UNITED STATES
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: June 30, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from: _______ to ________.
COMMISSION FILE NO. 1-12451
NEW YORK HEALTH CARE, INC.
(Exact name of registrant as specified in its charter)
New York 11-2636089
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1850 McDonald Avenue, Brooklyn, New York 11223
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (718) 375-6700
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. Yes X No
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes No X
--- ---
APPLICABLE ONLY TO CORPORATE REGISTRANTS
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: 24,939,776 (as of August 5,
2004).
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
(a) Our unaudited financial statements for the second quarter (six months ended
June 30, 2004) are set forth below. See Item 2 below for Management's Discussion
and Analysis of Financial Condition and Results of Operations for our second
quarter.
NEW YORK HEALTH CARE, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
JUNE 30, 2004
NEW YORK HEALTH CARE , INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS
JUNE 30, 2004 DECEMBER 31, 2003
------------------------------------
( Unaudited ) ( Note 1 )
Current assets:
Cash and cash equivalents $ 4,326,474 $ 7,337,896
Due from lending institution 140,493 208,721
Accounts receivable, net of allowance for uncollectible 7,376,817 6,577,283
amounts of $613,000 and $397,000 respectively
Unbilled services 146,068 100,114
Prepaid expenses and other current assets 587,396 319,195
------------------------------------
Total current assets 12,577,248 14,543,209
------------------------------------
Property and equipment, net 113,433 145,898
Goodwill, net 900,587 900,587
Other intangible assets, net 5,600,452 5,971,622
Other assets 77,464 67,652
------------------------------------
Total assets $ 19,269,184 $ 21,628,968
====================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accrued payroll $ 1,430,960 $ 1,786,044
Accounts payable and accrued expenses 7,026,116 5,849,732
Due to HRA 4,520,814 3,756,507
Due to related parties - 1,190,526
Income taxes payable - 24,394
------------------------------------
Total current liabilities 12,977,890 12,607,203
------------------------------------
Shareholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares
authorized; Class A Preferred, 590,375 authorized,
issued and outstanding 5,904 5,904
Common stock, $.01 par value, 100,000,000 shares
authorized; 24,943,821 shares issued and 24,939,776
outstanding 249,438 249,438
Additional paid-in capital 32,338,476 32,679,292
Accumulated deficit (26,293,051) (23,903,396)
Less: Treasury stock (4,045 common shares at cost) (9,473) (9,473)
------------------------------------
Total shareholders' equity 6,291,294 9,021,765
------------------------------------
Total liabilities and shareholders' equity $ 19,269,184 $ 21,628,968
====================================
THE ACCOMPANYING NOTES ARE INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-1
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------- -----------------------------
2004 2003 2004 2003
Net patient service revenue $ 12,171,007 $ 10,820,260 $ 23,677,465 $ 22,814,749
--------------- -------------- ------------- --------------
Expenses:
Professional care of patients 9,807,932 8,531,889 18,995,828 18,238,667
--------------- -------------- ------------- --------------
General and administrative
(excluding noncash compensation) 3,072,226 2,420,496 6,021,651 4,874,226
Noncash compensation 364 273,143 4,054 1,007,954
--------------- -------------- ------------- --------------
Total general and
administrative expenses 3,072,590 2,693,639 6,025,705 5,882,180
--------------- -------------- ------------- --------------
Product development (excluding
noncash compensation) 271,779 170,093 699,363 265,089
Noncash compensation (174,566) 10,513 (344,870) 28,222
--------------- -------------- ------------- --------------
Total product development 97,213 180,606 354,493 293,311
--------------- -------------- ------------- --------------
Goodwill impairment - - - 17,869,339
--------------
Bad debts expense 120,400 5,250 240,400 20,250
--------------- -------------- ------------- --------------
Depreciation and amortization 218,955 114,267 442,004 228,755
--------------- -------------- ------------- --------------
Total operating expense 13,317,090 11,525,651 26,058,430 42,532,502
--------------- -------------- ------------- --------------
Loss from operations (1,146,083) (705,391) (2,380,965) (19,717,753)
Non-operating income (expenses)
Interest income 14,664 16,593 26,971 24,810
Interest expense (5,827) (290) (10,836) (1,007)
--------------- -------------- ------------- --------------
Loss before provision for taxes (1,137,246) (689,088) (2,364,830) (19,693,950)
--------------- -------------- ------------- --------------
Provision for income taxes
Current 24,825 - 24,825 -
Deferred - - - -
--------------- -------------- ------------- --------------
24,825 - 24,825 -
--------------- -------------- ------------- --------------
Net loss $ (1,162,071) $ (689,088) $ (2,389,655) $ (19,693,950)
=============== ============== ============= ==============
Basic and diluted loss per share $ (0.05) $ (0.03) $ (0.10) $ (0.82)
Weighted and diluted average shares outstanding 24,939,776 23,918,975 24,939,776 23,903,492
THE ACCOMPANYING NOTES ARE INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-2
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2004
( UNAUDITED )
Common Stock Preferred Stock Treasury Stock
-------------------- ------------------ Additional ------------------ Total
Paid-In Accumulated Stockholders'
Shares Amount Shares Amount Capital Shares Amount Deficit Equity
---------- -------- ------- --------- ------------ ------- --------- ------------- ---------------
Balance at 24,943,821 $249,438 590,375 $ 5,904 $32,679,292 4,045 $ (9,473) $(23,903,396) $ 9,021,765
January 1, 2004
Warrants earned 15,670 15,670
for service
Reduction of (356,486) (356,486)
compensation
expense due
to a revaluation
of options/warrants
Net loss (2,389,655) (2,389,655)
---------- -------- ------- --------- ------------ ------- --------- ------------- ---------------
Balance at 24,943,821 $249,438 590,375 $ 5,904 $32,338,476 4,045 $ (9,473) $(26,293,051) $ 6,291,294
========== ======== ======= ========= ============ ======= ========= ============= ===============
June 30, 2004
THE ACCOMPANYING NOTES ARE INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-3
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE SIX MONTHS ENDED
JUNE 30,
-----------------------------
2004 2003
------------- --------------
Cash flows from operating activities:
Net loss $ (2,389,655) $ (19,693,950)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Goodwill impairment - 17,869,339
Noncash compensation (340,816) 1,036,176
Depreciation and amortization 442,004 228,755
Bad debts expense 240,400 20,250
Changes in operating assets and liabilities
net of effects of purchase of subsidiary:
Increase in accounts receivable
and unbilled services (1,085,888) (755,414)
Increase in prepaid expenses and other current assets (268,201) (517,130)
Decrease in due from lending institution 68,228 67,174
(Increase) decrease in other assets (9,812) 960
(Decrease) increase in accrued payroll (355,084) 246,336
Increase in accounts payable and accrued expenses 1,176,384 1,468,690
Decrease in due to related parties (1,190,526) -
Decrease in taxes payable (24,394) -
Increase in due to HRA 764,307 877,347
------------- --------------
Net cash (used in) provided by
operating activities (2,973,053) 848,533
------------- --------------
Cash flows from investing activities:
Net cash acquired from purchase of subsidiary - 3,548,658
Acquisition of property and equipment (8,500) (33,774)
Acquisition of intangible assets (29,869) (95,725)
Increase in restricted cash - (100,000)
------------- --------------
Net cash (used in) provided by
investing activities (38,369) 3,319,159
------------- --------------
Cash flows from financing activities:
Payments on lease obligation payable - (10,539)
Proceeds of issuance of common stock - 1,028,808
Collection of subscription receivable - 290,000
------------- --------------
Net cash provided by financing activities - 1,308,269
------------- --------------
Net (decrease) increase in cash and cash equivalents (3,011,422) 5,475,961
Cash and cash equivalents at beginning of period 7,337,896 2,625,378
------------- --------------
Cash and cash equivalents at end of period $ 4,326,474 $ 8,101,339
============= ==============
THE ACCOMPANYING NOTES ARE INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-4
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION AND BASIS OF CONSOLIDATION:
New York Health Care, Inc. ("New York Health Care") was 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 BioBalance Corporation, ("BioBalance") a Delaware Corporation, was
formed in May 2001. BioBalance is a specialty pharmaceutical company focused on
the development of proprietary biotherapeutic agents for various
gastrointestinal diseases that are poorly addressed by current therapies.
BioBalance has completed 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"). However, there is no
assurance that the FDA will not contest the status. BioBalance is also
exploring a formulation of its product as a prescription drug. There can be no
assurance that BioBalance will be successful in marketing any such products.
The consolidated entity, collectively referred to as the "Company", includes
BioBalance and New York Health Care, Inc. and its wholly owned subsidiary NYHC
Newco Paxxon, Inc. D/B/A Helping Hands Healthcare ("Helping Hands"). All
significant intercompany balances and transactions have been eliminated.
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 included in Form 10-K of New
York Health Care, Inc. for the year ended December 31, 2003 as filed on March
31, 2004 with the SEC.
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 six months ended June 30, 2004 are not necessarily indicative
of the results to be expected for the full year.
RECENT DEVELOPMENTS:
In November 2003, the Company learned that an individual then serving as a
director of the Company and president of BioBalance and another individual then
serving as a consultant to BioBalance were the subjects of a federal indictment
alleging that they conspired to manipulate the price and demand for the
Company's common stock by offering to pay a bribe, consisting of warrants to
purchase 500,000 shares of the Company's common stock and causing the Company's
board of directors to approve the issuance of the warrants by disguising the
warrants as compensation to an outside consultant to be engaged to perform
financial advisory services for BioBalance. At the Company's request, the then
director of the Company and president of BioBalance resigned from all positions
with the Company and the Company's Board of Directors authorized an independent
internal investigation regarding the subject matter of the indictment.
In January 2004, the staff of Listing Investigations, a division of Nasdaq Stock
Market, Inc., ("Nasdaq"), notified the Company, after requesting and obtaining
information and documents from the Company, that they had determined that the
Company no longer qualified for inclusion in the Nasdaq Stock Market
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
primarily based on public interest concerns and the Company's failure to timely
hold its 2002 annual stockholders' meeting in compliance with the Nasdaq
marketplace rules. In response, the Company requested a hearing before a Nasdaq
Listing Qualifications Panel to review the staff determination. The hearing was
held and on April 5, 2004, the Company announced that the Panel had determined
that the Company's common stock was delisted from Nasdaq, effective with the
opening of business on April 6, 2004. The Panel addressed concerns regarding
events related to the indictment and the Company's failure to timely hold its
2002 Annual stockholder's meeting. Subsequently, the Company's common stock
began trading in the Over-the-Counter Market on the Pink Sheets.
The law firm retained by the Company to conduct the independent internal
investigation found no evidence that any current officer, director or employee
of the Company knew of, or participated in, any alleged attempt to manipulate
the Company's common stock and, concluded that the Company responded properly to
the indictment based on the information at the time available to the Company.
At December 31, 2003, the Company treated the warrants referenced in the
indictment as being in effect in accordance with their terms.
On May 6, 2004, the Company entered into an engagement agreement with an
investment banking firm to act as exclusive placement agent, a non-firm
commitment basis, with respect to a proposed private offering of its
unregistered common stock and warrants to accredited investors. Under the terms
of the proposed offering, the Company will seek to raise up to $6 million
through an offering of its unregistered common stock and warrants. The net
proceeds of the offering would be used to fund the capital requirements of
BioBalance. The proposed offering is subject to satisfaction of a number of
conditions. The engagement agreement is subject to the satisfactory completion
of a due diligence review by the placement agent, and has a four month term, but
is terminable by either party on 10 days notice. There can be no assurance that
the engagement agreement will not be revised or terminated by either party, or
that the Company will make the proposed private offering, or that if the
offering is made, the terms that on which the offering will be made, or that the
Company will be able to raise sufficient funds to finance its ongoing
operations.
On May 13, 2004, the Company also executed a non-binding letter of intent with
executive officers of the Company for the acquisition of its home healthcare
business, subject to satisfaction of a number of conditions, including execution
of a definitive acquisition agreement, obtaining various corporate and
regulatory approvals, including stockholder approval, obtaining an acceptable
fairness opinion and receipt by the Company of at least $4 million to finance
its remaining operations. On July 15, 2004, the Company executed a definitive
agreement for the sale of the assets of its home healthcare business to a
company controlled by its chief executive officer and chief operating officer
for consideration of $2.7 million in cash and the forgiveness of certain future
obligations that may be due to them pursuant to Employment Agreements each of
them has with the Company. The sale is subject to the satisfaction of a number
of conditions including obtaining shareholder and regulatory approvals, and the
raising of $4 million from a private offering of its securities.
The Company will consider its home health care division as a discontinued
operations upon the closing of its raising the $4 million in a private offering
of its securities and shareholder approval of the proposed sale.
On August 3, 2004, the Company entered into an agreement with Messrs. Jerry
Braun and Jacob Rosenberg, the Company's Chief Executive Officer and Chief
Operating Officer, respectively, whereby,
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
the resignations of Messrs. Braun and Rosenberg as officers and directors of the
Company will be effective upon the Company's receipt of $4 million in gross cash
proceeds from a proposed private placement of the Company's securities.
As consideration for the resignations of Messrs. Braun and Rosenberg, among
other things, at the time of their resignations, they will be retained as
consultants to the Company and, as compensation therefore, each will be granted
10-year options to purchase up to 500,000 shares of the Company's common stock
at the fair market value of the common stock on the date of grant and existing
incentive stock options to purchase up to 606,667 shares granted to each of them
under the Company's stock option plan will be converted to non-qualified
options.
We cannot assure you that the Company will make the proposed private offering
or, if the offering is made, that it will be successful, or that the conditions
to the sale of the home healthcare business will be satisfied.
RISK FACTORS:
On July 22, 2004 the federal Second Circuit Court of Appeals recently issued an
ruling concerning the Fair Labor Standards Act on the validity of the
"companionship services" exemption from minimum wage and overtime payment
requirements.
Home care providers have long relied on this exemption to provide compensation
to home care aides and personal care workers with the expectation that there is
no obligation for overtime pay. At this point, the US Courts of Appeals has
remanded the decision back to the District Court for action. Until the District
Court acts and there is an order to change, home care agencies are not subject
to changing current wage/hour practices.
Implications for the home care industry and State will be changes in the expense
of paying overtime, challenges to ensuring patient continuity of care if
agencies can no longer afford to authorize overtime during an outgoing workforce
shortage, and the inability of workers to secure the number of hours of work
they desire
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.
RECLASSIFICATION:
Certain amounts in the prior period have been reclassified to conform to the
2004 presentation.
RECENT ISSUED ACCOUNTING PRONOUNCEMENTS
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In January 2003, the FASB issued Financial Interpretation No. 46 "Consolidation
of Variable Interest Entities" ("FIN 46"), which clarifies the application of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements." FIN 46
requires certain variable interest entities to be consolidated by the primary
beneficiary of the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not provide sufficient
equity at risk for the entity to support its activities. In December 2003, the
FASB revised certain elements of FIN 46 (FIN 46-R). The FASB also modified the
effective date of FIN 46. This interpretation applies immediately to variable
interest entities created after January 31, 2003 and variable interest entities
in which the Company obtains an interest after January 31, 2003. For variable
interest entities in which a company obtained an interest before February 1,
2003, the interpretation applies to the interim period ending after March 15,
2004. The adoption of FIN 46 did not have a material impact on the Company's
consolidated financial position or results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity" ("SFAS No.
150"). SFAS No. 150 establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. SFAS No. 150 requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances). SFAS No. 150 is effective for financial instruments entered
into or modified after May 31, 2003, and otherwise is effective at the beginning
of the first interim period beginning after June 15, 2003. The adoption of SFAS
No. 150 has not had and is not expected to have a material impact on the
Company's consolidated financial position or results of operations.
NOTE 2 - LOSS PER SHARE:
Basic loss per share excludes dilution and is computed by dividing net loss
available to common shareholders by the weighted average number of common shares
outstanding for the period.
Diluted earnings per share is computed by dividing net loss 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
losses for the three and six months ended June 30, 2004 and 2003, options,
warrants and preferred stock outstanding of 4,099,234 for the three and six
months ended June 30, 2004 and 3,419,368 for the three and six months ended June
30, 2003, were not included in the computation of diluted earnings per share,
because to do so would be antidilutive.
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 3 - INTANGIBLE ASSETS:
The major classifications of intangible assets and their respective estimated
useful lives are as follows:
June 30, 2004
----------------------------------------------------------
Estimated
Gross Carrying Accumulated Net Carrying Useful Life
Amount Amortization Amount Years
--------------- ------------- ------------- -----------
Intellectual property $ 3,576,500 $ 718,015 $ 2,858,485 10
Patents/trademarks 1,943,620 179,903 1,763,717 10
Non-compete agreement 770,000 134,750 635,250 5
Patient list 100,000 30,000 70,000 5
Customer base 390,000 117,000 273,000 5
--------------- ------------- -------------
$ 6,780,120 $ 1,179,668 $ 5,600,452
=============== ============= =============
December 31, 2003
-------------------------------------------------------------
Estimated
Gross Carrying Accumulated Net Carrying Useful Life
Amount Amortization Amount Years
------------------ ------------- ------------- -----------
Intellectual property $ 3,576,500 $ 539,189 $ 3,037,311 10
Patents/trademarks 1,913,751 83,690 1,830,061 10
Non-compete agreement 770,000 57,750 712,250 5
Patient list 100,000 20,000 80,000 5
Customer base 390,000 78,000 312,000 5
------------------ ------------- -------------
$ 6,750,251 $ 778,629 $ 5,971,622
================== ============= =============
Approximately $5.3 million of intangible assets relate to BioBalance. BioBalance
is a research and development company. The Company cannot assure that BioBalance
will be able to generate revenues or profits from operations of its business or
that BioBalance could be able to generate or sustain profitability in the
future.
NOTE 4 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts payable and accrued expenses consist of the following at:
June 30, 2004 December 31, 2003
-------------- ------------------
Accounts payable $ 583,683 $ 500,186
Accrued expenses 1,916,649 967,851
Accrued employee benefits 4,525,784 4,381,695
-------------- ------------------
$ 7,026,116 $ 5,849,732
============== ==================
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5 - LINE OF CREDIT:
New York Health Care has a $4,000,000 line of credit with G.E. Capital Health
Care Financial Services that expires November 29, 2004. The availability of
the line of credit is based on a formula of eligible accounts receivable. At
June 30, 2004, 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 tangible net worth. Borrowings under the agreement
bear interest at prime plus 1 1/2% at June 30, 2004 (5.50%).
At June 30, 2004, there was an amount due from G.E. Capital Health Care
Financial Services of $140,493. This is due to a lockbox being used by the
Company; all collections are deposited with G.E. Capital Health Care Financial
Services and then transferred to the bank.
On March 29, 2004, the loan agreement was amended to allow New York Health Care
to lend money to BioBalance if there is no outstanding loan under this
agreement. The agreement has also been amended to allow New York Health Care
to invest money in BioBalance.
NOTE 6 - 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, "Accounting for Stock-Based Compensation".
The fair value of each option grant is estimated on the date of grant by use of
the Black-Scholes option pricing model:
For The Three For The Six
Months Ended Months Ended
June 30, June 30,
-----------------------------------------------------
2004 2003 2004 2003
------------ ---------- ------------ -------------
Net loss, as reported $(1,162,071) $(689,088) $(2,389,655) $(19,693,950)
Less stock-based compensation expense
determined under fair value method for
all stock options, net of related income
tax benefit (41,115) (12,075) (642,345) (1,400,875)
------------ ---------- ------------ -------------
Pro forma net loss $(1,203,186) $(701,163) $(3,032,000) $(21,094,825)
============ ========== ============ =============
Basic and diluted loss per share, as reported $ (0.05) $ (0.03) $ (0.10) $ (0.82)
Basic and diluted loss per share, pro forma $ (0.05) $ (0.03) $ (0.12) $ (0.88)
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The weighted average warrants' assumptions used to estimate these values are as
follows:
For The Three Months Ended For The Six Months Ended
June 30, June 30,
----------------------------- ---------------------------
2004 2003 2004 2003
-------------- ------------- ------------ -------------
Risk free interest rate 1.66% 3.82% 1.66% 3.82%
Expected volatility of common stock 90% 107% 90% 107%
Dividend yield 0% 0% 0% 0%
Expected option term 3 yrs. 5yrs. 3yrs. 5yrs.
The following table summarizes options issued during the six months ended June
30, 2004:
Grant Date Number of Options Exercise Price Expiration Term
---------------- ----------------- --------------- ---------------
January 29, 2004 450,000 $ 2.13 10 yrs
These options were issued to employees in accordance with the Company's
Performance Incentive Plan.
Since the options were given to employees at not less than fair value on the
date of grant, no compensation expense was recorded.
Nasdaq implemented a rule on July 1, 2003 that requires a company to obtain
shareholder approval prior to the issuance of warrants to consultants or
non-employee members of the Board of Directors. The Company committed to issue
warrants to certain consultants subsequent to July 1, 2003. Therefore, these
commitments of warrants will be re-valued at each balance sheet date with the
appropriate adjustment made to compensation expense. Once shareholder approval
is obtained, no further adjustment to compensation expense will be recorded. For
the six and three months ended June 30, 2004, the re-valued warrants generated a
reduction in compensation of $356,486 and $174,566 respectively.
At June 30, 2004, the Company has 4,834,592 shares of Common Stock reserved for
issuance for these options and for options and warrants granted previously.
NOTE 7 - COMMITMENTS AND CONTINGENCIES:
An individual who is a former director of the Company and the former president
of BioBalance has filed a claim with the Company's directors' and officers'
liability insurance carrier seeking payment of legal fees incurred by him in
connection with the defense of a federal indictment relating to an alleged
conspiracy to manipulate the price of the Company's securities (see Note 1). The
Company's directors' and officers' liability insurance policy requires it to pay
the first $250,000 of such legal fees. Pursuant to the terms of the policy, the
Company has accrued this full liability as of June 30, 2004.
In April 2004, the Company entered into new lease agreements for two of its
existing offices expiring in 2004 and 2008. The approximate minimum annual
rentals are as follows for these two new leases:
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Years Ending
December 31,
- ------------
2004 $ 3,000
2005 83,000
2006 113,000
2007 231,000
2008 127,000
--------
Total $557,000
========
In June 2004, the Company entered into an employment agreement with the
president of BioBalance that expires on May 5, 2006 at an annual compensation of
$200,000. If BioBalance raises $5,000,000, his annual compensation will increase
to $225,000.
NOTE 8 - INCOME TAXES:
The temporary differences that give rise to deferred tax assets are impairment
of intangible assets for financial statement 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 June 30, 2004 and
December 31, 2003, the Company has computed a deferred tax asset in the amount
of approximately $3,886,000 and $1,693,000, respectively. A full valuation
allowance has been recorded against the net deferred tax assets because it is
not more likely than not that such assets will be recognized in the foreseeable
future. The valuation allowance increased by $998,000 and $2,193,000 during the
three and six months ended June 30, 2004 and by $258,500 and $635,000 during the
three and six months ended June 30, 2003, respectively.
NOTE 9 - SUPPLEMENTAL CASH FLOW DISCLOSURES:
For The Six Months Ended
June 30,
---------------------------
2004 2003
------------ -------------
Supplemental cash flow disclosures:
Cash paid during the period for:
Interest $ 10,836 $ 1,007
============ =============
Income taxes $ 29,190 $ 40,053
============ =============
NOTE 10 - SEGMENT REPORTING:
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 BioBalance, a segment that is developing a
probiotic agent for the treatment of gastrointestinal disorders. BioBalance has
not generated any revenue as of June 30, 2004.
New York Bio- Total
Health Care Balance Consolidated
------------- ------------ --------------
SIX MONTHS ENDED JUNE 30, 2004
Revenue:
Net patient service revenue $ 23,677,465 $ - $ 23,677,465
Sales - - -
------------- ------------ --------------
Total revenue $ 23,677,465 $ - $ 23,677,465
============= ============ ==============
Net loss $ (56,881) $(2,332,774) $ (2,389,655)
Total assets $ 13,831,346 $ 5,437,838 $ 19,269,184
SIX MONTHS ENDED JUNE 30, 2003
Revenue:
Net patient service revenue $ 22,814,749 $ - $ 22,814,749
Sales - - -
------------- ------------ --------------
Total revenue $ 22,814,749 $ - $ 22,814,749
============= ============ ==============
Net loss $(17,577,007) $(2,116,943) $ (19,693,950)
New York Bio- Total
Health Care Balance Consolidated
------------- ------------ --------------
THREE MONTHS ENDED JUNE 30, 2004
Revenue:
Net patient service revenue $ 12,171,007 $ - $ 12,171,007
Sales - - -
------------- ------------ --------------
Total revenue $ 12,171,007 $ - $ 12,171,007
============= ============ ==============
Net loss $ (99,927) $(1,062,144) $ (1,162,071)
THREE MONTHS ENDED JUNE 30, 2003
Revenue:
Net patient service revenue $ 10,820,260 $ - $ 10,820,260
Sales - - -
------------- ------------ --------------
Total revenue $ 10,820,260 $ - $ 10,820,260
============= ============ ==============
Net income (loss) $ 149,415 $ (838,503) $ (689,088)
NOTE 11 - DUE TO RELATED PARTIES
At December 31, 2003 the Company owed two officers $1,190,526, which was paid
off during the six months ended June 30, 2004.
ITEM 2: MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
FORWARD LOOKING STATEMENTS
Certain information contained in this report is forward-looking in nature. All
statements in this report, including those made by New York Health Care, Inc.
and its subsidiaries ("we" or the "Company"), other than statements of
historical fact, are forward-looking statements. Examples of forward-looking
statements include statements regarding the Company's future financial
condition, operating results, business and regulatory strategies, projected
costs, services, research and development, competitive positions and plans and
objectives of management for future operations. These forward-looking
statements are based on management's estimates, projections and assumptions as
of the date hereof and include the assumptions that underlie such statements.
Forward-looking statements may contain words such as "may," "will," "should,"
"would," "expect," "plan," "anticipate," "believe," "estimate," "predict,"
"potential," "continue," or the negative of these terms or other comparable
terminology. Any expectations based on these forward-looking statements are
subject to risks and uncertainties and other important factors, including those
discussed below and in the following section entitled "Risks and Uncertainties."
Other risks and uncertainties are disclosed in the Company's prior SEC filings,
including its Annual Report on Form 10-K for the fiscal year ended December 31,
2003. These and many other factors could affect the Company's future financial
operating results, and could cause actual results to differ materially from
expectations based on forward-looking statements made in this report or
elsewhere by the Company or on its behalf. The Company assumes no obligation to
update the information in this Quarterly Report.
OVERVIEW
The Company, as the result of a reverse merger effected in January 2003,
operates in two business segments; the home health care business, which has been
in operation for more than 15 years, and the specialty pharmaceutical business
of The BioBalance Corporation ("BioBalance"), a wholly-owned subsidiary of the
Company, which commenced in 2001 and is still in its development stage. For
accounting purposes, BioBalance is considered to be the "accounting acquirer"
in the transaction.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires that we make estimates and judgments
that affect the amounts reported of assets, liabilities, revenues and expenses
and the related disclosure of contingent assets and liabilities. We base our
estimates on historical experience and on various other assumptions we believe
to be applicable and reasonable under the current circumstances, the results of
which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or conditions.
In addition, we are periodically faced with uncertainties, the outcomes of
which are not within our control and will not be known for prolonged periods of
time. Some of these uncertainties are discussed below under "Risks and
Uncertainties."
We believe the following to be critical accounting policies that affect the
most significant estimates and judgments used in the preparation of our
consolidated financial statements:
Revenue Recognition
The Company recognizes patient service revenue on the date services are
rendered. Unbilled services represent amounts due for services rendered that had
not been billed at the end of each period because authorization had not been
received from the referral source.
Accounts Receivable
Accounts receivable of our home health care business consist of trade
receivables recorded at original invoice amounts, less an estimated allowance
for uncollectible accounts. We generally extend trade credit on a short-term
basis. Accordingly, our trade receivables do not bear interest, although we may
apply a finance charge to receivables that are past due. We periodically
evaluate accounts receivables for collectibility, based on past credit history
of customers and the current financial condition of those customers. Changes in
the estimated collectibility of accounts receivables are recorded in the results
of operations for the fiscal period in which the estimate is revised. Accounts
receivables we judge to be uncollectible are offset against
the allowance for uncollectible accounts. Generally, we do not require account
debtors to secure the payment of accounts payable.
Goodwill And Other Intangible Assets
Prior to fiscal 2002, the Company amortized goodwill and intangible assets
using the straight-line method over periods of up to 10 years. SFAS No.142
requires that goodwill and intangible assets having indefinite lives not be
amortized, but instead be tested for impairment at least annually.
Intangible assets determined to have definite lives are amortized over
their remaining useful lives.
Stock Based Compensation
The Company uses the intrinsic-value method of accounting for stock-based awards
granted to employees and the fair value method of accounting for warrants
granted to consultants for services. See Note 6 of Notes to Condensed
Consolidated Financial Statements (Unaudited) under Item 1 of this Report.
Long-Lived Assets
We evaluate long-lived assets, such as intangible assets, equipment and
leasehold improvements, for impairment when events or changes in circumstances
indicate that the carrying amounts of the assets may not be recoverable through
estimated undiscounted cash flows from the use of these assets, when an
impairment exists, the related assets are written down to fair value.
THREE AND SIX MONTHS ENDED JUNE 30, 2004 COMPARED WITH THREE AND SIX MONTHS
ENDED JUNE 30, 2003.
RESULTS OF OPERATIONS
Revenues for the six months ended June 30, 2004 increased to approximately
$23,677,000 from approximately $22,815,000 for the six months ended June 30,
2003. Revenues for the three months ended June 30, 2004 increased to
approximately $12,171,000 from approximately $10,820,000 for the three months
ended June 30, 2003. The increase in revenues is due to an increase in sale
volumn to some of our existing clients.
Cost of professional care of patients for the six months ended June 30,
2004 increased to approximately $18,996,000 from approximately $18,239,000 for
the six months ended June 30, 2003. Cost of professional care of patients for
the three months ended June 30, 2004 increased to approximately $9,808,000 from
approximately $8,532,000 for the three months ended June 30, 2003. The increase
in cost is due to the increase in sales.
Selling, general and administrative expenses ("SG&A") for the six months
ended June 30, 2004 increased 2.4% to approximately $6,026,000 from
approximately $5,882,000 for the six months ended June 30, 2003. Selling,
general and administrative expenses ("SG&A") for the three months ended June 30,
2004 increased 14% to approximately $3,073,000 from approximately $2,694,000 for
the three months ended June 30, 2003. The increase in expenses for these periods
is the result of administrative personnel increases and other costs associated
with the increased revenue.
For the six months ended June 30, 2004 the Company had a net loss of
approximately $2,390,000 as compared to a net loss of approximately $19,694,000
for the six months ended June 30, 2003. The loss for the six months ended June
30, 2004 of approximately $2,390,000 includes a loss of approximately $57,000
from the operations of the home care segment and a loss of approximately
$2,333,000 from the BioBalance segment, which to date has not generated any
revenue. The loss for the six months ended June 30, 2003 of approximately
$19,694,000 includes the approximately $17,869,000 non-cash charge for the
goodwill impairment, a net income of approximately $292,000 exclusive of
non-cash charge for goodwill impairment from the operations of the home health
care segment, offset by a loss of approximately $2,117,000, which includes a
non-cash expense in the amount of approximately $1,036,000 resulting from an
increase in the fair value of the options as a result of the merger and the
issuance of stock options to consultants from the BioBalance segment.
For the three months ended June 30, 2004 the Company [had] a net loss of
approximately $1,162,000, as compared to a net loss of approximately $689,000
for the three months ended June 30, 2003. The net loss of approximately
$1,162,000 includes a net loss of approximately $100,000 from the operations of
the home care segment and a net loss of approximately $1,062,000 from the
BioBalance segment.
LIQUIDITY AND CAPITAL RESOURCES
HOME HEALTH CARE SEGMENT
At June 30, 2004, the Company had no long-term debt. Future minimum rental
commitments for all non-cancelable lease obligations at June 30, 2004, are as
follows:
Payment due by period
----------------------------------------------------------
Less than More than
Contractual Obligations Total 1 year 1-3 years 4-5 years 5 years
---------------------------- ---------- ---------- ---------- ---------- ----------
Long-term debt obligations $ -- $ -- $ -- $ -- $ --
Capital lease obligations -- -- -- -- --
Operating lease obligations* 1,144,328 108,158 664,776 242,710 128,684
Purchase obligations -- -- -- -- --
----------------------------------------------------------
Total $1,144,328 $ 108,158 $ 664,776 $ 242,710 $ 128,684
========== ========== ========== ========== ==========
* These leases also generally contain provisions allowing rental obligations to be
accelerated upon default in the payment of rent or the performance of other lease
obligations. These leases generally contain provisions for additional rent based upon
increases in real estate taxes and other cost escalations.
The Company has no off-balance sheet arrangements and has not entered into any
transactions involving unconsolidated, limited purpose entities or commodity
contracts.
The sources of liquidity and capital resources for the home health care segment
are internally generated funds, cash on hand and amounts available under a
$4,000,000 revolving credit facility. Currently there is no outstanding
indebtedness under this facility.
Loans under this revolving credit loan facility, which expires in November
2004, may be used only for working capital of the Company's home health care
business and other costs arising in the ordinary course of that business. The
Company's obligations to pay the principal of, and interest on, loans advanced
under this facility are secured by substantially all the assets of the
Company's home health care business, and not by any assets of BioBalance.
Borrowings under the facility are permitted to the extent of a borrowing
base of up to 85% of "qualified accounts receivable" of the Company's home
health care business and there being no events of default under the relevant
loan documents subject to the lender's right to reduce the borrowing base
by applying a liquidity factor percentages based upon a calculation relating to
recent collection histories of certain classes of qualified accounts
receivable. Currently, application of the liquidity factors formula results in
97% of qualified accounts receivable being part of the borrowing base. At June
30, 2004, the amount available for borrowing under this facility, based on the
borrowing base formula was $4,000,000.
The loan agreement contains various restrictive covenants, which among other
things, require that the Company have a minimum tangible net worth greater than
$500,000. The Company has amended its loan agreement to allow it to lend money
to BioBalance if there is no outstanding loan under this agreement. The loan
agreement has also been amended to allow the Company to invest money in
BioBalance. The principal amount of loans borrowed under this facility bear
interest at a variable annual rate equal to the prime rate charged from time to
time by CitiBank, N.A. plus 1.5% (currently, 5.50% per annum) and the loan
agreement creating this facility provides for monthly payments of
interest on the outstanding loan balance on the basis of the actual number of
days elapsed over a year of 360 days.
For the six months ended June 30, 2004, net cash used in operating
activities was approximately $2,973,000, as compared to net cash provided by
operating activities of approximately $849,000 during the six months ended June
30, 2003, a decrease of $3,822,000. The $2,973,000 used by operations for the
six months ended June 30, 2004 was principally due to a decrease in due to
related parties, an increase in accounts receivable, a decrease in accrued
payroll and taxes payable, a net loss offset by an increase in accounts payable
and due to HRA.
Net cash used in investing activities for the six months ended June 30,
2004 totaled approximately $38,000 and consisted of the acquisition of property
and equipment and intangible assets. There was no net cash provided by or used
in financing activities for the six months ended June 30, 2004.
As of June 30, 2004, approximately $7,523,000 (approximately 39%) of the
company's total assets consisted of accounts receivable and unbilled services
from clients who are reimbursed by third party payers, as compared to
approximately $6,111,000 (approximately 32.5%) as of June 30, 2003. The increase
is the results of slower payments by some clients exceeding their normal 120-day
payment terms.
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 six months ended June 30, 2004, the Company's DSO
was 67. For the six months ended June 30, 2003, the Company's DSO was 58. The
increase in DSO's is the reset of some of our bigger clients exceeding our
120-day payment terms.
BioBalance Segment
Since its inception in 2001, BioBalance received aggregate gross proceeds
of $6,889,000 in a series of private placements from the sale of common stock.
As of June 30, 2004, BioBalance had no cash on hand. BioBalance estimates that
its capital requirements for the remainder of 2004 will be approximately $1.7
million. This budget assumes that BioBalance will receive financing proceeds in
the second half of 2004 to support its continuing operations. See "Risks and
Uncertainties - Business Risks - Risks Relating to BioBalance - Failure to
secure additional financing would result in impaired growth and inability to
operate."
BioBalance has incurred development costs excluding non-cash compensation
of $699,000 for the six months ended June 30, 2004. The majority of these costs
were for manufacturing clinical supplies and conducting clinical studies to
assess the safety and efficacy of BioBalance's lead product, PROBACTRIX(TM).
During this period, BioBalance completed an extended safety study in healthy
human volunteers at ten times the normal dose in 35 subjects for a six month
period. The data from this study is currently being compiled to be submitted for
publication in a peer-reviewed medical journal. During first half of 2004,
BioBalance also continued its IBS medical food clinical trial which was begun at
Ichilov Medical Center in Tel Aviv in November 2003. An additional site (St.
Michael's Hospital in Toronto) became operational in First Quarter this year,
but enrollment was significantly delayed due to personnel issues. Additional
sites in New York and Jerusalem have been added to compensate for the slow
enrollment which will become operational in the next quarter. Total enrollment
of 210 patients is anticipated for this trial, which will likely continue into
early 2005.
For the three months ended June 30, 2004, developmental costs excluding
non-cash compensation were $ 271,000. These expenses were split evenly between
the extended safety study and the IBS medical food trial.
Recent Accounting Pronouncements
In January 2003, the FASB issued Financial Interpretation No. 46 "Consolidation
of Variable Interest Entities" ("FIN 46"), which clarifies the application of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements." FIN 46
requires certain variable interest entities to be consolidated by the primary
beneficiary of the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not provide sufficient
equity at risk for the entity to support its activities. In December 2003, the
FASB revised certain elements of FIN 46 (FIN 46-R). The FASB also modified the
effective date of FIN 46. This interpretation applies immediately to variable
interest entities created after January 31, 2003 and variable interest entities
in which the Company obtains an interest after January 31, 2003. For variable
interest entities in which a company obtained an interest before February 1,
2003, the interpretation applies to the interim period ending after March 15,
2004. The adoption of FIN 46 did not have a material impact on the Company's
consolidated financial position or results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity" ("SFAS No.
150").
SFAS No. 150 establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. SFAS No. 150 requires that an issuer classify a financial instrument
that is within its scope as a liability (or an asset in some circumstances).
SFAS No. 150 is effective for financial instruments entered into or modified
after May 31, 2003, and otherwise is effective at the beginning of the first
interim period beginning after June 15, 2003. The adoption of SFAS No. 150 has
not had and is not expected to have a material impact on the Company's
consolidated financial position or results of operations.
RISKS AND UNCERTAINTIES
CERTAIN OF THE RISK FACTORS DESCRIBED BELOW PERTAIN TO THE CURRENT OPERATIONS OF
- --------------------------------------------------------------------------------
THE CONSOLIDATED ENTITIES AND WILL NOT NECESSARILY BE APPLICABLE TO THE
- -----------------------------------------------------------------------
REMAINING OPERATIONS IF THE PROPOSED DIVESTITURE OF THE HOME HEALTH CARE
- ------------------------------------------------------------------------
SEGMENT.
- --------
BUSINESS RISKS
RISKS ARISING FROM THE PRIOR COMBINATION OF THE HOME HEALTHCARE AND
BIOBALANCE BUSINESSES
THE ANTICIPATED BENEFITS FROM THE PRIOR BUSINESS COMBINATION OF THE HOME
HEALTHCARE OPERATION AND BIOBALANCE MAY NOT ACHIEVED IN THE FUTURE , IN WHICH
CASE THE BUSINESS, FINANCIAL CONDITION AND OPERATING RESULTS OF THE COMBINED
COMPANY COULD BE ADVERSELY EFFECTED. UNTIL SUCH TIME, IF EVER, THAT THE HOME
HEALTHCARE OPERATIONS ARE SOLD, must overcome significant issues in order to
realize any benefits or synergies from the prior combination of the healthcare
business and BioBalance including the timely, efficient and successful execution
of a number of events, the consummation of which is subject to a high degree of
uncertainty Key events include, among others,
- - Obtaining financing needed to fund BioBalance's future product development,
regulatory compliance, manufacturing and marketing activities;
- - Managing the disparate operations of two companies doing business in very
different sectors of the health care market;
- - Retaining, recruiting, and assimilating key personnel for each company;
and
- - Maintaining good working relationships between the managements of the Home
Healthcare and BioBalance businesses, as well as uniform standards, controls,
procedures and policies.
The execution of these tasks will involve considerable risks and may not be
successful. These risks include:
- - The potential disruption of the combined companies' ongoing business and
distraction of their respective management's;
- - Unanticipated expenses related to product development, regulatory compliance,
manufacturing and marketing;
- - The impairment of relationships with employees and customers as a result of
any
integration of new management personnel; and
- - Potential unknown liabilities associated with the BioBalance business.
We may not succeed in addressing these risks or any other problems
encountered in connection with any future operation of both business segments.
We cannot assure that we will realize any benefit from the prior acquisition
of BioBalance if we are unable to consummate the proposed sale of the healthcare
segment and adequately address any of the risks relating to continued operation
of both operating segments, our financial condition and results of operations
could be materially adversely affected.
RISKS RELATING TO BIOBALANCE
BIOBALANCE IS A DEVELOPMENT STAGE COMPANY, HAS GENERATED NO REVENUES TO
DATE AND HAS A LIMITED OPERATING HISTORY UPON WHICH IT MAY BE EVALUATED.
BioBalance was incorporated in May 2001, and has generated no revenues from
operations or meaningful assets, other than its intellectual property rights.
BioBalance faces all of the risks inherent in a new business and those risks
specifically inherent in the business of developing, testing, obtaining
regulatory approvals for, manufacturing, commercializing and selling a new
ethical drug or a new medical food product, with all of the unforeseen costs,
expenses, problems, and difficulties to which such ventures are subject. In July
2001 BioBalance acquired the intellectual property rights with respect to
certain probiotic agents from Israeli companies engaged in the research,
development, marketing or sales of probiotic bacteria and other technology. We
cannot assure that BioBalance will be able to generate revenues or profits from
operation of its business or that BioBalance will be able to generate or sustain
profitability in the future.
FAILURE TO SECURE ADDITIONAL FINANCING WOULD RESULT IN IMPAIRED GROWTH AND
INABILITY TO OPERATE . BioBalance will be required to expend substantial amounts
of working capital in order to develop, test, obtain the requisite regulatory
approvals for, manufacture and market its proposed product and establish the
necessary relationships to implement its business plan. BioBalance had no cash
on hand at June 30, 2004. If BioBalance fails to obtain adequate financing,
BioBalance's clinical and regulatory programs would need to be scaled back or
cancelled. BioBalance has no firm agreements or arrangements with respect to any
such financing and we cannot assure you that any needed funds will be available
to BioBalance on acceptable terms or at all. The inability to obtain sufficient
funding of BioBalance's operations in the immediate future could cause
BioBalance to curtail or cease it operations.
THE LOSS OF KEY EXECUTIVES OR CONSULTANTS OR THE FAILURE TO HIRE QUALIFIED
EMPLOYEES WOULD DAMAGE BIOBALANCE'S BUSINESS. Because of the highly technical
nature of its business, BioBalance depends greatly on attracting and retaining
experienced management and highly qualified and trained scientific personnel.
BioBalance's future success will depend on the continued services of its key
scientific and management personnel with whom it has entered into various
agreements. BioBalance's management team has only recently been assembled, with
the retention during 2003 of Dennis O'Donnell as President and Chief Executive
Officer, Dr. Robert Hoerr as Director of
Medical and Regulatory Affairs and Dr. Eileen Bostwick as Director of Research
and Development. BioBalance competes intensely for these professionals with
other companies in its industry. If BioBalance cannot retain or hire and
effectively integrate a sufficient number of qualified scientists and
experienced professionals, such inability would have a material adverse effect
on its capacity to grow its business and develop its products through the
clinical trial process. BioBalance does not presently maintain key person
insurance for any of its key personnel.
BIOBALANCE'S PRODUCTS ARE IN DEVELOPMENT AND MAY NOT SATISFY REGULATORY
REQUIREMENTS OR BECOME COMMERCIALLY VIABLE. The product that BioBalance is
currently developing will require additional development, testing, and
investment in order to market it as a therapeutic drug or medical food. We
cannot assure you that our product research and development efforts will be
successful, that candidates will enter clinical studies as anticipated, that
BioBalance will satisfy medical food or prescription drug requirements or that
any required regulatory approvals will be expeditiously applied for or obtained,
or that any products, if introduced, will be commercially successful.
BioBalance has conducted pre-clinical and small scale human trials and has
recently commenced a clinical trial for its initial product and has established
GRAS (Generally Recognized As Safe) status for PROBACTRIX(TM). The results of
these pre-clinical and small scale trials on products under development are not
necessarily predictive of results that will be obtained from large scale
clinical testing. We cannot assure you that clinical trials of the products
under development will demonstrate the safety and efficacy of such products or
will result in a marketable product. In addition, the administration alone or in
combination with drugs of any product developed by BioBalance may produce
undesirable side effects in humans. The failure to demonstrate adequately the
safety and efficacy of a medical food or prescription drug product under
development could delay or prevent regulatory approval, where required, and
delay or prevent commercial sale of the product, any of which could have a
material adverse effect on BioBalance.
The FDA may contest the GRAS status of the ingredients in PROBACTRIX(TM),
or contest the status of PROBACTRIX(TM) as a medical food. BioBalance may
encounter difficulties in manufacturing process development and formulation
activities that could result in delays in clinical trials, regulatory
submissions, regulatory approvals, and commercialization of its product, or
cause negative financial and competitive consequences. We cannot assure you that
PROBACTRIX(TM) or any other product will be successfully developed, be developed
on a timely basis or prove to be more effective than competing products based
on existing or newly developed technologies. The inability to successfully
complete development, or a determination by the Company, for financial or other
reasons, not to undertake to complete development of PROBACTRIX(TM) or any other
product, particularly in instances in which the Company has made significant
capital expenditures, would have a material adverse effect on the Company.
THE VALIDITY OF PATENTS COVERING PHARMACEUTICAL AND BIOTECHNOLOGICAL
INVENTIONS AND THE SCOPE OF CLAIMS MADE UNDER SUCH PATENTS IS UNCERTAIN; FAILURE
TO
SECURE NECESSARY PATENTS COULD IMPAIR BIOBALANCE'S ABILITY TO PRODUCE AND MARKET
ITS PRODUCTS. There is no consistent policy regarding the breadth of claims
allowed in specialty pharma/medical foods patents. In addition, patents may have
been granted, or may be granted, to others covering products or processes
BioBalance needs for developing its product. If BioBalance's product or
processes infringe upon the patents, or otherwise impermissibly utilize the
intellectual property, of others, BioBalance might be unable to develop,
manufacture, or sell its product. In such event, BioBalance may be required to
obtain licenses from third parties. We cannot assure you that BioBalance will be
able to obtain such licenses on acceptable terms, or at all.
FAILURE TO ASSEMBLE OR CONTRACT WITH AN ADEQUATE SALES ORGANIZATION COULD
RESULT IN A LACK OF FUTURE REVENUES. To market any of its products directly,
BioBalance would have to develop a substantial marketing and sales force.
Alternatively, BioBalance may, for certain products, attempt to obtain the
assistance of companies with established distributions systems and direct sales
forces. BioBalance does not know if it will be able to establish sales and
distribution capabilities or if it will be able to enter into licensing or other
agreements with established companies to sell its product.
BIOBALANCE OWNS NO MANUFACTURING FACILITIES AND WILL BE DEPENDENT ON THIRD
PARTIES TO MAKE ITS PRODUCT. BioBalance owns no manufacturing facilities or
equipment, and employs no manufacturing personnel. BioBalance expects to use
third parties to manufacture certain of its products on a contract basis.
BioBalance may not be able to obtain contract-manufacturing services on
reasonable terms or at all. If BioBalance is not able to contract manufacturing
services, it will not be able to make its products.
IF WE OR ANY OF OUR POTENTIAL PARTNERS FAIL TO OBTAIN REGULATORY APPROVAL
FOR OUR PRODUCTS, WE WILL NOT BE ABLE TO SELL THEM. If we determine to pursue
the IND regulatory pathway for our products, we and any pharmaceutical companies
with who we may partner must conduct time-consuming, extensive and costly
clinical trials to show the safety and efficacy of each of our drug candidates,
before a drug candidate can be approved for sale. We must conduct these trials
in compliance with FDA regulations and with comparable regulations in other
countries. If the FDA or another regulatory agency believes that we or our
partners have not sufficiently demonstrated the safety or efficacy of our drug
candidates, it will not approve them or will require additional studies, which
can be time consuming and expensive and which will delay commercialization of a
drug candidate. We and any partners may not be able to obtain necessary
regulatory approvals on a timely basis, if at all, for any of our drug
candidates. Failure to receive these approvals or delays in such receipt could
prevent or delay commercial introduction of a product and, as a result, could
negatively impact our ability to generate revenue from product sales.
Following approval of a drug candidate, we and any partners must comply
with comprehensive government regulations regarding how we manufacture, market
and distribute products. If we fail to comply with these regulations, regulators
could force us to withdraw a drug candidate from the market or impose other
penalties or requirements that could have a similar negative impact. We cannot
assure you that any of our drug
candidates will be safe and effective, will be approved for commercialization or
that our partners or we can successfully commercialize these drug candidates.
If the results of clinical testing indicate that any of our drugs under
development are not suitable for commercial use, or if additional testing is
required to demonstrate such suitability, we may need to abandon one or more of
our drug development programs.
THE COMPANY WILL BE DEPENDENT ON THIRD-PARTY MANUFACTURING
ARRANGEMENTS AND MUST COMPLY WITH GOOD MANUFACTURING PRACTICES. The manufacture
of the Company's proposed products may be subject to current Good Manufacturing
Practices ("GMP") or similar regulations prescribed by the FDA in the United
States. There can be no assurance that the Company or any entity manufacturing
products on behalf of the Company will be able to comply with GMP or satisfy
certain regulatory inspections in connection with the manufacture of the
Company's proposed products. Failure or delay by any manufacturer of the
Company's products to comply with GMP or similar regulations or satisfy
regulatory inspections would have a material adverse effect on the Company.
BIOBALANCE'S PRODUCT MAY BE DENIED MEDICAL FOOD STATUS. BioBalance's
primary regulatory strategy is the establishment of its initial product as a
medical food for the dietary management of Irritable Bowel Syndrome. The
advantage of this strategy s that it is a relatively rapid and relatively
inexpensive way to reach the market. A "medical food" is defined as a food which
is formulated to be consumed or administered under the supervision of a
physician and which is intended for the specific dietary management of a disease
or condition for which instinctive nutritional requirements, based on recognized
scientific principles, are established by medical evaluation. Perhaps most
importantly, FDA's policies on medical food products have long been in a state
of flux and are not the subject of final regulations. In the future, it is
possible that FDA policies in this area could be adopted that would prevent or
severely limit BioBalance's ability to market the PROBACTRIX(TM) product as a
medical food. We cannot assure that BioBalance will satisfy the regulatory
requirements applicable to medical foods. Such a failure would result in
BioBalance having to market the product as a dietary supplement under the
Dietary Supplement Health & Education Act (DSHEA) or as a drug which would have
to enter the new drug regulatory pathway at either Phase I, or Phase II, which
could result in the need to raise large sums of money. In addition, such a
determination may result in a significant delay in introduction of the product
to the market.
POTENTIAL FAILURE OF PLANNED CLINICAL TRIALS TO PRODUCE STATISTICALLY
SIGNIFICANT DATA COULD IMPAIR BIOBALANCE'S ABILITY TO SUCCESSFULLY MARKET ITS
PRODUCT. Even if BioBalance is successful in establishing medical food status,
there still is substantial risk that the extensive clinical trials that
BioBalance is planning will not yield sufficient statistically significant data
to make strong marketing claims. The failure to obtain such data could adversely
affect marketing efforts to the medical community, which is traditionally
resistant to new treatments even if approved by the FDA unless also supported by
statistically significant data before recommending it to patients, and severely
limit BioBalance's ability to successfully market its product.
POTENTIAL SIDE EFFECTS OF BIOBALANCE'S PRODUCT COULD IMPAIR BIOBALANCE'S
ABILITY TO SUCCESSFULLY MARKET ITS PRODUCT. Although no side effects of
BioBalance's product have been reported, it is possible that any time during
clinical trials or patient usage, side effects may be encountered. If they are
common enough or significant enough, this could result in BioBalance's product
being withdrawn from the market.
BIOBALANCE'S PRODUCTS MAY NOT BE ACCEPTED BY PHYSICIANS, INSURERS OR
PATIENTS. Patients, doctors, and insurers must accept BioBalance's product as
medically useful and cost-effective for BioBalance to be successful. Market
acceptance will require substantial education about the benefits of the product.
We cannot assure you that patients, doctors or insurers will accept BioBalance's
product, even if approved for marketing, on a timely basis. If patients, the
medical community, and insurers do not accept BioBalance's product or acceptance
takes longer than anticipated, profits would be reduced.
GOVERNMENT AND PRIVATE INSURANCE PLANS MAY NOT PAY FOR BIOBALANCE'S
PRODUCT. The success of BioBalance's product in the United States and other
significant markets will depend, in part, upon the extent to which a consumer
will be able to obtain reimbursement for the cost of such product from
governmental authorities, third-party payers and other organizations. BioBalance
cannot determine in advance the reimbursement status of newly approved
therapeutic products. Even if a product is approved for marketing, BioBalance
cannot be sure that adequate reimbursement will be available. Also, future
legislation or regulation, or related announcements or developments, concerning
the health care industry or third party or governmental coverage and
reimbursement may adversely affect BioBalance's business. In particular,
legislation or regulation limiting consumers' reimbursement rights could have a
material adverse effect on BioBalance's revenues.
BIOBALANCE MAY LOSE ANY TECHNOLOGICAL ADVANTAGE BECAUSE PHARMACEUTICAL
RESEARCH TECHNOLOGIES CHANGE RAPIDLY. The pharmaceutical research field is
characterized by rapid technological progress and intense competition. As a
result, BioBalance may not realize the expected benefits of its business
strategy. Businesses, academic institutions, governmental agencies, and other
public and private research organizations are conducting research to develop
technologies that may compete with those of BioBalance. It is possible that
competitors could acquire or develop technologies that would render BioBalance's
technology obsolete or noncompetitive. We cannot assure you that
BioBalance will be able to access the same technologies at an acceptable price,
or at all.
THE COMPANY COULD BE FACED WITH POSSIBLE PRODUCT LIABILITY LOSSES AND
ADVERSE PRODUCT PUBLICITY. BioBalance, like any other marketer of products that
are designed to be ingested, will face an inherent risk of exposure to product
liability claims and negative publicity in the event that the use of its product
results in injury. BioBalance faces the risk that materials used in the
manufacture of the final product may be contaminated with substances that may
cause sickness or injury to persons who have used the products, or that sickness
or injury to persons may occur if the product distributed by BioBalance is
ingested in dosages which exceed the dosage recommended on the product label. In
the event that insurance coverage or contractual indemnification is not
adequate, product
liability claims could have a material adverse effect on BioBalance. The
successful assertion or settlement of any uninsured claim, a significant number
of insured claims, or a claim exceeding any future insurance coverage, could
have a material adverse effect on BioBalance.
BioBalance will be highly dependent upon consumers' perception of the
safety and quality of its product as well as similar products distributed by
other companies. Thus, the mere publication of reports and negative publicity
asserting that such products may be harmful could have a material adverse effect
on BioBalance, regardless of whether such reports are scientifically supported,
whether the harmful effects would be present at the dosages recommended for such
products, or whether such adverse effects resulted from failure to consume the
product as directed.
INTENSE COMPETITION MAY RESULT IN AN INABILITY TO GENERATE SUFFICIENT
REVENUES TO OPERATE PROFITABLY. The pharmaceutical industry is highly
competitive. Numerous companies, many of which are significantly larger than
BioBalance, which have greater financial, personnel, distribution and other
resources than BioBalance and may be better able to withstand volatile market
conditions, will compete with BioBalance in the development, manufacture and
marketing of products for the treatment of IBS. We cannot give assurance that
national or international companies will not seek to enter, or increase their
presence in the industry. In addition, large internationally known companies
(such as Novartis and GlaxoSmithKline) are in competition with BioBalance in
this industry, since they have already spent millions of dollars to develop
treatments for IBS. Increased competition could have a material adverse effect
on BioBalance, as our competitors may have far greater financial and other
resources available to them and possess extensive manufacturing, distribution
and marketing capabilities far greater than those of BioBalance.
BIOBALANCE IS DEPENDENT ON NEW PRODUCTS AND CONTINUED INNOVATION. The
pharmaceutical industry in general, including the market for GI treatments, is
characterized by rapid innovation and advances. These advances result in
frequent product introductions and short product life cycles, requiring a high
level of expenditures for research and development and the timely introduction
of new products. BioBalance believes its ability to grow and succeed is
partially dependent upon its ability to introduce new and innovative products
into such markets. BioBalance currently has plans to introduce additional
products in to its anticipated markets, such as treatments for diarrhea and
Crohn's disease. We cannot assure that BioBalance will be successful in its
plans to introduce additional products to the market.
INTELLECTUAL PROPERTY RIGHTS MAY NOT PROTECT THE BIOBALANCE BUSINESS.
BioBalance has adopted an aggressive patent policy on current and future
products. It uses a combination of patents, trademarks and trade secrets to
protect its proprietary position on PROBACTRIX(TM).
We cannot assure that BioBalance's pending or future patent and trademark
registration applications will result in issued patents and registered
trademarks, or that, if
issued, BioBalance's applications will be upheld if challenged. Further, even if
granted, we cannot assure that these patents and trademarks will provide
BioBalance with any protection from competitors or, that if they do provide any
meaningful level of protection, that BioBalance will have the financial
resources necessary to enforce its patent and trademark rights. In addition, we
cannot assure that others will not independently develop technologies similar to
those covered by BioBalance's pending patents and trade secrets, or design
around the pending patents. If others are able to design around BioBalance's
patents, its results of operations could be materially adversely affected.
Further, BioBalance will have very limited, if any, protection of its
proprietary rights in those jurisdictions where it has not affected any filings
or where it fails to obtain protection through its filings.
We cannot assure that third parties will not assert intellectual property
infringement claims against BioBalance in the future with respect to current or
future products. BioBalance is responsible for defending against charges of
infringement of third party intellectual property rights by BioBalance's actions
and products and the assertion of such claims may require BioBalance to refrain
from the sale of its product, enter into royalty arrangements or undertake
costly litigation. Further, challenges may be instituted by third parties as to
the validity, enforceability and infringement of BioBalance's patents.
BioBalance's adherence to industry standards with respect to its product
may limit its opportunities to provide proprietary features which may be
protected. In addition, the laws of various countries in which BioBalance's
product may be sold may not protect BioBalance's product and intellectual
property rights to the same extent as the laws of the United States. As a
consequence, BioBalance requires all of its personnel to execute confidentiality
agreements and assignment of intellectual property agreements in its favor.
RISKS RELATING TO THE HOME HEALTH CARE BUSINESS
Our personnel costs could significantly increase in the future. On July 22, 2004
the federal Second Circuit Court of Appeals issued an ruling concerning the Fair
Labor Standards Act on the validity of the "companionship services" exemption
from minimum wage and overtime payment requirements.
Home care providers have long relied on this exemption to provide compensation
to home care aides and personal care workers with the expectation that there is
no obligation for overtime pay. At this point, the US Courts of Appeals has
remanded the decision back to the District Court for action. Until the District
Court acts and there is an order to change the current wage and overtime payment
exemptions, home care agencies are not subject to changing current wage/hour
practices.
Implications for the home care industry, including us, of an adverse court
ruling on the wage and overtime payment exemption issues will be changes in the
expense of paying overtime, challenges to ensuring patient continuity of care if
agencies can no longer afford to authorize overtime during an outgoing workforce
shortage, and the inability of workers to secure the number of hours of work
they desire.
OUR INDIRECT DEPENDENCY UPON REIMBURSEMENT BY THIRD-PARTY PAYERS; HEALTH
CARE REFORM COULD REDUCE REVENUES. More than 30% of our revenues of are paid by
Certified Home Health Agencies and Long-Term Home Health Care Programs, as well
as other clients who receive their payments from "third- party payers," such as
private insurance companies, self-insured employers and HMOs. Our revenues and
profitability, like those of other home health care companies, are affected by
the continuing efforts of third-party payers to contain or reduce the costs of
health care by lowering reimbursement or payment rates, increasing case
management review of services and negotiating reduced contract pricing. Because
home care is generally less costly than hospital-based care, home nursing and
home care providers have benefited from cost containment initiatives aimed at
reducing the costs of medical care. However, as expenditures in the home health
care market continue to grow, cost containment initiatives aimed at reducing the
costs of delivering services at non-hospital sites are likely to increase. A
significant reduction in coverage or payment rates of public or private
third-party payers would reduce New York Health Care's revenues and profit
margins. While we are not aware of any substantive changes in the Medicare or
Medicaid reimbursement systems for home health care which are about to be
implemented, revised budget plans of New York State or the federal government
could result in limitation or reduction in the reimbursement of home care costs
and in the imposition of limitations on the provision of services which will be
reimbursed. Moreover, third party payers, particularly private insurance
companies, may negotiate fee discounts and reimbursement caps for services we
provide.
SLOW PAYMENTS AND POSSIBLE BAD DEBTS MAY CAUSE WORKING CAPITAL SHORTAGES
AND OPERATING LOSSES. We generally collect payments from our contractors within
one to three months after services are rendered, but pay our obligations on a
current basis. This timing delay may cause working capital shortages from time
to time. We have a secured revolving credit facility, which may be available to
cover these periodic shortages. Borrowings or other methods of financing may not
be available when needed or, if available, may not be on terms acceptable to us.
Although we have established a bad debt reserve for uncollectible accounts, any
significant increase in bad debts would damage our profitability.
PROFESSIONAL LIABILITY INSURANCE MAY BECOME INADEQUATE, UNAVAILABLE OR TOO
COSTLY. The administration of home care and the provision of nursing services
entail certain liability risks. We maintain professional liability insurance
coverage with limits of $1,000,000 per claim and $3,000,000 annual aggregate,
with an umbrella policy providing an additional $5,000,000 of coverage. Although
we believe that the insurance we maintain is sufficient for present operations,
professional liability insurance is increasingly expensive and sometimes
difficult to obtain. A successful claim against us in excess of, or not covered
by, our insurance could adversely affect our business and financial condition.
Claims against us, regardless of their merit or eventual outcome, could also
adversely effect our reputation and home health care business.
CHANGES IN FEDERAL AND STATE REGULATION COULD INCREASE COSTS AND REDUCE
REVENUES. Our home health care business is subject to substantial regulation at
the state level and also under the federal Medicare and Medicaid laws. In
particular, we are subject to state laws regulating home care, nursing services,
health planning and professional ethics, as well as state and federal laws
regarding fraud and abuse in government funded health programs. Changes in the
law or new interpretations for existing laws can increase the relative costs of
doing business and reduce the amount of reimbursement by government and private
third-party payers. Although we have not experienced any difficulties to date
complying with applicable laws, rules or regulations, our failure to obtain,
renew or maintain any required regulatory approvals or licenses could have a
material adverse on us and could prevent us from offering our existing services
to patients or from further expansion.
Pending legislation in both the States of New York and New Jersey could
substantially impact the conduct of our home health care business and
potentially adversely affect the cost of operations and available reimbursement.
Under the pending legislation in New Jersey, home health care aides would be
required to register with various State-funded home care councils; the home care
councils would have the ability to employ home health care aides and provide
referrals to consumers seeking the services of home health care aides; the State
could assess and collect fees from home health care agencies to pay the costs of
operating the home care councils, and the State could fix minimum wages for home
health care aides, as well as place caps on permissible administrative expenses.
Under the pending legislation in New York, certain reporting requirements, as
well as caps on permissible administrative expenses, would be imposed. If the
pending legislation becomes law its current form, costs of operations of our
home health care business in both New York and New Jersey are likely to
increase, and we would not be able to conduct our home health care business in
New Jersey on a profitable basis.
INTENSE COMPETITION COULD RESULT IN LOSS OF CLIENTS, LOSS OF PERSONNEL,
REDUCED REVENUES AND INABILITY TO OPERATE PROFITABLY. The home health care
industry is marked by low entry costs and is highly fragmented and competitive.
We compete for personnel with hospitals and nursing homes, and we also compete
for both personnel and business with other companies that provide home health
care services, most of which are large established companies with significantly
greater resources, access to capital and greater name recognition than we have.
Our principal business competitors include Gentiva Health Services, Premiere
Health Services, National Home Health Care, Patient Care, Inc., and Personal
Touch Home Care Services, Inc. We also compete with many other small temporary
medical staffing agencies. Competition for qualified paraprofessional personnel
in the New York Metropolitan area is intense. New York Health Care believes
that, given the increasing level of demand for nursing services, significant
additional competition can be expected to develop in the future.
DEPENDENCE ON MAJOR CUSTOMERS AND REFERRAL SOURCES MAY RESULT IN
SUBSTANTIAL DECLINES IN REVENUES IF CUSTOMERS ARE LOST. The development and
growth of our home care and nursing businesses depends to a significant extent
on our ability to establish close working relationships with hospitals, clinics,
nursing homes, physician groups, HMO's, governmental health care agencies and
other health care providers. Many of our
contractual arrangements with customers are renewable annually. Existing
relationships may not be successfully maintained and additional relationships
may not be successfully developed and maintained in existing and future markets.
Our 10 largest customers accounted for approximately 86.8% of gross revenues
during the year ended December 31, 2003. One referral source, New York City
Medicaid, was responsible for approximately 50.45% of our gross revenues for the
year ended December 31, 2003. The loss of, or a significant reduction in,
referrals by these sources, as well as certain other key sources, would have a
material adverse effect on results of operations of our home health care
business.
LOSS OF KEY PERSONNEL MAY RESULT IN IMPAIRMENT OF THE ABILITY TO DELIVER
SERVICES OR MANAGE OPERATIONS. Our success in the home health care business to a
large extent depends upon the continued services of Jerry Braun, our President
and Chief Executive Officer, and Jacob Rosenberg, our Vice President, Chief
Operating officer and Chief Financial Officer. Although the Company has entered
into employment agreements with Messrs. Braun and Rosenberg which expire in
2009, and the Company is the sole beneficiary of a $5,000,000 life insurance
policy covering Mr. Braun and a $3,000,000 life insurance policy covering Mr.
Rosenberg, the loss of the services of either of these executive officers for
any reason, including, but not limited, to a violation of their employment
agreements, would damage us. The success of our home health business will also
depend, in part, upon our ability in the future to attract and retain additional
qualified licensed health care, operating, marketing and financial personnel.
Competition in the home health care industry for qualified personnel is often
intense and we may not be able to retain or hire the necessary personnel.
OUR INABILITY TO IDENTIFY SUITABLE LOCATIONS OR PERSONNEL OR TO SECURE FINANCING
MAY IMPAIR FUTURE GROWTH. Our ability to expand our home health care business
depends on a number of factors, including the availability of desirable
locations and qualified personnel, the availability of acquisition candidates
and our ability to finance such expansion. Our establishment of additional
branch offices and any future acquisitions by us may involve the use of cash,
debt or equity securities, or a combination thereof. We may be required to
obtain additional financing to achieve such objectives. That financing may not
be available, or, if available, may be on unacceptable terms. We are not
experienced in operating health care businesses unrelated to its current
businesses and we may be unable to successfully operate any such unrelated
health care business.
RISKS RELATING TO OUR COMMON STOCK
OUR DELISTING FROM NASDAQ HAS RESULTED IN REDUCED LIQUIDITY AND LOWER STOCK
PRICE. The results of the trading of our common is now reported in the Over-the
Counter Pink Sheets, as the result of the delisting of our common stock from the
Nasdaq SmallCap Market. As a result, the liquidity of the common stock has
been impaired, not only in the number of shares which can be bought and sold,
but also through delays in the timing of transactions, reduction in security
analysts' and news media's coverage and lower prices for our common stock than
might otherwise be attained. In addition, our common stock is subject to the
low-priced security or so-called "penny stock" rules that
impose additional sales practice requirements on broker-dealers who sell such
securities. For any transaction the penny stock rules require, among other
things, the delivery, prior to the transaction, of a disclosure schedule
required by the SEC relating to the penny stock market. The broker-dealer also
must disclose the commissions payable to both the broker-dealer and the
registered representative and current quotations for the securities.
Finally, monthly statements must be sent disclosing recent price information for
the penny stocks held in the customer's account.
POSSIBLE VOLATILITY OF COMMON STOCK MAY RESULT IN LOSSES TO SHAREHOLDERS.
The trading price of our common stock has been subject to significant
fluctuations. Since the merger in January 2003, it has ranged from a high of
$4.50 to a low of $0.75 in August 2004. The price of our common stock is likely
to continue to be affected by various factors, including, but not limited to,
our financial results, and the results of our development efforts of
PROBACTRIX(TM) and other products, variations in quarterly results of
operations, announcements of new contracts or services or acquisitions by the
Company or its competitors, governmental regulatory action, general trends in
the industry and other factors, such as extreme price and volume fluctuations
which have been experienced by the securities markets from time to time in
recent years.
ISSUANCE OF PREFERRED STOCK COULD REDUCE THE VALUE OF COMMON STOCK AND
COULD HAVE ANTI-TAKEOVER EFFECTS. We are authorized by our certificate of
incorporation to issue up to 5,000,000 shares of preferred stock value, on terms
which may be fixed by our board of directors without further stockholder action.
There are 590,375 shares of Series A convertible preferred stock currently
issued and outstanding which can be converted, on a 1-for-2/3rds basis, into
shares of common stock. The terms of any new series of preferred stock, which
may include priority claims to assets and dividends and special voting rights,
could adversely affect the rights of holders of the common stock. The issuance
of an additional series of preferred stock, depending upon the rights and
preferences of such series, could make the possible takeover of the Company or
the removal of our management more difficult, discourage hostile bids for
control of the Company in which shareholders may receive premiums for their
shares of common stock, or otherwise dilute the rights of holders of common
stock and the market price of the common stock.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Generally, the fair market value of fixed rate debt will increase as interest
rates fall and decrease as interest rates rise. The Company had no interest rate
exposure on fixed rate debt or other market risk at June 30, 2004.
ITEM 4. CONTROLS AND PROCEDURES
As required by Rule 13a-15(b) under the Securities Exchange Act of 1934 (the
"Exchange Act"), the Company's management, with the participation of the
Company's Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"),
evaluated the effectiveness of the Company's disclosure controls and procedures
as of the end of the period covered by this report in reaching a reasonable
level of assurance that the information required to be disclosed by the Company
in the reports that it files with the Securities and Exchange Commission ("SEC")
is recorded, processed, summarized and reported within the time period specified
in the SEC's rules and forms. Based upon that evaluation, the CEO and CFO
concluded that the Company's disclosure controls and procedures were effective
as of the end of the period covered by this report in reaching a reasonable
level of assurance that information required to be disclosed by the Company in
the reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time period specified in the
Securities and Exchange Commission's rules and forms.
As required by Exchange Act Rule 13a-15(d), the Company's management, including
the Chief Executive Officer and Chief Financial Officer, conducted an
evaluation of the Company's internal control over financial reporting to
determine whether any changes occurred during the fiscal quarter ended March
31, 2004 that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.
Based on that evaluation, other than the changes reported in the Company's
Annual Report on Form 10-K for the year ended December 31, 2003, which remained
in effect during the quarter ended June 30, 2004, there were no other changes
during such quarter.
PART II.
ITEM 5. OTHER INFORMATION
On July 15, 2004, the Company executed a definitive agreement for the sale of
the assets of its home healthcare business to a company controlled by its chief
executive officer and chief operating officer for consideration of $2.7 million
in cash and the forgiveness of certain future obligations that may be due to
them pursuant to Employment Agreements each of them has with the Company. The
sale is subject to the satisfaction of a number of conditions including
obtaining shareholder and regulatory approvals, and the raising of $4 million
from a private offering of its securities.
The Company will consider its home health care division as discontinued
operations upon the closing of its raising the $4 million in a private offering
of its securities and shareholder approval of the proposed sale of its home
healthcare business.
On August 3, 2004, the Company entered into an agreement with Messrs. Jerry
Braun and Jacob Rosenberg, the Company's Chief Executive Officer and Chief
Operating Officer, respectively, whereby, the resignations of Messrs. Braun and
Rosenberg as officers and directors of the Company will be effective upon the
Company's receipt of $4 million in gross cash proceeds from a proposed private
placement of the Company's securities.
As consideration for the resignations of Messrs. Braun and Rosenberg, among
other things, at the time of their resignations, they will be retained as
consultants to the Company and, as compensation therefore, each will be granted
10-year options to purchase up to 500,000 shares of the Company's common stock
at the fair market value of the common stock on the date of grant and existing
incentive stock options to purchase up to 606,667 shares granted to each of them
under the Company's stock option plan will be converted to non-qualified
options. The accounting treatment for these options and warrants will be
included in the calculation of the gain or loss of the sale of the home health
care business.
We cannot assure you that the Company will make the proposed private offering
or, if the offering is made, that it will be successful, or that the conditions
to the sale of the home healthcare business will be satisfied.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
No. Description
- ------- -----------
10.1 Employment agreement of Dennis O'Donnell
31.1 Certification of the Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of the Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of the Chief Financial Officer pursuant to 18 U.S.C.
Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
(b) Report on Form 8-K
The Company filed a report on Form 8-K dated April 5,2004 which furnished,
under Items 5, a press release announcing that a NASDAQ Listing Qualifications
Panel has determined that the Company's common stock will be delisted from the
NASDAQ Stock Market effective with the open of business on April 6, 2004 and
that commencing on April 6, 2004, the results of trading of the Company's common
stock will be reported in the OTC Pink Sheets.
The Company filed a report on Form 8-K dated May 14, 2004 which furnished a
press release announcing, among other things, the execution of a letter of
intent to divest itself of the home healthcare business.
On May 18, 2004 the Company furnished a report on Form 8-K to furnish a press
release to report on its financial results for the first quarter ended March 31,
2004.
SIGNATURES
Pursuant to the requirements 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.
NEW YORK HEALTH CARE, INC.
August 16, 2004 By: /s/ Jerry Braun
-------------------------
Jerry Braun
President and
Chief Executive Officer
August 16, 2004 By: /s/ Jacob Rosenberg
------------------------
Jacob Rosenberg
Chief Financial Officer
(Principal Financial and Principal
Accounting Officer)
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
- ------- -----------
10.1 Employment agreement for Dennis O'Donnell
31.1 Certification of the Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act
of 2002
31.2 Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
32.1 Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002