UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For The Quarter Ended June 30, 2003
Commission File Number 000-31249
CRITICAL HOME CARE, INC.
(Exact name of small business issuer as specified in its charter)
NEVADA 88-0331369
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
762 SUMMA AVENUE
WESTBURY, NEW YORK 11590
(Address of principal executive offices) Zip code
Issuer's telephone no.: 516-997-1200
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or such shorter
period that the registrant was required to file such reports), and (2) and has
been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: As of August 19, 2003, the
following were issued and outstanding:
Title of Class Number of Shares
Common Stock Outstanding
(par value $0.25 per share) 24,393,026
Transitional Small Business Disclosure Format (Check one): Yes[ ] No[X]
CRITICAL HOME CARE, INC. AND SUBSIDIARIES
INDEX
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
June 30, 2003 (unaudited) and September 30, 2002........ 1
Consolidated Statements of Operations
Three Months Ended June 30, 2003
and June 30, 2002 (unaudited)............................ 2
Consolidated Statements of Operations
Nine Months Ended June 30, 2003
and June 30, 2002 (unaudited)............................ 3
Consolidated Statements of Cash Flows
Nine Months Ended June 30, 2003
and June 30, 2002 (unaudited)............................ 4
Notes to the Consolidated Financial
Statements (unaudited)..................................... 5-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.............. 9-11
Item 3. Controls and Procedures.............................. 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings .................................... 12
Item 2. Changes in Securities................................. 12
Item 3. Defaults Upon Senior Securities....................... 12
Item 4. Submission of Matters to a Vote of Security
Holders............................................... 12
Item 5. Other Information .................................... 12
Item 6. Exhibits and Reports on Form 8-K...................... 12
Signatures............................................ 13
Certifications........................................ 14-15
CRITICAL HOME CARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, September 30,
2003 2002
------------ -----------
(unaudited)
ASSETS
CURRENT ASSETS
Cash.................................................................. $ 31,000 $ 54,000
Accounts receivable, net of allowance for
doubtful accounts of $210,000 and $495,000........................ 1,669,000 1,095,000
Inventory............................................................. 166,000 485,000
Prepaid expenses...................................................... 115,000 35,000
Deferred interest..................................................... - 75,000
----------- ----------
TOTAL CURRENT ASSETS.............................................. 1,981,000 1,744,000
----------- ----------
PROPERTY AND EQUIPMENT - NET............................................. 642,000 481,000
GOODWILL................................................................. 1,857,000 3,357,000
SECURITY DEPOSITS........................................................ 35,000 35,000
OTHER INTANGIBLES........................................................ 85,000 100,000
----------- ------------
TOTAL ASSETS..................................................... $ 4,600,000 $ 5,717,000
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt..................................... $ 7,000 $ 7,000
Accounts payable....................................................... 595,000 461,000
Accrued expenses and other current liabilities......................... 396,000 351,000
Notes payable - asset acquisitions..................................... - 532,000
Notes payable - other.................................................. 173,000 444,000
Notes payable - shareholder............................................ 162,000 -
--------- ---------
TOTAL CURRENT LIABILITIES.......................................... 1,333,000 1,795,000
--------- ---------
LONG-TERM DEBT
Notes payable - asset acquisition...................................... 233,000 -
Notes payable - other, net of discount of $38,000...................... 437,000 -
Note payable - shareholder............................................. 50,000 -
Other, net of current portion.......................................... 5,000 11,000
---------- ---------
TOTAL LONG TERM DEBT...................................................... 725,000 11,000
---------- ---------
TOTAL LIABILITIES......................................................... 2,058,000 1,806,000
---------- ---------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $0.25 par value; 100,000,000 shares authorized;
24,393,026 and 23,725,000 shares issued
and outstanding.................................................. 6,098,000 5,931,000
Additional paid-in capital............................................ 4,647,000 3,350,000
Accumulated deficit................................................... (8,203,000) (5,370,000)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY....................................... 2,542,000 3,911,000
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........................ $ 4,600,000 $ 5,717,000
=========== ===========
See accompanying notes to consolidated financial statements.
1
CRITICAL HOME CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
THREE MONTHS ENDED
JUNE 30,
-------------------
2003 2002
---- ----
NET SALES.............................................. $ 1,294,000 $ 323,000
COST OF GOODS SOLD..................................... 375,000 92,000
---------- ---------
GROSS PROFIT........................................... 919,000 231,000
---------- ---------
OPERATING EXPENSES:
Selling, general and administrative................ 1,067,000 246,000
Depreciation and amortization...................... 18,000 2,000
Impairment of goodwill............................. 1,500,000 -
--------- ---------
TOTAL OPERATING EXPENSES......................... $ 2,585,000 $ 248,000
--------- ---------
LOSS FROM OPERATIONS................................... (1,666,000) (17,000)
---------- ---------
OTHER EXPENSE:
Interest expense.................................... (43,000) (1,000)
Amortization of deferred debt discount,
Notes payable - other............................. (17,000) -
---------- ----------
( 60,000) (1,000)
---------- ----------
NET LOSS BEFORE INCOME TAXES........................... (1,726,000) (18,000)
PROVISION (CREDIT) FOR INCOME TAXES (*)................ - (3,000)
---------- ----------
NET LOSS............................................... $ (1,726,000) $ (15,000)
========== ==========
BASIC AND DILUTED LOSS PER SHARE....................... $ ( 0.07) $ (0.0009)
======== =========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING.......... 24,393,000 15,896,000
========== ==========
(*) The amounts for provision (credit) for income taxes and net loss are stated
on a pro-forma basis for the 2002 period due to the historical entity
having had Subchapter S status during that period
See accompanying notes to consolidated financial statements
2
CRITICAL HOME CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
NINE MONTHS ENDED
JUNE 30,
----------------
2003 2002
---- ----
NET SALES.............................................. $ 4,489,000 $ 929,000
COST OF GOODS SOLD..................................... 1,356,000 287,000
---------- ---------
GROSS PROFIT........................................... 3,133,000 642,000
---------- ---------
OPERATING EXPENSES:
Selling, general and administrative................ 3,728,000 570,000
Depreciation and amortization...................... 57,000 8,000
Impairment of goodwill............................. 1,500,000 -
-------- ---------
TOTAL OPERATING EXPENSES......................... $ 5,285,000 $ 578,000
-------- ---------
(LOSS) INCOME FROM OPERATIONS.......................... (2,152,000) 64,000
--------- ----------
OTHER INCOME (EXPENSE):
Interest expense, net............................... (120,000) (1,000)
Amortization of debt discount and
beneficial conversion feature..................... (666,000) -
Amortization of deferred debt discount,
notes payable - other............................. (33,000) -
Other income........................................ 138,000 -
---------- ----------
(681,000) (1,000)
---------- ----------
NET (LOSS) INCOME BEFORE INCOME TAXES.................. (2,833,000) 63,000
PROVISION FOR INCOME TAXES (*)......................... - 11,000
---------- ----------
NET (LOSS) INCOME...................................... $(2,833,000) $ 52,000
=========== ===========
BASIC AND DILUTED (LOSS) INCOME PER SHARE.............. $ (0.12) $ 0.0033
======== =======
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING.......... 24,210,000 15,896,000
========== ==========
(*) The amounts for provision for income taxes and net income are stated on a
pro-forma basis for the 2002 period due to the historical entity having had
Subchapter S status during that period
See accompanying notes to consolidated financial statements
3
CRITICAL HOME CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
NINE MONTHS ENDED
JUNE 30,
--------------
2003 2002
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income..................................... $ (2,833,000) $ 63,000
Adjustments to reconcile net (loss) income to
cash used by operating activities:
Provision for bad debts........................... 307,000 40,000
Depreciation and amortization..................... 121,000 5,000
Stock option compensation......................... 171,000 -
Amortization of debt discount and
beneficial conversion feature................... 666,000 -
Amortization of deferred debt discount
notes payable - other........................... 18,000 -
Impairment of goodwill............................ 1,500,000
Changes in operating assets and liabilities
Accounts receivable.............................. (881,000) (97,000)
Notes receivable................................. - (75,000)
Inventory........................................ 319,000 (12,000)
Prepaid expenses................................. ( 80,000) (8,000)
Deferred interest................................ 75,000 -
Accounts payable................................. 134,000 (8,000)
Accrued expenses and other current liabilities... 46,000 22,000
---------- ----------
NET CASH USED IN OPERATING ACTIVITIES................... (437,000) (70,000)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment, net.............. (266,000) (1,000)
---------- --------
NET CASH USED IN INVESTING ACTIVITIES................... (266,000) (1,000)
---------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from convertible promissory notes.......... 666,000 -
Proceeds from notes payable other................... 475,000 105,000
Debt issue costs.................................... (96,000) -
Payment of long-term debt........................... (6,000) (5,000)
Payment of notes payable - asset acquisitions....... (300,000) -
Payment of notes payable - other.................... (271,000) (60,000)
Proceeds from notes payable - shareholder........... 212,000 64,000
Increase in due to affiliate........................ - 13,000
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES.............. 680,000 117,000
-------- --------
NET (DECREASE) INCREASE IN CASH........................ (23,000) 46,000
CASH, BEGINNING OF PERIOD.............................. 54,000 4,000
--------- ---------
CASH, END OF PERIOD.................................... $ 31,000 $ 50,000
============ ===========
Supplementary information:
Cash paid during the period for:
Interest............................................ $ 2,000 $ 1,000
=========== ============
Taxes............................................... $ 1,000 $ 1,000
=========== ============
Non-Cash Financing Activities:
Deferred Debt Discount.............................. $ 56,000 $ -
=========== =============
Conversion of Notes Payable to Common Stock......... $ 666,000 $ -
=========== =============
Stock Option Compensation........................... $ 171,000 $ -
=========== =============
See accompanying notes to consolidated financial statements
4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial information of Critical Home Care, Inc. and
subsidiaries (collectively, the "Company") included in this report has been
prepared in conformity with the accounting principles reflected in the
consolidated, audited financial statements included in the Company's Annual
Report on Form 10-KSB for the transition period (nine months) ended September
30, 2002 filed with the Securities and Exchange Commission on February 19, 2003.
All adjustments are of a normal recurring nature and are, in the opinion of
management, necessary for a fair statement of the consolidated results for the
interim periods. This report should be read in conjunction with the Company's
financial statements included in the report on Form 10-KSB mentioned above as
well as the Company's other filings with the Securities and Exchange Commission.
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
NOTE 2 - DESCRIPTION OF BUSINESS
Critical Home Care, Inc. is incorporated in Nevada and based on Long
Island, New York. The Company markets, rents and sells surgical supplies,
orthotic and prosthetic products and durable medical equipment, such as
wheelchairs and hospital beds. The Company also provides oxygen and other
respiratory therapy services and equipment and operates four retail outlets in
the New York metropolitan area. Clients and patients are primarily individuals
residing at home. The Company's equipment and supplies are readily available in
the marketplace and the Company is not dependent on a single source.
Reimbursement and payor sources include Medicare, Medicaid, insurance companies,
managed care groups, HMO's, PPO's and private pay. The company had one payor
source (Medicare) which represented approximately 16% and 20% of the Company's
revenues for the nine months ended June 30, 2003 and 2002 respectively.
NOTE 3 - RECENT ACCOUNTING PRONOUNCEMENTS
In December 2002, the Financial Accounting Standards Board, "FASB" issued
Statement of Financial Accounting Standards, ("SFAS") No.148, Accounting for
Stock Based Compensation - Transition and Disclosure - an amendment of FASB
Statement No. 123." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock
Based Compensation," to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS No.148 amends the disclosure
requirements of SFAS No. 123 to require prominent disclosure in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. The
disclosure requirements apply to all companies for fiscal years ending after
December 15, 2002. The interim disclosure provisions are effective for financial
reports containing financial statements for interim periods beginning after
December 15, 2002. The adoption of SFAS No. 148 is not expected to have a
material impact on the Company's consolidated financial statements. As permitted
under SFAS No. 123, the Company continues to apply the Accounting Principals
Board Opinion No. 25, "Accounting for Stock Issued to Employees." As required
under SFAS No.148, the following table presents pro forma net (loss) income and
basic diluted (loss) earnings per share as if the fair value-based method had
been applied to all awards.
Nine Months Ended
----------------------------------------
June 30, 2003 June 30, 2002
----------------------------------------
Net (loss) income as reported.......................... $ (2,833,000) $ 52,000
Stock option compensation included in net (loss) income 171,000 -
Less: total stock-based employee compensation expense
determined under the fair value method, net of
related tax effects (135,000) -
--------------- ------------------
Pro Forma net (loss) income $ (2,797,000) $ 52,000
--------------- ------------------
Net (loss) income per share:
Basic (loss) earnings per share as reported $ (0.12) $ 0.0033
Pro Forma basic (loss) earnings per share $ (0.12) 0.0033
Diluted (loss) earnings per share as reported $ (0.12) 0.0033
Pro Forma diluted (loss) earnings per share $ (0.12) 0.0033
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In April 2003, the FASB issued SFAS No.149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." The statement amends and
clarifies accounting for derivative instruments, including certain derivatives
instruments embedded in other contracts and for hedging activities under SFAS
133. This Statement is effective for contracts entered into or modified after
June 30, 2003, except as stated below and for hedging relationships designated
after June 30, 2003. The guidance should be applied prospectively. The
provisions of this Statement that relate to SFAS 133 Implementation Issues that
have been effective for fiscal quarters that began prior to June 15, 2003,
should continue to be applied in accordance with respective effective dates. In
addition, certain provisions relating to forward purchases or sales of
when-issued securities that do not yet exist, should be applied to existing
contracts as well as new contracts entered into after June 30,2003. The adoption
of SFAS No. 149 is not expected to have an impact on the Company's financial
statements.
In May 2003 the FASB issued Statement of Financial Accounting Standards No.
150, "Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity" (SFAS No. 150). SFAS No. 150 establishes standards for
classification and measurement in the statement of financial position of certain
financial instruments with characteristics of both liabilities and equity. It
requires classification of 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 Company has not yet completed its analysis of SFAS No. 150,
however, it believes that the adoption of this pronouncement will not have a
material effect on the Company's consolidated financial statements.
NOTE 4 - ACQUISITIONS IN FISCAL 2002
On July 12, 2002, the Company acquired 100% of the common stock of Classic
Healthcare Solutions, Inc. ("Classic"); on August 8, 2002, the Company acquired
substantially all of the assets and business operations of Homecare Alliance,
Inc. ("Alliance"); on September 13, 2002, the Company acquired substantially all
of the assets and business operations of All Care Medical Products, Inc. ("All
Care") and on September 26, 2002, the Company consummated a reverse acquisition
with New York Medical, Inc. ("NYMI"). The results of operations of acquired
businesses have been included with those of the Company since the respective
dates of acquisition.
For accounting purposes, the transaction between NYMI and Critical was
considered, in substance, a capital transaction rather than a business
combination and has been accounted for under the purchase method of accounting
since the former shareholders of Critical now own a majority of the outstanding
common stock of NYMI. Accordingly, the combination of Critical with NYMI was
recorded as a recapitalization of Critical, pursuant to which Critical has been
treated as the continuing entity for accounting purposes and the historical
financial statements presented are those of Critical. Such historical financial
statements reflect the results of operations of Classic which was a sub chapter
S corporation through the date of its acquisition on July 12, 2002, and all tax
effects have therefore been shown on a pro-forma basis for the prior year.
Condensed, pro-forma combined statements of operations of All Care and
Critical for the three and nine months ended June 30, 2002 as if the transaction
had occurred on the first day of Fiscal 2002 are presented below.
Nine Months Three Months
Ended Ended
June 30, 2002 June 30, 2002
-------------- --------------
Net Sales $ 3,887,000 $ 1,304,000
Cost of Sales 1,291,000 421,000
------------- --------------
Gross Profit 2,596,000 883,000
------------- --------------
Operating Expenses 2,217,000 794,000
------------- --------------
Operating Income 379,000
89,000
------------- --------------
Other Income 4,000 1,000
------------- --------------
Income before taxes $ 383,000 $ 90,000
------------- --------------
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5 - ISSUANCE OF SECURITIES
During the nine months ended June 30, 2003, the Company sold a total of
$665,858 of convertible promissory notes (the "Notes") pursuant to a private
placement (the "Private Placement") under Rule 506 of Regulation D of the
Securities Act of 1933, as amended. The Notes were convertible into common stock
at the rate of one share for every $1.00 of Notes at the Company's discretion
and all of the Notes were converted into 665,858 shares of common stock during
the nine month period ended June 30, 2003. An additional 2,168 shares were
issued in payment of accrued interest. The private placement terminated February
28, 2003. As a result of the conversion price of $1.00 being less than the fair
market value on the dates the notes were purchased, the Company recorded a debt
discount and beneficial conversion feature non-cash charge of $666,000 during
the nine months ended June 30, 2003.
NOTE 6 - NOTES PAYABLE
During the quarter ended March 31, 2003 and June 30, 2003, the Company and
certain note holders of notes payable - asset acquisitions, notes payable -
other and note payable - shareholder agreed to amend the respective maturity
dates of their notes whereby they became long term obligations.
During the quarter ended March 31, 2003, the Company borrowed $475,000 from
three unrelated parties and $50,000 from the President of the Company and during
the quarter ended June 30, 2003 the Company borrowed an additional $162,000 from
the President of the Company. The notes payable to the three unrelated parties
include five year options to acquire an aggregate of 187,500 shares of the
Company's common stock at the lower of $1.00 per share or the selling price of
the common stock in any public offering during a period of 12 months from the
date the loans were consummated (February 2003). Using the Black Scholes method
of option valuation, these options are valued at $56,000 which amount has been
recorded as debt discount and is being amortized over the 14 month life of the
notes. The charge for the nine months ended June 30, 2003 was $18,000; the
balance of $38,000 has been reflected as a discount to notes payable, other.
Notes payable, at June 30, 2003 are summarized as follows:
Short term:
Notes payable - shareholder, issued in May and June 2003 pursuant
to working capital loans from the President of the Company
bearing interest at 8% and payable in May and June, 2004. $ 162,000
========
Notes payable - other, issued between July 1, 2002 and September 19, 2002 pursuant
to working capital loans provided by certain persons bearing interest at 8% to 12%
per annum payable through September 30, 2003. These notes are secured by certain assets
of the Company. Upon completion of the Health Capital Management Special Purpose Corporation,
("HC"), Funding Facility these loans will be subordinated to HC. Additionally the
security for these notes will be in a second position to HC.
$173,000
========
Long term:
Notes payable - asset acquisition, issued September 13, 2002 pursuant to
the All Care Asset Acquisition Agreement originally due September 2003,
as modified on April 16, 2003, bearing interest at 7% per annum
payable August 15, 2005. $233,000
========
Notes payable - other, issued in February 2003 pursuant to working capital
loans provided by certain persons bearing interest at 5% per annum payable
in April 2004. These notes are subject to certain acceleration provisions
which require a prepayment in the event the Company completes an equity
financing in excess of $500,000. $475,000
Less discount: (38,000)
---------
$437,000
========
Note payable - shareholder, issued in January 2003 pursuant to a working
capital loan from the President of the Company bearing interest
at 8% and payable October 16, 2005. $ 50,000
========
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 7 - INCOME TAXES
The provision for income taxes for the nine months ended June 30, 2003
consists of the following:
Current $ -
Deferred -
------------
Total $ -
------------
The Company recognizes deferred tax assets or liabilities for the future
tax consequences of events that have been recognized in its financial statements
or tax returns. The accompanying financial statements have been prepared on the
accrual basis in accordance with accounting principles generally accepted in the
United States of America and the Company prepares its tax returns on a cash
basis. Accordingly, the Company has recorded a deferred tax liability for the
increase in income taxes payable in future years related to the temporary
differences under these two accounting methods and a deferred tax asset for the
operating loss carryforwards, which the Company believes will be utilized
against future taxable income.
NOTE 8 - IMPAIRMENT OF GOODWILL
Pursuant to SFAS 142, the Company performed an analysis to test the
carrying value of goodwill as at June 30, 2003 to determine whether there was an
indication of impairment. The amount of any impairment is measured as the excess
of the carrying value over the implied fair value. Such analysis indicated an
impairment of goodwill of approximately $1,500,000, which amount has been
charged to expense during the quarter ended June 30, 2003.
NOTE 9 - FUNDING FACILITY
On May 20, 2003 HC provided the Company with a Letter of Intent covering a
potential Funding Facility of up to $2,000,000 to be secured by Eligible
Accounts Receivable, aged less than 120 days from the date of billing, as
defined. In some cases, such receivables will be purchased and as their ageing
exceeds 120 days they will be re-purchased by the Company through an offset to
advances. Other significant proposed terms include an advance rate on Eligible
Accounts Receivable of 80%; an effective purchase discount fee of between 1.18%
and 1.5% depending on the amount borrowed and the payment of certain servicing
fees on a per claim basis. On July 1, 2003 the Company signed an agreement
letter with HC to begin the funding process as soon as possible. The Company
paid $17,500, as an initial deposit on the commitment fee which is 1.75% of the
$2,000,000 "Funding Facility", the balance of the commitment fee will be paid at
the closing. In order to facilitate the agreement to fund the Company, HC
requested and received the personal guarantee of the President and Chief
Executive Officer. This guarantee covers any funds which the Company may borrow
from HC under the Funding Facility while he is President. The Company
anticipates the closing of the facility date on or before August 31, 2003
however, there can be no assurance that the Company will obtain such funding.
NOTE 10 - SUBSEQUENT EVENT
The President of the Company advanced additional funds to the Company in
the aggregate amount of $ 155,000 during July and August 2003. Such amounts are
due during July and August 2004.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements and Notes thereto appearing elsewhere in
this Form 10-QSB
Statements contained in this report include "forward-looking statements"
within the meaning of such term in Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. Forward-looking statements
involve known and unknown risks, uncertainties and other factors, which could
cause actual financial or operating results, performances or achievements
expressed or implied by such forward- looking statements not to occur or be
realized. Such forward-looking statements generally are based on our best
estimates of future results, performances or achievements, predicated upon
current conditions and the most recent results of the companies involved and
their respective industries. Forward-looking statements may be identified by the
use of forward-looking terminology such as "may," "can," "will," "could,",
"should," "project," "expect," "plan," "predict," "believe," "estimate," "aim,"
"anticipate," "intend," "continue," "potential," "opportunity" or similar terms,
variations of those terms or the negative of those terms or other variations of
those terms or comparable words or expressions.
Readers are urged to carefully review and consider the various disclosures
made by us in this Quarterly Report on Form 10-QSB, our Annual Report on Form
10-KSB filed on February 19, 2003 and our other filings with the Securities and
Exchange Commission. These reports and filings attempt to advise interested
parties of the risks and factors that may affect our business, financial
condition and results of operations and prospects. The forward-looking
statements made in this Form 10-QSB speak only as of the date hereof and we
disclaim any obligation to provide updates, revisions or amendments to any
forward-looking statements to reflect changes in our expectations or future
events.
Results of Operations
The Three Months Ended June 30, 2003 Compared to the Three Months Ended June 30,
2002
Sales increased by $ 971,000 in the third quarter of Fiscal 2003 as
compared to the third quarter of 2002. Approximately $ 908,000 of this increase
is attributable to sales generated by the operations of All Care and of Alliance
which have been consolidated with those of the Company since their respective
dates of acquisition. The balance of $ 63,000 represents an increase in sales
generated by Classic.
Gross profit for the three months ended June 30, 2003 was 71.0%, a slight
decrease from the 71.5% recorded in the prior year comparable period.
Selling, general and administrative expenses totaled $1,067,000 for the
three months ended June 30, 2003 compared to $246,000 for the three months ended
June 30, 2002. The net increase of $821,000 consists primarily of $526,000
attributable to the operations of Alliance and All Care, professional fees and
other expenses related to becoming a public company increased by approximately
$52,000; there was also a non-cash charge of $57,000 for stock option
compensation and there was an increase of approximately $186,000 in the selling,
general and administrative expenses of Classic. The increase of $186,000
consists primarily of an increase of approximately $154,000 in salaries and
related taxes and benefits from $109,000 in the 2002 three month period to
$263,000 in the 2003 three month period. Of this increase, approximately $35,000
is attributable to the two officers of Classic who were paid a minimum salary in
2002 and who were paid pursuant to employment contracts in 2003. The balance is
comprised of periodic employee review increases and an increase in the number of
persons on staff at Classic. In addition, there was a net increase of
approximately $32,000 in all other expenses.
Interest expense in the current year's quarter was $43,000 as compared to
$1,000 in the prior year's comparable quarter. Interest expense for the current
period includes $25,000 of amortization of deferred interest, and $18,000 of
accrued interest on Notes payable.
9
Amortization of debt discount and beneficial conversion feature, a non-cash
charge, represents the difference between the fair market value of the Company's
common stock and the conversion price of convertible notes on the dates sold and
issued pursuant to the private placement during the period of October, 2002
through January, 2003. The amount of debt discount pursuant to this calculation
is limited to the amount of investment made in the convertible promissory notes.
The actual difference between the fair market value and the conversion price was
$995,000 and the amount recorded in the financial statements is limited to the
total investment made of $666,000.
Amortization of deferred debt discount of $17,000 represents the amount of
amortization for the current quarter of the $56,000 fair value of stock options
granted to certain noteholders as explained in Note 6.
The Company recorded a charge for impairment of goodwill in the amount of
$1,500,000 in the quarter ended June 30, 2003. There was no such comparable
expense in the prior year's quarter ended June 30, 2002.
The Nine Months Ended June 30, 2003 Compared to the Nine months Ended June 30,
2002.
Sales increased by $ 3,560,000 for the nine-month period ended June 30,2003
as compared to the comparable period in Fiscal 2002. Approximately $ 3,282,000
of this increase is attributable to sales generated by the operations of All
Care and Alliance which have been consolidated with those of the Company since
their respective dates of acquisition. The balance of $278,000 represents an
increase in sales of Classic.
Gross profit for the nine months ended June 30, 2003 was 69.8%, a slight
increase from the 69.1% recorded in the prior year. This increase is primarily
due to DME rental income comprising a higher percentage of sales, and such
rental income generates a slightly higher gross profit than other sales.
Selling, general and administrative expenses totaled $3,728,000 for the
nine months ended June 30, 2003 compared to $570,000 for the nine months ended
June 30, 2002. The net increase of $3,158,000 consists primarily of selling,
general and administrative expenses of approximately $2,026,000 attributable to
the operations of Alliance and All Care including a bad debt write off of
$200,000 relative to certain historical accounts receivable of All Care that
were generated prior to their acquisition by Critical on September 12, 2002. In
addition, the Company expensed costs of $103,000 relative to the termination of
credit negotiations with Health Care Business Credit Corp.; incurred
professional fees and other expenses of $25,000 related to the terminated Ocean
Breeze acquisition, and professional fees and other expenses related to becoming
a public company increased by approximately $222,000. There was also a non-cash
charge of $171,000 for stock option compensation and there was an increase of
approximately $611,000 in the selling, general and administrative expenses of
Classic. The increase of $611,000 consists primarily of an increase of
approximately $454,000 in salaries and related taxes and benefits from $289,000
in the 2002 nine month period to $743,000 in the 2003 nine month period. Of this
increase, approximately $135,000 is attributable to the two officers of Classic
who were paid a minimum salary in 2002 and who were paid pursuant to employment
contracts in 2003. The balance is comprised of periodic employee review
increases and an increase in the number of persons on staff at Classic. In
addition, the Company recorded a bad debt write off of $100,000 relative to
certain historical accounts receivable of Classic that were generated prior to
the acquisition by Critical on July 12, 2002 and there was a net increase of
approximately $57,000 in all other expenses.
Net interest expense for the nine months ended June 30, 2003 was $120,000
as compared to $1,000 for the prior year's comparable period. Total interest
expense incurred in the nine months ended June 30, 2003 was $135,000 including
$75,000 of amortization of deferred interest, and $60,000 of interest on notes
payable. This amount was netted against interest income of $15,000 which was a
result of forgiveness of interest by certain noteholders.
Amortization of debt discount and beneficial conversion feature, a non-cash
charge, represents the difference between fair market value of the Company's
common stock and the conversion price of convertible notes on the date sold and
issued pursuant to the private placement during the period of October, 2002
through January, 2003. The amount of debt discount pursuant to this calculation
is limited to the amount of investment made in the convertible promissory notes.
The actual difference between the fair market value and the conversion price was
$ 995,000 and the amount recorded in the financial statements is limited to the
total investment made of $ 666,000.
10
Amortization of deferred debt discount of $33,000 represents the amount of
amortization of the $56,000 fair value of stock options granted to certain
noteholders as explained in Note 6. The amortization is for the period from
February 14, 2003 to June 30, 2003.
The Company recorded a charge for impairment of goodwill in the amount of
$1,500,000 during the nine months ended June 30, 2003. There was no such
comparable expense in the prior year's nine month period ended June 30, 2002.
Liquidity and Capital Resources
The Company's primary needs for liquidity and capital resources are the
funding of operating and administrative expenses related to the management of
the Company and its subsidiaries.
During the nine months ended June 30, 2003, cash decreased by $23,000. The
Company's cash of $31,000 and estimated funds that will be generated from
operations are not sufficient to both support current levels of operations for
the next twelve months, as well as to pay current liabilities when due. The
Company therefore, intends to raise capital in order to meet all of its
obligations. Additionally the Company has instituted various payroll and expense
reductions and other cost saving measures as required.
As mentioned in Note 8, the Company has received a letter of agreement from
HC relative to a possible funding facility of up to $2,000,000. On July 1, 2003
the Company signed a commitment letter with HC to begin the funding process as
soon as possible. The Company paid $ 17,500, as an initial deposit on the
commitment fee, and the balance of $17,500 will be paid at closing. The Company
anticipates that the closing of the funding arrangement will take place on or
about August 31, 2003. If such financing does not take place the Company will
take measures to reduce expenditures, and seek other sources of funding.
Subsequent to June 30, 2003, the President of the Company advanced
additional funds to the Company in the aggregate amount of $155,000. Such
amounts are due and payable during July and August 2004.
ITEM 3. CONTROLS AND PROCEDURES
An evaluation was performed, as of June 30, 2003, under the supervision and
with the participation of our President, and Chief Executive Officer; and our
Chief Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures. Based on such evaluation, these persons have
concluded that our disclosure controls and procedures were effective as of June
30, 2003. There have been no significant changes in our internal controls or in
other factors that could significantly affect our internal controls subsequent
to June 30, 2003.
11
PART II
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the quarter ended March 31, 2003, the Company borrowed an aggregate
of $475,000 from three non-affiliated persons and $ 50,000 from the President of
the Company. During the quarter ended June 30, 2003, the Company borrowed an
additional $ 162,000 from the President of the Company. The Company issued notes
payable due from April 2004 through June 2004. The notes payable to the three
non-affiliated parties were accompanied by five-year options to purchase an
aggregate of 187,500 shares of the Company's Common Stock. The options are
exercisable at the lower of $1.00 per share or the selling price of the common
stock in any public offering during a 12 month period from which the loans were
completed in February 2003.
There were no underwriters involved, nor discounts, but commissions of
$47,500 were paid on the above transaction relating to the $475,000. The
issuances of the notes and options were exempt from registration pursuant to
Section 4(2) of the Securities Act of 1933 as amended.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
Exhibit 31.1 - Certification pursuant to U.S.C. Section 1350, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
Exhibit 31.2 - Certification pursuant to U.S.C. Section 1350, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
Exhibit 32.1 - Certification pursuant to U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
Exhibit 32.2 - Certification pursuant to U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
(B) REPORTS ON FORM 8-K
The Company filed a Form 8-K on May 7, 2003 to report a change
in the Company's certifying accountants.
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.
CRITICAL HOME CARE, INC.
August 19, 2003
By: /s/ David S. Bensol
-------------------
David S. Bensol
Chief Executive Officer
By: /s/ Eric S. Yonenson
-------------------
Eric S. Yonenson
Chief Financial Officer
13