merger during the three and nine months ended September 30, 2018, respectively, and $3.6 million and $3.9 million during the three and nine months ended September 30, 2017, respectively. We expect general and administrative expenses as a percentage of revenues will decrease versus prior periods reflecting costs associated with the proposed merger.
Medicare provides broad and well-established reimbursement in the U.S. for treating end-stage renal disease patients with hemodialysis three times a week. Most patients using the System One in the home, however, have been prescribed to dialyze more than three times per week to attain the clinical benefits of more frequent dialysis. Given the increased provider costs associated with providing more frequent dialysis, access to our home hemodialysis products will be impacted by whether dialysis centers receive or pursue adequate reimbursement for the additional dialysis treatments. Reimbursement for more frequent hemodialysis requires medical justification provided by the dialysis center based on information from the patient’s physician, which increases the center’s administrative burden. In addition, there is no national standard for what constitutes medical justification, thus reimbursement for more frequent hemodialysis varies due to differing Medicare contractor policies and center billing practices. Dialysis centers may be unwilling to support more frequent home hemodialysis in the absence of predictable Medicare reimbursement for additional treatments per week based on submitted claims for medical justification.