Attached files
file | filename |
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EX-32.1 - Center for Wound Healing, Inc. | v174537_ex32-1.htm |
EX-31.1 - Center for Wound Healing, Inc. | v174537_ex31-1.htm |
EX-4.1 - Center for Wound Healing, Inc. | v174537_ex4-1.htm |
EX-31.2 - Center for Wound Healing, Inc. | v174537_ex31-2.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
¨
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
For the
quarterly period ended December 31, 2009
Commission
file number: 000-51317
THE
CENTER FOR WOUND HEALING, INC.
(Name of
Small Business Issuer in Its Charter)
Nevada
|
87-0618831
|
|
(State or jurisdiction of
Incorporation or organization)
|
(IRS Employer ID Number)
|
155 White
Plains Road, Suite 200, Tarrytown, NY 10591
[Address
of Principal Executive Offices]
Registrant's
telephone number, including area code: (914)
372-3150
Securities
registered under Section 12(b) of the Exchange Act:
None
Securities
registered under Section 12(g) of the Exchange Act:
Common
Stock, $0.001 par value per share
(Title of
Class)
Indicate
by check mark whether the Registrant (1) has filed all reports required to be
filed by Section 13 or J5 (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 a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨
|
Accelerated filer ¨
|
|
Non-accelerated filer ¨ (Do not check if a smaller reporting company)
|
Smaller reporting
company x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
YES ¨ NOx
State the
number of shares outstanding of each of the Issuer's classes of common equity,
as of the latest practicable date: As of January 31, 2010, there were 24,123,638
shares of common stock issued and outstanding.
THE
CENTER FOR WOUND HEALING, INC.
Report
on Form 10-Q
December
31, 2009
TABLE
OF CONTENTS
PAGE
|
|||
PART
I - FINANCIAL INFORMATION
|
|||
Item
1.
|
Unaudited
Interim Financial Statements
|
||
Condensed
Consolidated Balance Sheets – As of December 31, 2009 and June 30,
2009
|
3
|
||
Condensed
Consolidated Statements of Operations – Three and Six months ended
December 31, 2009 and 2008
|
4
|
||
Condensed
Consolidated Statement of Stockholders’ Equity –Six months ended December
31, 2009
|
5
|
||
Condensed
Consolidated Statements of Cash Flows – Six months ended December 31, 2009
and 2008
|
6
|
||
Notes
to Condensed Consolidated Financial Statements
|
7
|
||
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition
|
||
and
Results of Operations
|
17
|
||
Item
3.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
23
|
|
Item
4.
|
Controls
and Procedures
|
23
|
|
PART
II – OTHER INFORMATION
|
|||
Item
1.
|
Legal
Proceedings
|
24
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
24
|
|
Item
3.
|
Defaults
Upon Senior Securities
|
24
|
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
24
|
|
Item
5.
|
Other
Information
|
24
|
|
Item
6.
|
Exhibits
|
24
|
|
Signatures
|
25
|
2
ITEM
1.
|
UNAUDITIED
INTERIM FINANCIAL STATEMENTS
|
THE
CENTER FOR WOUND HEALING, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
December 31,
|
June 30,
|
|||||||
2009
|
2009
|
|||||||
(Unaudited)
|
||||||||
ASSETS
|
||||||||
CURRENT ASSETS
|
||||||||
Cash
|
$ | 1,481,756 | $ | 339,859 | ||||
Accounts
receivable, net of allowance for doubtful
|
||||||||
accounts
of $2,983,620 and $2,969,974 respectively
|
13,448,229 | 14,590,231 | ||||||
Notes
receivable, net of allowance of $118,298
|
118,298 | 140,536 | ||||||
Prepaid
expenses and other current assets
|
283,187 | 295,135 | ||||||
Total
current assets
|
15,331,470 | 15,365,761 | ||||||
Property
and equipment, net
|
6,398,789 | 7,585,373 | ||||||
Intangible
assets, net
|
2,067,006 | 3,110,378 | ||||||
Goodwill
|
751,957 | 751,957 | ||||||
Other
assets
|
1,252,759 | 1,427,391 | ||||||
TOTAL
ASSETS
|
$ | 25,801,981 | $ | 28,240,860 | ||||
LIABILITIES AND STOCKHOLDERS'
EQUITY
|
||||||||
CURRENT LIABILITIES
|
||||||||
Accounts
payable and accrued expenses
|
$ | 2,483,501 | $ | 3,080,796 | ||||
Current
maturities of obligations under capital leases
|
45,804 | 138,145 | ||||||
Current
maturities of notes payable and long-term debt
|
1,341,525 | 2,489,853 | ||||||
Payable
to former majority members
|
- | 118,034 | ||||||
Total
current liabilities
|
3,870,830 | 5,826,828 | ||||||
Notes
payable and long-term debt, less current maturities
|
17,030,792 | 15,096,439 | ||||||
Warrant
obligation
|
2,968,274 | - | ||||||
TOTAL
LIABILITIES
|
23,869,896 | 20,923,267 | ||||||
COMMITMENTS
AND CONTINGENCIES
|
||||||||
STOCKHOLDERS' EQUITY
|
||||||||
The
Center for Wound Healing, Inc. stockholders' equity:
|
||||||||
Common
stock, $0.001 par value; 290,000,000 shares authorized;
|
||||||||
24,123,638
shares issued and outstanding
|
24,123 | 24,123 | ||||||
Additional
paid-in capital (including cumulative effect of change in
|
||||||||
accounting
principle (see Note 2 k.)
|
20,351,088 | 31,625,135 | ||||||
Accumulated
deficit (including cumulative effect of change in
|
||||||||
accounting
principle (see Note 2 k.)
|
(18,689,914 | ) | (24,646,815 | ) | ||||
Total
The Center for Wound Healing, Inc stockholders' equity
|
1,685,297 | 7,002,443 | ||||||
Non-controlling
interest
|
246,788 | 315,150 | ||||||
TOTAL
STOCKHOLDERS' EQUITY
|
1,932,085 | 7,317,593 | ||||||
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
$ | 25,801,981 | 28,240,860 |
See
accompanying notes to condensed consolidated financial
statements.
3
THE
CENTER FOR WOUND HEALING, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
For The Three Months Ended
|
For The Six Months Ended
|
|||||||||||||||
December 31,
|
December 31,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
(Unaudited)
|
(Unaudited)
|
|||||||||||||||
NET
SERVICE REVENUE
|
$ | 7,852,355 | $ | 7,578,752 | $ | 15,140,324 | $ | 14,604,900 | ||||||||
OPERATING EXPENSES
|
||||||||||||||||
Cost
of services
|
3,989,552 | 3,820,499 | 7,942,260 | 7,402,391 | ||||||||||||
Sales
and marketing
|
175,767 | 51,869 | 251,640 | 92,818 | ||||||||||||
General
and administration
|
2,971,075 | 2,594,565 | 5,803,815 | 5,283,669 | ||||||||||||
Depreciation
and amortization
|
310,837 | 249,031 | 645,281 | 481,587 | ||||||||||||
Bad
debts
|
208,358 | 324,007 | 354,358 | 444,007 | ||||||||||||
TOTAL
OPERATING EXPENSES
|
7,655,589 | 7,039,971 | 14,997,354 | 13,704,472 | ||||||||||||
OPERATING
INCOME
|
196,766 | 538,781 | 142,970 | 900,428 | ||||||||||||
OTHER EXPENSES (INCOME)
|
||||||||||||||||
Interest
expense
|
1,564,983 | 1,157,523 | 3,043,881 | 2,252,642 | ||||||||||||
Interest
income
|
(5,617 | ) | (6,097 | ) | (6,251 | ) | (13,333 | ) | ||||||||
Loss
on disposal of property and equipment
|
5,749 | - | 13,792 | - | ||||||||||||
Change
in fair value of warrant obligation
|
323,211 | - | (665,265 | ) | - | |||||||||||
TOTAL
OTHER EXPENSES
|
1,888,326 | 1,151,426 | 2,386,157 | 2,239,309 | ||||||||||||
LOSS
BEFORE PROVISION FOR INCOME TAXES
|
(1,691,560 | ) | (612,645 | ) | (2,243,187 | ) | (1,338,881 | ) | ||||||||
PROVISION
FOR INCOME TAXES
|
- | 32,285 | - | 58,007 | ||||||||||||
NET
LOSS
|
(1,691,560 | ) | (644,930 | ) | (2,243,187 | ) | (1,396,888 | ) | ||||||||
Net
income (loss) attributable to non-controlling interest
|
18,424 | (16,210 | ) | (49,972 | ) | (46,388 | ) | |||||||||
NET
LOSS ATTRIBUTABLE TO THE CENTER FOR WOUND HEALING, INC
|
$ | (1,709,984 | ) | $ | (628,720 | ) | $ | (2,193,215 | ) | $ | (1,350,500 | ) | ||||
NET
LOSS PER COMMON SHARE - BASIC
|
||||||||||||||||
AND
DILUTED
|
$ | (0.07 | ) | $ | (0.03 | ) | $ | (0.09 | ) | $ | (0.06 | ) | ||||
WEIGHTED
AVERAGE NUMBER OF COMMON
|
||||||||||||||||
SHARES
- BASIC AND DILUTED
|
24,123,638 | 23,373,281 | 24,123,638 | 23,373,281 |
See
accompanying notes to condensed consolidated financial
statements.
4
THE
CENTER FOR WOUND HEALING, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR
THE SIX MONTHS ENDED DECEMBER 31, 2009
(unaudited)
The Center for Wound Healing, Inc Shareholders
|
||||||||||||||||||||||||
Common Stock
|
Additional Paid-
|
Accumulated
|
Noncontrolling
|
|||||||||||||||||||||
Shares
|
Amount
|
in Capital
|
Deficit
|
Interest
|
Total
|
|||||||||||||||||||
Balance
at June 30, 2009
|
24,123,638 | $ | 24,123 | $ | 31,625,135 | $ | (24,646,815 | ) | $ | 315,150 | $ | 7,317,593 | ||||||||||||
Cumulative
effect of change in accounting principle (see Note 2 k.)
|
(11,783,655 | ) | 8,150,116 | (3,633,539 | ) | |||||||||||||||||||
Stock-based
compensation
|
509,608 | 509,608 | ||||||||||||||||||||||
Distribution
to non-controlling interest holders
|
(18,390 | ) | (18,390 | ) | ||||||||||||||||||||
Net
loss
|
- | - | - | (2,193,215 | ) | (49,972 | ) | (2,243,187 | ) | |||||||||||||||
Balance
at December 31, 2009
|
24,123,638 | $ | 24,123 | $ | 20,351,088 | $ | (18,689,914 | ) | $ | 246,788 | $ | 1,932,085 |
See
accompanying notes to condensed consolidated financial
statements.
5
THE
CENTER FOR WOUND HEALING, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For
The Six Months Ended
|
||||||||
December
31,
|
||||||||
2009
|
2008
|
|||||||
CASH FLOWS FROM OPERATING
ACTIVITIES
|
||||||||
Net
loss
|
$ | (2,243,187 | ) | $ | (1,396,888 | ) | ||
Adjustments
to reconcile net loss to net cash provided by operating
activities:
|
||||||||
Depreciation
and amortization
|
2,503,664 | 2,366,476 | ||||||
Change
in fair value of warrant liability
|
(665,265 | ) | - | |||||
Amortization
of deferred financing costs
|
174,632 | 78,722 | ||||||
Bad
debt expense
|
354,358 | 444,007 | ||||||
Loss
on disposal of property and equipment
|
13,792 | - | ||||||
Accrued
interest added to debt principal
|
2,807,592 | 1,972,969 | ||||||
Stock-based
compensation expense
|
509,608 | 1,257,917 | ||||||
Changes
in operating assets and liabilities:
|
||||||||
Accounts
and notes receivable
|
809,882 | (1,365,055 | ) | |||||
Prepaid
expenses and other current assets
|
11,948 | 135,289 | ||||||
Other
assets
|
- | (66,664 | ) | |||||
Accounts
payable and accrued expenses
|
(597,298 | ) | (839,158 | ) | ||||
NET
CASH PROVIDED BY OPERATING ACTIVITIES
|
3,679,726 | 2,587,615 | ||||||
CASH FLOWS FROM INVESTING
ACTIVITIES
|
||||||||
Purchases
of property and equipment
|
(287,500 | ) | (974,841 | ) | ||||
Increase
in security deposits
|
- | (11,616 | ) | |||||
NET
CASH USED IN INVESTING ACTIVITIES
|
(287,500 | ) | (986,457 | ) | ||||
CASH FLOWS FROM FINANCING
ACTIVITIES
|
||||||||
Principal
payments on capital lease obligations
|
(92,340 | ) | (311,244 | ) | ||||
Advances
from affiliates
|
- | (6,772 | ) | |||||
Net
repayments from bank loan - revolving line of credit
|
(744,988 | ) | (2,120,011 | ) | ||||
Repayment
of bank loan - term note
|
(250,000 | ) | - | |||||
Payments
to former majority members
|
(118,033 | ) | (200,000 | ) | ||||
Proceeds
from notes payable
|
- | 2,000,000 | ||||||
Repayment
of capitalized interest on Bison Note
|
(763,437 | ) | - | |||||
Repayment
of notes payable
|
(263,141 | ) | (480,206 | ) | ||||
Distributions
to non-controlling interest
|
(18,390 | ) | (701 | ) | ||||
NET
CASH USED IN FINANCING ACTIVITIES
|
(2,250,329 | ) | (1,118,934 | ) | ||||
NET
INCREASE IN CASH
|
1,141,897 | 482,224 | ||||||
CASH – BEGINNING OF
PERIOD
|
339,859 | 55,139 | ||||||
CASH – END OF
PERIOD
|
$ | 1,481,756 | $ | 537,363 | ||||
SUPPLEMENTAL
DISCLOSURES OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
|
||||||||
Cash
paid during the period:
|
||||||||
Interest
|
$ | 829,653 | $ | 193,861 | ||||
Income
taxes
|
$ | - | $ | 58,007 |
See
accompanying notes to condensed consolidated financial
statements.
6
THE
CENTER FOR WOUND HEALING, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2009
(Unaudited)
Note
1 - Organization and Nature of Business
The
Center for Wound Healing, Inc. (“CFWH” or the “Company” was organized on May 25,
2005. CFWH develops and manages wound care centers, which are
marketed as “THE CENTER FOR WOUND HEALING TM” throughout the United
States. These centers render wound care treatments and the
specialized service of hyperbaric medicine, and are developed in partnerships
with community and acute care hospitals. CFWH is contracted by the
hospitals on a multi-year basis to start up and manage the hospital’s wound care
program.
As of
December 31, 2009, CFWH operates thirty-four (34) wound care centers with
various institutions. Such centers operate as either wholly-owned or
majority-owned limited liability subsidiaries of CFWH. CFWH manages
and provides administrative services to Hyperbaric Medical Association, P.C.
(“HMA”), a New York professional staffing company, owned by a Company employee,
under the terms of the Management Service Agreement between the Company and
HMA. In return, HMA provides professional healthcare staffing
services to CFWH, its sole customer, under the terms of the Technical Service
Agreement. The operations of HMA are conducted solely on behalf of
CFWH, which is its beneficial owner. CFWH is headquartered in Tarrytown, New
York.
Note
2 - Summary of Selected Significant Accounting Policies
a. Basis of
Presentation: The accompanying condensed consolidated financial
statements of the Company have been prepared in accordance with accounting
principles generally accepted for interim financial statements presentation and
in accordance with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States of America for complete financial statement presentation. In
the opinion of management, all adjustments (consisting of normal recurring
adjustments) necessary for a fair statement of the results of operations and
financial position for the interim periods presented have been
included. The year-end condensed consolidated balance sheet data was
derived from audited financial statements, but does not include all disclosures
required by accounting principles generally accepted in the United States of
America. The accompanying financial statements should be read in
conjunction with the Company’s Form 10-K for the year ended June 30, 2009, filed
with the Securities and Exchange Commission (“Commission”) on October 13,
2009. Interim results are not necessarily indicative of the results
for a full year.
7
b. Principles of
Consolidation. The accompanying condensed consolidated
financial statements include the accounts of CFWH and its wholly-owned and
majority-owned subsidiaries and of HMA, a variable interest entity, whose
primary beneficiary is CFWH. Purchases of majority ownership
interests are accounted for under the acquisition method of accounting and
initially reflect the fair value of net assets acquired at the dates of
acquisition. All intercompany profits, transactions, and balances
have been eliminated. Non-controlling interests in the net assets and
earnings or losses of the Company’s majority-owned subsidiaries are reflected in
the caption “Non-controlling interest” in the accompanying condensed
consolidated balance sheets and the caption “Net income (loss) attributable to
non-controlling interest” in the accompanying condensed consolidated statements
of operations. Non-controlling interest adjusts the Company's
consolidated results of operations to reflect only the Company's share of the
earnings or losses of its subsidiaries, and in the condensed consolidated
balance sheet represents the portion of the net assets of subsidiaries not
attributable to the Company.
d. Revenue Recognition and
Accounts Receivable. Patient service revenue is recognized
when the service is rendered, the amount due is estimable, in accordance with
the terms of the individual contracts with hospitals (the hospital retains a
percentage of each patients’ fee) and collection is reasonably
assured. The amounts realizable as revenue, which the Company
records, are based on reimbursement rates settled and paid by insurance
companies for wound care and hyperbaric treatments, which vary in accordance
with the insurance companies’ contracts with the
hospital. Although revenue is recognized at the time of
service, the hospitals are usually not billed for the service until the hospital
is paid by the third party payers. As a result, the accounts
receivable of the Company include amounts not yet billed to the
hospitals. As of December 31, 2009 and June 30, 2009 approximately
$9.0 and $12.6 million, respectively, of accounts receivable, were
unbilled. Because the collection of receivables from certain
hospitals encompasses two separate billing processes, by the hospital to third
party payers and by CFWH to the hospitals, the elapsed time between rendering of
patent services and collection by CFWH may be several months.
The allowance for billed and unbilled
doubtful accounts is provided based on historical trends and management
estimates. Accounts receivable determined to be uncollectible are
written off when identified.
e. Use of
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 the disclosure of commitments and contingencies, if any, at the
date of the financial statements, and revenue and expenses during the reporting
period. Actual results could differ from those
estimates. Significant estimates made by management include the
collectability of accounts receivable, the impairment of long-lived and
intangible assets, and the fair value of stock and warrants issued.
f. Fair Value of Financial
Instruments. The carrying amount of cash, accounts and notes
receivable, accounts payable and accrued expenses approximate fair value due to
short-term maturities of the instruments. The carrying amount of the
Company’s Bank Loan, (Note 5), approximates fair value due to the variable
interest rates applicable to such indebtedness. The fair value of the
Company’s other indebtedness, consisting of notes payable, capital lease
obligations and the Bison Note, (Note 5), was estimated to be approximately $27
million at December 31, 2009, based on the present values of future cash flows
discounted at estimated borrowing rates for similar loans.
8
g. Loss Per
Share. Basic net earnings (loss) per share are calculated
based on the weighted average number of common shares outstanding for each
period. Diluted loss per share includes potentially dilutive
securities such as outstanding options and warrants. Common shares
issuable upon the exercise of warrants and options outstanding that could
potentially dilute basic EPS in the future were not included in the computation
of diluted EPS because to do so would have been anti-dilutive for the periods
presented. Potential common shares as of December 31, 2009 and 2008
are as follows:
Dec, 2009
|
Dec, 2008
|
|||||||
Options
to purchase shares of common stock
|
3,952,500 | 3,610,167 | ||||||
Warrants,
issued and issuable, to purchase shares of common stock
|
14,085,676 | 14,085,676 | ||||||
Total
potential shares of common stock
|
18,038,176 | 17,695,843 |
h. Stock Based
Compensation. The Company recognizes all stock based payments,
including grants to employees of common stock options, as an expense based on
fair values of the grants measured on award dates, using the Black-Scholes
valuation model, over vesting periods of such grants and net of an estimated
forfeiture rate for grants to employees. The Company estimates
the expected life of options granted based on historical exercise patterns and
volatility based on trading patterns of its common stock over a period similar
to vesting period of the grants.
I. Income
Taxes. The Company uses the asset and liability method of
accounting for income taxes under which deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts and the tax bases of existing assets
and liabilities. Deferred tax assets and liabilities are measured
using enacted tax rates in effect for the year in which these temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets or liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. A valuation
allowance against deferred tax assets is provided when it is more likely than
not that the deferred tax asset will not be fully realized.
j. Impairment. The
Company reviews its long-lived assets and goodwill for impairment at least
annually and whenever events or changes in circumstances indicate the carrying
value may not be recoverable. As of December 31, 2009 were no such
indications.
9
k. Recently Issued Accounting
Pronouncements:
In June
2009, the Financial Accounting Standards Board (FASB) issued the FASB Accounting
Standards Codification (the “Codification”). Effective July 1, 2009, the
Codification became the single source of authoritative nongovernmental U.S.
generally accepted accounting principles (GAAP), superseding existing rules and
related literature issued by the FASB, American Institute of Certified Public
Accountants (“AICPA”) and Emerging Issues task Force (“EITF”). The
Codification also eliminates the previous US GAAP hierarchy and establishes one
level of authoritative GAAP. Rules and interpretive releases of the SEC
under authority of federal securities laws are also sources of authoritative
GAAP for SEC registrants. All other literature is considered
non-authoritative. The Codification, which has not changed GAAP, was
effective for interim and annual periods ending after September 15, 2009.
The Company adopted the Codification for the quarter ended September 30,
2009. Other than the manner in which new accounting guidance is
referenced, the adoption of the Codification had no impact on the Company’s
condensed consolidated financial statements.
Guidance
issued by the FASB in June 2009 requires companies to recognize in the financial statements the
effects of subsequent events that provide additional evidence about conditions
that existed at the date of the balance sheet, including the estimates inherent
in the process of preparing financial statements. An entity shall disclose the
date through which subsequent events have been evaluated, as well as whether
that date is the date the financial statements were issued. Companies are not
permitted to recognize subsequent events that provide evidence about conditions
that did not exist at the date of the balance sheet but arose after the balance
sheet date and before financial statements are issued. Some non-recognized
subsequent events must be disclosed to keep the financial statements from being
misleading. For such events a company must disclose the nature of the event, an
estimate of its financial effect, or a statement that such an estimate cannot be
made. This guidance applies prospectively for interim or annual financial
periods ending after June 15, 2009. The adoption of
this guidance did not affect the consolidated financial position, results of
operations or cash flows of the Company.
In August
2009, the FASB issued amended guidance on the measurement of liabilities at fair
value. The guidance provides clarification that in circumstances in
which a quoted market price in an active market for an identical liability is
not available, the fair value of a liability is measured using one or more of
the valuation techniques that uses the quoted price of an identical liability
when traded as an asset or, if unavailable, quoted prices for similar
liabilities or similar assets when traded as assets. If none of this
information is available, an entity should use a valuation technique in
accordance with existing fair valuation principles. This guidance is
effective for the first reporting period (including interim periods) after
issuance. The Company adopted this guidance in the quarter ended
September 30, 2009. The adoption had no impact on the Company’s
consolidated financial statements.
In June
2009, the FASB issued amendments to the accounting rules for variable interest
entities (VIEs) and for transfers of financial assets. The new
guidance for VIEs eliminates the quantitative approach previously required for
determining the primary beneficiary of a variable interest entity and requires
ongoing qualitative reassessments of whether an enterprise is the primary
beneficiary. In addition, qualifying special purpose entities (QPESs) are
no longer exempt from consolidation under the amended guidance. The
amendments also limit the circumstances in which a financial asset, or a portion
of a financial asset, should be derecognized when the transferor has not
transferred the entire original financial asset to an entity that is not
consolidated with the transferor in the financial statements being presented,
and/or when the transferor has continuing involvement with the transferred
financial asset. For the Company, the amendments are effective as of
the first quarter of fiscal 2011. The Company does not believe that adoption of
these amendments will have a material effect on its consolidated financial
statements.
10
In April,
2009, the FASB issued additional requirements regarding interim disclosures
about fair value of financial instruments to require disclosures about fair
value of financial instruments in interim and annual financial statements.
The new requirements are effective for interim periods ended after June 15, 2009
and the Company adopted this requirement in the quarter ended September 30,
2009. See Note 2 f. above.
In March
2008, the FASB issued new disclosure requirements regarding derivative
instruments and hedging activities. These requirements give financial
statement users better information about the reporting entity’s hedges by
providing for qualitative disclosures about the objectives and strategies for
using derivatives, quantitative data about the fair value of and gains and
losses on derivative contracts, and details of credit-risk-related contingent
features in their hedged positions. These requirements are effective for
financial statements issued for fiscal years beginning after November 15, 2008
and interim periods within such fiscal year with early application encouraged
but not required. The Company adopted the requirements effective July 1,
2009, and they did not have any effect on the Company’s consolidated financial
statements.
In
June 2008, a two step approach to evaluate whether an equity-linked
financial instrument (or embedded feature) is indexed to its own stock was
established, including evaluating the instrument’s contingent exercise and
settlement provisions. The standard was effective for financial statements
issued for fiscal years beginning after January 1, 2009 and interim periods
within such fiscal year. The Company adopted these requirements as of
July 1, 2009 and determined that 13,785,676 of the 14,085,676 outstanding
warrants to purchase the Company’s common shares are not considered indexed to
the Company’s own stock, as the respective agreements include reset
features. The 13,785,676 warrants were issued by the Company as
follows: (1) 2,750,000 warrants in April 2006 in a transaction with convertible
debt; (2) 3,093,750 warrants in January 2008 in satisfaction of the reset
provision related to the above April 2006 warrants; (3) 7,941,926 warrants in
March 2008 in connection with the Bison Note. The Company initially
recorded the fair value or relative fair value of these warrants as additional
paid-in capital. As of July 1, 2009, the Company recorded a warrant
obligation of approximately $3.6 million, which represents the
fair value of the warrants as of that date, and also recorded
approximately $8.1 million decrease in the fair value of these
warrants during the period from their respective dates of issuance through
the July 1, 2009 adoption date of the new accounting pronouncement as a
cumulative effect of a change in accounting principle, resulting in a reduction
to accumulated deficit and additional paid-in capital. The decrease
in the fair value of the warrant obligation during the six months ended December
31, 2009 of approximately $0.7 million is recorded as other income in the
condensed consolidated statement of operations. The fair value of the
above warrants and the assumptions employed in the Black-Scholes valuation
model, which were used to determine the fair value of the warrants at various
measurement dates were as follow:
11
December 31, 2009
|
July 1, 2009
|
Issuance Date
|
||||||||||
Number
of warrants
|
13,785,676 | 13,785,676 | 13,785,676 | |||||||||
Fair
value of each warrant, $ per share
|
0.13 – 0.28 | 0.18 – 0.33 | 1.07 – 2.00 | |||||||||
Combined
fair value of warrants, $*
|
2,968,276 | 3,633,549 | 22,440,279 | |||||||||
Market
price, $ per common share
|
0.50 | 0.55 | 1.68 – 4.00 | |||||||||
Exercise
price, $ per common share
|
2 – 5 | 2 - 5 | 2.00 -5.00 | |||||||||
Volatility,
%
|
116 - 137 | 114 – 123 | 95 – 111 | |||||||||
Dividend
yield, %
|
0 | 0 | 0 | |||||||||
Risk
free interest rate, %
|
3.5 | 3.5 | 3.5 – 4.9 | |||||||||
Contractual
life, years
|
1.25 – 5.25 | 1.75 – 5.75 | 3.2 - 7 |
*Consists of the fair value of the warrants determined
using the Black-Scholes model.
In
December 2007, the FASB issued new guidance on non-controlling interests in
consolidated financial statements. This guidance requires that ownership
interests in subsidiaries held by parties other than the parent, be clearly
identified, labeled, and presented in the consolidated financial statements
within equity, but separate from the parent’s equity. It also requires
that once a subsidiary is deconsolidated, any retained non-controlling equity
investment in the former subsidiary be initially measured at fair value.
Sufficient disclosures are required to clearly identify and distinguish between
the interests of the parent and the interests of the non-controlling
owners. This guidance is effective for fiscal years beginning after
December 15, 2008, and is to be applied prospectively, except for the
presentation and disclosure requirements, which are required to be applied
retrospectively for all periods presented. As a result of adoption,
effective July 1, 2009 the Company has retrospectively adjusted its financial
statements for the six months ended December 31, 2008 to include net loss
attributable to non-controlling interest (previously referred to as minority
interest) in consolidated net loss as presented below:
Attributable to
|
||||||||||||
Total
Equity
|
Company
|
Non-controlling
interest
|
||||||||||
Beginning
balance
|
$ | 9,889,807 | $ | 9,309,249 | $ | 580,558 | ||||||
Distribution
to non-controlling interest
|
(701 | ) | (701 | ) | ||||||||
Share-based
compensation
|
1,257,917 | 1,257,917 | - | |||||||||
Net
loss
|
(1,396,888 | ) | (1,350,500 | ) | (46,388 | ) | ||||||
Ending
balance
|
$ | 9,750,135 | $ | 9,216,666 | $ | 533,469 |
12
In
December 2007, the FASB issued new accounting guidance related to the accounting
for business combinations and related disclosures. This guidance
establishes principles and requirements for how an acquirer recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, any non-controlling interest in the acquiree, and any
goodwill acquired in a business combination. It also establishes
disclosure requirements to enable the evaluation of the nature and financial
effects of a business combination. The guidance is to be applied
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008. The Company adopted this guidance, effective July
1, 2009, and it did not have any effect on the Company’s consolidated financial
statements.
In
February 2008, the FASB issued amended guidance to delay the fair value
measurement and expanded disclosures about fair value measurements for
nonfinancial assets and nonfinancial liabilities, except for items that are
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually), until fiscal years beginning after November 15,
2008. Effective July 1, 2009, the Company adopted the guidance
related to fair value measurements for nonfinancial assets and nonfinancial
liabilities and the adoption of such guidance did not have a material effect on
the Company’s consolidated financial statements.
Note
3 – Stock options
There were 650,000 stock options
granted and 100,000 that were forfeited during the six months ended December 31,
2009. The following table represents changes in stock options during
the first six months of fiscal 2010.
Number of
Shares
|
Weighted
Average
Exercise
Price
|
Weighted Average
Remaining
Contractual Terms
(Years)
|
Aggregated
Intrinsic
Value
|
|||||||||||||
Outstanding
at June 30, 2009
|
3,402,500 | $ | 1.15 | 5.86 | $ | - | ||||||||||
Granted
|
650,000 | 1.05 | 2.81 | |||||||||||||
Forfeited
|
(100,000 | ) | 3.00 | - | ||||||||||||
Outstanding
at Dec 31, 2009
|
3,952,500 | $ | 1.09 | 5.35 | $ | - | ||||||||||
Exercisable
at Dec 31, 2009
|
2,642,500 | $ | 1.11 | 4.84 | $ | - |
As of
December 31, 2009, there was $509,608 of unrecognized compensation
cost.
The fair
value of the stock options granted during the six months ended December 31, 2009
was determined at the date of grant and is charged to compensation expense over
the vesting period of the options. The fair value of options granted
at the date of the grant was estimated using the Black-Scholes option pricing
model utilizing the following assumptions:
|
For the Six Months Ended
December 31, 2009
|
|||
Risk-free
interest rate
|
3.5%
|
|||
Expected
option life in years
|
2.5 – 3.0
|
|||
Expected
stock price volatility
|
108 – 114%
|
|
||
Expected
dividend yield
|
0%
|
13
The
risk-free interest rate for periods within the contractual life of the option is
based on the U.S. Treasury yield curve in effect at the time of the
grant. The Company uses historical data to estimate option exercise
and employee and director termination within the valuation model; separate
groups of employees and directors that have similar historical exercise behavior
are considered separately for valuation purposes. The expected term
of options granted represents the period of time that options granted are
expected to be outstanding; the range given above results from groups of
employees and directors exhibiting different behavior. Expected
volatilities are based on historical volatility of the Company’s
stock. The Company has not paid any dividends in the past and does
not expect to pay any in the near future.
The
weighted average fair value at date of grant for options granted during the six
months ended December 31, 2009 was $0.32 per option.
Note
4 – Accounts payable and accrued expenses
Accounts
payable and accrued expenses consist of the following at December 31, and June
30, 2009:
December, 2009
|
June, 2009
|
|||||||
Accrued
compensation
|
$ | 1,333,180 | $ | 1,370,063 | ||||
Accounts
payable
|
637,310 | 984,968 | ||||||
Other
current liabilities
|
513,009 | 725,765 | ||||||
$ | 2,483,499 | $ | 3,080,796 |
Note
5 – Notes payable and long-term debt:
Notes payable and long-term debt,
including the Bison Note, with an effective interest rate of 37%, consists of
the following at December 31, and June 30, 2009
December, 2009
|
June, 2009
|
|||||||
Bison
Note (principal amount of $25,575,243 and $24,455,781,
respectively)
|
$ | 16,349,192 | $ | 14,305,037 | ||||
Bank
Loan - Term Note
|
1,500,000 | 1,750,000 | ||||||
Bank
Loan - Revolving Line of Credit
|
- | 744,988 | ||||||
Med-Air
promissory note
|
431,496 | 554,614 | ||||||
Warantz
promissory notes
|
72,336 | 117,999 | ||||||
JD
Keith promissory note
|
- | 79,702 | ||||||
Vans
and auto loans
|
19,293 | 33,952 | ||||||
18,372,317 | 17,586,292 | |||||||
Less:
Current maturities
|
1,341,525 | 2,489,853 | ||||||
$ | 17,030,792 | $ | 15,096,439 |
14
Maturities
of the long-term portion of notes payable and long-term debt as of December 31,
2009 are as follows:
**Year
Ending December 31,
|
||||
2011
|
$ | 3,000,000 | ||
2012
|
3,000,000 | |||
2013
|
18,075,243 | |||
$ | 24,075,243 |
** The
difference between the maturity table above and the balance sheet amount of
notes payable and long-term debt at December 31, 2009 is attributable to the
Bison Note discount, which is amortized over the maturity of the Bison
Note.
As of
December 31, 2009, the Company failed to comply with a covenant in the
Securities Purchase Agreement relating to the Bison Note requiring the Company
to have a specified minimum trailing twelve-month Consolidated Adjusted
EBITDA. The Company and Bison have entered into an amendment to the
Securities Purchase Agreement relating to the Bison Note providing for, among
other things, the waiver by Bison of the Company’s failure to comply with such
covenant, and the amendment of the definition of Consolidated Adjusted EBITDA to
include certain specified add-backs through March 31, 2010. Such
amendment also provides that from and after January 1, 2010, the interest rate
payable on the Bison Note will be equal to (a) 16.5% per annum, consisting of
currently payable interest at the rate of 12% per annum and deferred interest at
the rate of 4.5% per annum if the Company is not in compliance with its
covenants under the Securities Purchase Agreement without giving effect to any
of the specified add-backs to the definition of Consolidated Adjusted EBITDA, or
(b) 15% per annum, consisting of currently payable interest at the rate of 12%
per annum and deferred interest at the rate of 3% per annum if the Company is in
compliance with its covenants under the Securities Purchase Agreement without
giving effect to any of such specified add-backs to the definition of
Consolidated Adjusted EBITDA.
Subject
to certain conditions, the Company is obligated to redeem the Bison Note upon
the occurrence of a Change of Control (as defined in the Securities Purchase
Agreement). The amendment to the Securities Purchase Agreement provides that if
a Change of Control occurs on or prior to June 30, 2010, then the purchase price
at which the Company is required to redeem the Bison Note shall include interest
that would have accrued from the date of redemption through June 30,
2010. In addition, the amendment to the Securities Purchase Agreement
provides that if the Change of Control occurs prior to July 31, 2010, then the
Warrants held by Bison will be canceled upon the redemption of the Bison Note
without further liability on the part of the Company.
15
Note
6 - Commitments
Registration
Rights Agreement
In
connection with the issuance of the Bison Note, the Company entered into a
Registration Rights Agreement with the holders of the Bison Note under which the
Company is required, after October 15, 2008, to be in a position to file, within
60 days upon a request, and maintain its effectiveness for at least 180 days, a
registration statement with the Securities and Exchange Commission (“SEC”)
covering the resale of the shares of common stock issuable pursuant to exercise
of the warrants issued with the Bison Note. If the Company fails to
file or maintain effectiveness of the registration statement or if the
registration statement is not declared effective by the SEC, the Company is
subject to a penalty equal to 2% of the securities to be registered per
month. Such penalty is doubled if the Company’s failure extends for
more than 90 days but the maximum amount of the penalty cannot exceed 20% of the
securities to be registered. The Company has not accrued any amounts
in connection with these commitments, because management believes that it is not
probable that any such penalties will be incurred.
Note
7 – Income Taxes
The
Company’s domestic effective income tax rate for the interim periods presented
is based on management’s estimate of the Company’s effective tax rate for the
applicable year and differs from the federal statutory income tax rate primarily
due to nondeductible permanent differences, state income taxes and changes in
the valuation allowance for deferred income taxes. In assessing the
realizability of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible.
The
Company maintains a full valuation allowance on its deferred tax
assets. Accordingly, the Company has not recorded a benefit for
income taxes.
On July
1, 2007, the Company adopted the accounting guidance for accounting for
uncertainty in income taxes which provides a financial statement recognition
threshold and measurement attribute for a tax position taken or expected to be
taken in a tax return. The Company will recognize the tax benefit from an
uncertain tax position only if it is more likely than not that the tax position
will be sustained on examination by the taxing authorities, based on the
technical merits of the position. The Company has not recognized any such
benefits. The Company recognizes interest and penalties related to these
unrecognized tax benefits in the income tax provision.
16
ITEM
2. Management's Discussion and Analysis of Financial Condition and
Results of Operations:
GENERAL
OVERVIEW
The
following Management’s Discussion and Analysis (“MD&A”) is intended to help
the reader understand our company. The MD&A is provided as a
supplement to, and should be read in conjunction with, our financial statements
and the accompanying notes.
FORWARD-LOOKING
INFORMATION
This
Quarterly Report on Form 10-Q includes forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. We have based
these forward-looking statements on our current expectations and projections
about future events. These forward-looking statements are subject to
known and unknown risks, uncertainties and assumptions about us that may cause
our actual results, levels of activity, performance or achievements to be
materially different from any future results, levels of activity, performance or
achievements expressed or implied by such forward-looking
statements. In some cases, you can identify forward-looking
statements by terminology such as “may,” “should,” “could,” “would,” “expect,”
“plan,” “anticipate,” “believe,” “estimate,” “continue,” or the negative of such
terms or other similar expressions. Actual operations and results may differ
materially from present plans and projections due to changes in economic
conditions, new business opportunities, changed business conditions, and other
developments. Other factors that could cause results to differ
materially are described in our filings with the Securities and Exchange
Commission.
There are
several factors that could cause actual results or events to differ materially
from those anticipated, and include, but are not limited to, general economic,
financial and business conditions, changes in and compliance with governmental
laws and regulations, including various state and federal government
regulations, our ability to obtain additional financing from outside investors
and/or bank and mezzanine lenders, and our ability to generate revenues
sufficient to achieve positive cash flow.
Readers
are cautioned not to place undue reliance on the forward-looking statements
contained herein, which speak only as of the date hereof. We believe
the information contained in this Form 10-Q to be accurate as of the date
hereof. Changes may occur after that date. We will not
update that information except as required by law in the normal course of our
public disclosure practices.
Additionally,
the following discussion regarding our financial condition and results of
operations should be read in conjunction with the financial statements and
related notes contained in Item 1 of Part I of this Form 10-Q.
17
GENERAL
The
Company develops and manages comprehensive wound care centers, which are
marketed as “THE CENTER FOR WOUND HEALING tm” primarily in the mid-Atlantic and
northeastern parts of the country. These centers render wound care
and the specialized service of hyperbaric medicine, and are developed in
partnerships with acute care hospitals. We enter into separate
multi-year operating agreements to startup and manage the wound care program
within the hospital environment. Although there can be no assurance
that we will be successful in each instance, our plans for each hospital center
requires a multi-year committed contract term adequate for us to recover our
investment in leasehold improvements (a sunk cost and non-transferable asset);
our start-up costs, including recruiting and training of personnel; and the
amortization of chamber lease financing. Generally, the hospital
provides us with appropriate space for each of our centers.
We are
responsible for the development and management of the wound care and hyperbaric
centers, including providing direct staff and billing support to ensure
hospitals are reimbursed appropriately. We also are responsible for
designing and installing necessary leasehold improvements of the
hospital-provided space and to supply the appropriate equipment, including the
hyperbaric chambers. We acquire the chambers under both operating and
capitalized lease financing transactions with $1 buyout arrangements (treated as
capitalized leases in our accompanying condensed consolidated financial
statements). As our operation grows, we have the ability to transfer
chambers between institutions to balance demand and maximize the use of our
resources.
Patient
service revenue is recognized when the service is rendered in accordance with
the terms of the contracts with hospitals. Most hospitals are not
billed for the service until the hospital is paid by the third party
payers. As a result, accounts receivable include amounts not yet
billed to the hospitals, collection of which by CFWH can take several
months.
RESULTS
OF OPERATIONS
COMPARISON
OF THREE MONTHS ENDED DECEMBER 31, 2009 TO THE THREE MONTHS ENDED DECEMBER 31,
2008
REVENUES:
Revenues
for the three months ended December 31, 2009 were $7.9 million, an increase of
$274 thousand or 3.6% over the $7.6 million of revenues generated in the three
months ended December 31, 2008. This is due to new centers added to
the Company’s portfolio in the first and second quarters of the fiscal year and
increased revenue at existing centers.
18
OPERATING
EXPENSES:
Overview: Operating
expenses for the three months ended December 31, 2009 were approximately $7.7
million or 97.5% of total revenue compared to $7.0 million or 92.9% of revenue
for the three months ended December 31, 2008. The $616 thousand
increase in operating expenses is the result of approximately $557 thousand in
higher payroll costs associated with the operations of new centers, and
increased staffing at the corporate level, including in the business
development, marketing, finance and human resources departments; approximately
$85 thousand in licensing fees for software not deployed the prior year; and
approximately $68 thousand in higher health insurance costs due to greater
number of employees participating in the plan.
Cost of
services: Cost
of services, which are comprised principally of payroll and payroll related
costs for administrative, professional and nursing staff required to administer
treatments at our centers, as well as depreciation relating to hyperbaric
medical chambers and leasehold improvements, was $4.0 million or 50.8% of total
revenues for three months ended December 31, 2009 compared with $3.8 million or
50.4% in the year ended December 31, 2008. The $170 thousand or 4.4%
increase is primarily attributable to higher direct labor associated with the
operations of new centers and increases in medical and commercial insurance
costs, which increased by 48.8% over the prior three month period.
Sales and
marketing: Sales and marketing expenditures increased by $124
thousand to $176 thousand compared with the three months ended December 31, 2008
due to trade show participation, hospital sponsorships and costs associated with
increased education, marketing and promotion efforts.
General and
administrative: General and administrative
expenses are comprised primarily of payroll and payroll related costs,
insurance, accounting, travel and entertainment costs, and professional
fees. General and administrative costs increased by $377 thousand to
$3.0 million or 37.8% of revenues for the three months ended December 31, 2009,
compared to $2.6 million or 34.2% of revenues for the three months ended
December 31, 2008. The increase is due to increased payroll and
payroll related costs for business development, center management and corporate
staff, including in the finance and human resources departments.
Depreciation and
amortization: Depreciation and amortization expense related to
corporate property and equipment and intangible assets
aggregated $311 thousand or 4.0% of revenues for the three months
ended December 31, 2009 compared to $249 thousand or 3.3% of total revenues for
the 2008 three months. The increase is due to the acquisition and
deployment of various software applications and hardware necessary for the
Company to conduct its business, contract amortization costs associated with the
purchase of a hospital contract, and to the amortization of the intangible
assets associated with the buyout of non-controlling interests.
Bad debt
expense: Bad debt expense was $208 thousand or 2.7% of total
revenues for the three months ended December 31, 2009 compared to $324 thousand
or 4.3% of revenues for the three months ended December 31, 2008. Bad
debt expense declined as a result of the Company’s intense focus on the quality
of its accounts receivable and improved collection efforts.
19
OTHER
INCOME (EXPENSE):
Interest
expense: The Company incurred interest expense of
approximately $1.6 million or 19.9% of total revenues for the three months ended
December 31, 2009, compared to $1.2 million or 15.3% of revenues for the 2008
three months. Interest expense increased by approximately $407
thousand due to an increase in the principal amount of the Bison Note as a
result of adding accrued interest to principal. Cash interest for the
three months ended December 31, 2009 was $784 thousand including $763 thousand
paid to Bison Capital. Cash interest for the three months ended
December 31, 2008 was $101 thousand.
Change in fair value of
warrants: The Company recorded $323 thousand of expense for
the three months ended December 31, 2009 due to the increase in the fair value
of the warrant obligation for the quarter as described in Note 2 to the
condensed consolidated financial statements.
COMPARISON
OF SIX MONTHS ENDED DECEMBER 31, 2009 TO THE SIX MONTHS ENDED DECEMBER 31,
2008
REVENUES:
Revenues
for the six months ended December 31, 2009 were $15.1 million, an increase of
$535 thousand or 3.7% over the $14.6 million of revenues generated in the six
months ended December 31, 2008. This is due to new centers added to
the Company’s portfolio in the first and second quarters of the fiscal year and
increased revenue at existing centers.
OPERATING
EXPENSES:
Overview: Operating
expenses for the six months ended December 31, 2009 were approximately $15.0
million or 99.1% of total revenues compared to $13.7 million or 93.8% of
revenues for the six months ended December 31, 2008. The $1.3 million
increase in operating expenses is the result of approximately $1.1 million in
higher payroll costs associated with the operations of new centers and increased
staffing at the corporate level, including in the business development,
marketing, finance and human resources departments; approximately $131 thousand
in licensing fees for software not deployed the prior year; and approximately
$156 thousand in higher health insurance costs due to greater number of
employees participating in the plan.
Cost of
services: Cost
of services, which are comprised principally of payroll and payroll related
costs for administrative, professional and nursing staff required to administer
treatments at our centers, as well as depreciation relating to hyperbaric
medical chambers and leasehold improvements, was $7.9 million or 52.5% of total
revenues for six months ended December 31, 2009 compared with $7.4 million or
50.7% in the year ended December 31, 2008. The $540 thousand or 6.8%
increase is primarily attributable to higher direct labor associated with the
operations of new centers and increases in health and commercial insurance
costs.
20
Sales and
marketing: Sales and marketing expenditures of $252 thousand
increased by $159 thousand from the prior six month period due to trade show
participation, hospital sponsorships and costs associated with increased
education, marketing and promotion efforts.
General and
administrative: General and administrative
expenses are comprised primarily of payroll and payroll related costs,
insurance, accounting, travel and entertainment costs, and professional
fees. General and administrative costs increased by $520 thousand to
$5.8 million or 38.3% of revenues for the six months ended December 31, 2009,
compared to $5.3 million or 36.2% of revenues for the six months ended December
31, 2008. The increase is due to increased payroll and payroll
related costs for business development, center management and corporate staff,
including in the finance and human resources departments, partially offset by a
reduction in stock compensation expense.
Depreciation and
amortization: Depreciation and amortization expense related to
corporate property and equipment and intangible assets aggregated $645 thousand
or 4.3% of revenues for the six months ended December 31, 2009 compared to $482
thousand or 3.3% of total revenues for the 2008 six months. The
increase is due to the acquisition and deployment of various software
applications and hardware necessary for the Company to conduct its business,
contract amortization costs associated with the purchase of a hospital contract,
and to the amortization of the intangible assets associated with the buyout of
the non-controlling interest.
Bad debt
expense: Bad debt expense was $354 thousand or 2.3% of total
revenues for the six months ended December 31, 2009 compared to $444 thousand or
3.0% of revenues for the six months ended December 31, 2008. Bad debt
expense declined as a result of the Company’s intense focus on the quality of
its accounts receivable and improved collection efforts.
OTHER
INCOME (EXPENSE):
Interest
expense: The Company incurred interest expense of
approximately $3.0 million or 20.1% of total revenues for the six months ended
December 31, 2009, compared to $2.3 million or 15.3% of revenues for the 2008
three months. Interest expense increased by approximately $791
thousand due to an increase in the principal amount of the Bison Note as a
result of adding accrued interest to principal. Cash interest for the
six months ended December 31 2009 was $830 thousand, including $763 thousand
paid to Bison Capital. Cash interest expense for the six months ended
December 31, 2008 was $194 thousand.
Change in fair value of
warrants: The Company recorded $665 thousand of income for the
six months ended December 31, 2009 due to the decrease in the fair value of the
warrant obligation for the quarter as described in Note 2k to the condensed
consolidated financial statements.
21
LIQUIDITY
AND CAPITAL RESOURCES:
Operating
Activities: Net cash provided
by operating activities was $3.7 million for the six months ended December 31
2009. While our net loss was $2.2 million, noncash expenses incurred
during the quarter included (a) $2.8 million of interest accrued for the notes
payable and long-term debt, (b) depreciation and amortization of $2.5 million
related to equipment, leasehold improvements, and certain hospital contracts,
(c) $0.5 million for the amortization of stock options, and (d) we recorded $0.7
million of income for the change in the fair value of the warrant
liability.
Investing
Activities: Net cash used in
investing activities was $0.3 million for the six months ended December 31,
2009. The primary use of cash was for the purchase of software
necessary to support the Company’s information technology needs. Net
cash used in investing activities was $1.0 million for the six months ended
December 31, 2008.
Financing
Activities: Net cash used by
financing activities was $2.3 million for the six months ended December 31,
2009. The Company repaid $0.7 million of the bank line of credit,
retired $0.5 million of notes and loans, paid $0.8 million of capitalized
interest on the Bison Note, and made the required payments of $0.1 million to
former majority members.
As more
fully described in Note 5 to the Company’s condensed consolidated financial
statements for the fiscal quarter ended December 31, 2009, the Securities
Purchase Agreement relating to the Bison Note has been amended to provide, among
other things, for the waiver of the Company’s failure to comply with a covenant
in such Securities Purchase Agreement requiring the Company to have a specified
minimum Consolidated Adjusted EBITDA for the fiscal quarter ended on such date,
to change the definition of Consolidated Adjusted EBITDA applicable to future
periods, and to change in the non-cash interest payable on the Bison Note in
future periods. The Company does not believe that such amendment will
adversely impact its liquidity and it believes it will be able to comply with
the amended covenant through the next 12 months.
We believe that the cash flows from
operations and borrowings under the senior bank line of credit will provide
sufficient liquidity for the Company to be able to finance our operations for at
least the next 12 months.
22
RECENT
ACCOUNTING PRONOUNCEMENTS:
See Note
2 to the Condensed Consolidated Financial Statements regarding the effects on
the Company’s financial statements of the adoptions of recent accounting
pronouncements.
ITEM 3. Quantitative
and Qualitative Disclosures About Market Risk
None.
ITEM
4T. Controls and Procedures
(a)
Evaluation of Disclosure
Controls and Procedures. Based on an evaluation of our
disclosure controls and procedures (as defined in Exchange Act Rules 240.13a -
15(e) and 240.15d — 15(e)), our Chief Executive Officer and Chief Financial
Officer has concluded that disclosure controls and procedures as of the end of
the period covered by this report are effective in providing timely material
information required to be disclosed in the reports filed or submitted under the
Exchange Act. The Company’s disclosure controls and procedures are
designed to provide reasonable assurances of achieving their objectives and the
Chief Executive Officer and Chief Financial Officer has concluded that the
Company’s disclosure controls and procedures are effective in reaching that
level of reasonable assurance.
(b)
Changes in Internal
Controls. During the quarter ended September 30, 2009 the Company
instituted a number of remediation actions to address material weaknesses
previously identified in the design and effectiveness of our internal controls
over financial reporting as it relates to accounting for highly complex
transactions. A material weakness is a deficiency, or a combination
of deficiencies, in internal control over financial reporting such that there is
a reasonable possibility that a material misstatement of our annual or interim
financial statements will not be prevented or detected on a timely
basis. Such remediation actions instituted in the prior quarter
included the hiring of the Company’s Vice President – Finance, securing the
professional advisory services of a qualified accounting firm separate from the
Company’s auditors, and strengthening the Company’s understanding, recording,
and reporting of such complex transactions. We believe that these
actions along with continuous focus on strengthening internal controls in
general have remediated the material weaknesses related to accounting for highly
complex transactions and have resulted in adequate internal controls over
financial reporting at December 31, 2009. During the quarter ended
December 31, 2009 there have not been any other changes in internal controls
over financial reporting identified in connection with an evaluation thereof
that have materially affected, or are reasonably likely to materially affect,
internal controls over financial reporting.
23
PART
II
ITEM
1. Legal Proceedings:
There is no action, suit, proceeding,
inquiry or investigation before or by any public board, government agency,
self-regulatory organization or body pending or, to the knowledge of the
executive officers of our company or any of our subsidiaries, threatened against
or affecting our company, our common stock, any of our subsidiaries or of our
company’s or our company’s subsidiaries’ officers or directors in their
capacities as such, in which an adverse decision could have a material adverse
effect.
ITEM
2. Unregistered
Sales of Equity Securities and Use of Proceeds
None.
ITEM
3. Default
Upon Senior Securities
None.
ITEM
4. Submission
of Matters to a Vote of Security Holders:
No
matters were submitted to shareholders for the period ended December 31,
2009.
ITEM
5. Other
Information:
None.
ITEM
6.
|
Exhibits:
|
|
Exhibit No.
|
Description of Exhibit
|
|
4.1
|
Second
Amendment to Securities Purchase Agreement dated February 12, 2010 to
Securities Purchase Agreement dated as of March 31, 2008 between Bison
Capital Equity Partners II-A, L.P. and Bison Capital Equity Partners II-B,
L.P., and the Company.
|
|
31.1
|
Certification
of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act.
|
|
31.2
|
Certification
of Chief Financial and Accounting Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act.
|
|
32.1
|
Certification
of Chief Executive Officer and Chief Financial Officer Pursuant
to Section 906 of the Sarbanes-Oxley
Act.
|
24
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Signature
|
Title
|
Date
|
||
/s/ Andrew G. Barnett
|
Chief
Executive Officer; Chief
|
February
16, 2010
|
||
Andrew G. Barnett
|
|
Financial
Officer; Chief Accounting
|
|
|
Officer |
25