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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission File Number:0-17821
ALLION HEALTHCARE, INC.
(Exact Name of registrant as specified in its charter)
DELAWARE 11-2962027
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1660 WALT WHITMAN ROAD, SUITE 105, MELVILLE, NY 11747
(Address of principal executive offices)
Registrant's telephone number, including area code: (631) 547-6520
33 WALT WHITMAN ROAD, SUITE 200A, HUNTINGTON
STATION, NY 11746 (Former name, former address and
former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ]No
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). [ ] Yes [X] No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. [X] Yes [ ]No
As of May 17, 2004, the total number of outstanding shares of the Registrant's
common stock was 3,100,000.
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1: Financial Statements:
Condensed Consolidated Balance Sheets as of March 31, 2004
(Unaudited) and December 31, 2003 3
Condensed Consolidated Statements of Operations for the Three Months
Ended March 31, 2004 and 2003 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2004 and 2003 (Unaudited) 5
Notes to Condensed Consolidated Financial
Statements (Unaudited) 6
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations 11
Item 3: Quantitative and Qualitative Disclosures about Market Risk 15
Item 4: Controls and Procedures 15
PART II. OTHER INFORMATION
Item 1: Legal Proceedings 16
Item 2: Changes in Securities, Use of Proceeds and Issuer Purchases of
Equity Securities 16
Item 3: Defaults Upon Senior Securities 17
Item 4: Submission of Matters to a Vote of Security Holders 17
Item 5: Other Information 17
Item 6: Exhibits and Reports on Form 8-K 17
Signatures 18
Exhibit 3.1
Exhibit 31.1 Certification
Exhibit 32.1 Certification
ALLION HEALTHCARE, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
At March 31,
2004 At December 31,
(UNAUDITED) 2003
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents $ 208,638 $ 640,790
Accounts receivable,
(net of allowance for doubtful
accounts of $437,032 in 2004
and 2003) 3,937,383 3,074,488
Inventories 1,258,580 1,296,655
Prepaid expenses and
other current assets 89,891 107,399
------------ ------------
Total current assets 5,494,492 5,119,332
Property and equipment, net 567,789 527,667
Goodwill 4,472,068 4,472,068
Intangible assets 1,999,063 2,117,601
Other assets 169,313 178,777
------------ ------------
TOTAL ASSETS $ 12,702,725 $ 12,415,445
============ ============
LIABILTIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 5,592,355 $ 5,750,909
Notes payable-subordinated 2,650,000 1,150,000
Revolving credit line 1,147,833 --
Current portion of capital lease
obligations 91,469 89,460
Current portion of other long-term debt 11,515 12,685
------------ ------------
Total current liabilities 9,493,172 7,003,054
LONG TERM LIABILITIES:
Note payable-subordinated 1,250,000 2,750,000
Capital lease obligations 138,526 162,160
Other 104,663 106,951
------------ ------------
Total liabilities 10,986,361 10,022,165
------------ ------------
CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.001 par value,
shares authorized 20,000,000;
issued and outstanding 2,414,168 2,414 2,414
Common stock, $.001 par value;
shares authorized 80,000,000;
issued and outstanding 3,100,000 3,100 3,100
Additional paid-in capital 10,261,526 10,261,526
Accumulated deficit (8,550,676) (7,873,760)
------------ ------------
Total stockholders' equity 1,716,364 2,393,280
------------ ------------
Total liabilities and
stockholders' equity $ 12,702,725 $ 12,415,445
============ ============
See notes to condensed consolidated financial statements.
NOTE: THE BALANCE SHEET AT DECEMBER 31, 2003 HAS BEEN DERIVED FROM THE AUDITED
FINANCIAL STATEMENTS AT THAT DATE BUT DOES NOT INCLUDE ALL OF THE INFORMATION
AND FOOTNOTES REQUIRED BY GENERALLY ACCEPTED ACCOUNTING PRINCIPLES FOR COMPLETE
FINANCIAL STATEMENTS. TO REVIEW COMPLETE FINANCIAL STATEMENTS, REFER TO THE
ANNUAL REPORT ON FORM 10-KSB.
-3-
ALLION HEALTHCARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three months ended
March 31,
2004 2003
------------ ------------
Net sales $ 14,447,117 $ 8,301,772
Cost of goods sold 12,726,193 7,107,338
------------ ------------
Gross profit 1,720,924 1,194,434
Operating expenses:
Selling, general and administrative expenses 2,306,610 1,346,606
------------ ------------
Operating loss (585,686) (152,172)
Interest expense (83,946) (48,192)
------------ ------------
Loss before income taxes (669,632) (200,364)
Provision for income taxes 7,284 1,246
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Net loss $ (676,916) $ (201,610)
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Basic and diluted loss per common share $ (.22) $ (.07)
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Basic and diluted weighted average
of common shares outstanding 3,100,000 3,100,000
============ ============
See notes to condensed consolidated financial statements.
-4-
ALLION HEALTHCARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three months ended March 31,
----------------------------
2004 2003
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (676,916) $ (201,610)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 178,411 81,360
Provision for doubtful accounts -- 58,925
Changes in operating assets and liabilities:
Accounts receivable (862,895) 142,745
Inventories 38,075 (136,326)
Prepaid expenses and other assets 26,832 (357,631)
Accounts payable and accrued expenses (158,554) 404,542
------------ ------------
Net cash used in operating activities $ (1,455,047) $ (7,995)
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CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of property and equipment (99,855) (1,094)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit $ 14,600,000 $ 8,525,000
Repayment of line of credit (13,452,167) (8,148,292)
Repayment of capital leases and long-term debt (25,083) (28,006)
------------ ------------
Net cash provided by financing activities $ 1,122,750 $ 348,702
------------ ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS $ (432,152) $ 339,613
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 640,790 212,927
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 208,638 $ 552,540
============ ============
See notes to condensed consolidated financial statements.
-5-
ALLION HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2004
NOTE A BASIS OF PRESENTATION
The unaudited financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q. Accordingly, they do not include all of the
information and footnotes required to be presented for complete financial
statements. The accompanying financial statements reflect all adjustments
(consisting only of normal recurring items), which are, in the opinion of
management, necessary for a fair presentation of the results for the interim
periods presented. The accompanying Balance Sheet at December 31, 2003 has been
derived from audited financial statements included in the Company's Annual
Report on Form 10-KSB for the year then ended.
The financial statements and related disclosures have been prepared with the
assumption that users of the interim financial information have read or have
access to the audited financial statements for the preceding fiscal year.
Accordingly, these financial statements should be read in conjunction with the
audited financial statements and the related notes thereto included in the
Annual Report on Form 10-KSB for the year ended December 31, 2003 and filed with
the Securities and Exchange Commission on April 14, 2004.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States require the Company's management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
The results of operations for the three months ended March 31, 2004 are not
necessarily indicative of the results to be expected for the year ending
December 31, 2004 or any other interim period.
NOTE B INVENTORIES
Inventories consist entirely of pharmaceuticals available for sale. Inventories
are recorded at lower of cost or market, cost being determined on a first-in,
first-out ("FIFO") basis.
NOTE C NET LOSS PER SHARE
Basic earnings per share are computed using the weighted average number of
common shares outstanding during the period. Diluted per share amounts include
dilutive common equivalent shares. Common equivalent shares, consist of the
incremental common shares issuable upon the exercise of stock options and
warrants; common equivalent shares are excluded from the calculation if their
effect is anti-dilutive. Diluted loss per share for the three months ended March
31, 2004, and 2003 do not include the impact of common stock options and
warrants then outstanding, as the effect of their inclusion would be
anti-dilutive.
-6-
NOTE D ISSUANCE OF PREFERRED STOCK
In April 2004, the Company raised approximately $2,000,000 in a private
placement with several investors. The Company sold 333,333 shares of Series D
convertible preferred stock at $6.00 per share subject to certain modifications
as defined in the Certificate of Designation of Series D Preferred Stock of
Allion Healthcare, Inc. There will be no dividends payable on the shares, unless
the Company, in its sole discretion declares a dividend with respect to the
common stock. In the event of any liquidation, the shares shall share on a pari
passu basis in liquidation with the Series A, B and C preferred stock
outstanding.
In April 2003, the Company raised $6,175,000 in a private placement with several
investors. The Company sold 1,235,000 shares of Series C convertible preferred
stock at $5.00 per share. There will be no dividends payable on the shares,
unless the Company, in its sole discretion declares a dividend with respect to
the common stock. In the event of any liquidation, these shares shall share on a
pari passu basis in liquidation with the Series A and B preferred stock
outstanding. A portion of the proceeds of the sale of the Series C convertible
preferred stock was used in connection with the Company's $1,475,000 settlement
of its lawsuit with Morris and Dickson.
NOTE E ACQUISITION
On May 1, 2003, the Company acquired Medicine Made Easy (MME). MME fills
specialty oral and injectable prescription medications and biopharmaceuticals.
MME began operations in January 1999 in the State of California. The aggregate
consideration for the acquisition was $4,950,000, subject to post-closing
adjustments, and warrants to purchase 227,273 shares of the Company's common
stock for $11.00 per share. $300,000 of the purchase price was paid in cash
prior to closing as a lock-up fee, of which $200,000 was paid as of December 31,
2002. $2,250,000 of the purchase price was paid in cash at closing. $1,150,000
of the purchase price was paid by subordinated secured promissory notes payable
on May 1, 2004. This note was paid in full as of May 1, 2004. The remaining
$1,250,000 was paid by subordinated secured promissory notes payable on May 1,
2005. These notes payable accrue interest at a rate of Prime Rate plus 2% per
annum. The Prime Rate as of March 31, 2004 was 4.00%. The notes payable are
secured by all the assets of the Company, and are subordinated to the Company's
senior indebtedness.
-7-
The purchase price consisted of:
Cash paid to seller prior to closing $ 300,000
Cash paid at closing 2,250,000
Notes payable-subordinated 2,400,000
Direct acquisition costs 496,898
Liabilities assumed 2,060,551
Fair value of warrants issued 27,354
-------------
Total $ 7,534,803
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The purchase price was allocated as follows:
Current assets $ 1,018,906
Property and equipment 202,461
Identified intangible assets 1,841,368
Goodwill (not deductible for tax purposes) 4,472,068
-------------
Total $ 7,534,803
=============
The operations of MME were included in the consolidated financial statements as
of May 1, 2003.
UNDER SFAS 141, "Business Combinations", the Company made an adjustment to
current assets and goodwill in the amount of $235,000 as of December 31, 2003 as
a result of the Company reaching an agreement on the California AIDS Drugs
Assistance Program (ADAP) Audit.
(Note F)
The following pro forma results were developed assuming the acquisition of
Medicine Made Easy occurred January 1, 2003. In addition, the sale of the Series
C convertible preferred stock is also presumed to have occurred on January 1,
2003.
Three Months Ended
March 31, 2003
------------------
Revenue $14,228,782
Net loss $ (306,519)
Basic and diluted loss per share $ (.10)
NOTE F CONTINGENCIES - LEGAL PROCEEDINGS
NEW YORK MEDICAID AUDIT. In May 2004, the Company was notified that MOMS
Pharmacy, Inc. ("MOMS"), the Company's New York wholly owned subsidiary, is the
subject of an audit and review being conducted by the New York State Department
of Health (the "Department"). As a consequence of the audit and review, the
Department is currently withholding 25% of MOMS payments under the Medicaid
program. The audit and review is expected to be completed by August 2004, at
which time the Department will advise MOMS of its findings. The Department may
conclude that MOMS is subject to certain financial penalties and fines, in which
case some or all of the payments withheld ultimately may not be paid to MOMS. At
this time, management is unable to estimate the ultimate outcome of the audit,
but does not believe the outcome will have a material adverse effect on the
Company's financial position and financial resources. No adjustments have been
recorded in the Company's consolidated financial statements for this matter.
-8-
NEW JERSEY MEDICAID AUDIT. During the first quarter of 2003, Medicaid commenced
a review of the Company's billing practices in New Jersey. In particular,
Medicaid reviewed whether the appropriate procedures were followed by the
Company and whether the requisite patient consents were obtained by the Company
at the time of delivery. During 2003 the Company accrued an estimated cost of
$200,000 for the New Jersey Medicaid Audit. In April 2004 the Company entered
into a settlement agreement with Medicaid of New Jersey for $200,000.
CALIFORNIA AIDS DRUG ASSISTANCE PROGRAM (ADAP) AUDIT. In 2003, prior to the
acquisition of MME by the Company, ADAP commenced a review of billing by MME in
California. In particular, ADAP reviewed whether the appropriate procedures were
followed and whether the requisite consents were obtained. The Company met with
ADAP and agreed to a settlement. The settlement amount was within the agreed
upon post closing price adjustment as agreed to between the Company and the
sellers of MME at the closing of the transaction. As a result, the Company will
not suffer any adverse financial effects from the ADAP audit.
NOTE G STOCK-BASED COMPENSATION PLANS
The Company accounts for its stock option awards to employees under the
intrinsic value based method of accounting prescribed by Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees." Under the
intrinsic value based method, compensation cost is the excess, if any, of the
fair market value of the stock at grant date or other measurement date over the
amount an employee must pay to acquire the stock. The Company makes pro forma
disclosures of net income and earnings per share as if the fair value based
method of accounting had been applied as required by Statement of Financial
Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation" and SFAS No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure." The Company has not granted options below fair
market value on the date of grant. Pro forma information for Stock Based
Compensation Plans is in the table that follows:
Three Months Ended
----------------------------------
March 31, March 31,
2004 2003
-------------- -----------------
Net loss, as reported $ (676,916) $ (201,610)
Deduct: Total stock-based employee
compensation expense determined
under fair value method used (10,371) (22,517)
-------------- -----------------
Net loss, pro forma $ (687,287) $ (224,127)
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Net loss per share;
Basic and diluted, as reported $ (.22) $ (.07)
============== =================
Basic and diluted, pro forma $ (.22) $ (.07)
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-9-
NOTE H CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS
The Company provides prescription medications to its customers in the United
States through its four wholly owned subsidiaries. Credit losses relating to
customers historically have been minimal and within management's expectations.
At December 31, 2003, the Company maintained approximately 92% of its cash and
cash equivalents with two financial institutions.
At March 31, 2004, the Company maintained approximately 77% of its cash and cash
equivalents with two financial institutions.
Under certain federal and state third-party reimbursement programs, the Company
received net patient revenues of approximately $12,886,000 and $6,942,000 for
the three months ended March 31, 2004 and March 31, 2003, respectively. At March
31, 2004 and December 31, 2003, the Company had an aggregate outstanding
receivable from federal and state agencies of approximately $3,400,000 and
$3,012,000 respectively.
NOTE I MAJOR SUPPLIERS
During the three months ended March 31, 2004 and 2003, the Company purchased
approximately $12,557,000 and $7,049,900, respectively from two major suppliers.
Amounts due to these suppliers at March 31, 2004 and December 31, 2003 were
approximately $4,260,000 and $1,026,600 respectively.
In September 2003, the Company signed a five-year agreement with a drug
wholesaler that requires certain minimum purchases per the agreement. If the
Company does not meet the minimum purchase commitments as set forth in the
agreement, the Company will be charged a prorated amount of 0.20% of the
projected volume remaining on the Term of the Agreement. The agreement also
states that the Company's minimum purchases during the term of the agreement
will be no less than $400,000,000. The Company has purchased approximately
$25,000,000 from this drug wholesaler since the beginning of the term of this
agreement.
NOTE J SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES
During the three months ended March 31, 2004 and 2003 the Company paid state
franchise taxes of $15,666 and $35,980, respectively.
Interest paid for the three months ended March 31, 2004 and 2003 were $72,265
and $46,051, respectively.
NOTE K SUBSEQUENT EVENTS
In April 2004, the Company raised approximately $2,000,000 in a private
placement with several investors. The Company sold 333,333 shares of Series D
convertible preferred stock at $6.00 per share subject to certain modifications
as defined in the Certificate of Designation of Series D Preferred Stock of
Allion Healthcare, Inc. There will be no dividends payable on the shares, unless
the Company, in its sole discretion declares a dividend with respect to the
common stock. In the event of any liquidation, the shares shall share on a pari
passu basis in liquidation with the Series A, B and C preferred stock
outstanding.
-10-
ALLION HEALTHCARE, INC. AND SUBSIDIAIRIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with our condensed
consolidated financial statements and notes thereto included elsewhere in this
Report. This discussion contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The forward-looking statements included herein and any
expectations based on such forward-looking statements are subject to risks and
uncertainties and other important factors, including, without limitation, the
Company's cash constraints, the Company's limited operating history, the ability
of the Company to market its customized packaging system and the acceptance of
such system by healthcare providers and patients, the ability of the Company to
manage its growth with a limited management team, the ability of the Company to
integrate acquisitions, and the other risks and uncertainties described from
time to time in the Company's public announcements and SEC filings, including
without limitation the Company's Quarterly and Annual Reports on Forms 10-QSB
and 10-KSB, respectively.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2004 AND 2003
NET SALES
Net sales for the three months ended March 31, 2004 increased to $14,447,117
from $8,301,772 for the three months ended March 31, 2003, an increase of
74.02%.
The increase in net sales for the three months ended March 31, 2004 as compared
to the same period in 2003 is attributable to the Company's acquisition of MME
and to volume growth with the addition of new patients in New York and Florida
divisions. The Company's California division generated net sales of
approximately $4,967,000 for the three months ended March 31, 2004. The
California division was acquired May 1, 2003 and therefore did not contribute
net sales for the three months ended March 31, 2003. Net sales in New York
increased by approximately $1,567,000 for the three months ended March 31, 2004
as compared to the same period in 2003. Net sales in Florida increased by
approximately $141,000 for the three months ended March 31, 2004 as compared to
the same period in 2003. Net sales in Texas decreased by approximately $530,000
for the three months ended March 31, 2004 as compared to the same period in
2003. This decline resulted primarily from the New Jersey Medicaid Audit, which
negatively affected the Company's Texas division. The Texas division has
historically serviced the Company's New Jersey customers and while the New
Jersey Medicaid audit was ongoing, the Company restricted service to New Jersey
patients.
-11-
GROSS PROFIT
Gross profit was $1,720,924 and $1,194,434 for the three months ended March 31,
2004 and 2003 respectively, and represents 11.91% and 14.39% of net sales,
respectively. The Company's gross margins for the three months ended March 31,
2004 decreased by approximately 2.48% as compared with the gross margins for the
three months ended March 31, 2003 due to a 2% prescription reimbursement rate
decrease by New York Medicaid and Aids Drug Assistance Program (ADAP) that went
into effect in July 2003, as well as the Company devoting more of its efforts to
servicing the HIV/AIDS market, which has a lower gross margin.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $2,306,610 and $1,346,606 for
the three months ended March 31, 2004 and 2003, respectively, and represented
15.97% and 16.22% of net sales, respectively.
The increase in selling, general and administrative expenses of $960,004 for the
three months ended March 31, 2004 as compared to the same period in 2003 was
primarily due to the following factors:
- increases in clinical, administrative and sales personnel costs
related to the MME acquisition of approximately $480,000;
- an increase in general operating expenses related to the MME
acquisition of approximately $245,000;
- an increase in depreciation and amortization expenses related to the
MME acquisition of approximately $92,000; and
- an increase in the Company's general and umbrella insurance policies
of approximately $50,000.
OPERATING LOSS
Operating losses were $585,686, and $152,172 for the three months ended March
31, 2004 and 2003, respectively and represents 4.05% and 1.83% of net sales,
respectively. The increase in operating loss is attributable to an increase in
selling, general and administrative expenses, and lower gross margin reflecting
a 2% prescription reimbursement rate decrease by New York Medicaid and ADAP that
went into effect in July 2003.
INTEREST EXPENSE
Interest expense was $83,946 and $48,192 for the three months ended March 31,
2004 and 2003, respectively. The increase in interest expense is primarily
attributable to the Company's increased short-term borrowing from its revolving
credit facility and interest on the secured promissory notes payable related to
the acquisition of Medicine Made Easy.
-12-
PROVISION FOR INCOME TAXES
For the three months ended March 31, 2004, the Company recorded a provision for
income taxes of $7,284, as compared to an income tax provision of $1,246 for the
comparable period in the prior year. The provision for income taxes relates
primarily to franchise tax payments. Deferred tax assets related to net
operating loss carry-forwards from prior year losses and losses with the
acquisition of Medicine Made Easy ("MME") have been fully reserved by a
valuation allowance since the Company historically had losses and cannot
determine the future utilization of those assets. In addition, as a result of
the change in ownership with the acquisition of MME, certain limitations may
apply on the ultimate utilization of the losses related to MME.
NET LOSS
For the three months ended March 31, 2004, the Company recorded a net loss of
$676,916, as compared to a net loss of $201,610 for the comparable period in the
prior year. This increase in net loss is attributable to the increase in
selling, general and administrative expenses, lower gross margin, and an
increase in interest expense for the period.
LIQUIDITY AND CAPITAL RESOURCES
The Company purchases the medications it needs to fill prescriptions from
wholesalers, who require that almost all purchases be made in cash. The Company
is reimbursed by third party payors, on average, within 30 days after a
prescription is filled and a claim is submitted in the appropriate format.
Accordingly, the Company needs significant cash resources to operate. At March
31, 2004, the Company's cash balance was $208,638.
The Company has a revolving credit facility with GE Capital for an amount up to
a maximum of $6.0 million available to the Company for short-term borrowings
which expires in April 2006. Borrowings under the facility are based on the
Company's accounts receivable and bear interest at Prime Rate plus two percent.
The Prime Rate at March 31, 2004 was 4.00%. At March 31, 2004, the Company's
borrowing capacity was approximately $2,350,000, and its borrowings under this
facility were $1,147,833. The Company's borrowings are collateralized by a
-13-
perfected and primary security interest in all of the Company's assets, accounts
receivable, trademarks, licenses, and value of any kind of the Company and
require compliance with certain financial covenants. As of March 31, 2004, the
Company was in compliance with all of these covenants.
In addition to the revolving credit line, the Company has a $1,500,000 bank loan
from a bank that accrues interest at Prime Rate per annum, with the full
principal payable in March of 2005. The Prime Rate at March 31, 2004 was 4.00%.
If the Company is unable to pay off this loan when due, the Company will enter
into discussions with the bank that issued the loan to extend the loan for
another year. In the past, the bank has agreed to extend the term of the loan,
but there can be no assurance that it will be willing to do so on terms
acceptable to the Company or at all. This bank loan has been secured by one of
the Company's principal investors.
The Company's principal sources of liquidity have been from the net proceeds of
external financing transactions. The Company has financed operating losses
through the private placement of securities. The Company expects to continue to
fund operations through external financing transactions until it achieves
positive cash flow. In April 2004, the Company raised $2,000,000 in a private
placement with several investors. The Company sold 333,333 shares of Series D
convertible preferred stock at $6.00 per share subject to certain modifications
as defined in the Certificate of Designation of Series D Preferred Stock of
Allion Healthcare, Inc. There will be no dividends payable on the shares, unless
the Company, in its sole discretion declares a dividend with respect to the
common stock. In the event of any liquidation, the shares shall share on a pari
passu basis in liquidation with the Series A, B and C preferred stock
outstanding. In May 2004, the Company was notified that its New York wholly
owned subsidiary ("MOMS Pharmacy, Inc.") is the subject of an audit and review
being conducted by the New York State Department of Health (the "Department").
During the course of the Department's investigation which is expected to be
completed by August 2004, 25% percent of the payments to MOMS Pharmacy, Inc.
will be withheld by the Department. For the three months ended March 31, 2004,
approximately 56% of the Company's revenues were derived from MOMS Pharmacy,
Inc. See "Part II Other Information Item 1. Legal Proceedings". Based on the
Company's current financial position and expected financial performance in 2004,
it does not believe that its liquidity would be adversely impacted in 2004 as a
result of the MOMS Pharmacy, Inc. Medicaid audit or if it is unable to complete
additional financings.
The Company's liquidity is also impacted by the credit terms that it receives by
its suppliers. In September 2003, the Company expanded its relationship with
AmerisourceBergen, a large drug wholesaler. The Company signed a five-year
purchase agreement with that drug wholesaler which requires certain minimum
purchase commitments over the term of the agreement and improved the Company's
payment terms from approximately 13 days to 31 days. If the Company has not met
the minimum purchase commitments as set forth in the agreement, the Company will
be charged a prorated amount of 0.20% of the projected volume remaining on the
term of the Agreement. Pursuant to the terms of the arrangement between the
Company and the drug wholesaler, the drug wholesaler has a security interest in
the Company's personal property that is subordinated to GE Capital.
OFF-BALANCE SHEET ARRANGEMENTS
The Company does not have any off-balance sheet arrangements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
There have been no material changes in the Company's critical accounting
policies and estimates from those disclosed in Item 6 of the Company's Annual
Report on Form 10-KSB for the year ended December 31, 2003.
ACQUISITION
On May 1, 2003, the Company acquired Medicine Made Easy. The aggregate
consideration for the acquisition was $4,950,000, subject to post-closing
adjustments, and warrants to purchase 227,273 shares of the Company's common
stock for $11.00 per share. $300,000 of the purchase price was paid in cash
prior to closing as a lock-up fee. $2,250,000 of the purchase price was paid in
cash at closing. $1,150,000 of the purchase price was paid by subordinated
secured promissory notes payable on May 1, 2004. These notes were paid in full
as of May 1, 2004. The remaining $1,250,000 was paid by subordinated secured
promissory notes payable on May 1, 2005. These notes payable accrue interest at
a rate of Prime Rate plus 2% per annum. The notes payable are secured by cash,
cash equivalents, accounts receivable, inventory, fixed and other assets of the
Company and are subordinated to GE Capital and AmerisourceBergen.
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Through the acquisition of MME, the Company expects its patient base to increase
and potentially generate profits during 2004. Prior to the acquisition, the
Company's management was aware of the losses that were being generated by MME's
operations. Management plans to implement its methods and strategies to provide
a lower cost of operations, while also increasing its patient base and profits.
There can be no assurance, however, the Company will be successful in these
endeavors.
CONTRACTUAL OBLIGATIONS
At March 31, 2004, the Company's contractual cash obligations and commitments
(including those related to the MME transactions) during the next five years are
as follows:
Commitments 1-3 Years 4-5 Years Total
------------------------- --------------- ---------------- ---------------
Operating leases $ 943,498 $ 427,219 $ 1,370,717
Capital leases 255,781 - 255,781
Notes payable 3,900,000 - 3,900,000
Revolving credit line 1,147,833 - 1,147,833
Long term debt 116,178 - 116,178
Purchase commitments 236,648,951 138,250,000 374,898,951
--------------- ---------------- ---------------
$243,012,241 $ 138,677,219 $ 381,689,460
=============== ================ ===============
The Company entered into a lease agreement in February 2004 that expires in June
2009, to relocate its New York pharmacy and corporate office. The Company
completed its move to the new facility in the beginning of March 2004.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our primary financial market risk exposure consists of interest rate
risk related to interest that we are obligated to pay on our variable-rate debt.
We do not use derivative financial instruments to manage our exposure
to rising interest rates on our variable-rate debt.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Under the supervision
and with the participation of management, including our principal executive
officer who is also acting as the principal financial officer, the Company
evaluated the effectiveness of the design and operation of its disclosure
controls and procedures, as such term is defined in Rule 13a-15(e) promulgated
under the Securities Exchange Act of 1934, as amended (the "Exchange Act") as of
the end of the period covered by this quarterly report on Form 10-Q for the
quarter ended March 31, 2004 (the "Report"). Based on this evaluation, such
executive concluded that the Company's disclosure controls and procedures were
effective in ensuring that all material information required to be filed in this
Report has been made known to him in a timely manner.
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CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING. There have been
no significant changes in the Company's internal controls over financial
reporting that occurred during the most recent fiscal quarter that have
materially affected, or are reasonably likely to materially affect, the
Company's internal controls over financial reporting.
ALLION HEALTHCARE, INC. AND SUBSIDIARIES
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
NEW YORK MEDICAID AUDIT. In May 2004, the Company was notified that MOMS
Pharmacy, Inc. ("MOMS"), the Company's New York wholly owned subsidiary, is the
subject of an audit and review being conducted by the New York State Department
of Health (the "Department"). As a consequence of the audit and review, the
Department is currently withholding 25% of MOMS payments under the Medicaid
program. The audit and review is expected to be completed by August 2004, at
which time the Department will advise MOMS of its findings. The Department may
conclude that MOMS is subject to certain financial penalties and fines, in which
case some or all of the payments withheld ultimately may not be paid to MOMS. At
this time, management is unable to estimate the ultimate outcome of the audit,
but does not believe the outcome will have a material adverse effect on the
Company's financial position and financial resources. No adjustments have been
recorded in the Company's consolidated financial statements for this matter.
NEW JERSEY MEDICAID AUDIT. During the first quarter of 2003, Medicaid commenced
a review of the Company's billing practices in New Jersey. In particular,
Medicaid reviewed whether the appropriate procedures were followed by the
Company and whether the requisite patient consents were obtained by the Company
at the time of delivery. During 2003 the Company accrued an estimated cost of
$200,000 for the New Jersey Medicaid Audit. In April 2004 the Company entered
into a settlement agreement with Medicaid of New Jersey for $200,000.
CALIFORNIA AIDS DRUG ASSISTANCE PROGRAM (ADAP) AUDIT. In 2003, prior to the
acquisition of MME by the Company, ADAP commenced a review of billing by MME in
California. In particular, ADAP reviewed whether the appropriate procedures were
followed and whether the requisite consents were obtained. The Company met with
ADAP and agreed to a settlement. The settlement amount was within the agreed
upon post closing price adjustment as agreed to between the Company and the
sellers of MME at the closing of the transaction. As a result, the Company will
not suffer any adverse financial effects from the ADAP audit.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF
EQUITY SECURITIES
In April 2004, the Company raised $2,000,000 in a private placement
with several investors. The Company sold 333,333 shares of Series D convertible
preferred stock at $6.00 per share subject to certain modifications as defined
in the Certificate of Designation of Series D Preferred Stock of Allion
Healthcare, Inc. There will be no dividends payable on the shares, unless the
Company, in its sole discretion declares a dividend with respect to the common
stock. In the event of any liquidation, the shares shall share on a pari passu
basis in liquidation with the Series A, B and C preferred stock outstanding. The
Series D shares were sold pursuant to Regulation D of the Securities Act of
1933, as amended.
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION.
In January 2004, the Company's Chief Financial Officer, Broughan Gorey
resigned. Michael P. Moran, President and CEO has been serving as the
Company's acting Chief Financial Officer since Mr. Gorey's resignation.
In April 2004, the Company entered into a preferred provider
relationship with Roche Laboratories Inc. to provide specialty pharmacy
services and fill prescriptions for Fuzeon, one of the pharmaceutical
company's HIV products. In exchange for providing data to the
pharmaceutical company the Company will be permitted to purchase the
HIV product at a discount.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herein:
3.1E Amended and Restated Certificate of Designation of Rights and
Preferences of Series D Preferred Stock of Allion Healthcare,
Inc.
31.1 Certification of the Chief Executive Officer and acting Chief
Financial Officer pursuant to Rule 13a-14(a) (Section 302 of the
Sarbanes-Oxley Act of 2002)
32.1 Certification of the Chief Executive Officer and acting Chief
Financial Officer pursuant to 18 U.S.C.ss.1350 (Section 906 of
the Sarbanes-Oxley Act of 2002)
(b) Reports on Form 8-K: - NONE
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SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Date: May 17, 2004
ALLION HEALTHCARE, INC., AND SUBSIDIARIES
(Registrant)
By: /S/ MICHAEL P. MORAN
------------------------
Michael P. Moran
Chairman, President, Chief Executive
Officer, Secretary and Acting Chief
Financial Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
/s/ JOHN PAPPAJOHN
- ------------------
John Pappajohn, Director
Date: MAY 17, 2004
/s/ DERACE SCHAFFER, M.D.
- -------------------------
Derace Schaffer, M.D., Director
Date: MAY 17, 2004
/s/ JAMES HOOVER
- ----------------
James Hoover, Director
Date: MAY 17, 2004
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