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EX-32 - CERTIFICATION OF THE CEO - HASCO Medical, Inc.ex321.htm
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EX-31 - CERTIFICATION OF THE CFO - HASCO Medical, Inc.ex312.htm
EX-31 - CERTIFICATION OF THE CEO - HASCO Medical, Inc.ex311.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

 

 

x

QUARTERLY REPORT UNDER TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Period ended September 30, 2009

OR

 

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to _________

Commission File No. 000-52422

 

HASCO Medical, Inc.

(Name of Small Business Issuer)


 

 

 

Florida

 

65-0924471

(State or other jurisdiction of
Incorporation or Organization)

 

(IRS Employer Identification No.)

 

 

 

14809 Hampton Court, Dallas, TX

 

75254

 

(Address of principal executive offices)

 

(Zip Code)


 

972-931-1911

(Registrant’s Telephone Number, including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the 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 o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o   No  o

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

o

Accelerated filer

o

Non-accelerated filer

o  (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 o   No x

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: At November 11, 2009, there were 713,496,000 outstanding shares of common stock, $.001 par value per share.

Transitional Small Business Disclosure Format (Check one): Yes o  No x


HASCO MEDICAL, INC.
Form 10-Q
Quarterly period ended September 30, 2009

Index

 

 

 

 

 

Part I.

Financial Information

 

 

 

Item 1.

Financial Statements

 

3

 

 

Consolidated Balance Sheets as of September 30, 2009 (Unaudited) and as of December 31, 2008 (Audited)

 

3

 

 

Consolidated Statements of Operations for the three and nine months ended September 30, 2009 and 2008 (Unaudited)

 

4

 

 

Consolidated Statements of Cash Flows for the nine months ended September 30, 2009 and 2008 (Unaudited)

 

5

 

 

Notes to Unaudited Consolidated Financial Statements

 

6

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

17

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

28

 

Item 4.

Controls and Procedures

 

28

Part II.

Other Information

 

 

 

Item 1.

Legal Proceedings

 

29

 

Item 1A.

Risk Factors

 

29

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

29

 

Item 3.

Defaults Upon Senior Securities

 

29

 

Item 4.

Submission of Matters to a Vote of Security Holders

 

29

 

Item 5.

Other Information

 

29

 

Item 6.

Exhibits

 

29

FORWARD LOOKING STATEMENTS

          This report contains forward-looking statements regarding our business, financial condition, results of operations and prospects. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions or variations of such words are intended to identify forward-looking statements, but are not deemed to represent an all-inclusive means of identifying forward-looking statements as denoted in this report. Additionally, statements concerning future matters are forward-looking statements.

          Although forward-looking statements in this report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include, without limitation, those specifically addressed under the headings “Risks Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our current report on Form 8-K, in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Form 10-Q and in other reports that we file with the SEC. You are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this report.

          We file reports with the SEC. The SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including us. You can also read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. You can obtain additional information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

          We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this report, except as required by law. Readers are urged to carefully review and consider the various disclosures made throughout the entirety of this quarterly report, which are designed to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.

2


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

HASCO Medical, Inc. and Subsidiary
Consolidated Balance Sheets

 

 

 

 

 

 

 

 

 

 

September 30, 2009
(Unaudited)

 

December 31, 2008
(1)

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

 

Cash

 

$

8,512

 

$

141,163

 

Accounts receivable, net

 

 

455,720

 

 

356,801

 

Inventory

 

 

112,626

 

 

223,022

 

Prepaid expenses

 

 

28,114

 

 

8,998

 

 

 

   

 

   

 

 

 

 

 

 

 

 

 

Total Current Assets

 

 

604,972

 

 

729,984

 

 

 

 

 

 

 

 

 

OTHER ASSETS:

 

 

 

 

 

 

 

Property and equipment, net

 

 

297,798

 

 

186,056

 

Deposits

 

 

420

 

 

420

 

 

 

   

 

   

 

 

 

 

 

 

 

 

 

Total Assets

 

$

903,190

 

$

916,460

 

 

 

   

 

   

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

250,741

 

$

142,339

 

Notes payable, current portion

 

 

17,600

 

 

10,205

 

Accrued income tax payable

 

 

 

 

82,250

 

Due to related party

 

 

 

 

7,005

 

Accrued interest payable

 

 

11,250

 

 

8,750

 

 

 

   

 

   

 

 

 

 

 

 

 

 

 

Total Current Liabilities

 

 

279,591

 

 

250,549

 

 

 

   

 

   

 

 

 

 

 

 

 

 

 

LONG-TERM LIABILITIES:

 

 

 

 

 

 

 

Notes Payable

 

 

21,860

 

 

21,015

 

Notes Payable - related party

 

 

150,000

 

 

150,000

 

 

 

   

 

   

 

 

 

 

 

 

 

 

 

Total Long-Term Liabilities

 

 

171,860

 

 

171,015

 

 

 

   

 

   

 

 

 

 

 

 

 

 

 

Total Liabilities

 

 

451,451

 

 

421,564

 

 

 

   

 

   

 

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY:

 

 

 

 

 

 

 

Common stock ($.001 par value; 750,000,000 shares authorized; 713,496,000 and 554,676,000 shares issued and outstanding at September 30, 2009 and December 31, 2008, respectively)

 

 

713,496

 

 

554,676

 

Additional paid in capital

 

 

 

 

(227,861

)

(Accumulated deficit) retained earnings

 

 

(261,757

)

 

168,081

 

 

 

   

 

   

 

 

 

 

 

 

 

 

 

Total Stockholders’ Equity

 

 

451,739

 

 

494,896

 

 

 

   

 

   

 

 

 

 

 

 

 

 

 

Total Liabilities and Stockholders’ Equity

 

$

903,190

 

$

916,460

 

 

 

   

 

   

 

(1) Derived from Audited Financial Statements

See accompanying notes to unaudited consolidated financial statements

3


HASCO Medical, Inc. and Subsidiary
Consolidated Statements of Operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

 

 

 

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

 

 

 

 

 

 

 

 

 

 

(Unaudited)

 

(Unaudited)

 

(Unaudited)

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

749,698

 

$

1,150,699

 

$

2,654,608

 

$

3,528,019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

 

175,537

 

 

268,537

 

 

684,656

 

 

902,233

 

 

 

   

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

 

574,161

 

 

882,162

 

 

1,969,952

 

 

2,625,786

 

 

 

   

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketing and selling

 

 

5,757

 

 

1,241

 

 

15,152

 

 

2,055

 

Depreciation and amortization expense

 

 

6,172

 

 

136,302

 

 

18,443

 

 

186,805

 

General and administrative

 

 

620,574

 

 

910,540

 

 

1,928,987

 

 

1,924,045

 

 

 

   

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total operating expenses

 

 

632,503

 

 

1,048,083

 

 

1,962,582

 

 

2,112,905

 

 

 

   

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations

 

 

(58,342

)

 

(165,921

)

 

7,370

 

 

512,881

 

 

 

   

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expenses):

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss on disposal of assets

 

 

 

 

 

 

 

 

(53,825

)

Gain on extinguishment of debt

 

 

 

 

 

 

8,750

 

 

 

Interest income

 

 

 

 

993

 

 

 

 

5,182

 

Interest expense

 

 

(4,779

)

 

(3,020

)

 

(12,777

)

 

(4,807

)

 

 

   

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other income (expenses):

 

 

(4,779

)

 

(2,027

)

 

(4,027

)

 

(53,450

)

 

 

   

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) income before taxes

 

 

(63,121

)

 

(167,948

)

 

3,343

 

 

459,431

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax benefit (expense)

 

 

81,229

 

 

 

 

104,729

 

 

(39,800

)

 

 

   

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

18,108

 

$

(167,948

)

$

108,072

 

$

419,631

 

 

 

   

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per common shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

 

$

 

$

 

$

 

 

 

   

 

   

 

   

 

   

 

Diluted

 

$

 

$

 

$

 

$

 

 

 

   

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

713,496,000

 

 

554,676,000

 

 

637,005,485

 

 

554,676,000

 

 

 

   

 

   

 

   

 

   

 

Diluted

 

 

713,496,000

 

 

554,676,000

 

 

637,005,485

 

 

554,676,000

 

 

 

   

 

   

 

   

 

   

 

See accompanying notes to unaudited consolidated financial statements

4


HASCO Medical, Inc. and Subsidiary
Consolidated Statements of Cash Flows

 

 

 

 

 

 

 

 

 

 

For the Nine Months Ended
September 30,

 

 

 

 

 

 

 

2009

 

2008

 

 

 

 

 

 

 

 

 

(Unaudited)

 

(Unaudited)

 

 

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

 

$

108,072

 

$

419,631

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation

 

 

113,311

 

 

376,820

 

Bad debt expense

 

 

251,513

 

 

527,580

 

Changes in operating assets and liabilities

 

 

 

 

 

 

 

Accounts receivable

 

 

(350,432

)

 

(701,356

)

Inventory

 

 

110,396

 

 

21,697

 

Prepaid expenses and other current assets

 

 

(19,116

)

 

(32,784

)

Other assets

 

 

 

 

(130

)

Accounts payable and accrued liabilities

 

 

(122,577

)

 

213,007

 

Accrued expense - related party

 

 

(7,005

)

 

 

 

 

   

 

   

 

 

 

 

 

 

 

 

 

Net cash provided by operating activities

 

 

84,162

 

 

824,465

 

 

 

   

 

   

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(203,294

)

 

(320,692

)

 

 

   

 

   

 

 

 

 

 

 

 

 

 

Net cash used in investing activities

 

 

(203,294

)

 

(320,692

)

 

 

   

 

   

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Advance from related party

 

 

 

 

225,896

 

Payment of dividends

 

 

 

 

(852,175

)

Repayments of notes payable

 

 

(13,519

)

 

(18,125

)

 

 

   

 

   

 

 

 

 

 

 

 

 

 

Net cash used in financing activities

 

 

(13,519

)

 

(644,404

)

 

 

   

 

   

 

 

 

 

 

 

 

 

 

Net decrease in cash

 

 

(132,651

)

 

(140,631

)

 

 

 

 

 

 

 

 

Cash at beginning of period

 

 

141,163

 

 

314,369

 

 

 

   

 

   

 

 

 

 

 

 

 

 

 

Cash at end of period

 

$

8,512

 

$

173,738

 

 

 

   

 

   

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

Cash paid during the year for interest

 

$

 

$

 

 

 

   

 

   

 

 

 

 

 

 

 

 

 

Cash paid during the year for taxes

 

$

 

$

 

 

 

   

 

   

 

See Notes to Unaudited Consolidated Financial Statements.

5


HASCO MEDICAL, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2009

NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization

HASCO Medical, Inc. (“HASCO” or the “Company”), formerly BBC Graphics of Palm Beach Inc, was incorporated in May 2009 under the laws of the State of Florida. The Company operated as a provider of advertising and graphic design services. In June 2009, the Company changed its name to HASCO Medical, Inc.

On May 12, 2009, HASCO completed the acquisition of Southern Medical & Mobility, Inc. (SMM”) pursuant to the terms of the Agreement and Plan of Merger (the “Merger Agreement”) among HASCO, SMM and Southern Medical Acquisition, Inc., a Delaware corporation and a wholly-owned subsidiary of the Company. Under the terms of the Merger Agreement Southern Medical Acquisition, Inc. was merged into Southern Medical & Mobility, Inc., and Southern Medical & Mobility, Inc. became a wholly-owned subsidiary of HASCO. The shareholder of Southern Medical & Mobility, Inc., HASCO Holdings, LLC, was issued a total of 554,676,000 shares of the Company’s common stock in exchange for their Southern Medical & Mobility, Inc. share.

Southern Medical & Mobility, Inc. provides home health care services and products consisting primarily of the rental and sale of home medical equipment and home health care supplies. These services and products are paid for primarily by Medicare, Medicaid, and other third-party payors.

After the merger and transactions that occurred at the same time as the merger, there were 642,176,000 shares of the Company’s common stock outstanding, of which 620,000,000, approximately 96.5%, were held by HASCO Holdings, LLC, the former sole shareholder of Southern Medical & Mobility, Inc.

For accounting purposes, HASCO Medical, Inc. has accounted for the transaction as a reverse acquisition and HASCO will be the surviving entity as a publicly-traded company under the name HASCO Medical Inc. or together with its subsidiaries. The Company did not recognize goodwill or any intangible assets in connection with this transaction.

The Merger was accounted for as a reverse acquisition, with Southern Medical & Mobility, Inc, as the accounting acquirer. Accordingly, the reverse acquisition is being accounted for as a capital transaction in substance, rather than a business combination. For accounting purposes, the net liabilities of HASCO Medical, Inc. were recorded at fair value as of the Closing Date, with an adjustment to additional paid-in capital. The deficit accumulated by HASCO was carried forward after the Merger. The results of operations of HASCO Medical, Inc. are included in the accompanying Consolidated Statements of Operations from the date of the Merger through September 30, 2009.

Effective with the reverse merger, all previously outstanding common stock owned by HASCO Medical, Inc.’s shareholders were exchanged for the Company’s common stock. The value of the Company’s common stock that was issued to HASCO Medical, Inc.’s shareholders was the historical cost of the Company’s net tangible assets, which did not differ materially from its fair value.

All references to common stock, share and per share amounts have been retroactively restated to reflect the reverse acquisition as if the transaction had taken place as of the beginning of the earliest period presented. 

6


HASCO MEDICAL, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2009

NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Services and Products

The Company provides a diversified range of home health care services and products.

Home Medical Equipment and Medical Supplies. The Company provides a variety of equipment and supplies to serve the needs of home care patients. Revenues from home medical equipment and supplies are derived principally from the rental and sale of wheelchairs, power chairs, hospital beds, ambulatory aids, bathroom aids and safety equipment, and rehabilitation equipment.

Home Respiratory Equipment. The Company provides a wide variety of home respiratory equipment primarily to patients with severe and chronic pulmonary diseases. Patients are referred to the Company most often by primary care and pulmonary physicians as well as by hospital discharge planners and case managers. After reviewing pertinent medical records on the patient and confirming insurance coverage information, a Company service technician visits the patient’s home to deliver and to prepare the prescribed equipment. Company representatives coordinate the prescribed regimen with the patient’s physician and train the patient and caregiver in the correct use of the equipment. For patients renting equipment, Company representatives also make periodic follow-up visits to the home to provide additional instructions, perform required equipment maintenance, and deliver oxygen and other supplies.

NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“US GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8-03 of Regulation S-X. Accordingly, the consolidated financial statements do not include all of the information and footnotes required by US GAAP for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included and such adjustments are of a normal recurring nature. These consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ended December 31, 2008 and notes thereto and other pertinent information contained in Form 8-K of HASCO Medical, Inc. (the “Company”, “we”, “us”. Or “our”) as filed with the Securities and Exchange Commission (the “Commission”). All significant intercompany transactions and balances have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the balance sheets and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Significant estimates in 2009 and 2008 include the allowance for doubtful accounts, the valuation of inventory, and the useful life of property and equipment.

7


HASCO MEDICAL, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2009

NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Fair Value of Financial Instruments

The Company adopted the new guidance on fair value measurements. The new guidance clarifies the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows:

Level 1-Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date.

Level 2-Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other then quoted prices that are observable, and inputs derived from or corroborated by observable market data.

Level 3-Inputs are unobservable inputs which reflect the reporting entity’s own assumptions on what assumptions the market participants would use in pricing the asset or liability based on the best available information.

The carrying amounts of financial instruments, including cash, accounts receivable, accounts payable and accrued liabilities approximated fair value as of September 30, 2009, because of the relatively short-term maturity of these instruments and their market interest rates.

Revenue Recognition and Concentration of Credit Risk 

Revenues are recognized under fee for service arrangements through equipment we rent to patients, sales of equipment, supplies, and other items we sell to patients. Revenue generated from equipment that we rent to patients is recognized over the rental period, typically one month, and commences on delivery of the equipment to the patients. Revenue related to sales of equipment, and supplies is recognized on the date of delivery to the patients. All revenues are recorded at amounts estimated to be received under reimbursement arrangements with third-party payors, including private insurers, prepaid health plans, Medicare and Medicaid.

Our revenues are recognized on an accrual basis in the period in which services and related products are provided to customers and are recorded at net realizable amounts estimated to be paid by customers and third-party payors. Insurance benefits are assigned to the Company and, accordingly, the Company bills on behalf of its customers. The Company’s billing system contains payor-specific price tables that reflect the fee schedule amounts in effect or contractually agreed upon by various government and commercial payors for each item of equipment or supply provided to a customer. The Company has established an allowance to account for sales adjustments that result from differences between the payment amount received and the expected realizable amount. Actual adjustments that result from differences between the payment amount received and the expected realizable amount are recorded against the allowance for sales adjustments and are typically identified and ultimately recorded at the point of cash application or when otherwise determined pursuant to the Company’s collection procedures. We report revenues in our financial statements net of such adjustments.

8


HASCO MEDICAL, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2009

NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Revenue Recognition and Concentration of Credit Risk (continued)

Certain items provided by the Company are reimbursed under rental arrangements that generally provide for fixed monthly payments established by fee schedules for as long as the patient is using the equipment and medical necessity continues (subject to capped rental arrangements which limit the rental payment periods in some instances and which may result in a transfer of title to the patient at the end of the rental payment period). Once initial delivery of rental equipment is made to the patient, a monthly billing cycle is established based on the initial date of delivery. The Company recognizes rental arrangement revenues ratably over the monthly service period and defers revenue for the portion of the monthly bill that is unearned. No separate payment is earned from the initial equipment delivery and setup process. During the rental period, we are responsible for servicing the equipment and providing routine maintenance, if necessary.

The Company records revenue when persuasive evidence of an arrangement exists, services have been rendered or product delivery has occurred, the sales price to the customer is fixed or determinable, and collectability is reasonably assured.

Due to the nature of the industry and the reimbursement environment in which we operate, certain estimates are required to record net revenues and accounts receivable at their net realizable values at the time products and/or services are provided. Inherent in these estimates is the risk that they will have to be revised or updated as additional information becomes available. Specifically, the complexity of many third-party billing arrangements and the uncertainty of reimbursement amounts for certain services from certain payors may result in adjustments to amounts originally recorded. Such adjustments are typically identified and recorded at the point of cash application, claim denial or account review.

Included in accounts receivable are earned but unbilled receivables. Unbilled accounts receivable represent charges for equipment and supplies delivered to customers for which invoices have not yet been generated by the billing system. Prior to the delivery of equipment and supplies to customers, we perform certain certification and approval procedures to ensure collection is reasonably assured and that unbilled accounts receivable are recorded at net amounts expected to be paid by customers and third-party payors. Billing delays, generally ranging from several days to several weeks, can occur due to delays in obtaining certain required payor-specific documentation from internal and external sources, interim transactions occurring between cycle billing dates established for each customer within the billing system and business acquisitions awaiting assignment of new provider enrollment identification numbers. In the event that a third-party payor does not accept the claim for payment, the customer is ultimately responsible.

We perform analyses to evaluate the net realizable value of accounts receivable. Specifically, we consider historical realization data, accounts receivable aging trends, other operating trends and relevant business conditions. Because of continuing changes in the health care industry and third-party reimbursement, it is possible that our estimates could change, which could have a material impact on our operations and cash flows.

Cash and Cash Equivalents

For purposes of the unaudited consolidated statements of cash flows, the Company considers all highly liquid instruments purchased with a maturity of three months or less and money market accounts to be cash equivalents.

9


HASCO MEDICAL, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2009

NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Concentrations of Credit Risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents, accounts receivable, and notes payable. The Company’s investment policy is to invest in low risk, highly liquid investments. The Company does not believe it is exposed to any significant credit risk in its cash investment.

The Company performs on-going credit evaluations of its customer base including those included in accounts receivable at September 30, 2009 and December 31, 2008, and, generally, does not require collateral. The Company maintains reserves for potential credit losses and such losses have been within management’s expectations.

Accounts Receivable

Accounts receivable consists primarily of receivables due from Medicare Medicaid, and third party payors. The Company recorded a bad debt allowance of $119,432 and $305,539 as of September 30, 2009 and December 31, 2008, respectively. Management performs ongoing evaluations of its accounts receivable.

Due to the nature of the industry and the reimbursement environment in which the Company operates, certain estimates are required to record net revenues and accounts receivable at their net realizable values. Inherent in these estimates is the risk that they will have to be revised or updated as additional information becomes available. Specifically, the complexity and uncertainty of reimbursement amounts for certain services from certain payors may result in adjustments to amounts originally recorded. Such adjustments are typically identified and recorded at the point of cash application, claim denial or account review.

Management performs periodic analyses to evaluate accounts receivable balances to ensure that recorded amounts reflect estimated net realizable value. Specifically, management considers historical realization data, accounts receivable aging trends, and other operating trends. Also considered are relevant business conditions such as governmental and managed care payor claims processing procedures and system changes.

Accounts receivable are reduced by an allowance for doubtful accounts which provides for those accounts from which payment is not expected to be received, although services were provided and revenue was earned. Upon determination that an account is uncollectible, it is written-off and charged to the allowance.

Inventory

Inventory is valued at the lower of cost or market, on an average cost basis and includes primarily finished goods.

Shipping and Handling Costs

The Company classifies costs related to freight as costs of sales.

10


HASCO MEDICAL, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2009

NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Property and Equipment

Property and equipment are carried at cost and are depreciated on a straight-line basis over the estimated useful lives of the assets. The cost of repairs and maintenance is expensed as incurred; major replacements and improvements are capitalized. When assets are retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in income in the year of disposition. The Company examines the possibility of decreases in the value of fixed assets when events or changes in circumstances reflect the fact that their recorded value may not be recoverable.

Impairment of Long-Lived Assets

The Company reviews, long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable, or at least annually. The Company recognizes an impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset. The amount of impairment is measured as the difference between the asset’s estimated fair value and its book value. The Company did not record any impairment charges for the nine months ended September 30, 2009 and 2008.

Income Taxes

The Company was taxed as an S Corporation until June 2, 2008. At that time the Company changed its status to a C Corporation which resulted in a reclassification of retained earnings to additional paid-in capital.

During the nine months period ended September 30, 2009, the Company recorded an income tax benefit of $104,729 from the reversal of the accrual of income tax expense during fiscal 2008 and the receipt of income tax refund in July 2009.

Deferred income tax assets and liabilities are computed for differences between the carrying amounts of assets and liabilities for financial statement and tax purposes. Deferred income tax assets are required to be reduced by a valuation allowance when it is determined that it is more likely than not that all or a portion of a deferred tax asset will not be realized. In determining the necessity and amount of a valuation allowance, management considers current and past performance, the operating market environment, tax planning strategies and the length of tax benefit carryforward periods.

Pursuant to accounting standards related to the accounting for uncertainty in income taxes, the evaluation of a tax position is a two-step process. The first step is to determine whether it is more likely than not that a tax position will be sustained upon examination, including the resolution of any related appeals or litigation based on the technical merits of that position. The second step is to measure a tax position that meets the more-likely-than-not threshold to determine the amount of benefit to be recognized in the financial statements. A tax position is measured at the largest amount of benefit that is greater than 50% likelihood of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent period in which the threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not criteria should be de-recognized in the first subsequent financial reporting period in which the threshold is no longer met. The accounting standard also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosures, and transition. The adoption had no effect on the Company’s consolidated financial statements.

11


HASCO MEDICAL, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2009

NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Subsequent Events

For purposes of determining whether a post-balance sheet event should be evaluated to determine whether it has an effect on the financial statements for the period ending September 30, 2009, subsequent events were evaluated by the Company as of November 11, 2009, the date on which the unaudited consolidated financial statements at and for the period ended September 30, 2009, were available to be issued.

Related Parties

Parties are considered to be related to the Company if the parties that, directly or indirectly, through one or more intermediaries, control, are controlled by, or are under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. The Company discloses all related party transactions. All transactions shall be recorded at fair value of the goods or services exchanged. Property purchased from a related party is recorded at the cost to the related party and any payment to or on behalf of the related party in excess of the cost is reflected as a distribution to related party.

Recently Issued Accounting Pronouncements

In June 2009, the FASB issued Accounting Standards Update No. 2009-01, “Generally Accepted Accounting Principles” (ASC Topic 105) which establishes the FASB Accounting Standards Codification (“the Codification” or “ASC”) as the official single source of authoritative U.S. generally accepted accounting principles (“GAAP”). All existing accounting standards are superseded. All other accounting guidance not included in the Codification will be considered non-authoritative. The Codification also includes all relevant Securities and Exchange Commission (“SEC”) guidance organized using the same topical structure in separate sections within the Codification.

Following the Codification, the Board will not issue new standards in the form of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting Standards Updates (“ASU”) which will serve to update the Codification, provide background information about the guidance and provide the basis for conclusions on the changes to the Codification.

The Codification is not intended to change GAAP, but it will change the way GAAP is organized and presented. The Codification is effective for our third-quarter 2009 financial statements and the principal impact on our financial statements is limited to disclosures as all future references to authoritative accounting literature will be referenced in accordance with the Codification. In order to ease the transition to the Codification, we are providing the Codification cross-reference alongside the references to the standards issued and adopted prior to the adoption of the Codification.

In April 2009, the FASB issued FASB Staff Positions FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (ASC Topic 320-10-65). This update provides guidance for allocation of charges for other-than-temporary impairments between earnings and other comprehensive income. It also revises subsequent accounting for other-than-temporary impairments and expands required disclosure. The update was effective for interim and annual periods ending after June 15, 2009. The adoption of FAS 115-2 and FAS 124-2 did not have a material impact on the results of operations and financial condition.

12


HASCO MEDICAL, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2009

NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Recently Issued Accounting Pronouncements (continued)

In April 2009, the FASB issued FSP SFAS 107-1 and APB 28-1, “Interim Disclosures About Fair Value of Financial Instruments” (ASC Topic 320-10-65). This update requires fair value disclosures for financial instruments that are not currently reflected on the balance sheet at fair value on a quarterly basis and is effective for interim periods ending after June 15, 2009. The Company’s financial instruments include cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and notes payable. At September 30, 2009 and December 31, 2008 the carrying value of the Companies financial instruments approximated fair value, due to their short term nature.

In May 2009, the FASB issued SFAS No. 165, “Subsequent Events” (ASC Topic 855). This guidance is intended to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or available to be issued. It is effective for interim and annual reporting periods ending after June 15, 2009. The adoption of this guidance did not have a material impact on our consolidated financial statements. The Company evaluated all events and transactions that occurred after September 30, 2009 up through November 10, 2009. During this period no material subsequent events came to our attention.

In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)” (ASC Topic 810-10). This updated guidance requires a qualitative approach to identifying a controlling financial interest in a variable interest entity (VIE), and requires ongoing assessment of whether an entity is a VIE and whether an interest in a VIE makes the holder the primary beneficiary of the VIE. It is effective for annual reporting periods beginning after November 15, 2009. We are currently evaluating the impact of the pending adoption of SFAS No. 167 on our consolidated financial statements.

In October 2009, the FASB issued ASU No. 2009-13, “Multiple-Deliverable Revenue Arrangements.” This ASU establishes the accounting and reporting guidance for arrangements including multiple revenue-generating activities. This ASU provides amendments to the criteria for separating deliverables, measuring and allocating arrangement consideration to one or more units of accounting. The amendments in this ASU also establish a selling price hierarchy for determining the selling price of a deliverable. Significantly enhanced disclosures are also required to provide information about a vendor’s multiple-deliverable revenue arrangements, including information about the nature and terms, significant deliverables, and its performance within arrangements. The amendments also require providing information about the significant judgments made and changes to those judgments and about how the application of the relative selling-price method affects the timing or amount of revenue recognition. The amendments in this ASU are effective prospectively for revenue arrangements entered into or materially modified in the fiscal years beginning on or after June 15, 2010. Early application is permitted. The Company is currently evaluating this new ASU.

In October 2009, the FASB issued ASU No. 2009-14, “Certain Revenue Arrangements That Include Software Elements.” This ASU changes the accounting model for revenue arrangements that include both tangible products and software elements that are “essential to the functionality,” and scopes these products out of current software revenue guidance. The new guidance will include factors to help companies determine what software elements are considered “essential to the functionality.” The amendments will now subject software-enabled products to other revenue guidance and disclosure requirements, such as guidance surrounding revenue arrangements with multiple-deliverables. The amendments in this ASU are effective prospectively for revenue arrangements entered into or materially modified in the fiscal years beginning on or after June 15, 2010. Early application is permitted. The Company is currently evaluating this new ASU.

13


HASCO MEDICAL, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2009

NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Earnings Per Share

Earnings per common share are calculated under the provisions of a FASB issued new guidance,” which established new accounting standards for computing and presenting earnings per share. The accounting standard requires the Company to report both basic earnings per share, which is based on the weighted-average number of common shares outstanding, and diluted earnings per share, which is based on the weighted-average number of common shares outstanding plus all potential dilutive common shares outstanding.

The following table sets forth the computation of basic and diluted income (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three month
period ended
September 30, 2009

 

Three month
period ended
September 30, 2008

 

Nine month
period ended
September 30, 2009

 

Nine month
period ended
September 30, 2008

 

               

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

18,108

 

$

(167,948

)

$

108,072

 

$

419,631

 

                       

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator for basic income (loss) per share (weighted-average shares)

 

 

713,496,000

 

 

554,676,000

 

 

637,005,485

 

 

554,676,000

 

                       

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator for dilutive income (loss) per share (adjusted weighted-average)

 

 

713,496,000

 

 

554,676,000

 

 

637,005,485

 

 

554,676,000

 

                       

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted loss per share from continuing operations

 

$

0.00

 

$

0.00

 

$

0.00

 

$

0.00

 

                       

NOTE 3 - PROPERTY AND EQUIPMENT

Property and equipment consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimated Life

 

September 30, 2009 

 

December 31, 2008

 

 

 

 

 

 

 

 

 

Office equipment

 

 

5 years

 

$

38,707

 

$

38,325

 

Rental equipment

 

 

13 - 36 months

 

 

455,717

 

 

666,012

 

Vehicles

 

 

5 years

 

 

49,900

 

 

49,231

 

Computer equipment

 

 

5 years

 

 

31,483

 

 

31,192

 

 

 

 

 

 

   

 

   

 

 

 

 

 

 

 

575,807

 

 

784,760

 

Less: accumulated depreciation

 

 

 

 

 

(278,009

)

 

(598,704

)

 

 

 

 

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

297,798

 

$

186,056

 

 

 

 

 

 

   

 

   

 

For the nine months ended September 30, 2009 and 2008, depreciation expense amounted to $113,311 and $376,820, of which $94,867 and $190,015 is included in cost of sales, respectively.

14


HASCO MEDICAL, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2009

NOTE 4 - COMMITMENTS

The Company leases office space in Mobile, Alabama under a five-year operating lease that expires on June 30, 2013. The office lease agreement has certain escalation clauses and renewal options. Additionally, the Company has lease agreements for computer equipment, including an office copier and fax machine. Future minimum rental payments required under these operating leases are as follows:

 

 

 

 

 

Years ending December 31:

 

 

 

 

2009

 

$

16,500

 

2010

 

 

66,000

 

2011

 

 

66,000

 

2012

 

 

66,000

 

2013 and thereafter

 

 

33,000

 

 

 

   

 

 

 

$

247,500

 

 

 

   

 

Rent expense was $61,693 and $26,743 for the nine months ended September 30, 2009 and 2008, respectively.

NOTE 5 - SEGMENT REPORTING

Pursuant to accounting standards related to the Disclosure about Segments of an Enterprise and Related Information which establishes standards for the reporting by business enterprises of information about operating segments, products and services, geographic areas, and major customers. The method for determining what information to report is based on the way that management organizes the operations of the Company for making operational decisions and assessments of financial performance.

The Company’s operating decision-maker is considered to be the chief executive officer (CEO). The CEO reviews financial information for purposes of making operating decisions and assessing financial performance. The financial information reviewed by the CEO is identical to the information presented in the accompanying statements of operations. Therefore, the Company has determined that it operates in a single operating segment. For the periods ended September 30, 2009 and 2008 all material assets and revenues of the Company were in the United States.

NOTE 6 - STOCKHOLDERS’ EQUITY

On May 12, 2009 HASCO Medical, Inc. (“HASCO”) completed the acquisition of Southern Medical & Mobility, Inc. (SMM”) pursuant to the terms of the Agreement and Plan of Merger (the “Merger Agreement”) among HASCO, SMM and Southern Medical Acquisition, Inc., a Delaware corporation and a wholly-owned subsidiary of the Company. Under the terms of the Merger Agreement Southern Medical Acquisition, Inc. was merged into Southern Medical & Mobility, Inc., and Southern Medical & Mobility, Inc. became a wholly-owned subsidiary of HASCO. The shareholder of Southern Medical & Mobility, Inc., HASCO Holdings, LLC, was issued a total of 554,676,000 shares of the Company’s common stock in exchange for their Southern Medical & Mobility, Inc. share.

For accounting purposes, HASCO Medical, Inc. has accounted for the transaction as a reverse acquisition and HASCO will be the surviving entity as a publicly-traded company under the name HASCO Medical Inc. or together with its subsidiaries. The Company did not recognize goodwill or any intangible assets in connection with this transaction.

Effective with the reverse merger, all previously outstanding common stock owned by HASCO Medical, Inc.’s shareholders were exchanged for the Company’s common stock. The value of the Company’s common stock that was issued to HASCO Medical, Inc.’s shareholders was the historical cost of the Company’s net tangible assets, which did not differ materially from its fair value.

15


HASCO MEDICAL, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2009

NOTE 6 - STOCKHOLDERS’ EQUITY (continued)

All references to common stock, share and per share amounts have been retroactively restated to reflect the reverse acquisition as if the transaction had taken place as of the beginning of the earliest period presented. 

Simultaneous with the closing of the merger agreement, the Company issued 71,320,000 shares in connection with the payment of liability to shareholders amounting to $172,476.

NOTE 7 - STOCK OPTION PLAN

Under the Company’s stock option plan, adopted on July 9, 2009, 20,000,000 shares of common stock were reserved for issuance upon exercise of options granted to directors, officers and employees of the Company. The Company is authorized to issue Incentive Stock Options (“ISOs”), which meet the requirements of Section 42 of the Internal Revenue Code of 1986. At its discretion, the Company can also issue Non Statutory Options (“NSOs”). When an ISO is granted, the exercise price shall be equal to the fair market value per share of the common stock on the date of the grant. The exercise price of an NSO shall not be less than fair market value of one share of the common stock on the date the option is granted. The vesting period will be determined on the date of grant. As of September 30, 2009, no options had been granted.

NOTE 8 - RELATED PARTY TRANSACTIONS

Note payable to related party

The Company entered into a note payable with its largest shareholder, HASCO Holdings, LLC in June 2008, at the time of the Company’s acquisition by HASCO. The loan was in the amount of $150,000, was for working capital, and bears interest at 10% per annum. The loan has a term of five years and is included on the accompanying balance as a long term liability. As of September 30, 2009, accrued interest from such notes payable amounted to $11,250.

Management Fee

The Company paid management fee of approximately $142,000 to HASCO Holdings, LLC during the nine months ended September 30, 2009. In July 2009, HASCO Holdings, LLC has decided to no longer charge the Company management fee starting in June 2009.

16


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

          The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and related notes appearing elsewhere in this report. This discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions. The actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including but not limited to the risks discussed in this report.

Overview

          From our formation in May 1999 through April 2006, we were in the business of providing advertising and graphic design services to our clients. On October 1, 2004, we were administratively dissolved by the State of Florida pursuant to Sections 607.1420 and 607.1421 of the Florida Business Corporation Act. On April 29, 2006, we were reinstated as an active Florida corporation pursuant to Section 607.1422 of the Florida Business Corporation Act. As of that date, we discontinued our advertising and graphics design business.

          We were organized under the laws of the State of Florida in May 1999. Our principal executive offices are located at 1416 West I-65 Service Road S., Mobile, AL 36693, and our telephone number is (251) 633-4133.

          On January 12, 2009 HASCO Holdings, LLC acquired 65,324,000 shares of HASCO Medical, Inc. common stock for total consideration of $150,000. HASCO Holdings, LLC thereby purchased beneficial ownership of 75% of the outstanding shares of common stock of the Company. HASCO Holdings, LLC acquired the common shares of the Company from two shareholders, Robert Druzak, and John R. Signorello.

          On May 12, 2009, HASCO Medical, Inc. (i) closed a share exchange transaction, pursuant to which HASCO Medical, Inc. became the 100% parent of SOUTHERN MEDICAL & MOBILITY, and (ii) assumed the operations of SOUTHERN MEDICAL & MOBILITY.

HASCO Medical, Inc., through the reverse merger of its wholly-owned subsidiary with and into Southern Medical & Mobility, is a low cost, quality provider of a broad range of home healthcare services that serve patients in Alabama, Florida, and Mississippi. We have two major service lines: home respiratory equipment and durable/ home medical equipment. Our objective is to be a leading provider of home health care products and services in the markets we operate.

          For accounting purposes, the Merger was treated as a reverse acquisition with Southern Medical & Mobility, Inc. being the accounting acquirer. Therefore, the Company’s historical financial statements reflect those of Southern Medical & Mobility, Inc.

Critical Accounting Policies

          The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

          A summary of significant accounting policies is included in Note 1 to the audited consolidated financial statements included for the year ended December 31, 2008 and notes thereto contained on Form 8-K/A of the Company as filed with the Securities and Exchange Commission. Management believes that the application of these policies on a consistent basis enables us to provide useful and reliable financial information about the Company’s operating results and financial condition.

          Our consolidated financial statements include a summary of the significant accounting policies and methods used in the preparation of our consolidated financial statements. Management believes the following critical accounting policies affect the significant judgments and estimates used in the preparation of the financial statements.

17


          Use of Estimates - Management’s Discussion and Analysis or Plan of Operations is based upon our unaudited consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, management evaluates these estimates, including those related to allowances for doubtful accounts receivable and the carrying value of property and equipment and long-lived assets. Management bases these estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis of making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

          Revenue Recognition - The Company records revenue when persuasive evidence of an arrangement exists, services have been rendered or product delivery has occurred, the sales price to the customer is fixed or determinable, and collectability is reasonably assured. The following policies reflect specific criteria for the various revenues streams of the Company:

 

 

Revenues from sales of products are generally recognized when products are shipped unless the Company has obligations remaining under sales or licensing agreements, in which case revenue is either deferred until all obligations are satisfied or recognized ratably over the term of the contract.

 

 

Revenue from services is recorded as it is earned. Customers are generally billed every two weeks based on the units of production for the project. Each project has an estimated total which is based on the estimated units of production and agreed upon billing rates.

 

 

Amounts billed in advance of services being provided are recorded as deferred revenues and recognized in the consolidated statement of operations as services are provided.

Reimbursement by Third Party Payors

          We derive substantially all of our revenues from reimbursement by third party payors, including Medicare, Medicaid, and private insurers. Our business has been, and may continue to be, significantly impacted by changes mandated by Medicare legislation.

          Under existing Medicare laws and regulations, the sale and rental of our products generally are reimbursed by the Medicare program according to prescribed fee schedule amounts calculated using statutorily-prescribed formulas. The Balanced Budget Act of 1997 (BBA) granted authority to the Secretary of the Department of Health and Human Services (DHHS) to increase or reduce the reimbursement for home medical equipment, including oxygen, by up to 15% each year under an inherent reasonableness procedure. The regulation implementing the inherent reasonableness authority establishes a process for adjusting payments for certain items and services covered by Medicare Part B when the existing payment amount is determined to be grossly excessive or deficient. The regulation lists factors that may be used by the Centers for Medicare and Medicaid Services (CMS), the agency within the DHHS responsible for administering the Medicare program, and its contractors to determine whether an existing reimbursement rate is grossly excessive or deficient and to determine what a realistic and equitable payment amount is. Also, under the regulation, CMS and its contractors will not consider a payment amount to be grossly excessive or deficient and make an adjustment if they determine that an overall payment adjustment of less than 15% is necessary to produce a realistic and equitable payment amount. The implementation of the inherent reasonableness procedure itself does not trigger payment adjustments for any items or services and to date, no payment adjustments have occurred or been proposed under this inherent reasonableness procedure.

          In addition to its inherent reasonableness authority, CMS has the discretion to reduce the reimbursement for home medical equipment (HME) to an amount based on the payment amount for the least costly alternative (LCA) treatment that meets the Medicare beneficiary’s medical needs. LCA determinations may be applied to particular products and services by CMS and its contractors through the informal notice and comment process used in establishing local coverage policies for HME. Using either its inherent reasonableness authority or LCA determinations, CMS and its contractors may reduce reimbursement levels for certain items and services covered by Medicare Part B, including products and services we offer which could have a material adverse effect on our revenues, profit margins, profitability, operating cash flows and results of operations. With respect to its LCA policies, on October 16, 2008, a U.S. District Court in the District of Columbia held that CMS did not have the authority to implement LCA determinations in setting payment amounts for covered inhalation drugs. DHHS filed its notice of appeal on December 10, 2008. We cannot predict whether this court decision will be overturned or whether CMS or its contractors will continue to apply LCA policies in the future to inhalation drugs or other HME products we offer to Medicare beneficiaries.

18


          Recent legislation, each of which has been signed into law, including the Medicare Improvement for Patients and Providers Act of 2008 (MIPPA), Medicare, Medicaid and State Children’s Health Insurance Program Extension Act of 2007 (“SCHIP Extension Act”), the Deficit Reduction Act of 2005 (DRA) and the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA), contain provisions that negatively impact reimbursement for the primary HME products that we provide. MIPPA retroactively delayed the implementation of competitive bidding for eighteen months and decreased the 2009 fee schedule payment amounts by 9.5 percent for product categories included in competitive bidding. The SCHIP Extension Act reduced Medicare reimbursement amounts for covered Medicare Part B drugs, including inhalation drugs that we provide, beginning April 1, 2008. The DRA caps the Medicare rental period for oxygen equipment at 36 months of continuous use, after which time title of the equipment would transfer to the beneficiary. For purposes of this cap, the DRA provides for a new 36-month rental period that began January 1, 2006 for all oxygen equipment. With the passage of MIPPA, transfer of title of oxygen equipment at the end of the 36-month rental cap was repealed, although the rental cap remained in place. The MMA significantly reduced reimbursement for inhalation drug therapies beginning in 2005, reduced payment amounts for five categories of HME, including oxygen, beginning in 2005, froze payment amounts for other covered HME items through 2007, established a competitive acquisition program for HME and implemented quality standards and accreditation requirements for HME suppliers. MIPPA, the SCHIP Extension Act, DRA and MMA provisions (each of which is discussed in more detail below), when fully implemented, will have a material adverse effect on our revenues, profit margins, profitability, operating cash flows and results of operations. We cannot predict the impact that any federal legislation enacted in the future will have on our revenues, profit margins, profitability, operating cash flows and results of operations.

          Changes in the law or new interpretations of existing laws could have a dramatic effect on permissible activities, the relative costs associated with doing business and the amount of reimbursement by government and other third-party payors. Reimbursement from Medicare and other government programs is subject to federal and state statutory and regulatory requirements, administrative rulings, interpretations of policy, implementation of reimbursement procedures, retroactive payment adjustments and governmental funding restrictions. Our levels of revenue and profitability, like those of other health care companies, are affected by the continuing efforts of government payors to contain or reduce the costs of health care, including competitive bidding initiatives, measures that impose quality standards as a prerequisite to payment, policies reducing certain HME payment rates and restricting coverage and payment for inhalation drugs, and refinements to payments for oxygen and oxygen equipment.

          (1) Competitive Bidding Program for HME. On April 2, 2007, CMS issued its final rule implementing a competitive bidding program for certain HME products under Medicare Part B. This nationwide competitive bidding program is designed to replace the existing fee schedule payment methodology. Under the competitive bidding program, suppliers compete for the right to provide items to beneficiaries in a defined region. CMS selects contract suppliers that agree to receive as payment the “single payment amount” calculated by CMS after bids are submitted. Round one of the competitive bidding program began on July 1, 2008 in ten high-population competitive bidding areas (CBAs). The competitive bidding program was scheduled to expand to 70 additional CBAs for a total of 80 CBAs in 2009 and additional areas thereafter.

          However, on July 15, 2008, the United States Congress, following an override of a Presidential veto, enacted MIPPA. MIPPA retroactively delays the implementation of competitive bidding for eighteen months, and terminates all existing contracts previously awarded. MIPPA includes a 9.5% nationwide reduction in reimbursement effective January 1, 2009 for the product categories included in competitive bidding, as a budget neutrality offset for the eighteen month delay. Effective April 18, 2009, CMS’s Interim Final Rule incorporates the MIPPA requirements into regulations. CMS will be issuing further guidance on the timeline for and bidding requirements related to the Round 1 re-bid.

          (2) Certain Clinical Conditions, Accreditation Requirements and Quality Standards. The MMA required establishment and implementation of new clinical conditions of coverage for HME products and quality standards for HME suppliers. Some clinical conditions have been implemented, such as the requirement for a face-to-face visit by treating physicians for beneficiaries seeking power mobility devices. CMS published its quality standards and criteria for accrediting organizations for HME suppliers in 2006 and revised some of these standards in October 2008. As an entity that bills Medicare and receives payment from the program, we are subject to these standards. We have revised our policies and procedures to ensure compliance in all material respects with the quality standards. These standards, which are applied by independent accreditation organizations, include business-related standards, such as financial and human resources management requirements, which would be applicable to all HME suppliers, and product-specific quality standards, which focus on product specialization and service standards. The product specific standards address several of our products, including oxygen and oxygen equipment, CPAP and power and manual wheelchairs and other mobility equipment.

19


          Currently, we are accredited by the Accreditation Commission for Health Care, Inc. (ACHC) for Medical Supply Provider Services. The ACHC is a CMS recognized accrediting organization. Round one competitive bid suppliers will now be required to be accredited by September 30, 2009.

          On January 25, 2008, CMS published a proposed rule to clarify, expand and add to the existing enrollment requirements that Durable Medical Equipment and Prosthetics, Orthotics, and Supplies (DMEPOS) suppliers must satisfy to establish and maintain billing privileges in the Medicare program. Included in the proposed rule are revised or clarified requirements regarding contracting with an individual or entity to provide licensed services, record retention, clarification of the term “appropriate site” as set forth in the regulation (which may be expanded to include a minimum square footage requirement), use of cell phones and beepers/pagers as a method of receiving calls from the public or beneficiaries, comprehensive liability insurance, patient solicitation, maintenance of ordering and referring documentation, sharing of a practice location with another Medicare provider, and minimum operating hours. At this time, we cannot predict the impact that this proposed rule, if implemented, would have on our business.

          On January 2, 2009, CMS published its final rule on surety bond requirements for DMEPOS suppliers, effective March 3, 2009. The amount of the surety bond has been set at $50,000 and must be obtained for each National Provider Identifier (NPI) number subject to Medicare billing privileges. We are required to have our own NPI number. There may be an upward adjustment for suppliers that have had adverse legal actions imposed on them in the past. DMEPOS suppliers already enrolled in Medicare must obtain a surety bond by October 2, 2009, and newly enrolled suppliers or those changing ownership will be subject to the provisions of the new rule on May 4, 2009. We have obtained a surety bond by October 2, 2009.

          (3) Reduction in Payments for HME and Inhalation Drugs. The MMA changes also included a reduction in reimbursement rates beginning in January 2005 for oxygen equipment and certain other items of home medical equipment (including wheelchairs, nebulizers, hospital beds and air mattresses) based on the percentage difference between the amount of payment otherwise determined for 2002 and the 2002 median reimbursement amount under the Federal Employee Health Benefits Program (FEHBP) as determined by the Office of the Inspector General of the DHHS. The FEHBP adjusted payments remained “frozen” through 2008. With limited exceptions, items that were not included in competitive bidding received a 5% update for 2009. As discussed above, for 2009, MIPPA included a 9.5% nationwide reduction in reimbursement for the product categories included in competitive bidding, as a budget neutrality offset for the eighteen month delay.

          (4) Reductions in Payments for Oxygen and Oxygen Equipment. The DRA which was signed into law on February 8, 2006, has made certain changes to the way Medicare Part B pays for certain of our HME products, including oxygen and oxygen equipment. For oxygen equipment, prior to the DRA, Medicare made monthly rental payments indefinitely, provided medical need continued. The DRA capped the Medicare rental period for oxygen equipment at 36 months of continuous use, after which time ownership of the equipment would transfer to the beneficiary. For purposes of this cap, the DRA provides for a new 36-month rental period that began January 1, 2006 for all oxygen equipment. In addition to the changes in the duration of the rental period for capped rental items and oxygen equipment, the DRA permits payments for servicing and maintenance of the products after ownership transfers to the beneficiary.

          On November 1, 2006, CMS released a final rule to implement the DRA changes, which went into effect January 1, 2007. Under the rule, CMS clarified the DRA’s 36-month rental cap on oxygen equipment. CMS also revised categories and payment amounts for the oxygen equipment and contents during the rental period and for oxygen contents after equipment ownership by the beneficiary as described below. With the passage of MIPPA on July 15, 2008, transfer of title to oxygen equipment at the end of the 36-month rental cap was repealed, although the rental cap remained in place. Effective January 1, 2009, after the 36th continuous month during which payment is made for the oxygen equipment, the equipment is to continue to be furnished during any period of medical need for the remainder of the reasonable useful lifetime of the equipment. After the 36-month rental cap, payment is made only for oxygen contents and for certain reasonable and necessary maintenance and servicing (for parts and labor not covered by the supplier’s or manufacturer’s warranty) (discussed in more detail below).

20


 

 

Payment for Rental Period. For stationary oxygen equipment, the 2009 monthly payment amount is $175.79, a decrease of $23.49 from the 2008 amount. The 2009 monthly portable oxygen add-on amount is $28.77, a decrease of $3.02 from the 2008 amount. These 2009 payment amounts include the 9.5% reduction associated with MIPPA. The 2009 monthly payment amount for oxygen-generating portable oxygen equipment remains unchanged from 2008 at $51.63 and is unaffected by MIPPA.

 

 

Payment for Contents after 36-Month Rental Cap. Payment is based on the type of equipment owned and whether it is oxygen-generating. Previously, CMS paid a combined average monthly payment amount of $154.90 for furnishing oxygen contents for stationary and portable systems after the 36 month rental cap. This amount included payment for both stationary contents and portable contents. CMS will split this payment into a separate monthly payment amount for stationary oxygen content of $77.45 and a separate monthly payment amount for portable oxygen content of $77.45. This payment amount is for oxygen contents for equipment that is not oxygen-generating. If the beneficiary uses both stationary and portable equipment that is not oxygen-generating, the monthly payment amount for oxygen contents is $154.90. For stationary or portable oxygen equipment that is oxygen-generating, there will be no monthly payment for contents.

          In its November 1, 2006 final rule, CMS also acknowledged certain other payments after the 36-month rental cap, including payment for supplies such as tubing and masks. In addition, CMS detailed several requirements regarding a supplier’s responsibility to maintain and service capped rental items and provided for a general maintenance and servicing payment for certain oxygen-generating equipment beginning six months after the 36-month rental cap. On October 30, 2008, CMS issued new oxygen payment rules and supplier responsibilities to address changes to the transfer of title under MIPPA. In the final rule, CMS determined that for liquid or gaseous oxygen (stationary or portable), after the 36-month rental cap, there will be no additional Medicare payment for the maintenance and servicing of such equipment for the remainder of the useful lifetime of the equipment. CMS also determined that for 2009 only, Medicare will pay for in-home, maintenance and servicing visits for oxygen concentrators and transfilling equipment every six months, beginning six months after the end of the 36-month rental cap. This payment will be made if the supplier visits the beneficiary’s home, performs any necessary maintenance and servicing, and inspects the equipment to ensure that it will function safely for the next six months. CMS also solicited public comments on whether to continue such maintenance and servicing payments after 2009. Finally, CMS clarified that though it retains title to the equipment, a supplier is required to continue to furnish needed oxygen equipment and contents for liquid or gaseous equipment after the 36-month rental cap until the end of the equipment’s reasonable useful lifetime. CMS determined the reasonable useful lifetime for oxygen equipment to be five years provided there are no breaks in service due to medical necessity, computed based on the date the equipment is delivered to the beneficiary. On January 27, 2009, CMS posted further instructions on the implementation of the 36-month rental cap, including guidance on payment for oxygen contents after month 36 and the replacement of oxygen equipment that has been in continuous use by the patient for the equipment’s reasonable useful lifetime (as defined above). In accordance with these instructions, and consistent with the final rule published on October 30, 2008, suppliers may bill for oxygen contents on a monthly basis after the 36-month rental cap, and the supplier can deliver up to a maximum of three months of oxygen contents at one time. Additionally, in accordance with these instructions, and consistent with the final rule published on October 30, 2008, we now provide replacement equipment to our patients that exceed five years of continuous use.

          The financial impact of the 36-month rental cap will depend upon a number of variables, including, (i) the number of Medicare oxygen customers reaching 36 months of continuous service, (ii) the number of patients receiving oxygen contents beyond the 36-month rental period and the coverage and billing requirements established by CMS for suppliers to receive payment for such oxygen contents, (iii) the mortality rates of patients on service beyond 36 months, (iv) the incidence of patients with equipment deemed to be beyond its reasonable useful life that may be eligible for new equipment and therefore a new rental episode and the coverage and billing requirements established by CMS for suppliers to receive payment for a new rental period, (v) any breaks in continuous use due to medical necessity, and (vi) payment amounts established by CMS to reimburse suppliers for maintenance of oxygen equipment. We cannot predict the impact that any future rulemaking by CMS will have on our business. If payment amounts for oxygen equipment and contents are further reduced in the future, this could have an adverse effect on our revenues, profit margins, profitability, operating cash flows and results of operations.

21


THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 COMPARED TO THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008

The following table provides an overview of certain key factors of our results of operations for the three and nine months ended September 30, 2009 as compared to the three and nine months ended September 30, 2008:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30,

 

Nine months ended September 30,

 

 

 

 

 

 

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

 

 

 

 

 

 

 

 

Net Revenues

 

$

749,698

 

$

1,150,699

 

$

2,654,608

 

$

3,528,019

 

Cost of sales

 

 

175,537

 

 

268,537

 

 

684,656

 

 

902,233

 

Operating Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketing and selling

 

 

5,757

 

 

1,241

 

 

15,152

 

 

2,055

 

Depreciation and amortization

 

 

6,172

 

 

136,302

 

 

18,443

 

 

186,805

 

General and administrative

 

 

620,574

 

 

910,540

 

 

1,928,987

 

 

1,924,045

 

Total operating expenses

 

 

632,503

 

 

1,048,083

 

 

1,962,582

 

 

2,112,905

 

Income (loss) from operations

 

 

(58,342

)

 

(165,921

)

 

7,370

 

 

512,881

 

Total other income (expense)

 

 

(4,779

)

 

(2,027

)

 

(4,027

)

 

(53,450

)

Provision for income taxes

 

 

(81,229

)

 

 

 

(104,729

)

 

39,800

 

Net income (loss)

 

$

18,108

 

$

(167,948

)

$

108,072

 

$

419,631

 

Other Key Indicators:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended
September 30,

 

Nine months ended
September 30,

 

 

 

 

 

 

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

 

 

 

 

 

 

 

 

Cost of sales as a percentage of revenues

 

23.4

%

 

23.3

%

 

25.8

%

 

25.6

%

 

Gross profit margin

 

76.6

%

 

76.7

%

 

74.2

%

 

74.4

%

 

General and administrative expenses as a percentage of revenues

 

82.8

%

 

79.1

%

 

72.7

%

 

54.5

%

 

Total operating expenses as a percentage of revenues

 

84.4

%

 

91.1

%

 

73.9

%

 

59.9

%

 

Nine Month Period ended September 30, 2009

Net Revenues

For the nine months ended September 30, 2009, we reported revenues of $2,654,608 as compared to revenues of $3,528,019 for the nine months ended September 30, 2008, a decrease of $873,411 or approximately 24.8%. The decrease is primarily due to the impact of the 9.5% MIPAA reduction and lower reimbursement rates from third party payors.

Cost of Sales

          Our cost of sales consists of the depreciation of rental assets and products purchased for resale. For the nine months ended September 30, 2009, cost of sales was $684,656, or approximately 25.8% of revenues, compared to $902,233, or approximately 25.6% of revenues, for the nine months ended September 30, 2008. There was no material change in the costs of sales as a percentage of revenue and the corresponding gross profit margin for the six months ended June 30, 2009 as compared to the six months ended June 30, 2008.

Total Operating Expenses

          Our total operating expenses decreased approximately 7.1% to $1,962,987 for the nine months ended September 30, 2009 as compared to $2,112,905 for the nine months ended September 30, 2008. These changes include:

          • Marketing and Selling. For the nine months ended September 30, 2009, marketing and selling costs were $15,152 as compared to $2,055 for the nine months ended September 30, 2008, an increase of $13,097. The increase was due to marketing, advertising and print advertising programs initiated during the nine months ended September 30, 2009.

22


          • Depreciation expense. For the nine months ended September 30, 2009, depreciation expense amounted to $18,443 as compared to $186,805 for the nine months ended September 30, 2008, a decrease of $168,362 or 90.1%. The decrease in depreciation was primarily attributable to older assets which were fully depreciated in fiscal 2008.

          • General and administrative expense. For the nine months ended September 30, 2009, general and administrative expenses were $1,928,987 as compared to $1,924,045 for the nine months ended September 30, 2008, an increase of $4,942 or approximately 0.3%. For the nine months ended September 30, 2009 and 2008 general and administrative expenses consisted of the following:

 

 

 

 

 

 

 

 

 

 

Fiscal Q3
2009

 

Fiscal Q3
2008

 

 

 

 

 

 

 

Rent

 

$

61,693

 

$

26,743

 

Employee compensation

 

 

1,123,634

 

 

1,051,218

 

Professional fees

 

 

105,130

 

 

33,552

 

Internet/Phone

 

 

21,745

 

 

32,875

 

Travel/Entertainment

 

 

61,501

 

 

18,913

 

Bad debt expense

 

 

251,513

 

 

527,580

 

Insurance

 

 

39,242

 

 

57,283

 

Other general and administrative

 

 

122,874

 

 

175,881

 

Management fees

 

 

141,655

 

 

 

 

 

   

 

   

 

 

 

$

1,928,987

 

$

1,924,045

 

 

 

   

 

   

 


 

 

For the nine months ended September 30, 2009, rent expense increased to $34,950 as compared to $26,743. Rent expense is higher due to the Company’s relocation to its retail location in Mobile, Alabama. 

 

 

For the nine months ended September 30, 2009, salaries and related expenses increased to $1,123,634, or 6.9% as compared to $1,051,218. Employee compensation is higher due to increased employees as part of the Company’s long term growth strategy.

 

 

For the nine months ended September 30, 2009, Professional fees expense increased to $105,130 as compared to $33,552. Professional fees expense increased as a result of non-recurring legal and audit fees incurred in connection with the reverse merger which was executed in May 2009. 

 

 

For the nine months ended September 30, 2009, internet and telephone expense decreased to $21,745 as compared to $32,875. Internet and telephone expense decreased as a result of the change in service provider resulting in lower costs and the Company’s move to its retail location in August 2008. 

 

 

For the nine months ended September 30, 2009, travel and entertainment expense increased to $61,501 as compared to $18,913. Travel and entertainment expense increased as a result of increased business development activities and travel by senior management. 

 

 

For the nine months ended September 30, 2009 Bad debt expense amounted to $251,513 as compared to $527,580 for the nine months ended September 30, 2008, a decrease of 276,067, or 52%. The decrease was due to the implementation of improved collections procedures, and the overall decrease in revenues for the nine months ended September 30, 2009 as compared to the prior year. 

 

 

For the nine months ended September 30, 2009 Insurance expense decreased to $39,242 as compared to $57,283 for the nine months ended September 30, 2008. Insurance expense decrease due to change in insurance providers during the period.

 

 

For the nine months ended September 30, 2009 Other general and administrative expense decreased to $122,874 as compared to $175,881 for the nine months ended September 30, 2008. The decrease is primarily attributable to decrease in repairs and maintenance of $36,900 by the Company. 

 

 

For the nine months ended September 30, 2009 Management fee expense increased to $141,655 as compared to $0 for the nine months ended September 30, 2008. The increase is primarily attributable to management fees paid to HASCO Holdings, LLC beginning in January 2009. The monthly fee is $30,000 as compared to none in the same period in 2008. In July 2009, HASCO Holdings, LLC has decided to no longer charge us management fee starting in June 2009.

23


INCOME FROM OPERATIONS

          We reported income from operations of $7,370 for the nine months ended September 30, 2009 as compared to income from operations of $512,881 for the nine months ended September 30, 2008, a decrease of $505,511 or approximately 98.6%.

OTHER INCOME (EXPENSES)

          Losses on disposal of assets. Losses on disposal of assets were $0 and $53,825 for the nine months ended September 30, 2009 and 2008, respectively. In 2008, the losses are attributable to the disposal of vehicles and office equipment which were no longer used by the Company upon moving to their new location and change of ownership.

          Interest Income. Interest income for the nine months ended September 30, 2009 amounted to $0. This compares to $5,182 in interest income in the comparable period in fiscal 2008.

          Interest Expense. For the nine months ended September 30, 2009, interest expense amounted to $12,777 as compared to $4,807 for the nine months ended September 30, 2008. The increase in interest expense is primarily attributable to higher notes payable and interest bearing liabilities in fiscal 2009.

NET INCOME

          Our net income was $108,072 for the nine months ended September 30, 2009 as compared to net income of $419,631 for the nine months ended September 30, 2008.

Three Month Period ended September 30, 2009

Net Revenues

          For the three months ended September 30, 2009, we reported revenues of $749,698 as compared to revenues of $1,150,699 for the three months ended September 30, 2008, a decrease of $401,001 or approximately 34.8%. The decrease is primarily due to the impact of the 9.5% MIPAA reduction and lower reimbursement rates from third party payors.

Cost of Sales

          Our cost of sales consists of the depreciation of rental assets and products purchased for resale. For the three months ended September 30, 2009, cost of sales was $175,537, or approximately 23.4% of revenues, compared to $268,537, or approximately 23.3% of revenues, for the three months ended September 30, 2008. There was no material change in the costs of sales as a percentage of revenue and the corresponding gross profit margin for the six months ended June 30, 2009 as compared to the six months ended June 30, 2008.

Total Operating Expenses

          Our total operating expenses decreased approximately 39.7% to $632,503 for the three months ended September 30, 2009 as compared to $1,048,083 for the three months ended September 30, 2008. These changes include:

          • Marketing and Selling. For the three months ended September 30, 2009, marketing and selling costs were $5,757 as compared to $1,241 for the three months ended September 30, 2008, an increase of $4,516.

          • Depreciation and amortization expense. For the three months ended September 30, 2009, depreciation expense amounted to $6,172 as compared to $136,302 for the three months ended September 30, 2008, a decrease of $130,130 or 95.5%. The decrease in depreciation was primarily attributable to older assets which were fully depreciated in fiscal 2008.

24


          • General and administrative expense. For the three months ended September 30, 2009, general and administrative expenses were $620,574 as compared to $910,540 for the three months ended September 30, 2008, a decrease of $289,966 or approximately 31.8%. For the three months ended September 30, 2009 and 2008 general and administrative expenses consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

Fiscal Q3

 

 

Fiscal Q3

 

 

 

 

2009

 

 

2008

 

 

 

 

 

 

 

Rent

 

$

22,150

 

$

26,743

 

Employee compensation

 

 

447,365

 

 

453,444

 

Professional fees

 

 

55,504

 

 

9,884

 

Internet/Phone

 

 

9,895

 

 

17,792

 

Travel/Entertainment

 

 

14,501

 

 

13,109

 

Bad debt expense

 

 

29,445

 

 

184,231

 

Insurance

 

 

18,436

 

 

35,008

 

Other general and administrative

 

 

23,278

 

 

170,329

 

 

 

   

 

   

 

 

 

$

620,574

 

$

910,540

 

 

 

   

 

   

 


 

 

For the three months ended September 30, 2009, Rent expense slightly decreased to $22,150 as compared to $26,743 

 

 

For the three months ended September 30, 2009, salaries and related expenses decreased to $447,365 as compared to $453,444. The slight decrease was due to non-recurring compensation expense during the 2008 period. 

 

 

For the three months ended September 30, 2009, internet/telephone expense decreased to $9,895 as compared to $17,792, a decrease of $7,897 or 44.4%. Internet and telephone expense decreased as a result of the change in service provider resulting in lower costs and the Company’s move to its retail location in August 2008. 

 

 

For the three months ended September 30, 2009, professional fees increased to $55,504 as compared to $9,884, an increase of $45,620 or 461.6%. Professional fees are higher due to the reverse merger transaction which occurred in May 2009. 

 

 

For the three months ended September 30, 2009, travel and entertainment expense increased to $14,501 as compared to $13,109. Travel and entertainment expense increased due to increased business development activity and travel by senior management. 

 

 

For the three months ended September 30, 2009 bad debt expense amounted to $29,445 as compared to $184,231 for the three months ended September 30, 2008, a decrease of $154,786 or 84%. The decrease was due to improved collection efforts and the decline in revenues. 

 

 

For the three months ended September 30, 2009 Insurance expense decreased to $18,436 as compared to $35,008 for the three months ended September 30, 2008, a decrease of $16,572, or 47.3%. Insurance expense decreased due to change in insurance providers during the period. 

 

 

For the three months ended September 30, 2009 Other general and administrative expense decreased to $23,278 as compared to $170,329 for the three months ended September 30, 2008. The decrease is primarily attributable to decrease in office expense, office supplies and repairs and maintenance by the Company.

LOSS FROM OPERATIONS

          We reported loss from operations of $58,342 for the three months ended September 30, 2009 as compared to loss from operations of $165,921 for the three months ended September 30, 2008, a decrease of $107,579.

OTHER INCOME (EXPENSES)

          Interest Income. Interest income for the three months ended September 30, 2009 amounted to $0. This compares to $993 in interest income in the comparable period in fiscal 2008.

          Interest Expense. For the three months ended September 30, 2009, interest expense amounted to $4,779 as compared to $3,020 for the three months ended September 30, 2008, an increase of $1,759.

25


NET INCOME (LOSS)

          Our net income was $18,108 for the three months ended September 30, 2009 compared to net loss of $167,948 for the three months ended September 30, 2008.

LIQUIDITY AND CAPITAL RESOURCES

          Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations and otherwise operate on an ongoing basis. The following table provides an overview of certain selected balance sheet comparisons between September 30, 2009 and December 31, 2008:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

$

 

%

 

 

 

2009

 

2008

 

Change

 

Change

 

 

 

 

 

 

 

 

 

 

 

Working capital

 

 

325,381

 

 

479,435

 

 

(154,054

)

 

(32.1

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

 

8,512

 

 

141,163

 

 

(132,651

)

 

(94.0

)%

Accounts receivable, net

 

 

455,720

 

 

356,801

 

 

98,919

 

 

27.7

%

Inventory

 

 

112,626

 

 

223,022

 

 

(110,396

)

 

(49.5

)%

Total current assets

 

 

604,972

 

 

729,984

 

 

(125,012

)

 

(17.1

)%

Property and equipment, net

 

 

297,798

 

 

186,056

 

 

111,742

 

 

60.1

%

Total assets

 

 

903,190

 

 

916,460

 

 

(13,270

)

 

(1.4

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

 

250,741

 

 

142,339

 

 

108,402

 

 

76.2

%

Notes payable-current

 

 

17,600

 

 

10,205

 

 

7,395

 

 

72.5

%

Total current liabilities

 

 

279,591

 

 

250,549

 

 

29,042

 

 

11.6

%

Notes payable-long term

 

 

171,860

 

 

171,015

 

 

845

 

 

0.5

%

Total liabilities

 

 

451,451

 

 

421,564

 

 

29,887

 

 

7.1

%

(Accumulated deficit)retained earnings

 

 

(261,757

)

 

168,081

 

 

(429,838

)

 

(255.7

)%

Stockholders’ equity

 

 

451,739

 

 

494,896

 

 

(43,157

)

 

(8.7

)%

          Net cash provided by operating activities was $84,162 for the nine months ended September 30, 2009 as compared to net cash provided by operating activities of $824,465 for the nine months ended September 30, 2008, a decrease of $740,303. For the nine months ended September 30, 2009, we had net income of $108,072 and non-cash items such as depreciation expense of $113,311, bad debt of $251,513 offset by decreases from changes in assets and liabilities of $388,734. During the nine months ended September 30, 2009 we experienced an increase in accounts receivable of $350,432, an increase in prepaid expenses of $19,116, and an increase in accounts payable and accrued expenses of $129,582, which was offset by a decrease in inventory of $110,396. For the nine months ended September 30, 2008, we used cash to fund our net income of $419,631 incremented by non-cash items such as depreciation expense of $376,820, bad debts of $527,580, offset by changes in assets and liabilities of $499,566.

          Net cash used in investing activities for the nine months ended September 30, 2009 was $203,294 as compared to net cash used in investing activities of $320,692 for the nine months ended September 30, 2008. During the nine months ended September 30, 2009 and 2008, we used cash of $203,294 and $320,692 for property and equipment purchases, respectively.

          Net cash used in financing activities for the nine months ended September 30, 2009 was $13,519 as compared to net cash used in financing activities of $644,404 for the nine months ended September 30, 2008. For the nine months ended September 30, 2009, net cash used in financing activities related to payments on notes payable of $13,519. For the nine months ended September 30, 2008, net cash used in financing activities included dividends paid of $852,175, payments on notes payable of $18,125, offset by proceeds from borrowings of $225,896.

          At September 30, 2009 we had a working capital surplus of $325,381 and accumulated deficit of $(261,757).

          In connection with our annual report for our fiscal year ending December 31, 2009 our management will be required to provide an assessment of the effectiveness of our internal control over financial reporting, including a statement as to whether or not internal control over financial reporting is effective. In order to comply with this requirement we will need to engage a consulting firm to undertake an analysis of our internal controls. We have yet to engage such a consulting firm and are unable at this time to predict the costs associated with our compliance with Section 404 of Sarbanes-Oxley Act of 2002.

26


Contractual Obligations and Off-Balance Sheet Arrangements

Contractual Obligations

The following tables summarize our contractual obligations as of September 30, 2009.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payments Due by Period

 

 

 

 

 

 

 

Total

 

Less than 1 year

 

1-3 Years

 

3-5 Years

 

5 Years +

 

 

 

 

 

 

 

 

 

 

 

 

 

Contractual Obligations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Lease

 

$

247,500

 

$

16,500

 

$

198,000

 

$

33,000

 

$

 

Notes payable

 

 

39,460

 

 

4,548

 

 

34,912

 

 

 

 

 

Notes payable – related party

 

 

150,000

 

 

 

 

 

 

150,000

 

 

 

 

 

   

 

   

 

   

 

   

 

   

 

Total Contractual Obligations:

 

$

436,960

 

$

21,048

 

$

232,912

 

$

183,000

 

$

 

 

 

   

 

   

 

   

 

   

 

   

 

Off-balance Sheet Arrangements

We have not entered into any other financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as shareholder’s equity or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.

Recently Issued Accounting Pronouncements

In June 2009, the FASB issued Accounting Standards Update No. 2009-01, “Generally Accepted Accounting Principles” (ASC Topic 105) which establishes the FASB Accounting Standards Codification (“the Codification” or “ASC”) as the official single source of authoritative U.S. generally accepted accounting principles (“GAAP”). All existing accounting standards are superseded. All other accounting guidance not included in the Codification will be considered non-authoritative. The Codification also includes all relevant Securities and Exchange Commission (“SEC”) guidance organized using the same topical structure in separate sections within the Codification.

Following the Codification, the Board will not issue new standards in the form of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting Standards Updates (“ASU”) which will serve to update the Codification, provide background information about the guidance and provide the basis for conclusions on the changes to the Codification.

The Codification is not intended to change GAAP, but it will change the way GAAP is organized and presented. The Codification is effective for our third-quarter 2009 financial statements and the principal impact on our financial statements is limited to disclosures as all future references to authoritative accounting literature will be referenced in accordance with the Codification. In order to ease the transition to the Codification, we are providing the Codification cross-reference alongside the references to the standards issued and adopted prior to the adoption of the Codification.

In April 2009, the FASB issued FASB Staff Positions FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (ASC Topic 320-10-65). This update provides guidance for allocation of charges for other-than-temporary impairments between earnings and other comprehensive income. It also revises subsequent accounting for other-than-temporary impairments and expands required disclosure. The update was effective for interim and annual periods ending after June 15, 2009. The adoption of FAS 115-2 and FAS 124-2 did not have a material impact on the results of operations and financial condition.

In April 2009, the FASB issued FSP SFAS 107-1 and APB 28-1, “Interim Disclosures About Fair Value of Financial Instruments” (ASC Topic 320-10-65). This update requires fair value disclosures for financial instruments that are not currently reflected on the balance sheet at fair value on a quarterly basis and is effective for interim periods ending after June 15, 2009. The Company’s financial instruments include cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and notes payable. At September 30, 2009 and December 31, 2008 the carrying value of the Companies financial instruments approximated fair value, due to their short term nature.

27


In May 2009, the FASB issued SFAS No. 165, “Subsequent Events” (ASC Topic 855). This guidance is intended to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or available to be issued. It is effective for interim and annual reporting periods ending after June 15, 2009. The adoption of this guidance did not have a material impact on our consolidated financial statements. The Company evaluated all events and transactions that occurred after September 30, 2009 up through November 10, 2009. During this period no material subsequent events came to our attention.

In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)” (ASC Topic 810-10). This updated guidance requires a qualitative approach to identifying a controlling financial interest in a variable interest entity (VIE), and requires ongoing assessment of whether an entity is a VIE and whether an interest in a VIE makes the holder the primary beneficiary of the VIE. It is effective for annual reporting periods beginning after November 15, 2009. We are currently evaluating the impact of the pending adoption of SFAS No. 167 on our consolidated financial statements.

In October 2009, the FASB issued ASU No. 2009-13, “Multiple-Deliverable Revenue Arrangements.” This ASU establishes the accounting and reporting guidance for arrangements including multiple revenue-generating activities. This ASU provides amendments to the criteria for separating deliverables, measuring and allocating arrangement consideration to one or more units of accounting. The amendments in this ASU also establish a selling price hierarchy for determining the selling price of a deliverable. Significantly enhanced disclosures are also required to provide information about a vendor’s multiple-deliverable revenue arrangements, including information about the nature and terms, significant deliverables, and its performance within arrangements. The amendments also require providing information about the significant judgments made and changes to those judgments and about how the application of the relative selling-price method affects the timing or amount of revenue recognition. The amendments in this ASU are effective prospectively for revenue arrangements entered into or materially modified in the fiscal years beginning on or after June 15, 2010. Early application is permitted. The Company is currently evaluating this new ASU.

In October 2009, the FASB issued ASU No. 2009-14, “Certain Revenue Arrangements That Include Software Elements.” This ASU changes the accounting model for revenue arrangements that include both tangible products and software elements that are “essential to the functionality,” and scopes these products out of current software revenue guidance. The new guidance will include factors to help companies determine what software elements are considered “essential to the functionality.” The amendments will now subject software-enabled products to other revenue guidance and disclosure requirements, such as guidance surrounding revenue arrangements with multiple-deliverables. The amendments in this ASU are effective prospectively for revenue arrangements entered into or materially modified in the fiscal years beginning on or after June 15, 2010. Early application is permitted. The Company is currently evaluating this new ASU.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

          Not required for smaller reporting companies.

Item 4. Controls and Procedures

          Evaluation of disclosure controls and procedures. We maintain “disclosure controls and procedures” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934. In designing and evaluating our disclosure controls and procedures, our management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Under the supervision and with the participation of our CEO and CFO, or the persons performing similar functions, our management has evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our CEO and CFO, has concluded that our disclosure controls and procedures were effective in providing reasonable assurance that information required to be disclosed in our reports under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods prescribed by SEC rules and regulations, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer to allow timely decisions regarding required disclosure.

28


          Changes in internal control over financial reporting. There have been no changes in our internal control over financial reporting during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

          None.

Item 1A. Risk Factors

          Not required for smaller reporting companies.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

          None

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

 

 

 

Exhibit

 

 

Number

 

Description

 

 

 

 

 

 

31.1

 

Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*

 

 

 

31.2

 

Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*

 

 

 

32.1

 

Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

 

 

 

32.2

 

Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

 * Filed herein

29


SIGNATURES

          In accordance with the requirements of the Exchange Act, the registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

 

HASCO MEDICAL, INC.

 

 

 

 

By:

/s/ Hal Compton, Jr.

 

 

 

November 16, 2009

 

Hal Compton, Jr.,

 

 

Chief Executive Officer, principal executive officer

 

 

 

 

By:

/s/ Mark B. Lucky

 

 

 

November 16, 2009

 

Mark B. Lucky

 

 

Chief Financial Officer, principal financial and
accounting officer

30