Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended June 30, 2012

OR

 

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

For the transition period from                      to                     

Commission File Number: 000-30326

 

 

FIRST PHYSICIANS CAPITAL GROUP, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

DELAWARE		77-0557617
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

 

433 North Camden Drive #810 Beverly Hills, California		90210
(Address of principal executive offices)		(Zip Code)

(310) 860-2501

(Registrant’s Telephone Number, Including Area Code)

N/A

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ¨  Yes    x  No

Indicate by check mark whether the registrant 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).    x  Yes    ¨  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer		¨		Accelerated filer		¨
Non-accelerated filer		¨  (Do not check if a smaller reporting company)		Smaller reporting company		x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    x  No

 

Number of shares of common stock outstanding as of March 28, 2014			23,909,507

 

 

 

---

Table of Contents

EXPLANATORY NOTE

The last periodic report of First Physicians Capital Group, Inc. (the “Registrant”) filed with the Securities and Exchange Commission was the Form 10-Q for the Fiscal Quarter Ended December 31, 2010, filed February 22, 2011. In order to become current with all required quarterly and annual reports under the Section 13(a) of the Securities Exchange Act of 1934, the Registrant is filing this Form 10-Q for the Fiscal Quarter Ended June 30, 2012 concurrently with Form 10-Q’s for the Fiscal Quarters Ended March 31, 2011, June 30, 2011, December 31, 2011, March 31, 2012, December 31, 2012, March 31, 2013, June 30, 2013 and December 31, 2013, and Form 10-K’s for the Fiscal Years Ended September 30, 2011, September 30, 2012 and September 30, 2013.

TABLE OF CONTENTS

 

		Page
PART I			1
FINANCIAL INFORMATION			1
Item 1. FINANCIAL STATEMENTS			1
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			11
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			14
Item 4. CONTROLS AND PROCEDURES			14
PART II OTHER INFORMATION			15
Item 1. LEGAL PROCEEDINGS			15
Item 1A. RISK FACTORS			15
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS			15
Item 3. DEFAULTS UPON SENIOR SECURITIES			15
Item 4. MINE SAFETY DISCLOSURES			15
Item 5. OTHER INFORMATION			15
Item 6. EXHIBITS			15
SIGNATURES			16
EXHIBIT INDEX			17

 

i

---

Table of Contents

PART I

FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

FIRST PHYSICIANS CAPITAL GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except shares and per share data)

 

		June 30, 2012				September 30, 2011
		(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	3,587			$	1,001
Accounts receivable, net of allowance for uncollectible accounts			6,985				4,055
Prepaid expenses			104				60
Other current assets			8				37
Assets of discontinued operations			3				12
Total current assets			10,687				5,165
Property and equipment, net			17				33
Notes receivable			22,343				24,493
Other assets			273				293
Non current assets of discontinued operations			41				41
Total assets		$	33,361			$	30,025
LIABILITIES, PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable		$	1,146			$	1,031
Accrued expenses			1,455				1,720
Current maturities of long term debt			6,163				4,102
Liabilities of discontinued operations			576				576
Total current liabilities			9,340				7,429
Long term debt, net of current portion			6,256				7,993
Deferred gain			15,749				18,050
Total liabilities			31,345				33,472
Commitments and contingencies
Non-redeemable preferred stock:
Preferred stock Series 1-A ($0.01 par value, 2,802,000 shares authorized; 67,600 shares issued and outstanding as of June 30, 2012 and September 30, 2011)			166				166
Preferred stock Series 2-A ($0.01 par value, 1,672,328 shares authorized; 3,900 shares issued and outstanding as of June 30, 2012 and September 30, 2011)			25				25
Total non-redeemable preferred stock			191				191
Redeemable preferred stock:
Preferred stock Series 5-A ($0.01 par value, 5,000,000 shares authorized; 9,000 shares issued and outstanding as of June 30, 2012 and September 30, 2011)			7,832				7,832
Preferred stock Series 6-A ($0.01 par value, 5,000 shares authorized; 4,875 shares issued and outstanding as of June 30, 2012 and September 30, 2011)			4,381				4,381
Total redeemable preferred stock			12,213				12,213
Stockholders’ deficit:
Common stock ($0.01 par value, 100,000,000 shares authorized; 15,049,507 shares issued and outstanding as of June 30, 2012 and September 30, 2011)			153				153
Additional paid-in-capital			80,819				80,238
Accumulated deficit			(91,256	)			(96,138	)
Treasury stock, at cost (149,744 shares as of June 30, 2012 and September 30, 2011)			(104	)			(104	)
Total stockholders’ deficit			(10,388	)			(15,851	)
Total liabilities, preferred stock and stockholders’ deficit		$	33,361			$	30,025

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

1

---

Table of Contents

FIRST PHYSICIANS CAPITAL GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands except share and per share data)

(Unaudited)

 

		Three months ended
		June 30, 2012				June 30, 2011
Net revenue from services		$	4,306			$	2,773
Cost and expenses:
Selling, general and administrative expenses			2,621				3,114
Depreciation and amortization			6				8
Total costs and expenses			2,627				3,122
Operating income (loss)			1,679				(349	)
Other income (expense):
Other income			—				22
Interest expense			(359	)			(198	)
Total other income (expense)			(359	)			(176	)
Net income (loss) from continuing operations		$	1,320			$	(525	)
Net income from discontinued operations, net of income taxes (including net gain from disposal of assets of $50 and $3,791 in 2012 and 2011, respectively. See Note 2. “Discontinued Operations”)			50				3,825
Net income		$	1,370			$	3,300
Basic earnings (loss) per share of common stock:
Continuing operations		$	0.09			$	(0.03	)
Discontinued operations			0.00				0.25
Total basic earnings per share of common stock		$	0.09			$	0.22
Diluted earnings (loss) per share of common stock:
Continuing operations		$	0.02			$	(0.03	)
Discontinued operations			0.00				0.25
Total diluted earnings per share of common stock		$	0.02			$	0.22

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

2

---

Table of Contents

FIRST PHYSICIANS CAPITAL GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands except share and per share data)

(Unaudited)

 

		Nine months ended
		June 30, 2012				June 30, 2011
Net revenue from services		$	12,106			$	3,314
Cost and expenses:
Selling, general and administrative expenses			7,955				5,696
Depreciation and amortization			16				21
Total costs and expenses			7,971				5,717
Operating income (loss)			4,135				(2,403	)
Other income (expense):
Other income			—				25
Interest expense			(854	)			(405	)
Gain on retirement of note payable			1,447				—
Total other income (expense)			593				(380	)
Net income (loss) from continuing operations		$	4,728			$	(2,783	)
Net income from discontinued operations, net of income taxes (including net gain from disposal of assets of $151 and $3,672 in 2012 and 2011, respectively. See Note 2. “Discontinued Operations”)			154				3,313
Net income		$	4,882			$	530
Basic earnings (loss) per share of common stock:
Continuing operations		$	0.31			$	(0.18	)
Discontinued operations			0.01				0.22
Total basic earnings per share of common stock		$	0.32			$	0.04
Diluted earnings per share of common stock:
Continuing operations		$	0.08			$	(0.18	)
Discontinued operations			0.00				0.22
Total diluted earnings per share of common stock		$	0.08			$	0.04

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

3

---

Table of Contents

FIRST PHYSICIANS CAPITAL GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

 

		Nine months ended
		June 30, 2012				June 30, 2011
Cash flows from operating activities:
Net income		$	4,882			$	530
Net income from discontinued operations			154				3,313
Net income (loss) from continuing operations			4,728				(2,783	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Gain on retirement of note payable			(1,447	)			—
Depreciation and amortization			16				21
Bad debt provision			3,772				1,766
Amortization of stock-based compensation			581				710
Changes in working capital components:
Accounts receivable			(6,702	)			(3,358	)
Prepaid expenses			(44	)			(178	)
Other assets			49				160
Accounts payable			115				273
Accrued expenses			(318	)			726
Net cash provided by (used in) operating activities			750				(2,663	)
Net cash provided by discontinued operations’ operating activities			12				2,289
Net cash provided by (used in) operating activities			762				(374	)
Cash flows from investing activities:
Net cash provided by discontinued operations’ investing activities			—				525
Net cash provided by investing activities			—				525
Cash flows from financing activities:
Proceeds from long term debt			2,089				730
Payments on long term debt			(265	)			(189	)
Net cash provided by financing activities			1,824				541
Net cash used in discontinued operations’ financing activities			—				(484	)
Net cash provided by financing activities			1,824				57
Net increase in cash and cash equivalents			2,586				208
Cash and cash equivalents at beginning of year			1,001				535
Cash and cash equivalents at end of quarter		$	3,587			$	743
Supplemental cash flow information:
Cash paid for interest		$	496			$	492
Cash paid for taxes			—				—
Non-cash transactions:
Note receivable given as consideration for payment of note payable		$	2,150			$	—
Notes payable extinguished through assignment of notes receivable		$	1,500			$	—
Notes receivable from sale of assets		$	—			$	14,150
Notes receivable from sale leaseback		$	—			$	10,343
Assumption of mortgage on sale leaseback		$	—			$	6,625
Assumption of capitalized loan cost on sale leaseback		$	—			$	282

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

4

---

Table of Contents

FIRST PHYSICIANS CAPITAL GROUP, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of First Physicians Capital Group, Inc., f/k/a Tri-Isthmus Group, Inc., a Delaware corporation (the “Company,” “we,” “us,” or “our,” depending on the context), as of June 30, 2012 and September 30, 2011 and for the three and nine month periods ended June 30, 2012 and June 30, 2011, have been prepared on substantially the same basis as our annual consolidated financial statements and should be read in conjunction with our Annual Report on Form 10-K (the “Form 10-K”), filed with the United States Securities and Exchange Commission (the “SEC”) on April 4, 2014, and any amendments thereto, for the Fiscal Year Ended September 30, 2011 (the “Fiscal Year Ended September 30, 2011”). In the opinion of management, the accompanying condensed consolidated financial statements reflect all adjustments of a normal recurring nature considered necessary to present fairly the financial information included herein.

The consolidated financial statements include our accounts and the accounts of our subsidiaries. All significant inter-company balances and transactions have been eliminated.

The results as of September 30, 2011 have been derived from our audited consolidated financial statements for the fiscal year ended as of such date.

The unaudited consolidated results for interim periods are not necessarily indicative of expected results for the full fiscal year.

Future Funding

We have an accumulated deficit of approximately $91.3 million as of June 30, 2012. This deficit has been funded primarily through preferred stock and common stock, promissory notes and cash generated from operations.

At June 30, 2012, we had current liabilities of $9.3 million and current assets of $10.7 million.

Reclassifications

Certain reclassifications have been made to the prior period amounts in order to conform to the current period presentation.

Critical Accounting Policies

For critical accounting policies affecting us, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” of our Annual Report on Form 10-K for the Fiscal Year Ended September 30, 2011. Critical accounting policies affecting us have not changed materially since September 30, 2011.

Fair Value of Financial Instruments

Carrying amounts of certain of our financial instruments, including cash equivalents, accounts receivable and accounts payable approximate fair value due to their short maturities. Carrying value of notes receivable, notes payable and long-term debt approximate fair values as they bear market rates of interest. None of our financial instruments are held for trading purposes.

 

5

---

Table of Contents

Revenue Recognition

The Company has contracted billing rates for its management services which it bills as gross revenue as services are delivered. Gross billed revenues are then reduced by the Company’s estimate of allowances based on expected collections, which includes the provision for doubtful accounts, to arrive at net revenues. Net revenues may not represent amounts ultimately collected. The Company adjusts current period revenue for differences in estimated revenue recorded in prior periods and actual cash collections.

The following table shows gross revenues and allowances for the three and nine months ended June 30, 2012 and 2011 (in thousands):

 

		Three months ended								Nine months ended
		June 30,				June 30,				June 30,				June 30,
		2012				2011				2012				2011
Revenue from services		$	5,654			$	4,532			$	15,878			$	5,080
Allowances			(1,348	)			(1,759	)			(3,772	)			(1,766	)
Net revenue		$	4,306			$	2,773			$	12,106			$	3,314
Allowances percentage			24	%			39	%			24	%			35	%

The Company computes its estimate of bad debt by taking into account collections received, for the services performed and also estimating amounts collectible for the services performed within the last twelve months.

2. Discontinued Operations

As of June 30, 2012 and 2011, the operating assets of RHA Tishomingo, RHA Anadarko, RHA Stroud, SPMC, Del Mar, Point Loma, and SPA, have been recorded as assets held for sale and the liabilities as liabilities of operations held for sale. We have reclassified the results of operations of RHA Tishomingo, LLC, RHA Anadarko, RHA Stroud, SPMC, Del Mar, Point Loma, and SPA for all periods presented, to discontinued operations.

The results of discontinued operations for the three and nine months ended June 30, 2012 and 2011 are as follows (in thousands):

 

		Three Months ended								Nine Months ended
		June 30,				June 30,				June 30,				June 30,
		2012				2011				2012				2011
Revenue from services		$	—			$	3,243			$	5			$	16,717
Costs and expenses:
Selling, general and administrative expenses			—				2,858				2				15,343
Depreciation and amortization			—				166				—				813
Total costs and expenses			—				3,024				2				16,156
Operating income			—				219				3				561
Other income (expense):
Other income			—				(6	)			—				12
Interest expense			—				(116	)			—				(608	)
Non-controlling interests			—				(63	)			—				(324	)
Loss before income taxes			—				34				3				(359	)
Taxation			—				—				—				—
Net income (loss) from discontinued operations		$	—			$	34			$	3			$	(359	)

 

6

---

Table of Contents

3. Net Income (Loss) Per Share

 

		Three months ended (in thousands)								Nine months ended (in thousands)
		June 30, 2012				June 30, 2011				June 30, 2012				June 30, 2011
Numerator for basic and diluted income (loss) per share:
Net income (loss) attributable to continuing operations		$	1,320			$	(525	)		$	4,728			$	(2,783	)
Net income attributable to discontinued operations			50				3,825				154				3,313
Denominator for basic earnings (loss) per share —weighted average shares			15,049,507				15,049,507				15,049,507				15,049,507
Numerator for diluted earnings (loss) per share:
Net income (loss) attributable to continuing operations			1,373				(525	)			4,887				(2,783	)
Net income attributable to discontinued operations			50				3,825				154				3,313
Denominator for diluted earnings (loss) per share —weighted average shares			62,844,872				15,049,507				62,844,872				15,049,507
Basic earnings (loss) per share of common stock:
Continuing operations		$	0.09			$	(0.03	)		$	0.31			$	(0.18	)
Discontinued operations			0.00				0.25				0.01				0.22
Total basic earnings per share of common stock		$	0.09			$	0.22			$	0.32			$	0.04
Diluted earnings (loss) per share of common stock:
Continuing operations		$	0.02			$	(0.03	)		$	0.08			$	(0.18	)
Discontinued operations			0.00				0.25				0.00				0.22
Total diluted earnings per share of common stock		$	0.02			$	0.22			$	0.08			$	0.04

For the three and nine month periods ended June 30, 2012 and 2011, stock options outstanding to purchase 6,760,000 and 7,260,000 common shares respectively and warrants outstanding to purchase 846,250 and 4,731,513 common shares respectively, had strike prices above market value and are considered “out-of-the-money,” and were therefore excluded from the computation of diluted net income (loss) per share.

For the three and nine month periods ended June 30, 2012, the following potential common shares outstanding were included in the computation of diluted net income per share; 67,600 Series 1-A Convertible Preferred Stock convertible into 33,493 common shares, 3,900 Series 2-A Convertible Preferred Stock convertible into 1,872 common shares, 9,000 Series 5-A Convertible Preferred Stock convertible into 28,800,000 common shares, 4,875 Series 6-A Convertible Preferred Stock convertible into 15,600,000 common shares, and $2,100,000 of 2009 Bridge Financing convertible into 3,360,000 common shares. For the three and six month periods ended March 31, 2012, interest expense of $53,000 and $159,000 respectively, related to the convertible debt was added back to net income attributable to continuing operations for the computation of diluted net income per share. For the three and nine month periods ended June, 2011, these potential common shares outstanding were excluded from the computation of diluted net loss per share as their effect is anti-dilutive.

4. Accounts Receivable

Accounts receivable consisted of the following (in thousands):

 

		June 30,				September 30,
		2012				2011
Gross patient accounts receivable		$	15,095			$	8,432
Reserves for bad debt			(8,110	)			(4,338	)
Reserves for contractual allowances			—				(39	)
Patient accounts receivable, net		$	6,985			$	4,055

5. Other Current Assets

Other current assets consisted of the following (in thousands):

 

		June 30,				September 30,
		2012				2011
Other current assets:
Deposits		$	7			$	7
Other receivables			1				30
Total other assets		$	8			$	37

 

7

---

Table of Contents

6. Property and Equipment

Property and equipment consisted of the following (in thousands):

 

		June 30,				September 30,
		2012				2011
Property and equipment:
Computer hardware		$	130			$	130
Accumulated depreciation			(113	)			(97	)
Property and equipment, net		$	17			$	33

7. Long-term Debt

Beginning in February 2012, we entered into a staggered bridge financing transaction (the “2012 Bridge Financing”) whereby we entered into three promissory notes, in the aggregate principal amount of $1,279,000 (the “2012 Bridge Notes”), with three investors (the “2012 Lenders”) with maturity dates of June 30, 2014. The 2012 Bridge Loans funded as follows; $340,000, $320,000, $390,000 and $229,000 in February, March, April, and May of 2012 respectively. All of the 2012 Bridge Financing was considered a related party transaction. The 2012 Bridge Notes were paid in full in the Fiscal Year Ended September 30, 2013.

Long-term debt consists of the following (in thousands):

 

		June 30, 2012				September 30, 2011
Note payable secured by real estate, $27,513 payable monthly, including interest based on Wall Street Journal prime plus 2% adjusted quarterly, floor of 7%, rate is currently 7%, matures November 2028		$	3,194			$	3,278
Note payable secured by real estate, $34,144 payable monthly, including interest based on Wall Street Journal prime plus 2% adjusted quarterly, floor of 7%, rate is currently 7%, matures November 2028			3,044				3,181
Note payable, 5% interest payable quarterly, matures on or before December 11, 2011			—				1,500
Bridge notes payable, 10% interest, matures on or before June 2014			5,413				3,324
Note payable, 9% interest per annum and matures in February 2016			288				332
Revolving line of credit, 5% interest per annum			380				380
Note payable, 10% interest per annum, matures September 2014			100				100
Total			12,419				12,095
Less current maturities of long term debt			(6,163	)			(4,102	)
Total long term debt		$	6,256			$	7,993

The following chart shows scheduled principal payments due on long-term debt as of June 30, 2012 for the next five years and thereafter (in thousands):

 

June 30,		Payments
2013		$	6,163
2014			400
2015			532
2016			458
2017			408
Thereafter			4,458
Total		$	12,419

 

8

---

Table of Contents

8. Warrants

Outstanding exercisable warrants consisted of the following as of June 30, 2012:

 

		Remaining				Exercise
Description		Life				Price				Warrants
July 16, 2007 Preferred Stock Series 5-A warrants issued to investor			1 month			$	0.45				50,000
September 30, 2008 Preferred Stock Series 5-A warrants issued to placement agent			9 months				0.5				436,250
June 8, 2009 Preferred Stock Series 6-A warrants issued to investor			21 months				0.50				210,000
June 10, 2009 warrants issued to Medical Advisory Board			21 months				0.63				150,000
											846,250

A summary of our stock warrant activity and related information at June 30, 2012 and September 30, 2011 is as follows:

 

										Weighted-Average
		Number of Shares of Common Stock								Exercise Price Per Share
		Nine months				Fiscal year				Nine months				Fiscal year
		ended				Ended				ended				ended
		June 30,				September 30,				June 30,				September 30,
		2012				2011				2012				2011
Warrants outstanding at beginning of the period			4,731,513				7,949,013			$	0.58			$	0.51
Issued			—				—				—				—
Exercised			—				—				—				—
Cancelled or expired			(3,885,263	)			(3,217,500	)		$	0.60			$	0.38
Warrants outstanding at end of the period			846,250				4,731,513			$	0.52			$	0.58

9. Stock Options

The following summarizes activities under the stock option plans:

 

										Weighted-Average
		Number of Options								Exercise Price Per Share
		Nine Months Ended				Fiscal Year Ended				Nine Months Ended				Fiscal Year Ended
		June 30,				September 30,				June 30,				September 30,
		2012				2011				2012				2011
Options outstanding at beginning of the period Granted			7,260,000				8,659,082			$	0.61			$	0.62
— at above fair market value			—				—				—				—
— at fair market value			—				—				—				—
— at below fair market value			—				—				—				—
Exercised			—				—				—				—
Cancelled			—				—				—				—
Forfeited			(500,000	)			(1,399,082	)			0.63				0.62
Options outstanding at end of the period			6,760,000				7,260,000			$	0.61			$	0.61
Options vested/exercisable at end of the period			5,450,000				4,370,000			$	0.61			$	0.61

The following summarizes information for stock options outstanding as of June 30, 2012:

 

										Weighted-average
						Weighted-average				remaining
Exercise price		Number of options				exercise price				contractual life
$0.40			360,000			$	0.40				1.5
$0.63			6,400,000			$	0.63				3.1

 

9

---

Table of Contents

10. Subsequent Events

2013 Bridge Financing

Beginning in November 2013, we entered into a staggered bridge financing transaction (the “2013 Bridge Financing”) whereby we entered into four (4) promissory notes, with interest of 10% per annum, in the aggregate principal amount of $650,000 (the “2013 Bridge Notes”), with 4 investors, each note maturing June 30, 2014. The 2013 Bridge Loans funded as follows; $450,000 and $200,000 in November 2013 and January 2014, respectively. Three of the investors, SMP Investments I, LLC (SMP), Anthony J. Ciabottoni, and William Houlihan each hold a 10% or greater voting interest and are considered related parties. The fourth investor, Blue Ridge Investments, LLC is wholly owned by Richardson Sells, a member of the Board, and is therefore also considered a related party. The four lenders contributed $300,000, $125,000, $125,000, and $100,000, respectively.

Bridge Note Extensions

In January 2014, each 2011 Bridge Lender agreed to extend the maturity date(s) of their respective Notes with the same terms and conditions contained in the originally executed Notes and related extensions until June 2014. Also in January 2014, each 2009 Bridge Lender agreed to extend the maturity date(s) of their respective Notes with the same terms and conditions contained in the originally executed Notes and related extensions until June of 2014. Three of the Bridge Lenders, SMP, Anthony Ciabattoni, and William A. Houlihan each hold a 10% or greater voting interest and are considered related parties to this transaction.

In addition, as part of the 2009 Bridge Notes extensions, in January 2014 the Company issued “penny” warrants to SMP for the purchase of up to 8,500,000 shares of Common Stock at an initial exercise price of $0.01 per share and exercisable for a period of five years from the date of issuance. SMP was one of the original 2009 Bridge Financing lenders. SMP, holds a 10% or greater voting interest and is considered a related party. In March 2014, SMP exercised its warrant to purchase 8,500,000 shares of common stock for an aggregate purchase price of $85,000. The $85,000 proceeds were received by the company in Fiscal Year 2013, and were recorded as a liability until such time as the Company was able to accept the warrants.

Series 5-A and 6-A Convertible Preferred Stock Waiver

In February 2014, a majority of the Series 5-A Convertible Preferred Stock and Series 6-A Convertible Preferred Stock holders consented to waive their rights to demand registration. As a result of the majority consent, demand registration rights for all of the stockholders of the two classes of stock were waived.

Warrant Exercise

In March 2014, we accepted two warrant exercises in the amount of 150,000 and 210,000 shares of Common Stock, at an exercise price of $0.625 and $0.50 per share respectively, for an aggregate purchase price of $198,000 from two investors. The $198,000 proceeds had been received by the company in Fiscal Year 2011, and were recorded as a liability until such time as the Company was able to accept the warrants.

Warrant Issuance

The 2011 Bridge Financing had attached warrants to purchase an aggregate of 2,278,079 shares of our Common Stock with an exercise price of $0.3125, maturing five years from date of issuance. These warrants were issued January 1, 2014. Three of the 2011 Bridge Lenders, SMP, Anthony J. Ciabattoni, and William A. Houlihan, each hold a 10% or greater voting interest and are considered related parties to this transaction and received in aggregate 1,746,080 of the warrants.

The 2012 Bridge Financing had attached warrants to purchase an aggregate of 4,092,800 shares of our Common Stock with an exercise price of $0.3125, maturing five years from date of issuance. These warrants were issued January 1, 2014. The 2012 Bridge Lenders, SMP, Anthony J. Ciabattoni, and William A. Houlihan each hold a 10% or greater voting interest and are considered related parties to this transaction.

Series 7-A Convertible Preferred Stock

        On December 5, 2013, the Company filed a Certificate of Designation of Rights and Preferences of Series 7-A Convertible Preferred Stock authorizing the issuance of up to 7,000 Series 7-A Convertible Preferred Stock. As part of the consideration for entering into the 2011 Bridge Financing, all of the 2011 Bridge Lenders were granted the option to convert their current holdings if any, of Series 5-A Preferred Convertible Stock, 6-A Preferred Convertible Stock and Common Stock (collectively the “Exchanged Securities”), into Series 7-A Convertible Preferred Stock. Upon election to convert, each lender would receive the number of Series 7-A Convertible Preferred Stock equal to the initial consideration paid for their Exchanged Securities divided by $1,000. In connection with the conversion, each 2011 Bridge Lender shall receive warrants to purchase a number of shares of Common Stock of the Company in an amount equal to 1,120 multiplied by the aggregate number of shares of Series 7-A Preferred issued. Such issued warrants shall have an exercise price of $0.3125, and shall expire five years from date of issuance. The Company has received notification from all the 2011 Bridge Lenders of their intent to convert, as appropriate, their holdings of Exchanged Securities to Series 7-A Convertible Preferred Stock, which will result in the issuance of an aggregate of 5,998 Series 7-A Preferred Stock and warrants to purchase 6,717,760 shares of Common Stock. Three of the 2011 Bridge Lenders, SMP, Anthony J. Ciabattoni, and William A. Houlihan, each hold a 10% or greater voting interest and will be considered related parties to this transaction.

Litigation

In June 2011, the Company vacated office space in Oklahoma City, Oklahoma prior to the expiration of the lease, at which time the landlord proceeded with litigation to collect outstanding lease payments. In December 2013, both parties entered into a settlement agreement under which the Company agreed to make a one-time payment of $65,000 in full satisfaction of all amounts due under the lease terms.

 

10

---

Table of Contents

Change in Management

Effective November 18, 2013, David Hirschhorn resigned (i) as Chief Executive Officer, Chairman of the Board of Directors (the “Board”) and as a member of the Board of First Physicians Capital Group, Inc., a Delaware corporation (the “Registrant”), and (ii) from any and all other positions and in all other capacities in which he served as an officer or director of the Registrant or any of the Registrant’s subsidiaries. Mr. Hirschhorn had no disagreements with the Registrant on any matter related to the Registrant’s operations, policies or practices.

On November 21, 2013, the Board appointed Sean J. Kirrane to the position of Chief Executive Officer of the Registrant, to serve until his successor is duly appointed and qualified or until his earlier resignation or removal. Mr. Kirrane has no family relationship with any officer or director of the Registrant or any of its subsidiaries.

 

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 the condensed consolidated financial statements and the related notes appearing elsewhere in this Quarterly Report on Form 10-Q (this “Form 10-Q”).

FORWARD LOOKING STATEMENTS

The discussion in this Form 10-Q contains forward-looking statements that may be subject to protection under the Private Securities Litigation Reform Act of 1995 and such statements should not be unduly relied upon. Forward-looking statements can be identified by the use of words such as “may,” “will,” “could,” “should,” “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans” and variations thereof or of similar expressions. All forward-looking statements included in this Form 10-Q are based on information available to us on the date hereof. We assume no obligation to update any such forward-looking statements. Our actual results in future periods could differ materially from those indicated in such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to:

 

•

our ability to obtain ongoing financing, manage our cash resources, control expenses and continue as a going concern;

 

•

impact of our indebtedness on our ability to invest in the ongoing needs and growth of our business;

 

•

significant past operating losses, potential future losses and limited ongoing revenue;

 

•

changes in government regulation, particularly healthcare laws;

 

•

possession of significant voting control over us by the holders of our Series 5-A Preferred Stock and Series 6-A Convertible Preferred Stock;

 

•

increased competition in the industry, geography and the segments in which we compete;

 

•

our ability to attract and retain employees and key members of management;

 

•

changes in economic and industry conditions;

 

•

reliance on third parties to provide services critical to our operations;

 

•

potential dilution of existing stockholders if we raise capital by issuing additional capital stock;

 

•

availability of appropriate prospective acquisitions or investment opportunities;

 

•

significant costs and obligations as a result of being a public company;

 

•

continued positive relationships with our customers;

 

•

deterioration in the collectability of our accounts;

 

•

major man-made or natural disasters;

 

•

compliance with applicable laws and regulations and cost of potential legal actions such as litigation or investigations;

 

•

inadequacy of our insurance coverage and fluctuating insurance requirements and costs;

 

•

impact of a potential requirement to record asset impairment charges in the future;

 

•

failure of our information technology system or the breach of our network security;

 

•

impact on our disclosure of use the scaled disclosure option available to smaller reporting companies; and

 

•

volatility in the price of our common stock.

 

11

---

Table of Contents

OVERVIEW

References to “we,” “us,” “our,” “Tri-Isthmus Group,” “FPCG” or the “Company” refer to First Physicians Capital Group, Inc. and its subsidiaries. We maintain our executive offices at 433 North Camden Drive, #810, Beverly Hills, California 90210. Our telephone number is +1 (310) 860-2501.

We invest in and provide financial and managerial services to healthcare facilities in non-urban markets. We promote quality medical care by offering improved access and breadth of services. We unlock the value of our investments by developing strong, long-term and mutually-beneficial relationships with our physicians and the communities they serve.

This Form 10-Q report covers the fiscal quarter ended June 30, 2012.

Information in this Form 10-Q is current as of March 28, 2014, unless otherwise specified.

STRATEGY

During the Fiscal Year Ended September 30, 2010, we shifted our strategy away from majority ownership in healthcare delivery companies to a focus on the provision of management, financial, and ancillary healthcare and IT services to the rural and community hospital market. We expect to maintain and/or acquire minority ownership in selected healthcare delivery companies that complement our management services and financing activities. We may also invest in, acquire or partner with other companies that provide similar services in our markets.

In pursuit of this reorganization, we undertook an initiative to divest ourselves of underperforming facilities and reduce or outsource administrative functions to better align cost structures and business volume. As a result of the initiative, during the Fiscal Year Ended September 30, 2011, we successfully divested ourselves of our majority owned hospitals, and obtained contracts to provide the healthcare management services to several hospital clients.

We currently have 4 operating subsidiaries which are First Physicians Business Solutions, LLC, First Physicians Resources, LLC, First Physicians Services, LLC and First Physicians Realty Group. First Physicians Business Solutions, LLC provides an array of management services to include hospital operations management, revenue cycle management, IT, finance and human resources. First Physicians Services provides ancillary service oversight and management solutions for lab, pharmacy, and emergency departments in rural hospital settings. First Physicians Resources, LLC provides medical and back office staffing solutions to our hospital clientele. First Physicians Realty Group is our real estate subsidiary that owns healthcare related properties and leases them to clients. We currently have contracts to provide financial and back office services to two hospital clients.

MATERIAL CHANGES IN RESULTS OF OPERATIONS

REVENUE

Net revenue from services was $4.3 million for the three month period ended June 30, 2012, compared to $2.8 million for the three month period ended June 30, 2011, representing an increase of $1.5 million. Revenue from services was $12.1 million for the nine month period ended June 30, 2012, compared to $3.3 million for the nine month period ended June 30, 2011, representing an increase of $8.8 million. The increases for both periods were the result of the new contracts to provide healthcare services management the Company obtained in the Fiscal Quarter ended June 30, 2011.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses decreased by $0.5 million, to $2.6 million in the three month period ended June 30, 2012 compared to $3.1 million in the three month period ended June 30, 2011. The Company incurs certain costs which they pass directly through to their customers under the management agreements in place. For the three month period ended June 30, 2012, these pass through costs represented a higher proportion of overall costs incurred compared to the three month period ended June 30, 2011, resulting in a decrease in selling, general and administrative expense. Selling, general and administrative expenses increased by $2.3 million, to $8.0 million in the nine month period ended June 30, 2012 compared to $5.7 million in the

 

12

---

Table of Contents

three month period ended June 30, 2011. These increases were the result of the increased costs associated with the new contracts to provide healthcare services management the Company obtained in the Fiscal Quarter ended June 30, 2011. Amortization of stock-based compensation is included in selling, general and administrative expenses for the three and nine month periods ended June 30, 2012 and 2011.

INTEREST EXPENSE

Interest expense increased $161,000 to $359,000 for the three month period ended June 30, 2012 as compared to $198,000 for the three month period ended June 30, 2011. Interest expense increased $449,000, to $854,000 for the nine months ended June 30, 2012 from $405,000 for the nine months ended June 30, 2011. The increases for the three and nine month periods ended June 30, 2012 and 2011 were primarily the result of additional $2,089,000 bridge financing during the nine month period ended June 30, 2012.

MATERIAL CHANGES IN FINANCIAL CONDITION — AT JUNE 30, 2012, COMPARED TO SEPTEMBER 30, 2011:

CASH AND CASH EQUIVALENTS

As of June 30, 2012, cash and cash equivalents totaled $3.6 million, an increase of $2.6 million when compared with the $1.0 million on hand at September 30, 2011. This increase of 258% which was primarily the result of the net $1.8 million in proceeds from notes payable and $0.8 million cash from operations.

ACCOUNTS RECEIVABLES

As of June 30, 2012, accounts receivable, net of allowances for uncollectible accounts totaled $7.0 million, an increase of $3.0 from $4.0 million at September 30, 2011. This increase was primarily due to the increased billings generated from the new contracts to provide healthcare services management the Company obtained in the Fiscal Quarter ended June 30, 2011.

LONG-TERM DEBT

Long-term debt increased $0.3 million from September 30, 2011 to June 30, 2012. This increase reflects $1.8 million of additional borrowing offset by the settlement of litigation in which a portion of our notes receivable was given in payment of the $1.5 million note payable.

LIQUIDITY AND CAPITAL RESOURCES

We have funded operations primarily through cash flows from operations, , short term bridge financing and the sales of certain of our businesses. We estimate that based on current plans and assumptions, that our available cash and cash flows from operations will be sufficient to satisfy our cash requirements under our present operating expectations, without further financing, for the next 12 months.

As of June 30, 2012 we had a working capital of $1.3 million compared with a working capital deficit of $2.3 million at September 30, 2011. This increase in working capital of $3.6 was primarily a result of the $2.6 million increase in cash and the $3.0 million increase in accounts receivable.

As of June 30, 2012 we had a stockholders’ deficit of $10.4 million, as compared to a stockholders’ deficit of $15.9 million as of September 30, 2011. The decrease in stockholders’ deficit arose from operating income for the nine month period ended June 30, 2012.

During the nine month period ended June 30, 2012 there was $0.8 million cash provided by operating activities, compared to $2.7 million cash used by operating activities for the nine month period ended June 30, 2011. This $3.5 million increase in cash provided by operations was primarily the result of the increase in net income.

Net cash provided by investing activities during the nine month period ended June 30, 2012 was $0.0 million, compared to $0.5 million during the nine month period ended June 30, 2011, a decrease of $0.5 million. This decrease in cash from investing activities was primarily the result of cash proceeds from discontinued assets in the nine month period ended June 30, 2011, whereas there was no cash from discontinued operations in the nine month period ended June 30, 2012.

 

13

---

Table of Contents

Cash provided by financing activities totaled $1.8 million in the nine month period ended June 30, 2012 and was provided by proceeds from notes payable of $2.1 million, offset by routine payments of $0.3 million. Cash provided by financing activities totaled $0.06 million in the nine month period ended June 30, 2011 and was also provided by an increase in notes payable.

Prior to the current fiscal year, we sustained operating losses since our inception and have an accumulated deficit of approximately $91.3 million as of June 30, 2012, as compared with an accumulated deficit of $96.1 million as of September 30, 2011. These losses have been funded principally through the issuance of preferred and common stock, the issuance of promissory notes and cash generated from operations.

We are not aware of any trends, demands, events or uncertainties that will result in a material change in our liquidity or capital resources, nor do we expect any changes in the cost of our capital resources or the mix and relative cost of our capital resources.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

Item 4. CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures: As of the end of the period covered by this report an evaluation was carried out by our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our controls and procedures were materially deficient as of the end of the fiscal quarter ended June 30, 2012.

(b) Changes in Internal Control Over Financial Reporting: There have been no changes in our internal control over financial reporting during the fiscal quarter ended June 30, 2012 that have a material effect on our internal control over financial reporting.

 

14

---

Table of Contents

PART II

OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

None.

Item 1A. RISK FACTORS

Because we are a “Smaller Reporting Company” we are not required to disclose the information required by this item.

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

Item 3. DEFAULTS UPON SENIOR SECURITIES

None.

Item 4. MINE SAFETY DISCLOSURES

None.

Item 5. OTHER INFORMATION

None.

Item 6. EXHIBITS

See Exhibit index following the Signatures page.

 

15

---

Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Date: April 4, 2014				First Physicians Capital Group, Inc. (Registrant)
				By:		/s/ Sean Kirrane
						Sean Kirrane
						Chief Executive Officer, Chief Financial Officer and authorized signatory. (Principal Executive Officer and Principal Accounting Officer)

 

16

---

Table of Contents

EXHIBIT INDEX

 

Exhibit No.		Description
2.1*		Membership Interest Purchase Agreement (filed as Exhibit 2.1 to the Form 8-K, as filed with the SEC on November 5, 2007)
3.1*		Certificate of Incorporation (filed as Exhibit 3.1 to the Form 8-K, as filed with the SEC on November 14, 2000)
3.2*		Amended and Restated Bylaws dated October 25, 2002 (filed as Exhibit 3.2 to the Form 8-K, as filed with the SEC on October 28, 2002)
3.3*		Certificate of Designation of Rights and Preferences of Series 2-A Convertible Preferred Stock filed November 8, 2000 (filed as Exhibit 4.1 to the Form 8-K, as filed with the SEC on November 14, 2000)
3.4*		Certificate of Designation of Rights and Preferences of Series 3-A Convertible Preferred Stock filed June 20, 2001 (filed as Exhibit 4.1 to the Form 8-K, as filed with the SEC on July 2, 2001)
3.5*		Certificate of Designation of Rights and Preferences of Series 4-A Convertible Preferred Stock (filed as Exhibit 3.1 to the Form 8-K, as filed with the SEC on October 28, 2002)
3.6*		Certificate of Designation of Rights and Preferences of Series 5-A Convertible Preferred Stock (filed as Exhibit 3.1 to the Form 8-K, as filed with the SEC on July 21, 2005)
3.7*		Certificate of Amendment to the Certificate of Designation of Rights and Preferences Series 5-A Convertible Preferred Stock filed January 10, 2008 (filed as Exhibit B to the Form of Series 5-A Preferred Stock and Warrant Purchase Agreement, filed as Exhibit 10.52 herein)
3.8*		Certificate of Designation of Rights and Preferences of Series 6-A Convertible Preferred Stock filed April 2, 2008 (filed as Exhibit 3.1 to the Form 8-K, as filed with the SEC on April 3, 2008)
3.9*		Certificate of Amendment to the Certificate of Designation of Rights and Preferences of Series 5-A Convertible Preferred Stock filed May 15, 2008 (filed as Exhibit 4.2 to the Form 10-Q, as filed with the SEC on May 20, 2008)
3.10*		Certificate of Amendment to the Certificate of Designation of Rights and Preferences of Series 6-A Convertible Preferred Stock filed May 15, 2008 (filed as Exhibit B to the Form of Series 6-A Preferred Stock and Warrant Purchase Agreement, filed as Exhibit 10.54 herein)
3.11*		Certificate of Designation of Rights and Preferences of Series 7-A Convertible Preferred Stock (filed as Exhibit 3.1 to the Form 8-K, as filed with the SEC on December 12, 2013)
4.1*		Certificate of Decrease of Shares Designated as Series 7-A Convertible Preferred Stock, dated and filed January 22, 2010 (filed as Exhibit 3.1 to the Form 8-K, as filed with the SEC on January 28, 2010)
4.2*		Certificate of Decrease of Shares Designated as Series 1-A Convertible Preferred Stock (filed as Exhibit 4.1 to the Form 8-K, as filed with the SEC on July 13, 2005)
4.3*		Certificate of Decrease of Shares Designated as Series 2-A Convertible Preferred Stock (filed as Exhibit 4.2 to the Form 8-K, as filed with the SEC on July 13, 2005)

 

17

---

Table of Contents

Exhibit No.		Description
4.4*		Certificate of Decrease of Shares Designated as Series 3-A Convertible Preferred Stock (filed as Exhibit 4.3 to the Form 8-K, as filed with the SEC on July 13, 2005)
4.5*		Certificate of Decrease of Shares Designated as Series 4-A Convertible Preferred Stock (filed as Exhibit 4.4 to the Form 8-K, as filed with the SEC on July 13, 2005)
4.6*		Form of Warrant (filed as Exhibit 4.2 to Form 8-K, filed with the SEC on July 21, 2005)
4.7*		Form of Warrant (filed as Exhibit 4.2 to Form 8-K, filed with the SEC on August 23, 2005)
4.8*		Form of Warrant (filed as Exhibit 4.2 to Form 8-K, filed with the SEC on September 22, 2006)
4.9*		Form of Extension of Warrant, dated July 18, 2007 (filed as Exhibit 4.1 to Form 8-K as filed with the SEC on December 18, 2008)
31.1		Certification Pursuant to Rule 13a-14(d) promulgated under the Securities Exchange Act of 1934
32.1		Certification Pursuant to 18 U.S.C. 1350
101.INS**		XBRL Instance Document
101.SCH**		XBRL Taxonomy Extension Schema
101.CAL**		XBRL Taxonomy Extension Calculation Linkbase
101.DEF**		XBRL Taxonomy Extension Definition Linkbase
101.LAB**		XBRL Taxonomy Extension Label Linkbase
101.PRE**		XBRL Taxonomy Extension Presentation Linkbase

 

*	Previously filed with the SEC as indicated, and hereby incorporated herein by reference.

**

Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability.

 

18