SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X. QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
- -- ACT OF 1934
For the quarterly period ended: MARCH 31, 2003
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
- -- EXCHANGE ACT OF 1934
COMMISSION FILE NO. 1-12451
NEW YORK HEALTH CARE, INC.
(Exact name of registrant as specified in its charter)
NEW YORK 11-2636089
(State of other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1850 MCDONALD AVENUE, BROOKLYN, NY 11223
(Address of principal executive offices) (Zip Code)
(718) 375-6700
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act 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. Yes X No
--- ---
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities under
a plan confirmed by a court.
Yes No
--- ---
APPLICABLE ONLY TO CORPORATE REGISTRANTS
State the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 23,918,974
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
(a) New York Health Care's unaudited, interim financial statements for
its first fiscal quarter (the three months ended March 31, 2003) have been set
forth below. Management's discussion and analysis of the company's financial
condition and the results of operations for the first quarter will be found
under Item 2, following the financial statements.
NEW YORK HEALTH CARE, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED
MARCH 31, 2003
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, 2003 December 31, 2002
---------------- -------------------
(Unaudited) (Note 1)
Current assets:
Cash and cash equivalents $ 8,263,438 $ 2,625,378
Restricted cash 200,000 100,000
Due from lending institution 141,792 -
Accounts receivable, net of allowance for uncollectible
amounts of $327,000 5,675,969 -
Subscriptions receivable - 290,000
Unbilled services 52,967 -
Prepaid expenses and other current assets 341,357 36,342
---------------- -------------------
Total current assets 14,675,523 3,051,720
Property and equipment, net 219,606 -
Goodwill, net 900,587 -
Other intangible assets, net 2,355,311 1,936,033
Deferred merger costs - 248,363
Other assets 74,229 23,333
---------------- -------------------
Total assets $ 18,225,256 $ 5,259,449
================ ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accrued payroll $ 1,113,644 -
Current portion of lease obligations payable 12,576 -
Accounts payable and accrued expenses 7,179,885 $ 349,182
Due to HRA 2,292,418 -
---------------- -------------------
Total current liabilities 10,598,523 349,182
---------------- -------------------
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares
authorized; Class A Preferred, 590,375 authorized,
issued and outstanding 5,904 -
Common stock, $.01 par value,100,000,000 shares
authorized; 23,943,821 shares issued and 23,918,975
outstanding as of March 31, 2003; 50,000,000 shares
authorized; 21,116,494 shares issued and outstanding
as of December 31, 2002 239,438 211,165
Additional paid-in capital 28,268,962 6,550,328
Deficit (20,856,088) (1,851,226)
Less: Treasury stock (24,846 common shares at cost) (31,483) -
---------------- -------------------
Total shareholders' equity 7,626,733 4,910,267
---------------- -------------------
Total liabilities and shareholders' equity $ 18,225,256 $ 5,259,449
================ ===================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-1
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For The Three Months Ended
March 31,
---------------------------
2003 2002
------------- ------------
Net patient service revenue $ 11,994,489 $ -
------------- ------------
Expenses:
Professional care of patients 9,706,778 -
-------------
Product development 94,996 87,946
------------- ------------
General and administrative
(excluding non cash compensation) 2,453,730 240,177
Non cash compensation 752,520 -
------------- ------------
Total general and administrative expenses 3,206,250 240,177
------------- ------------
Goodwill impairment 17,869,339 -
Bad debts expense 15,000 -
Depreciation and amortization 114,488 52,000
------------- ------------
Total operating expenses 31,006,851 380,123
------------- ------------
Loss from operations (19,012,362) (380,123)
Non-operating expenses:
Interest income 8,217 -
Interest expense (717) -
------------- ------------
Net loss $(19,004,862) $ (380,123)
============= ============
Basic and diluted loss per share $ (0.79) $ (.02)
============= ============
Weighted and diluted average shares outstanding 23,912,406 19,970,474
============= ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-2
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2003
(UNAUDITED)
Preferred Treasury
Common Stock Stock Additional Stock
--------------------------- --------------------- Paid-In -------------------------
Shares Amount Shares Amount Capital Shares Amount
------------ ------------- --------- ---------- ----------- ------------ -----------
Balance at January 1, 2003 21,116,494 $ 211,165 - - $ 6,550,328
Common stock issued for cash, net 327,327 3,273 1,025,535
Reverse acquisition on January 2,
2003 2,500,000 25,000 590,375 $ 5,904 19,940,579 24,846 $ (31,483)
Revaluation of options/warrants
as part of the reverse acquisition 721,100
Warrants earned for service 31,420
Net loss
------------ ------------- --------- ---------- ----------- ------------ -----------
Balance at March 31, 2003 23,943,821 $ 239,438 590,375 $ 5,904 $28,268,962 24,846 $ (31,483)
============ ============= ========= ========== =========== ============ ===========
Deficit Total
------------- ------------
Balance at January 1, 2003 $ (1,851,226) $ 4,910,267
Common stock issued for cash, net 1,028,808
Reverse acquisition January 2,
2003 19,940,000
Revaluation of options/warrants
as part of the reverse acquisition 721,100
Warrants earned for service 31,420
Net loss (19,004,862) (19,004,862)
------------- ------------
Balance at March 31, 2003 $(20,856,088) $ 7,626,733
============= ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-3
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For The Three Months Ended
March 31,
--------------------------
2003 2002
------------- -----------
Cash flows from operating activities:
Net loss $(19,004,862) $ (380,123)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Goodwill impairment 17,869,339 -
Non cash compensation 752,520 -
Depreciation and amortization 114,488 55,249
Bad debts expense 15,000 -
Changes in operating assets and liabilities
net of effects of purchase of subsidiary:
Increase in accounts receivable
and unbilled services (368,291) (33,833)
Increase in prepaid expenses and other current assets (120,392) -
Decrease in due from lending institution 11,033 -
Decrease in other assets 2,350 -
Decrease in accrued payroll (84,131) -
Increase in accounts payable and accrued expenses 1,508,315 9,802
Increase in due to HRA 360,621 -
------------- -----------
Net cash provided by (used in)
operating activities 1,055,990 (348,905)
------------- -----------
Cash flows from investing activities:
Net cash acquired from purchase of subsidiary 3,407,442 -
Acquisition of property and equipment (28,446) -
Acquisition of intangible assets (10,029) (8,000)
Increase in restricted cash (100,000) -
------------- -----------
Net cash provided by (used in)
investing activities 3,268,967 (8,000)
------------- -----------
Cash flows from financing activities:
Payments on lease obligation payable (5,705) -
Proceeds of issuance of common stock 1,028,808 1,009,319
Collection of subscription receivable 290,000 -
------------- -----------
Net cash provided by financing activities 1,313,103 1,009,319
------------- -----------
Net increase in cash and cash equivalents 5,638,060 652,414
Cash and cash equivalents at beginning of period 2,625,378 896,426
------------- -----------
Cash and cash equivalents at end of period $ 8,263,438 $1,548,840
============= ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-4
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION:
Organization:
New York Health Care, Inc. ("New York Health Care") was initially organized
under the laws of the State of New York in 1983. New York Health Care provides
services of registered nurses and paraprofessionals to patients throughout New
York and New Jersey. The Bio Balance Corporation, ("Bio Balance") a Delaware
corporation, was formed in May 2001. Bio Balance is a medical foods/specialty
pharma company devoted to the discovery, manufacturing and marketing of
probiotic agents for therapy of gastrointestinal diseases. Although Bio Balance
has commenced the tests and panel review necessary for its product to be
established as generally regarded as safe ("GRAS") and a medical food under
regulations of the Food and Drug Administration ("FDA"), there is no assurance
that the FDA will not contest the status. Further if Bio Balance is successful
in establishing GRAS and medical food status, there can be no assurance that Bio
Balance will be successful in marketing any such products. The consolidated
entity, collectively referred to as the "Company", includes Bio Balance and New
York Health Care, Inc. and its wholly owned subsidiary NYHC Newco Paxxon Inc.
D/B/A Helping Hands Health Care ("Helping Hands"). All significant intercompany
balances and transactions have been eliminated.
On January 2, 2003, Bio Balance acquired New York Health Care in a transaction
accounted for as a reverse acquisition (See Note 2). The accompanying condensed
consolidated financial statements of the Company reflect the historical results
of the predecessor entity, Bio Balance, prior to January 2, 2003 and the
consolidated results of operations of the Company subsequent to the acquisition
date of January 2, 2003.
The common stock and per share information in the condensed consolidated
financial statements and related notes have been retroactively adjusted to give
effect to the reverse acquisition on January 2, 2003.
In January 2003, the Company amended its certificate of incorporation to provide
for an increase in the Company's number of authorized common stock and preferred
stock. The authorized number of common stock increased from 50,000,000 shares
to a total of 100,000,000 shares. The authorized number of preferred stock
increased from 2,000,000 shares to a total of 5,000,000 shares.
F-5
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The accompanying interim consolidated financial statements have been prepared by
the Company without audit, in accordance with the instructions for Form 10-Q
pursuant to the rules and regulations of the Securities and Exchange Commission
("SEC") and therefore do not include all information and notes normally provided
in the annual financial statements and should be read in conjunction with the
audited financial statements and the notes thereto of Bio Balance and New York
Health Care for the year ended December 31, 2002. Included in the Form 8-K/A of
New York Health Care, Inc. as filed on March 17, 2003 with the SEC is Bio
Balance's audited financial statements for the year ended December 31, 2002, and
in the Form 10-K of New York Health Care, Inc. as filed on March 17, 2003 with
the SEC is New York Health Care's audited financial statements for the year
ended December 31, 2002.
In the opinion of the Company, the accompanying unaudited financial statements
contain all adjustments (which consist of normal and recurring adjustments)
necessary for a fair presentation of the financial statements. The results of
operations for the three months ended March 31, 2003 are not necessarily
indicative of the results to be expected for the full year.
Estimates:
The preparation of financial statements in conformity with generally accepted
accounting principles requires 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.
Recently Issued Accounting Pronouncements:
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure". This statement amends SFAS No. 123,
"Accounting for Stock-Based Compensation," to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, this statement amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The Company has chosen to continue to account for stock-based
compensation using the intrinsic value method prescribed in APB Opinion No. 25
and related interpretations. Accordingly, compensation expense for stock
options is measured as the excess, if any, of the estimate of the market value
of the Company's stock at the date of the grant over the amount an employee must
pay to acquire the stock. The Company has adopted the disclosure provisions of
SFAS No. 148.
F-6
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2 - ACQUISITION OF NEW YORK HEALTH CARE, INC. AND PRIVATE PLACEMENT:
On January 2, 2003, Bio Balance consummated a business combination with New York
Health Care. As a result of the merger, Bio Balance shareholders exchanged all
of their Bio Balance shares for 21,443,821 shares of common stock of New York
Health Care. New York Health Care effectuated a one share for one and one-half
shares reverse stock split simultaneously with the merger. Because the former
Bio Balance stockholders own a majority of the common stock (89.7%) of the
merged company, Bio Balance is considered to be the accounting acquirer in the
transaction. The acquisition of New York Health Care provides Bio Balance with
access to the public equity markets through New York Health Care, which would
otherwise be unavailable in the current equity financing climate.
The purchase price of the acquisition was as follows:
Value of New York Health Care common stock $13,100,000
Value of New York Health Care preferred stock 1,890,000
Value of New York Health Care options/warrants 4,950,000
Bio Balance's transaction costs 390,000
-----------
Total purchase price $20,330,000
===========
Common stock valued at approximately $13.1 million is based on the New York
Health Care's common stock outstanding at January 2, 2003, at an average closing
price for a six day period ended July 24, 2002 ($5.30) (measurement date) (after
giving effect to the one and one half reverse stock split).
The value of the preferred stock was calculated using the common stock price
less a 10% discount which reflects the limited marketability of the common stock
into which the preferred stock is convertible. The fair value of $4.9 million
of the New York Health Care options/warrants was determined using the
Black-Scholes valuation model. To determine the fair value of these options/
warrants, the following assumptions were used: expected volatility of 122%,
risk-free interest rates ranging from 1.62% to 4.55%, and expected life of
approximately 4.95 years.
F-7
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
As part of the merger, outstanding Bio Balance options/warrants (586,452 shares)
became exercisable for New York Heath Care stock. Compensation expense of
$721,000 was recorded on January 2, 2003 for the increase in the fair value of
the vested Bio Balance options/warrants as a result of the merger. The unvested
options/warrants will be remeasured at fair value on the date of vesting and
recorded as compensation expense.
As part of their employment agreements, if the two officers/directors from New
York Health Care are terminated from the Board of Directors prior to the
expiration of their employment agreements, they will enter into consulting
agreements with the Company for a period of not less than five years commencing
with the date of termination. As compensation, the Company will issue an option
to each officer/director to acquire 500,000 shares of the Company common stock
at the fair market value on date of termination. These options are contingent
upon future services and will be recorded under EITF 96-18. In addition, the
agreements required a payment to them if a change in control of New York Health
Care occurred. This amounted to $1,940,526 and was recorded as a liability in
accounts payable and accrued expenses in the net assets of New York Health Care
on January 2, 2003.
Under the purchase method of accounting, the total estimated purchase price as
detailed above was allocated to New York Health Care's net tangible and
intangible assets based on their fair values as of January 2, 2003. At January
2, 2003, New York Health Care's tangible assets and liabilities at fair value
were as follows:
Cash $ 3,549,000
Due from lending institution 153,000
Accounts receivable 5,280,000
Unbilled services 96,000
Prepaid expenses and other current assets 185,000
Property and equipment 225,000
Other assets 53,000
Accrued payroll (1,198,000)
Current portion of lease obligation (18,000)
Accounts payable and accrued expenses (5,323,000)
Due to HRA (1,932,000)
------------
$ 1,070,000
============
F-8
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Based on the independent valuation prepared using estimates and assumptions
provided by management, the total purchase price of $20,330,000 has been
allocated as follows:
Purchase price allocation:
Net tangible assets of New York Health Care $ 1,070,000
Goodwill 18,770,000
Customer base 390,000
Patient list 100,000
-----------
$20,330,000
===========
The following supplemental pro forma information is presented to illustrate the
effects of the acquisition on the historical operating results for the three
months ended March 31, 2003 and 2002 as if the acquisition had occurred at the
beginning of the respective period.
For The Three Months Ended
--------------------------
March 31, March 31,
2003 2002
------------- -----------
Net revenue $ 11,994,489 $9,237,128
Net loss for the period $(19,004,862) $ (297,470)
Net loss per share $ (0.79) $ (0.01)
Included in the three months ended March 31, 2003 net loss is a goodwill
impairment charge of $17,869,339.
Private Placement:
On January 2, 2003, Bio Balance completed a private placement of 327,327 shares
of its common stock. The shares were offered to accredited investors at a price
of $3.27 per share for aggregate gross proceeds of $1,072,000 and net proceeds
of $1,028,808.
F-9
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 3 - LOSS PER SHARE:
Basic loss per share excludes dilution and is computed by dividing income
available to common shareholders by the weighted average number of common shares
outstanding for the period.
Diluted earnings per share is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding for the
period, adjusted to reflect potentially dilutive securities including the
presumed conversion of the preferred stock from the date of its issuance. Due to
a loss for the three months ended March 31, 2003 and 2002, options, warrants and
preferred stock outstanding of 2,711,868 and 0 at March 31, 2003 and 2002,
respectively, were not included in the computation of diluted earnings per
share, because to do so would be antidilutive.
NOTE 4 - RESTRICTED CASH:
At March 31, 2003, the Company had $200,000 of restricted cash held in escrow in
connection with the Company's proposed purchase of certain technology.
NOTE 5 - GOODWILL AND INTANGIBLE ASSETS:
As a result of the merger, the Company had recognized goodwill on the
transaction. The goodwill is associated with the home care business and on the
date of the merger the Company determined that the goodwill was impaired. The
indicator leading to an impairment was the fact that, based on the current home
health care market, the home health care business could not be sold in the open
market for its recorded purchase price. The Company hired a valuation expert who
valued the Company using the capitalized earnings/cash flow methodology and the
market multiple approach. Based on these methodologies, it was determined that
an impairment had been incurred. The goodwill impairment amounted to
$17,869,339.
The changes in the carrying amount of goodwill by reportable segment for the
three months ended March 31, 2003 were as follows:
Goodwill
---------------------------------------------------------------------
Balance Acquisition Impairment Balance
January 1, 2003 January 2, 2003 January 2, 2003 March 31, 2003
---------------- ---------------- ---------------- ---------------
New York Health Care $ - $ 18,769,926 $ 17,869,339 $ 900,587
Bio Balance $ - $ - $ - $ -
The impairment charges are noncash in nature and do not affect the Company's
liquidity.
F-10
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The major classifications of intangible assets and their respective estimated
useful lives are as follows:
March 31, 2003
----------------------------------------------------------
Estimated
Gross Carrying Accumulated Net Carrying Useful Life
Amount Amortization Amount Years
--------------- ------------- ------------- -----------
Intellectual property $ 2,036,500 $ 339,363 $ 1,697,137 10
Patents/trademarks 211,162 18,488 192,674 10
Patient list 100,000 5,000 95,000 5
Customer base 390,000 19,500 370,500 5
--------------- ------------- -------------
$ 2,737,662 $ 382,351 $ 2,355,311
=============== ============= =============
December 31, 2002
----------------------------------------------------------
Estimated
Gross Carrying Accumulated Net Carrying Useful Life
Amount Amortization Amount Years
--------------- ------------- ------------- -----------
Intellectual property $ 2,036,500 $ 288,450 $ 1,748,050 10
Patents/trademarks 201,133 13,150 187,983 10
--------------- ------------- -------------
$ 2,237,633 $ 301,600 $ 1,936,033
=============== ============= =============
NOTE 6 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts payable and accrued expenses consist of the following:
March 31, 2003 December 31, 2002
--------------- ------------------
Accounts payable $ 620,598 $ 349,182
Accrued expenses 947,458 -
Accrued employee benefits 3,671,303 -
Due to executive officers 1,940,526 -
--------------- ------------------
$ 7,179,885 $ 349,182
=============== ==================
F-11
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 7 - LINE OF CREDIT:
The Company has a $4,000,000 line of credit with Heller Financial that expires
November 29, 2004. The availability of the line of credit is based on a formula
of eligible accounts receivable. At March 31, 2003, approximately $4,000,000 was
available to the Company. Certain assets of the Company collateralize the line
of credit. The agreement contains various restrictive covenants, which among
other things, require that the Company maintain a minimum net worth. Borrowings
under the agreement bear interest at prime plus 1.5% (5.75% at March 31, 2003).
At March 31, 2003, there was an amount due from Heller Financial of $141,792.
This is due to a lockbox being used by the Company; all collections are
deposited with Heller Financial and then transferred to the bank.
NOTE 8 - STOCKHOLDER'S EQUITY:
In January 2003, the Company issued 327,327 shares of common stock for gross
proceeds of $1,072,000.
On January 2, 2003, the Company recapitalized 2,475,154 shares of common stock
and 590,375 shares of preferred stock in connection with the reverse
acquisition.
The Company has authorized 590,375 shares of Class A preferred stock. The
holders of the preferred stock are entitled to a dividend equal to 9% of the
purchase price for shares of the preferred stock before any dividend is paid on
common stock. Dividends may be declared quarterly at the discretion of the
Board of Directors and are not cumulative. The holders of preferred stock
receive no preference on liquidation and such shares may be converted into
two-thirds of one share of common stock at any time. The Class A preferred
stockholders are entitled to vote on matters that affect them.
NOTE 9 - STOCK OPTIONS/WARRANTS:
The Company uses the intrinsic-value method of accounting for stock-based awards
granted to employees. No stock-based compensation cost is included in net loss,
as all options granted during periods presented had an exercise price equal to
the market value of the stock on the date of grant. In accordance with SFAS
No.148, "Accounting for Stock Based Compensation - Transition and Disclosure,"
the following table presents the effect on net loss and net loss per share had
compensation cost for the Company's stock plans been determined consistent with
SFAS No.123 The fair value of each option grant is estimated on the date of
grant by use of the Black-Sholes option pricing model:
F-12
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
March 31, March 31,
2003 2002
------------- -----------
Net loss, as reported $(19,012,362) $ (380,123)
Less stock-based compensation expense
determined under fair value method for
all stock options, net of related income
tax benefit $ (1,388,800) $ -
Pro forma net loss $(20,401,162) $ (380,123)
Basic and diluted loss per share, as reported $ (0.79) $ (0.02)
Basic and diluted loss per share, pro forma $ (0.85) $ (0.02)
On January 15, 2003, the Company granted a consultant a warrant to purchase up
to 100,000 shares of Common Stock at an exercise price of $4.15 per share (which
was not less than the fair value on date of grant). The warrant expires in one
year. On February 3, 2003, the Company granted a consultant a warrant to
purchase up to 35,000 shares of Common Stock at an exercise price of $3.40 per
share (which was not less than the fair value on the date of grant). The warrant
expires in one year. These warrants vest monthly and are expensed at the fair
value on the date of vesting. As of March 31, 2003, $17,709 was expensed as
compensation for these warrants.
On March 7, 2003, the Company granted 500,000 stock options, pursuant to its
Performance Incentive Plan, to key employees at an exercise price of $3.14 per
share (which was not less than the fair value on the date of grant). The stock
options expire in ten years. On March 7, 2003, the Company granted each of
three of its board members a warrant to purchase up to 20,000 shares of common
stock at an exercise price of $3.14 per share (which was not less than the fair
value on date of grant). The warrants expire in ten years. Since the warrants
and options were given to employees with an exercise price equal to fair value
on the date of grant, no compensation expense was recorded. At March 31, 2003,
the Company has 4,712,500 shares of Common Stock reserved for issuance for these
options and for options and warrants granted previously.
On April 14, 2003, the Company granted a consulting firm a warrant to purchase
up to 500,000 shares of common stock at an exercise price of $2.50 per share.
The warrant expires in one year.
F-13
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 10 - COMMITMENTS:
In February 2003, the Company entered into consulting agreements with two
individuals to serve as Director of Medical and Regulatory Affairs and Director
of Research and Development. The agreements provide for aggregate annual
compensation of $250,000 and provide for specified bonuses when the Company
meets certain goals.
NOTE 11 - INCOME TAXES:
The temporary differences that give rise to deferred tax assets are impairment
of intangible assets for book purposes over tax purposes, the direct write-off
method for receivables, using accelerated methods of amortization and
depreciation for property and equipment for tax purposes, and using statutory
lives for intangibles for tax purposes. Also included in the deferred tax asset
is a net operating loss carryforward. At March 31, 2003 and December 31, 2002,
the Company has computed a deferred tax asset in the amount of approximately
$1,228,500 and $240,000, respectively. A full valuation allowance has been
recorded against the net deferred tax assets because it is more likely than not
that such assets will not be recognized in the foreseeable future. The valuation
allowance increased by $1,048,500 during the three months ended March 31, 2003.
NOTE 12 - SUPPLEMENTAL CASH FLOW DISCLOSURES:
For The Three Months Ended
--------------------------
March 31, March 31,
2003 2002
---------- ----------
Supplemental cash flow disclosures:
Cash paid during the period for:
Interest $ 717 $ -
Income taxes $ 40,053 $ 2,300
F-14
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 13 - SEGMENT REPORTING:
The Company has two reportable business segments: New York Health Care, a home
health care agency that provides a broad range of health care support services
to patients in their homes, and Bio Balance, a segment that is developing a
probiotic agent for the treatment of gastrointestinal disorders. Bio Balance
has not generated any revenue as of March 31, 2003.
New York Bio Total
Health Care Balance Consolidated
------------- ------------ --------------
THREE MONTHS ENDED MARCH 30, 2003
Revenue:
Net patient service revenue $ 11,994,489 $ - $ 11,994,489
Sales - - -
------------- ------------ --------------
Total revenue $ 11,994,489 $ - $ 11,994,489
============= ============ ==============
Loss before income taxes $(17,726,422) $(1,278,440) $ (19,004,862)
Assets $ 12,908,421 $ 5,316,835 $ 18,225,256
Prior to its acquisition of New York Health Care on January 2, 2003, the Company
only had one segment, which did not generate any revenue.
THREE MONTHS ENDED MARCH 31, 2002
Revenue:
Sales $ - $ -
----------- -----------
Total revenue $ - $ -
=========== ===========
Loss before income taxes $ (380,123) $(380,123)
=========== ===========
Assets $3,005,836 $3,005,836
=========== ===========
F-15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
FORWARD LOOKING STATEMENTS
Information provided by New York Health Care in this report may contain,
"forward-looking" information, as that term is defined by the Private Securities
Litigation Reform Act of 1995 (the "Act"). In particular, the information
contained in "Management's Discussion and Analysis of Financial Condition and
Results of Operation-Liquidity and Capital Resources" contains information
concerning the ability of the Company to service its obligations and other
financial commitments as they come due. The forward looking statements are
qualified in their entirety by these cautionary statements, which are being made
pursuant to the provisions of the Act and with the intention of obtaining the
benefits of the "safe harbor" provisions of the Act.
The company cautions investors that any forward-looking statements it makes are
not guarantees of future performance and that actual results may differ
materially from those in the forward-looking statements as a result of various
factors, including, but not limited to, the following:
(a) In recent years, an increasing number of legislative proposals have
been introduced or proposed by Congress and some state legislatures, which
would effect major changes in the healthcare system. However, the company
cannot predict the form of healthcare reform legislation, which may be proposed
or adopted by either the Congress or state legislatures. Accordingly, the
company is unable to assess the effect of any such legislation on its business.
There can be no assurance that any such legislation will not have a material
adverse impact on the future growth, revenues and net income of the company.
(b) The company derives substantial portions of its revenues from
third-party payers including, both directly and indirectly, government
reimbursement programs such as Medicare and Medicaid and some portions of its
revenues from non-governmental sources, such as commercial insurance companies,
health maintenance organizations and other charge-based contracted payment
sources. Both government and non-government payers have undertaken
cost-containment measures designed to limit payments to healthcare providers.
There can be no assurance that payments under governmental and non-governmental
payer programs will be sufficient to cover the costs allocable to eligible
patients. The company cannot predict whether or what proposals or
cost-containment measures will be adopted or, if adopted and implemented, what
effect, if any, such proposals might have on the operations of the company.
(c) The company is subject to extensive federal, state and local
regulations governing licensure, conduct of operations at existing facilities,
construction of new facilities, purchase or lease of existing facilities,
addition of new services, certain capital expenditures, cost-containment and
reimbursement for services rendered. The failure to obtain or renew required
regulatory approvals or licenses, the delicensing of facilities owned, leased or
operated by the company or the disqualification of the company from
participation in certain federal and state reimbursement programs could have a
material adverse effect upon the operations of the company.
(d) There can be no assurance that the company will be able to
continue its substantial historical growth or be able to fully implement its
business strategies or that management will be able to successfully integrate
the operations of its various acquisitions.
(e) Bio Balance's business plans are subject to a variety of matters,
including but not limited to (i) trends effecting the treatment of Irritable
Bowel Syndrome, (ii) United States Food and Drug Administration regulations,
(iii) the possibility of rapid advances in treatment, (iv) the impact of
competition from substantially larger companies, (v) the possible introduction
of new products, (vi) Bio Balance's need for alliances with potential
manufacturers and marketing organizations, and (vii) other matters.
THREE MONTHS ENDED MARCH 31, 2003 COMPARED WITH THREE MONTHS ENDED MARCH 31,
2002.
On January 2, 2003, New York Health Care, Inc. and The Bio Balance Corp., a
development stage company, in what amounted to a "reverse acquisition"
consummated a business merger wherein Bio Balance became a wholly-owned
subsidiary of New York Health Care and the stockholders of Bio Balance exchanged
all of the issued and outstanding shares of Bio Balance for approximately 90% of
the issued and outstanding shares of New York Health Care. For accounting
purposes, Bio Balance is therefore considered to be the "accounting acquirer" in
the transaction. As a result, the historical financial information in this
report is that of Bio Balance, not New York Health Care. (New York Health Care's
prior reports as filed with the SEC remain available on the SEC website at
http://www.sec.gov). It is important to keep this in mind because the operations
on a consolidated basis of New York Health Care and Bio Balance for the first
quarter of 2003 are being compared to the operations of Bio Balance only for the
first quarter of 2002 without regard to those of New York Health Care for that
period.
New York Health Care operates its business in two segments; the home health care
business which has been in operation for more than fifteen years, and the
probiotics business of Bio Balance, which was begun in 2001 and is still in its
development stage.
RESULTS OF OPERATIONS
Revenues for the three months ended March 31, 2003 increased to approximately
$11,994,000 from no reported revenue for the three months ended March 31, 2002.
Cost of professional care of patients for the three months ended March 31, 2003
increased to approximately $9,707,000 from no reported costs for the three
months ended March 31, 2002.
Selling, general and administrative expenses ("SG&A") for the three months ended
March 31, 2003 increased 1,235.8% to approximately $3,206,000 from approximately
$240,000 for the three months ended March 31, 2002. The increase in expenses is
the result of combining the SG&A of two segments as compared to SG&A of only one
segment.
As a result of the merger, the company was required, pursuant to SFAS 141 to
recognize goodwill on the transaction of approximately $18,770,000. An
independent valuation of the company, pursuant to SFAS 142 determined that the
SFAS 141 goodwill was simultaneously impaired by approximately $17,869,000, a
charge which is non-cash in nature.. As a result of the application of SFAS 141
and 142 the company suffered a net loss for the three months ended March 31,
2003 of approximately $19,005,000, as compared to a net loss of approximately
$380,000 for the three months ended March 31, 2002.
The impairment charge of $17,869,000 is non-cash in nature and does not affect
the Company's liquidity.
The net loss of approximately $19,005,000 includes the impairment non cash
charge of $17,869,000 and also includes a non-cash expense in the amount of
$753,000 resulting from an increase in the fair value of the options as a result
of the merger. Without these two non-cash items, the net loss would be $383,000.
This amount includes net income of $143,000 from the operations of the home
health care segment offset by operating losses of $526,000 from the Bio-Balance
segment.
Cash at March 31, 2003 increased by approximately $5,740,000 as compared to
December 31, 2002. The increase is the result of combining cash from two
segments as compared to cash of only one segment.
LIQUIDITY AND CAPITAL RESOURCES
Home Health Care Segment
The home health care segment has a $4,000,000 line of credit with a lending
institution that renewed November 28, 2002. The availability of the line of
credit is based on a formula, which is 85% of eligible accounts receivable. As
of March 31, 2003 the amount available to borrow based on the formula was
$4,000,000. The only restrictive covenant is that the home health care segment
has a net worth greater then $500,000.
For the three months ended March 31, 2003, net cash provided by operating
activities was approximately $1,056,000 as compared to cash used of
approximately $349,000 during the three months ended March 31, 2002, an increase
of $1,405,000. The $1,056,000 provided by operations for the three months ended
March 31, 2003 was principally due to an increase in accounts payable and
accrued expenses, an increase in due to HRA, increase in non-cash amortization
of stock options, increase in goodwill impairment offset by an increase in
accounts receivable and unbilled services and a net loss for the period.
Net cash provided by investing activities for the three months ended March 31,
2003 totaled approximately $3,269,000, due mainly from cash acquired from the
purchase of the Bio Balance subsidiary.
Net cash provided by financing activities for the three months ended March 31,
2003 totaled approximately $1,313,000, resulting from proceeds of issuance of
common stock by Bio Balance immediately prior to the acquisition, collection of
subscription receivable.
As of March 31, 2003, approximately $5,729,000 (approximately 31.4%) of the
Company's total assets consisted of accounts receivable from clients who are
reimbursed by third-party payers. As of March 31, 2002 Bio Balance had no
accounts receivable.
Days Sales Outstanding ("DSO") is a measure of the average number of days
taken by the Company to collect its account receivable, calculated from the date
services are billed. For the three months ended March 31, 2003, the Company's
DSO was 54. As of March 31, 2002 Bio Balance had no accounts receivable.
Bio Balance Segment
Since its inception in 2001, Bio Balance received aggregate gross proceeds
of $6,889,000 in a series of private placements from the sale of common stock.
As of March 31, 2003, Bio Balance had cash on hand of approximately $3,106,000,
all of which was available to fund operations. Bio Balance estimates that its
capital requirements for the remainder of 2003 will be approximately $2,000,000.
This budget assumes that Bio Balance will continue along the Medical Food
Approval track with the FDA. WDWilliamIs "Medical Food Approval track" a term of
art? I understood that the GRAS process does NOT involve any "approval" by the
FDA. This phrase may be misleading.
POTENTIAL REGULATORY CHANGES
There have been reports concerning federal budget negotiations regarding
potential changes in the way the Government will reimburse home health care
companies in the future, including the possibility of capitation. While the
company is not currently a Medicare-Certified Home Health Agency subject to
these changes, most of the company's referral sources are and they may be
negatively impacted by this legislation which was adopted to control home health
care costs. While it is still premature to discern what impact, if any, the
potential changes may have on the company's operations; there can be no
assurance that future legislation will not result in reduced reimbursement rates
from referral sources.
Regulatory Strategy
BioBalance intends to comply with applicable requirements for the introduction
of its first product, PROBACTRIX(TM), to the United States market as a medical
food for the treatment of IBS and chronic diarrhea. To be marketed as a medical
food: 1) the ingredients must be either approved food additives or "generally
recognized as safe" (GRAS); and 2) the product must satisfy the statutory
definition of a medical food. Medical food status allows the Company to make
medical claims, a key differentiator from nutritional supplements.
Under the current regulatory process, products conforming to the definition of a
medical food must make a self-determination that the ingredients in the product
are either approved food additives or generally recognized as safe (GRAS) before
introducing the product to market. GRAS status is determined by the company
introducing the product without the need for any pre-marketing clearance from
the FDA, although a process of voluntary notification to the agency is
available, in which case FDA has 90 days to raise questions or objections to the
GRAS self-determination.
BioBalance began the process of establishing GRAS status last year with the
retention of Patton Boggs to develop and implement a process to establish GRAS
and to conduct clinical studies to obtain statistically significant data to
support the marketing of the product as safe and effective. Under that process,
(1) an exhaustive review and write-up relating to scientific literature relating
to the safety of the product needs to be performed, (2) laboratory testing needs
to be conducted to verify that the product in question is the same as reflected
in the scientific literature reviewed, and (3) a panel of experts must review
the literature and laboratory results and render an opinion as to whether the
product satisfies GRAS status.
A panel composed of the GRAS experts and additional members with relevant
expertise must also review PROBACTRIX(TM) for medical food status and provide an
opinion as to whether the product meets the medical food definition.
As of today, (1) the literature review had been completed, (2) laboratory
testing to verify the character of BioBalance's product had been completed at
two universities and at a well known and established testing center for
bacteriological strains, and (3) the first peer reviewable article relating to
PROBACTRIXTM had been published and efforts were ongoing to secure peer reviewed
articles covering BioBalance's complete dossier. In February 2003, BioBalance
hired Dr. Robert Hoerr, MD, Ph.D. and Dr. Eileen Bostwick, Ph.D. as Director of
Medical and Regulatory Affairs and Director of Research and Development,
respectively, to complete the GRAS and medical food determination process.
BioBalance anticipates that completion of this process will occur by first
quarter of 2004 or earlier.
Although BioBalance intends to comply with the procedures and regulations to
establish and market its product as a medical food, there can be no assurance
that GRAS status will be achieved, or the FDA will not contest the GRAS status
of the ingredient(s) in PROBACTRIX(TM) or the status of our product as a medical
food, in which case introduction of our product to the market could be delayed
for an extended period, or indefinitely, pending resolution of the product's
status or, in the alternative, compliance with the regulatory process applicable
to ethical drugs.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits required by item 601 of Regulation S-K.
Exhibit
Number Description of Exhibit
------ ------------------------
99.1 Officers' certification pursuant to the
Sarbanes-Oxley Act of 2002.
99.2 Officers' certification pursuant to the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K.
-------------------
On January 15, 2003 New York Health Care filed a report on Form 8-K,
and on March 17, 2003 New York Health Care filed a report on Form 8-K/A,
discussing acquisition of The Bio Balance Corp. under Items 1, 2 and 7.
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
May 15, 2003
NEW YORK HEALTH CARE, INC.
By: /s/ Jacob Rosenberg
--------------------------------------
Jacob Rosenberg, Vice President, Chief
Operating Officer, Chief Financial and
Accounting Officer and Secretary