10771 Sherman Way Sun Valley, CA 91352 P: 818.255.2476 F: 818.255.2122
www.xtendmedical.com Stock Symbol: XMDC
January 22, 2008
Letter to Shareholders
Dear XTend Medical Shareholders,
As the company enters 2008, I wanted to take the time to address many issues that simply
cannot be placed in a Press Release wherein we’re limited to 500 words. I trust this
information I’m sharing with you will underscore how much confidence I have in the
company. All of us involved with the company will continue to work hard to make
XTend Medical a very profitable and powerful company that you can be proud to be a
shareholder of.
Business Model
I have been amazed at the shareholder emails I have received about share price, dilutions,
shorting, etc yet have only had one shareholder actually ask me about the business model
XTend Medical is currently working.
As some of you may or may not know, XTend Medical’s business model is based on
securing the best medical products for use in the healthcare industry. These companies
MUST have cutting-edge technology within the healthcare arena that change the way
patients are taken care of. While it is our ultimate goal to be able to develop our own
product line, we’re very confident that by working with companies that have spent
millions of dollars developing their products, it places us in a very good position to
capitalize in the market immediately. It is up to current management to sift through the
enormous amount of companies that currently have products that will have an impact in
the healthcare sector.
As you have seen with our alliance with EvRest, we have successfully aligned ourselves
with a company that an incredible product for use in the diabetic sector. Why Diabetes
you ask? Well consider the fact that over 20% of healthcare is spent on patients with
diabetes that relates to over $2.1 billion dollars. This potential market of over 19 million
patients in the U.S. alone places the company in a very good position to capitalize. Take
this into account along with the fact that Medical Cost Management, (XTend owns 25%
of this company), has been working in the diabetic sector for the last 15 years and has
deep contacts with the decision makers and medical directors of the target companies
we’re going after, and you see we have an incredible opportunity to bring in some serious revenue and earnings for the company.
Our model is based on delivering to managed care companies, physician groups, health
insurance payers, and individual patients a defined Disease Management Program that
addresses the issues that healthcare companies face in dealing with diabetic patients.
Now if you look at the managed companies that control patients, this is where the model
really makes sense. We’ve had meetings with the top tier managed care companies and
have demonstrated through the Infopia glucose meter, coupled with the Eocene modem,
that a program like this for diabetic management is exactly what they need in order to
address the main concern for them – patient compliance.
If a diabetic patient is required to test themselves three times a day yet only do it once,
then much more costs will be involved in treating that patient for problems that arise due
to their non-compliance of the testing program they currently are on. This meter and
modem allows for the case manager or diabetic nurse to keep in constant monitor of how
the patient is complying with the designated program. Once the program is decided upon,
then patients will be proactive in managing their disease thus mitigating any possible
hospitalization, amputations and other serious conditions related to non-compliance of
the program.
In addition to diabetics, we’ve also signed alliances with other companies that can offer
products that we can submit to these managed care companies for use in other medical
sectors within their organization. Our alliance we signed with Hathaway subsidiary DDI,
further exemplifies how we work.
Their product, the vibration device that checks for neuropathy levels in patients, has
many applications for the managed care companies we work with. This product not only
assists with the diabetic patient, but also has the ability to assist in kidney and heart
diagnosis as well as working with alcoholic patients in rehabilitation. While these are
three of the areas that the product can be applied to now, additional areas in medicine will
benefit greatly by utilizing a mobile device that detects neuropathic deficiencies. We’re
excited about the potential for this product as it is the first of its kind in the marketplace
and the global marketing potential is huge.
We’ve worked very hard to constantly be in touch with these companies and to make sure
they have the information to make a decision based on not only economics but what’s
best for their patients. It’s easy to be frustrated as this decision process and the time it
takes, but unfortunately this is what we deal with when working with managed care
companies. Once they have made their decision to go with us, then the real work begins
and the processes start to implement the programs we submitted.
Our model is based on delivering to managed care companies, physician groups, health
insurance payers, and individual patients a defined Disease Management Program that
addresses the issues that healthcare companies face in dealing with diabetic patients.
Now if you look at the managed companies that control patients, this is where the model
really makes sense. We’ve had meetings with the top tier managed care companies and
have demonstrated through the Infopia glucose meter, coupled with the Eocene modem,
that a program like this for diabetic management is exactly what they need in order to
address the main concern for them – patient compliance.
If a diabetic patient is required to test themselves three times a day yet only do it once,
then much more costs will be involved in treating that patient for problems that arise due
to their non-compliance of the testing program they currently are on. This meter and
modem allows for the case manager or diabetic nurse to keep in constant monitor of how
the patient is complying with the designated program. Once the program is decided upon,
then patients will be proactive in managing their disease thus mitigating any possible
hospitalization, amputations and other serious conditions related to non-compliance of
the program.
In addition to diabetics, we’ve also signed alliances with other companies that can offer
products that we can submit to these managed care companies for use in other medical
sectors within their organization. Our alliance we signed with Hathaway subsidiary DDI,
further exemplifies how we work.
Their product, the vibration device that checks for neuropathy levels in patients, has
many applications for the managed care companies we work with. This product not only
assists with the diabetic patient, but also has the ability to assist in kidney and heart
diagnosis as well as working with alcoholic patients in rehabilitation. While these are
three of the areas that the product can be applied to now, additional areas in medicine will
benefit greatly by utilizing a mobile device that detects neuropathic deficiencies. We’re
excited about the potential for this product as it is the first of its kind in the marketplace
and the global marketing potential is huge.
We’ve worked very hard to constantly be in touch with these companies and to make sure
they have the information to make a decision based on not only economics but what’s
best for their patients. It’s easy to be frustrated as this decision process and the time it
takes, but unfortunately this is what we deal with when working with managed care
companies. Once they have made their decision to go with us, then the real work begins
and the processes start to implement the programs we submitted.
Revenue Model
How does XTend make money? To simplify this process, take a look at how the
healthcare sector pays. There are three kinds of payment areas we’re working with:
1. Medicare Reimbursable
2. Medicaid, (MediCal in Ca)
3. Private Insurance or Managed Care Companies
1. Under Medicare, it’s simply an amount that Medicare reimburses the company
that sends the product out to the patient. XTend submits the info to Medicare;
they deduct 20% of the amount for the products (s), and then wire the money to us
on a weekly basis. This does take time due to transferring of data from the patient,
getting verifications, etc. So the process is time consuming but once the patient is
in the system, they rarely change to another product.
2. Medicaid is similar but the qualifications are different. Usually the processes are
more time consuming and approval is a little harder to come by. Still, once those
patients are in the system, it rarely changes.
3. Managed care companies are the ones that offer the greatest opportunity for
XTend. Not only do we target 1000’s of patients at one time, the managed care
company usually dictates the terms of repayment based on Medicare
reimbursement and they pay us directly. We have no record keeping or data needs
on our end and while the implementation process usually takes some time, the
managed care companies give XTend long term contracts due to the roll-out of
products that can last up to a year or longer based on how many patients are
converted to our programs.
The usual rates for reimbursement are in the $36 dollar range. Our costs are in the $20
range so we net out each patient app. $12-16 per patient per month. Now take that and
multiply this times the patients we will have and the numbers correspond to substantial
revenues for the company. Taking into account some additional costs the company is still
looking at an overall gross profit of 33%.
As you can see, targeting managed care companies is the main thrust for the company.
The ability to add patients in the 1000’s quickly brings in substantial revenue and the
value of the company is raised significantly, thereby increasing the PPS and the market
cap.
Revenue Model
How does XTend make money? To simplify this process, take a look at how the
healthcare sector pays. There are three kinds of payment areas we’re working with:
1. Medicare Reimbursable
2. Medicaid, (MediCal in Ca)
3. Private Insurance or Managed Care Companies
1. Under Medicare, it’s simply an amount that Medicare reimburses the company
that sends the product out to the patient. XTend submits the info to Medicare;
they deduct 20% of the amount for the products (s), and then wire the money to us
on a weekly basis. This does take time due to transferring of data from the patient,
getting verifications, etc. So the process is time consuming but once the patient is
in the system, they rarely change to another product.
2. Medicaid is similar but the qualifications are different. Usually the processes are
more time consuming and approval is a little harder to come by. Still, once those
patients are in the system, it rarely changes.
3. Managed care companies are the ones that offer the greatest opportunity for
XTend. Not only do we target 1000’s of patients at one time, the managed care
company usually dictates the terms of repayment based on Medicare
reimbursement and they pay us directly. We have no record keeping or data needs
on our end and while the implementation process usually takes some time, the
managed care companies give XTend long term contracts due to the roll-out of
products that can last up to a year or longer based on how many patients are
converted to our programs.
The usual rates for reimbursement are in the $36 dollar range. Our costs are in the $20
range so we net out each patient app. $12-16 per patient per month. Now take that and
multiply this times the patients we will have and the numbers correspond to substantial
revenues for the company. Taking into account some additional costs the company is still
looking at an overall gross profit of 33%.
As you can see, targeting managed care companies is the main thrust for the company.
The ability to add patients in the 1000’s quickly brings in substantial revenue and the
value of the company is raised significantly, thereby increasing the PPS and the market
cap.
Castle Hill Acquisition
As you are aware from the pr sent, we have ended the Castle Hill acquisition. We
strongly felt this would be a great acquisition for the company at the time we entered into
the agreement. As time went on, the value of this deal declined to a point that it would
have placed a tremendous financial strain on the company. The decision to end the deal
was based on the following factors:
1. Occupancy Rate of the facility – At the time we entered into the agreement,
Castle Hill was at a 91% occupancy rate. This rate satisfied not only the private
lender but also HUD, the government agency that mandates loans on facilities
such as Castle Hill. As the months passed, this rate as of January 1, 2008 had
dropped significantly to just over 71%. Our lender therefore, due to HUD
requirements, mandated that in order for the facility to qualify for funding, this
number had to be back in the 90s. This would have required an incredible
financial commitment on our part as well as additional months of marketing and
upgrades to the facility that we weren’t anticipating at the time we entered into the
agreement.
2. Marketing and Upgrades – In order for the facility to be able to market to
potential residents, many upgrades to units would have had to take place in order
to compete with the surrounding facilities of the same like. When we finished our
initial due diligence, the facilities met the standards we had required from the
lender. However, as the winter months passed, it became apparent to us that the
upgrades had to take place for Castle Hill to become once again marketable on the
empty units. Our inspection in December revealed an average cost of app. $25k
per unit in order to get them to a favorable condition. With some 50 units needing
these upgrades, we simply couldn’t risk the future of the company on an
investment like this.
3. Valuation of the project – Our initial valuation of the project was placed at $30
million dollars, plenty of an asset to qualify for a higher exchange from an asset
standpoint. However, from a profitability perspective, the acquisition would have
only netted the company less than $300k per year for the next three years while
the dementia unit would have been built and the servicing of increased debt. At
1% compared to 30% on our managed care model, we felt this was not worth the
original idea behind this acquisition.
In summation, XTend management felt that risking a major financial commitment on the
Castle Hill facility simply would not be of the best interest of the company and all of our
shareholders. Our main business model simply put would make a substantial profit as
compared to a risky venture that would have raised us to another exchange, but would in
the long run, severely hamper our ability to support our managed care programs.
Castle Hill Acquisition
As you are aware from the pr sent, we have ended the Castle Hill acquisition. We
strongly felt this would be a great acquisition for the company at the time we entered into
the agreement. As time went on, the value of this deal declined to a point that it would
have placed a tremendous financial strain on the company. The decision to end the deal
was based on the following factors:
1. Occupancy Rate of the facility – At the time we entered into the agreement,
Castle Hill was at a 91% occupancy rate. This rate satisfied not only the private
lender but also HUD, the government agency that mandates loans on facilities
such as Castle Hill. As the months passed, this rate as of January 1, 2008 had
dropped significantly to just over 71%. Our lender therefore, due to HUD
requirements, mandated that in order for the facility to qualify for funding, this
number had to be back in the 90s. This would have required an incredible
financial commitment on our part as well as additional months of marketing and
upgrades to the facility that we weren’t anticipating at the time we entered into the
agreement.
Strategic Alliances
There have been questions raised on the investor boards as to what the importance of
having these strategic alliances. It saves the company resources! Our alliance with
EvRest assist the company with financing the roll-out to managed care companies. As I
stated earlier, the process of implementing these programs takes a great deal of effort,
time, and capital while the patients get into the system and Medicare kicks in.
For example, when we close out some of our contracts, we’re looking at say 50k patients.
Our cost of goods is app. $90 per patient, or for this example $4.5 million dollars. While
the company can certainly raise the money for this, we feel dilution will only hurt the
company and with EvRest as a strategic partner, their ability to finance this works great
for all involved.
As we continue with signing strategic alliances, please keep in mind these are done for
specific reasons that will only benefit the company. The management team you have in
place would not let a great strategic alliance opportunity go by, yet through our
experience, it only makes sense if it helps the company with the current business model
now, or in the future.
In summation, please know that XTend Medical has worked very hard over the past 5
months to position ourselves to be a great company in a growing sector. Your patience is
greatly appreciated as we continue to work on closing contracts, gaining patients, and
building this company into something you as shareholders can be proud of and we, as
management, can continue to run with a bright future ahead for all of us.
All the Best,
Paul D. Lisenby
Chairman & CEO
