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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: September 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 November
5, 2004).
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements.
(a) Our unaudited financial statements as of September 30, 2004 and for the
three and nine months ended September 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 third quarter.
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, 2004 December 31, 2003
-------------------- -------------------
( Unaudited ) ( Note 1 )
Current assets:
Cash and cash equivalents $ 3,260,924 $ 7,337,896
Due from lending institution 259,963 208,721
Accounts receivable, net of allowance for uncollectible
amounts of $612,000 and $397,000, respectively 7,929,813 6,577,283
Unbilled services 64,347 100,114
Prepaid expenses and other current assets 547,106 319,195
-------------------- -------------------
Total current assets 12,062,153 14,543,209
Property and equipment, net 94,559 145,898
Goodwill, net 900,587 900,587
Other intangible assets, net 5,421,353 5,971,622
Other assets 77,465 67,652
-------------------- -------------------
Total assets $ 18,556,117 $ 21,628,968
==================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accrued payroll $ 1,551,457 $ 1,786,044
Accounts payable and accrued expenses 6,869,421 5,849,732
Due to HRA 4,870,635 3,756,507
Due to related parties - 1,190,526
Income taxes payable - 24,394
-------------------- -------------------
Total current liabilities 13,291,513 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 32,325,690 32,679,292
Accumulated deficit (27,306,955) (23,903,396)
Less: Treasury stock (4,045 common shares at cost) (9,473) (9,473)
-------------------- -------------------
Total shareholders' equity 5,264,604 9,021,765
-------------------- -------------------
Total liabilities and shareholders' equity $ 18,556,117 $ 21,628,968
==================== ===================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
For The Three Months Ended For The Nine Months Ended
September 30, September 30,
-------------------------- ---------------------------
2004 2003 2004 2003
------------ ------------ ------------ -------------
Net patient service revenue $12,397,208 $11,044,365 $36,074,673 $ 33,859,114
------------ ------------ ------------ -------------
Expenses:
Professional care of patients 9,961,241 8,821,090 28,957,069 27,059,757
------------ ------------ ------------ -------------
General and administrative 3,005,330 2,482,798 9,026,981 7,357,024
(excluding noncash compensation)
Noncash compensation 73 141,806 4,127 1,149,760
------------ ------------ ------------ -------------
Total general and
Administrative expenses 3,005,403 2,624,604 9,031,108 8,506,784
------------ ------------ ------------ -------------
Product development 312,870 211,287 1,012,233 476,376
(excluding noncash compensation)
Noncash compensation (12,859) 319,039 (357,729) 347,261
------------ ------------ ------------ -------------
Total product development 300,011 530,326 654,504 823,637
------------ ------------ ------------ -------------
Goodwill impairment - - - 17,869,339
Bad debts expense - 15,000 240,400 35,250
------------ ------------ ------------ -------------
Depreciation and amortization 220,320 165,913 662,324 394,668
------------ ------------ ------------ -------------
Total operating expense 13,486,975 12,156,933 39,545,405 54,689,435
------------ ------------ ------------ -------------
Loss from operations (1,089,767) (1,112,568) (3,470,732) (20,830,321)
------------ ------------ ------------ -------------
Non-operating income (expenses):
Interest income 27,126 13,376 54,097 37,649
Interest expense (7,479) - (18,315) (470)
------------ ------------ ------------ -------------
Loss before provision for taxes (1,070,120) (1,099,192) (3,434,950) (20,793,142)
------------ ------------ ------------ -------------
(Benefit) from income taxes
Current (56,216) - (31,391) -
Net loss $(1,013,904) $(1,099,192) $(3,403,559) $(20,793,142)
============ ============ ============ =============
Basic and diluted loss per share $ (0.04) $ (0.05) $ (0.14) $ (0.86)
Weighted and diluted average shares
outstanding 24,939,776 24,375,497 24,939,776 24,062,556
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004
( UNAUDITED )
Common Stock Preferred Stock Additional Treasury Stock
-------------------------- ---------------------- Paid-In ----------------
Shares Amount Shares Amount Capital Shares Amount
---------------------------------------------------------------------------------
Balance at January 1, 2004 24,943,821 $ 249,438 590,375 $ 5,904 $32,679,292 4,045 $(9,473)
Warrants earned for service 15,743
Reduction of compensation expense due
to a revaluation of options/warrants (369,345)
Net loss
---------------------------------------------------------------------------------
Balance at September 30, 2004 24,943,821 $ 249,438 590,375 $ 5,904 $32,325,690 4,045 $(9,473)
=================================================================================
Total
Accumulated Stockholders'
Deficit Equity
--------------------------
Balance at January 1, 2004 $(23,903,396) $9,021,765
Warrants earned for service 15,743
Reduction of compensation expense due
to a revaluation of options/warrants (369,345)
Net loss (3,403,559) (3,403,559)
--------------------------
Balance at September 30, 2004 $(27,306,955) $5,264,604
==========================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
NEW YORK HEALTH CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Nine Months Ended
September 30,
2004 2003
------------ -------------
Cash flows from operating activities:
Net loss $(3,403,559) $(20,793,142)
Adjustments to reconcile net loss to net cash
Used in operating activities:
Goodwill impairment - 17,869,339
Noncash compensation (353,602) 1,497,021
Depreciation and amortization 662,324 394,668
Bad debts expense 240,400 35,250
Changes in operating assets and liabilities
Net of effects of purchase of subsidiary:
Increase in accounts receivable
and unbilled services (1,557,163) (992,684)
Increase in prepaid expenses and other current assets (227,911) (324,014)
(Increase) decrease in due from lending institution (51,242) 56,525
(Increase) decrease in other assets (9,813) 2,960
(Decrease) increase in accrued payroll (234,587) 371,398
Increase (decrease) in accounts payable and
accrued expenses 1,019,689 (1,229,719)
Increase in due to HRA 1,114,128 1,232,091
(Decrease) increase in due to related parties (1,190,526) 1,540,526
Decrease in income taxes payable (24,394) -
------------ -------------
Net cash used in
operating activities (4,016,256) (339,781)
------------ -------------
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 (52,216) (384,896)
Decrease in restricted cash - 100,000
------------ -------------
Net cash (used in) provided by
investing activities (60,716) 3,229,988
------------ -------------
Cash flows from financing activities:
Exercise of options - 17,201
Payments on lease obligation payable - (15,503)
Proceeds of issuance of common stock - 1,028,808
Collection of subscription receivable - 290,000
------------ -------------
Net cash provided by financing activities - 1,320,506
------------ -------------
Net (decrease) increase in cash and cash equivalents (4,076,972) 4,210,713
Cash and cash equivalents at beginning of period 7,337,896 2,625,378
------------ -------------
Cash and cash equivalents at end of period $ 3,260,924 $ 6,836,091
============ =============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
NOW 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 is pursuing accelerated prescription drug development of its lead
product, PROBACTRIX TM by filing an investigational new drug ("IND") application
for the prevention and/or treatment of pouchitis. 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 nine months ended September 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
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
NOW YORK HEALTH CARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 or about September 23, 2004 New York Healthcare, Inc. commenced an offering
for sale (the "Offering") of a minimum aggregate offering of $4,000,000 and a
maximum aggregate offering of $6,000,000, of shares of its unregistered common
stock, $0.01 par value ("Common Stock") and associated warrants to persons who
qualify as "accredited investors" as defined in the rules under the Securities
Act of 1933, as amended, ( the "Securities Act") pursuant to the terms of a
Confidential Private Placement Memorandum. The purchase price per share of
Common Stock sold in the Offering will be equal to 95% of the volume weighted
average price of the Common Stock for the 10 trading days prior to the initial
closing of the Offering, but not less than $0.60 nor more than $1.00 per share.
For every two shares of Common Stock purchased in the Offering, investors will
receive a five-year redeemable warrant to purchase shares of Common Stock (the
"Warrants"). Each Warrant is exercisable for one share of Common Stock at an
exercise price equal to 125% of the price per share of Common Stock sold in the
Offering.
The proceeds of the Offering will be used to fund product development and the
working capital needs of the operations of BioBalance, including the development
of its lead product candidate PROBATRIX(TM) for the treatment of pouchitis. Up
to $1,250,000 of the proceeds will be used to repay the outstanding amounts
under intercompany loans made by New York Health Care to BioBalance. The terms
of this loan are; interest at 1 % above prime and the principal and accrued
interest are due upon closing of this offering of at least an amount sufficient
to pay the amount of the outstanding loan, or upon demand by lender.
The Offering will expire on December 31, 2004, unless the Offering is extended
for a period of up to 30 days.
The Common Stock, the Warrants, and the Common Stock underlying the Warrants
offered have not been registered under the Securities Act and may not be offered
or sold in the United States absent registration or an applicable exemption from
the registration requirements.
On May 13, 2004, the Company 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, the assumption of all of the
liabilities and obligations with respect to the home healthcare business 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 Company's 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, 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.
NOW YORK HEALTH CARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 573,334 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's private offering 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 a
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.
Stock Based Compensation:
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.
Reclassification:
Certain amounts in the prior period have been reclassified to conform to the
2004 presentation.
Recent Issued 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 periods ending after March
NOW YORK HEALTH CARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 nine months ended September 30, 2004 and 2003, options,
warrants and preferred stock outstanding of 3,344,234 for the three and nine
months ended September 30, 2004 and 3,706,868 for the three and nine months
ended September 30, 2003, were not included in the computation of diluted
earnings per share, because to do so would be antidilutive.
NOTE 3 - INTANGIBLE ASSETS:
The major classifications of intangible assets and their respective estimated
useful lives are as follows:
September 30, 2004
-----------------------------------------------------------
Estimated
Gross Carrying Accumulated Net Carrying Useful Life
Amount Amortization Amount Years
--------------- ------------- ------------- ------------
Intellectual property $ 3,576,500 $ 807,427 $ 2,769,073 10
Patents/trademarks 1,965,967 228,937 1,737,030 10
Non-compete agreement 770,000 173,250 596,750 5
Patient list 100,000 35,000 65,000 5
Customer base 390,000 136,500 253,500 5
--------------- ------------- -------------
$ 6,802,467 $ 1,381,114 $ 5,421,353
=============== ============= =============
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
=============== ============= =============
NOW YORK HEALTH CARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Approximately $5.1 million of intangible assets relate to BioBalance.
Biobalance is a research and development company and has had significant losses
since inception. The Company cannot assure that BioBalance will be able to
generate revenues or profits from operations of its business or that BioBalance
will be able to generate or sustain profitability in the future. Accordingly,
there is substantial doubt about BioBalance's ability to continue as a going
concern and the realization of its intangible assets.
See Item 2 "Management's Discussion and Analysis of Financial Condition and
Results of Operations-Risk and Uncertainties-Risk Relating to BioBlance", for
additional uncertainties relating to the realization of such intangible assets.
NOTE 4 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts payable and accrued expenses consist of the following at:
September 30, 2004 December 31, 2003
------------------- ------------------
Accounts payable $ 548,908 $ 500,186
Accrued expenses 2,051,088 967,851
Accrued employee benefits 4,269,425 4,381,695
------------------- ------------------
$ 6,869,421 $ 5,849,732
=================== ==================
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
September 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 September 30, 2004 (6.25%). The
Company is in the process of renewing the line of credit under the same terms
and conditions as the current line.
At September 30, 2004, there was an amount due from G.E. Capital Health Care
Financial Services of $259,963. 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. At September 30, 2004, New York Health Care
loaned BioBalance $850,000.
NOTE 6 - STOCK OPTIONS/WARRANTS:
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".
NOW YORK HEALTH CARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 Nine
Months Ended Months Ended
September 30, September30,
-------------------------- ---------------------------
2004 2003 2004 2003
------------ ------------ ------------ -------------
Net loss, as reported $(1,013,904) $(1,099,192) $(3,403,559) $(20,793,142)
Less stock-based compensation expense
determined under fair value method for
all stock options, net of related income
tax benefit (50,689) (137,600) (693,034) (1,538,475)
------------ ------------ ------------ -------------
Pro forma net loss $(1,064,593) $(1,236,792) $(4,096,593) $(22,331,617)
============ ============ ============ =============
Basic and diluted loss per share, as reported $ (0.04) $ (0.05) $ (0.14) $ (0.86)
Basic and diluted loss per share, pro forma $ (0.04) $ (0.05) $ (0.16) $ (0.93)
The options' assumptions used to estimate these values are as follows:
For The Three Months Ended For The Nine Months Ended
September 30, September 30,
-------------------------- ----------------------------
2004 2003 2004 2003
------------ ------------ ------------- -------------
Risk free interest rate 2.81% 1.65% 1.59 to 2.81% 1.52 to 3.82%
Expected volatility of common stock 103% 84% 88 to 103% 84 to 107%
Dividend yield 0% 0% 0% 0%
Expected option term 3 yrs. 2yrs. 3yrs. 2- 5yrs.
The following table summarizes options issued during the nine months ended
September 30, 2004:
Grant Date Number of Options Exercise Price Expiration Term
- ----------------------- ----------------- --------------- ---------------
January 29, 2004 450,000 $ 2.13 10 yrs
September 14, 2004 100,000 $ 0.50 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 are 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 nine and three months ended September 30, 2004, the re-valued warrants
generated a reduction in compensation of $369,345 and $12,859 respectively.
At September 30, 2004, the Company has 4,934,592 shares of Common Stock reserved
for issuance of options and warrants.
NOW YORK HEALTH CARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 7 - COMMITMENTS AND CONTINGENCIES:
In November 2003, a former director of the Company who was an officer of
BioBalance resigned and a consulting agreement with a consultant to BioBalance
was suspended, and subsequently terminated, as a result of matters related to
certain claims made against the former director and the consultant by the U.S.
Attorney's office relating to an alleged attempt by these two individuals to
manipulate the Company's common stock. The Company is obligated, under certain
circumstances, to indemnify the former director against liability and to pay for
his costs of defending himself from certain legal actions that arose from his
activities as a director or officer of the Company. To date, the Company's
insurance carrier has advanced funds on behalf of the Company to the former
director to cover the expenses of his defense to the government action. Unless
it is legally determined that the former director is not entitled to
indemnification, the Company would be required to reimburse the insurance
carrier for $250,000 of the amount it advanced on behalf of the former director.
The Company has accrued the $250,000 on its financial statements as of September
30, 2004. In addition, the terminated consulting agreement that BioBalance had
entered into in 2001 with the consultant and a company affiliated with the
consultant provided for the payment to the consultant of annual consulting fees
of $250,000 per year through at least January 2008 and the issuance of 200,000
warrants to the consulting company, subject to earlier termination of the
consulting agreement under certain circumstances, including for cause, as
defined in the agreement, or without cause. Although BioBalance has notified the
consultant in writing on September 23, 2004, of the termination of the
consulting agreement for cause, should the consultant bring an action to
challenge the termination and a court determines that the agreement was actually
terminated without cause, then BioBalance could be obligated under the agreement
to pay to the consulting company a severance payment equal to three times the
sum of its annual base consulting fee ($750,000) and any cash bonus paid to it
in the three-year period preceding the date of termination and to provide the
consultant with certain health and other benefits for a period of five-years.
The Company has accrued approximately $353,000 in its consolidated financial
statements as of September 30, 2004 relating to this consulting agreement which
includes $125,000 in the third quarter of 2004 to cover additional payments
provided for in the consulting agreement which the Company may be required to
pay. Moreover, the Company believes that it will be able to defend its position
in a possible claim by the consultant that it is owed money under the consulting
agreement, although there can be no assurance as to the amount of monies, if
any, that BioBalance may have to pay under the consulting agreement or that the
consultant will not bring an action against BioBalance or the Company for an
alleged breach of the consulting agreement.
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:
Years Ending
December 31,
- ------------
2004 $ 3,000
2005 83,000
2006 113,000
2007 118,000
2008 123,000
--------
Total $440,000
========
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 in a private placement $5,000,000, his annual
compensation will increase to $225,000.
During October 2004, it was determined that certain of the shares of Common
Stock that the Company issued to holders of BioBalance stock in connection with
the Company's January 2003 acquisition of BioBalance may not have been exempt
from the registration or qualification requirements of the state securities laws
of certain of the states where the holders of BioBalance stock then resided
although they were registered under the Securities Act of 1933, as amended.
Although the Company is unable to quantify the actual number of shares involved
that are still owned by the original recipients of the Company's Common Stock
received in the BioBalance acquisition, the per share purchase price paid by the
BioBalance holders for the BioBalance shares they exchanged in the acquisition
ranged from $.03 to $3.00 per share and the Company currently believes that the
purchase price paid by such persons who might have certain statutory rescission
rights does not exceed approximately $345,000, exclusive of any penalties or
interest, although no assurance can be given that any such claims will not
exceed this amount. The Company cannot determine the effect, if any, on its
operations or financial condition that may occur from the failure to register or
qualify these shares under applicable state securities laws. If it is determined
that the Company offered Common Stock in connection with the BioBalance
acquisition without properly registering or qualifying the shares under state
laws, or securing exemption from registration, regulators could impose on the
Company monetary fines or other sanctions as provided under these laws. The
Company is unable to estimate the amount of monetary fines, if any, or the
nature or scope of any sanctions at this time and is continuing its
investigation of this matter.
NOW YORK HEALTH CARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 September 30, 2004
and December 31, 2003, the Company has computed a deferred tax asset in the
amount of approximately $4,307,000 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 $421,000 and
$2,614,000 during the three and nine months ended September 30, 2004 and by
$158,000 and $793,000 during the three and nine months ended September 30, 2003,
respectively.
NOTE 9 - SUPPLEMENTAL CASH FLOW DISCLOSURES:
For The Nine Months Ended
September 30,
------------------------
2004 2003
----------- -----------
Supplemental cash flow disclosures:
Cash paid during the period for:
Interest $ 18,315 $ 470
=========== ===========
Income taxes $ 40,410 $ 58,465
=========== ===========
Supplemental schedule of non cash investing
and financing activities:
The Company purchased intangibles which were
partially acquired through the issuance of
1,000,000 shares of common stock. $ - $ 3,600,000
=========== ===========
NOTE 10 - SEGMENT REPORTING:
The Company has two reportable business segments: New York Health Care, a home
health care agency that provides a broad range of health care support services
to patients in their homes, and BioBalance, a segment that is developing a
biotherapeutic agent for the treatment of gastrointestinal disorders.
BioBalance has not generated any revenue as of September 30, 2004.
NOW YORK HEALTH CARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
New York Bio- Total
Health Care Balance Consolidated
------------- ------------ --------------
Nine Months Ended September 30, 2004
Revenue:
Net patient service revenue $ 36,074,673 $ - $ 36,074,673
Sales - - -
------------- ------------ --------------
Total revenue $ 36,074,673 $ - $ 36,074,673
============= ============ ==============
Net income (loss) $ 134,217 $(3,537,776) $ (3,403,559)
Total assets $ 13,239,474 $ 5,316,643 $ 18,556,117
Nine Months Ended September 30, 2003
Revenue:
Net patient service revenue $ 33,859,114 $ - $ 33,859,114
Sales - - -
------------- ------------ --------------
Total revenue $ 33,859,114 $ - $ 33,859,114
============= ============ ==============
Net loss $(17,525,678) $(3,267,464) $ (20,793,142)
============= ============ ==============
Three Months Ended September 30, 2004
Revenue:
Net patient service revenue $ 12,397,208 $ - $ 12,397,208
Sales - - -
------------- ------------ --------------
Total revenue $ 12,397,208 $ - $ 12,397,208
============= ============ ==============
Net income (loss) $ 191,098 $(1,205,002) $ (1,013,904)
============= ============ ==============
Three Months Ended September 30, 2003
Revenue:
Net patient service revenue $ 11,044,365 $ - $ 11,044,365
Sales - - -
------------- ------------ --------------
Total revenue $ 11,044,365 $ - $ 11,044,365
============= ============ ==============
Net income (loss) $ 51,329 $(1,150,521) $ (1,099,192)
============= ============ ==============
NOTE 11 - DUE TO RELATED PARTIES
At December 31, 2003 the Company owed two officers $1,190,526, which was paid
off during the nine months ended September 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", "our", 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 20 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 Note1 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 NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED WITH THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 2003.
Results of Operations
Revenues for the nine months ended September 30, 2004 increased to
approximately $36,075,000 from approximately $33,859,000 for the nine months
ended September 30, 2003. Revenues for the three months ended September 30, 2004
increased to approximately $12,397,000 from approximately $11,044,000 for the
three months ended September 30, 2003. The increase in revenues is due to an
increase in sale volume to some of our existing clients.
Cost of professional care of patients for the nine months ended September
30, 2004 increased to approximately $28,957,000 from approximately $27,060,000
for the nine months ended September 30, 2003. Cost of professional care of
patients for the three months ended September 30, 2004 increased to
approximately $9,961,000 from approximately $8,821,000 for the three months
ended September 30, 2003. The increase in cost is due to the increase in sales.
Selling, general and administrative expenses ("SG&A") for the nine months
ended September 30, 2004 increased 6% to approximately $9,031,000 from
approximately $8,507,000 for the nine months ended September 30, 2003. Selling,
general and administrative expenses ("SG&A") for the three months ended
September 30, 2004 increased 14% to approximately $3,005,000 from approximately
$2,625,000 for the three months ended September 30, 2003. The increase in
expenses for these periods is the result of administrative personnel increases
and other costs associated with the increased revenue. In addition, the Company
incurred significant legal, accounting and insurance cost in 2004 relating to
the indictment of one of its directors.
For the nine months ended September 30, 2004, the Company had a net loss of
approximately $3,404,000 as compared to a net loss of approximately $20,793,000
for the nine months ended September 30, 2003. The loss for the nine months ended
September 30, 2004 of approximately $3,404,000 includes income of approximately
$134,000 from the operations of the home care segment and a loss of
approximately $3,538,000 from the BioBalance segment, which to date has not
generated any revenue. The net loss of approximately $20,793,000 for the nine
months ended September 30, 2003 includes the non-cash impairment charge of
$17,869,000 non-cash charge for goodwill impairment, net income of approximately
$343,000 exclusive of non-cash charge for goodwill impairment from the
operations of the home health care segment, offset by a loss of approximately
$3,267,000, which includes a non-cash expense in the amount of approximately
$1,497,000 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 September 30, 2004, the Company had a net loss
of approximately $1,014,000, as compared to a net loss of approximately
$1,099,000 for the three months ended September 30, 2003. The net loss for the
three months ended September 30, 2004 of approximately $1,014,000 includes net
income of approximately $191,000 from the operations of the home care segment
and a net loss of approximately $1,205,000 from the BioBalance segment.
Liquidity and Capital Resources
Home Health Care Segment
At September 30, 2004, the Company had no long-term debt. Future minimum rental
commitments for all non-cancelable lease obligations at September 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* 999,897 83,862 544,640 242,711 128,684
Purchase obligations -- -- -- -- --
--------------------------------------------------------
Total $ 999,897 $ 83,862 $ 544,640 $ 242,711 $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 September 30, 2004,
the amount available for borrowing under this facility, based on the borrowing
base formula was $4,000,000. The Company is in the process of renewing the line
of credit under the same terms and conditions as the current line.
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. At September
30, 2004, New York Health Care loaned BioBalance $850,000. 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, 6.25% 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 nine months ended September 30, 2004, net cash used in operating
activities was approximately $4,016,000, as compared to net cash used in
operating activities of approximately $340,000 during the nine months ended
September 30, 2003, a decrease of $3,676,000. The $4,016,000 used by operations
for the nine months ended September 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 nine months ended September
30, 2004 totaled approximately $61,000 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 nine months ended September 30, 2004.
As of September 30, 2004, approximately $7,994,000 (approximately 43%) 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 $6,333,000 (approximately 30%) as of September 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 nine months ended September 30, 2004, the Company's
DSO was 65. For the nine months ended September 30, 2003, the Company's DSO was
62. The increase in DSO's is the result of some of our bigger clients exceeding
our 120-day payment terms.
BioBalance Segment
Since its inception on 2001, BioBalance received aggregate gross proceeds
of $6,889,000 in a series of private placements from the sale of its common
stock. As of September 30, 2004 BioBalance had $6,000 of cash on hand.
BioBalance estimates that its capital requirements for the remainder of 2004
will be approximately $1.4 million and its projected losses for 2005 will be
approximately $3.5 million. This budget assumes that BioBalance will receive
financing proceeds in the fourth quarter 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 product development costs excluding non-cash
compensation of $1,012,000 for the nine months ended September 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
candidate, 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.
BioBalance began an Irritable Bowel Syndrome ("IBS") medical food clinical trial
at Ichilov Medical Center in Tel Aviv in November 2003. An additional site (St.
Michael's Hospital in Toronto) became operational in the first quarter this
year, but enrollment was significantly delayed due to personnel issues.
Additional sites in New York and Jerusalem were added in the third quarter to
compensate for the slow enrollment. Total enrollment of 210 patients is
anticipated for this trial, which will continue into 2005.
BioBalance is pursing accelerated regulatory approval of PROBACTRIX(TM) as a
prescription drug for the prevention and/or treatment of pouchitis by filing an
Investigational New Drug ("IND") application with the U.S. Food and Drug
Administration ("FDA"). Pouchitis is a non-specific inflammation of the "pouch"
or ileal reservoir, which usually occurs during the first two years after bowel
reconstruction due to ulcerative colitis. Symptoms including steadily
increasing stool frequency that may be accompanied by incontinence, bleeding,
fever and/or a feeling of urgency. There are currently no approved treatments
for pouchitis. BioBalance also will seek orphan drug designation for this
indication. "Orphan drug" refers to a product that treats a rare disease
affecting less than a specified number of persons (200,000 in the U.S.). The
orphan drug regulatory strategy provides a significantly shorter approval
process and less costly clinical studies. Additional clinical studies can
subsequently be conducted to determine whether there is support for broader
usage. BioBalance anticipates filing the IND in the fourth quarter of 2004.
For the three months ended September 30, 2004, product development costs
excluding non-cash compensation were $ 313,000. 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).
RISK 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 OF THE COMPANY IF THE PROPOSED DIVESTITURE OF THE HOME
HEALTH CARE SEGMENT IS CONSUMMATED.
BUSINESS
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 be achieved in the future, in which
case the business, financial condition and operating results of the combined
company could be adversely affected. Until such time, if ever, that the home
healthcare operations are sold, the Company 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 managements;
- - 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.
SHARES OF OUR COMMON STOCK ISSUED IN CONNECTION WITH OUR ACQUISITION OF
BIOBALANCE MAY HAVE BEEN ISSUED WITHOUT COMPLYING WITH CERTAIN STATE SECURITIES
LAWS.
During October 2004, it was determined that certain of the shares of common
stock that we issued to holders of BioBalance stock in connection with our
January 2003 acquisition of BioBalance may not have been exempt from the
registration or qualification requirements of the state securities laws of
certain of the states where the holders of BioBalance stock then resided
although they were registered under the Securities Act of 1933, as amended.
Although we are unable to quantify the actual number of shares involved that are
still owned by the original recipients of our shares in the acquisition, the per
share purchase price paid by the BioBalance holders for the BioBalance shares
they exchanged in the acquisition ranged from $.03 to $3.00 per share and we
currently believe that the purchase price paid by such persons who might have
certain statutory rescission rights does not exceed approximately $345,000,
exclusive of any penalties or interest, although no assurance can be given that
any such claims will not exceed this amount. We cannot determine the effect, if
any, on our operations or financial condition that may occur from the failure to
register or qualify these shares under applicable state securities laws. If it
is determined that we offered securities without properly registering or
qualifying them under state laws, or securing exemption from registration,
regulators could impose on us monetary fines or other sanctions as provided
under these laws. We are unable to estimate the amount of monetary fines, if
any, or the nature or scope of any sanctions at this time.
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 limited
cash on hand at September 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 prescription drug. BioBalance cannot be
sure that BioBalance's product research and development efforts will be
successful, that candidates will enter clinical studies as anticipated, that
BioBalance will satisfy Good Laboratory Procedures ("GLP"), 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 anecdotal and pre-clinical
trials and has recently commenced an IBS medical food clinical trial for
PROBACTRIX(TM) and has established GRAS (Generally Recognized As Safe) status to
date. The results of these pre-clinical and anecdotal trials on products under
development are not necessarily predictive of results that will be obtained from
large scale clinical testing. We cannot be sure 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 therapeutic 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. In addition, the FDA may disagree with
the GRAS status of the ingredients in PROBACTRIX(TM), or contest the status of
PROBACTRIX(TM) as a medical food. Commercial formulation has yet to be developed
for PROBACTRIX(TM). We 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
our 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 us, for
financial or other reasons, not to undertake to complete development of
PROBACTRIX(TM) or any other product, particularly in instances in which we have
made significant capital expenditures, could have a material adverse effect on
us.
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
BioBalance's proposed pharmaceutical 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.
POTENTIAL SIDE EFFECTS OF BIOBALANCE'S PRODUCTS COULD IMPAIR BIOBALANCE'S
ABILITY TO SUCCESSFULLY MARKET ITS PRODUCT. Although no side effects of
BioBalance's product, PROBACTRIX(TM) have been reported, it is possible that any
time during clinical trials or patient usage, side effects for this product or
any one product that BioBalance may develop may be encountered. If they are
common enough or significant enough, this could result in BioBalance's products
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 gastrointestial
("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 a 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 affect 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 in 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 trading of our Common Stock 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 OUR 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 $0.50 in September 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 OUR 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 September 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
September 30, 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 September 30, 2004, there were no other
changes during such quarter.
PART II.
ITEM 6. EXHIBITS
Exhibits
Exhibit
No. Description
- ------- -----------
2.1 Purchase and Sale agreement dated as of July 15, 2004 by and among the
Company, NYHC Newco Paxxon Inc. and New York Health Care, LLC
10.1 Option agreement dated September 14, 2004 between the Company and
Dennis O'Donnell.
10.2 Form of option agreement under the Company's Performance Incentive
(Stock Option) Plan
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
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.
November 22, 2004 By: /s/ Jerry Braun
-------------------------
Jerry Braun
President and
Chief Executive Officer
November 22, 2004 By: /s/ Jacob Rosenberg
------------------------
Jacob Rosenberg
Chief Financial Officer
(Principal Financial and Principal
Accounting Officer)
EXHIBIT INDEX
Exhibit
No. Description
- ------- -----------
2.1 Purchase and Sale agreement dated as of July 15, 2004 by and among the
Company, NYHC Newco Paxxon Inc. and New York Health Care, LLC
10.1 Option agreement dated September 14, 2004 between the Company and
Dennis O'Donnell.
10.2 Form of option agreement under the Company's Performance Incentive
(Stock Option) Plan
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