ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL INFORMATION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the attached unaudited consolidated financial statements and notes thereto. In addition to historical information, the following discussion contains forward-looking statements that involve risks, uncertainties and assumptions. Where possible, we have tried to identify these forward looking statements by using words such as “anticipate,” “believe,” “intends” or similar expressions. Our actual results may differ materially from those anticipated by the forward-looking statements due to important factors and risks including, but not limited to, those set forth under “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2011.
Introduction
The Company is a South Florida pharmacy, which specializes in providing anti-retroviral patient care management, durable medical equipment (DME) and pharmaceutical needs to long term care facilities and doctor’s offices. The pharmacy industry is highly competitive; we compete with national and independent retail drug stores, specialty pharmacies, supermarkets, convenience stores, mail order prescription providers, discount merchandisers, membership clubs, health clinics, internet pharmacies, and home medical equipment providers.
Our specific focus is to increase our revenues and presence in the specialty pharmacy business, pursuing expansion initiatives we instituted during the 2011 fiscal year.
Overview
As we entered the 2011 fiscal year, our business plan was to take advantage of our competitive bidding contract with Medicare by providing DME in South Florida. We also took several steps to enhance our long-term care prescription services including increasing our marketing efforts and moving forward with our expansion plans. We also began to concentrate on a new source of revenue, the specialty/anti-retroviral medication market, which we believe is underserved in South Florida.
In the second quarter of 2011 we entered the specialty/anti-retroviral medication market. We structured our pharmacy to provide prescription filling services for patients whose needs include anti-retroviral medication and offer patients care management. To increase the credibility and quality of our services, we hired a team of personnel, knowledgeable in the care and management of individuals with infectious diseases. Our services in this segment include customized and confidential prescription packaging, an extensive inventory of specialty/ anti-retroviral medications, and 24-hour emergency customer assistance.
Our plans to grow our specialty pharmacy segment include grassroots marketing efforts targeted at physician groups and other referral sources. During the past year, our overall gross profit margin on specialty pharmacy services has been impacted by two primary factors: high medication costs and lower reimbursements rates by insurance carriers. Specialty medication costs are high, resulting in lower gross margins for such products. For the nine months ended September 30, 2012, sale of prescriptions to patients taking anti-retro viral medication were approximately $2.7 million.
In January 2011, our Medicare competitive bidding contract became effective for the sale of durable medical equipment. Since then, we have ramped up our marketing efforts of such products resulting in a substantial increase in our DME sales of 47% for the first nine months of 2012 as compared to the same period in 2011. However, cash flow from DME sales has been slowed by Medicare’s review of nearly all hospital beds and oxygen products rentals. In the 3rd quarter of 2012, we began to see an increase in their cash flow, as a result of Medicare’s completion of its review.
As part of Medicare’s review process, Medicare denied a large number of claims, which we appealed. Because this appeals process has taken longer than expected, we have taken a bad debt allowance and write off approximately $239,000 against our DME receivables; however we are still in the process of attempting to collect these amounts, and if successful, will record payments against these receivables against other income.
Based on the above, we expect to see ongoing improvements in our cash flow in the near term.
In the fourth quarter of 2012, we renegotiated the lease on our Opa Locka store location. Under the new terms, we will not continue to pay rent until the landlord has completed the build out of the new location, which has been delayed for various construction reasons. Based on current conditions, we do not believe this location will be in operation until the later part of the second quarter 2013. Our second location, (our “North Shore Hospital” location) in Miami, FL, was tentatively scheduled to open in the second quarter of 2013, pending the City of Miami’s zoning approval of our building plans. However, to date, no such approval has been granted, and we are re-evaluating the feasibility of this location.
RESULTS OF OPERATIONS
Three Months Ended September 30, 2012 and 2011 (as restated)
The following table summarizes our results of operations for the three months ended September 30, 2012 and September 20, 2011. All amounts have been rounded to the nearest thousand.
| Three Months Ended | |
| | | September 30, 2012 | | | September 30, 2011 | | | | | | | |
| | | Dollars | | | % of Revenue | | | Dollars | | | % of Revenue | | | $ change | | | % change | |
| Total revenues - net | | $ | 2,532,000 | | | | 100 | % | | $ | 1,938,000 | | | | 100 | % | | $ | 594,000 | | | | 31 | % |
| Total cost of sales | | | 1,750,000 | | | | 69 | % | | | 1,086,000 | | | | 56 | % | | $ | 664,000 | | | | 61 | % |
| Total gross margin | | | 782,000 | | | | 31 | % | | | 852,000 | | | | 44 | % | | $ | (70,000 | ) | | | -8 | % |
| Operating expenses | | | 1,100,000 | | | | 43 | % | | | 946,000 | | | | 49 | % | | $ | 154,000 | | | | 16 | % |
| Other income (expense) | | | (87,000 | ) | | | -3 | % | | | (4,000 | ) | | | 0 | % | | $ | (83,000 | ) | | | 2075 | % |
| Operating loss | | | (405,000 | ) | | | -16 | % | | | (98,000 | ) | | | -5 | % | | $ | (307,000 | ) | | | 313 | % |
| Income tax benefit (expense) | | | 40,000 | | | | 2 | % | | | (25,000 | ) | | | -1 | % | | $ | 65,000 | | | | -260 | % |
| Net loss | | | (365,000 | ) | | | -14 | % | | | (123,000 | ) | | | -6 | % | | $ | (242,000 | ) | | | 197 | % |
Revenue
Our pharmacy and DME revenues were as approximately as follows.
| Three Months Ended | |
| | | September 30, 2012 | | | September 30, 2011 | | | | | | | |
| | | Dollars | | | % of Revenue | | | Dollars | | | % of Revenue | | | $ change | | | % change | |
| Pharmacy | | $ | 2,229,000 | | | | 88 | % | | $ | 1,622,000 | | | | 84 | % | | $ | 607,000 | | | | 37 | % |
| DME | | $ | 303,000 | | | | 12 | % | | $ | 316,000 | | | | 16 | % | | | (13,000 | ) | | | -4 | % |
| Total Sales | | $ | 2,532,000 | | | | | | | $ | 1,938,000 | | | | | | | $ | 594,000 | | | | 31 | % |
Net revenue increased approximately $594,000 or 31% for the three months ended September 30, 2012 as compared to the three months ended September 30, 2011. Net revenues from our Pharmacy operation increased 37% quarter-over-quarter, while net revenues from our DME operations decreased slightly, or 4%. Our increase in pharmacy revenue is mainly related to the increase in anti-retro viral medication sales, which carry a higher than average sale price.
Gross Margin
Our gross margin as a percent of sales decreased from 44% to 31% for three months ended September 30, 2012 as compared to the three months ended September 30, 2011. Overall margins for this period were lower mainly due to higher sales of anti-retro viral medication that carry a lower gross margin than do other medications.
Operating Expenses
Our operating expenses increased $154,000 or 16% for the three months ended September 30, 2012 as compared to the three months ended September 30, 2011. The increase was mainly attributable to our write off of certain DME receivables (as discussed above) and costs associated with the Medicare review (as also discussed above).
Net Loss
Our overall net loss increased approximately $242,000 for the three months ended September 30, 2012 as compared to the three months ended September 30, 2011, mainly attributable to a one time write off of accounts receivable of approximately $239,000.
Nine months ended September 30, 2012 and 2011 (as restated)
The following table summarizes our results of operations for the nine months ended September 30, 2012 and September 20, 2011. All amounts have been rounded to the nearest thousand.
| Nine Months Ended | |
| | | September 30, 2012 | | | September 30, 2011 | | | | | | | |
| | | Dollars | | | % of Revenue | | | Dollars | | | % of Revenue | | | $ change | | | % change | |
| Total revenues - net | | $ | 7,502,000 | | | | 100 | % | | $ | 5,708,000 | | | | 100 | % | | $ | 1,794,000 | | | | 31 | % |
| Total cost of sales | | | 5,338,000 | | | | 71 | % | | | 2,918,000 | | | | 51 | % | | $ | 2,420,000 | | | | 83 | % |
| Total gross margin | | | 2,164,000 | | | | 29 | % | | | 2,790,000 | | | | 49 | % | | $ | (626,000 | ) | | | -22 | % |
| Operating expenses | | | 2,709,000 | | | | 36 | % | | | 2,920,000 | | | | 51 | % | | $ | (211,000 | ) | | | -7 | % |
| Other income (expense) | | | (88,000 | ) | | | -1 | % | | | (4,000 | ) | | | 0 | % | | $ | (84,000 | ) | | | 2100 | % |
| Operating loss | | | (633,000 | ) | | | -8 | % | | | (134,000 | ) | | | -2 | % | | $ | (499,000 | ) | | | 372 | % |
| Income tax expense | | | 40,000 | | | | 1 | % | | | (76,000 | ) | | | -1 | % | | $ | 116,000 | | | | -153 | % |
| Net loss | | | (593,000 | ) | | | -8 | % | | | (210,000 | ) | | | -4 | % | | $ | (383,000 | ) | | | 182 | % |
Revenue
Our pharmacy and DME revenues were as approximately as follows.
| Nine Months Ended | |
| | | September 30, 2012 | | | September 30, 2011 | | | | | | | |
| | | Dollars | | | % of Revenue | | | Dollars | | | % of Revenue | | | $ change | | | % change | |
| Pharmacy | | $ | 6,510,000 | | | | 87 | % | | $ | 5,033,000 | | | | 88 | % | | $ | 1,477,000 | | | | 29 | % |
| DME | | $ | 992,000 | | | | 13 | % | | $ | 675,000 | | | | 12 | % | | | 317,000 | | | | 47 | % |
| Total Sales | | $ | 7,502,000 | | | | | | | $ | 5,708,000 | | | | | | | $ | 1,794,000 | | | | 31 | % |
Net revenue increased approximately $1,794,000 or 31% for the nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011. Net revenues from our Pharmacy operation increased 29% year over year, while net revenues from our DME operations increased 47%. Our increase in pharmacy revenue is mainly related to the increase in anti-retro viral medication sales, which carry a higher than average sale price; our increase in DME sales is related to our full implementation of our competitive bidding contract with Medicare, which had only just begun during the first quarter of 2011.
Gross Margin
Our gross margin as a percent of sales decreased from 49% to 29% for nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011. Overall margins for this period were lower mainly due to much higher sales of anti-retro viral medication that carry a much lower gross margin than do other medications. Conversely, our gross margin was positively impacted by our increase in DME sales, which allowed for bulk purchasing from vendors resulting in slightly higher overall margins for the nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011.
Operating Expenses
Our operating expenses decreased approximately $211,000 or 7% for the nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011. The decrease was mainly attributable to our restructuring of management’s compensation, offset by bad debt expense.
Net Loss
Our overall net loss increased approximately $383,000 for the nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011. Our overall net loss was mainly attributable to a one time write off of accounts receivable of approximately $239,000 and lower gross margins brought about by our concentration on the anti-retro viral marketplace.
LIQUIDITY AND CAPITAL COMMITMENTS
Current Market Conditions
We regularly monitor economic conditions and associated impacts on the financial markets and our business. Though there has been improvement in the global economic environment we continue to be cautious. We continue to evaluate the financial health of our supplier base, carefully manage customer credit, and monitor the concentration risk of our cash.
We believe that no significant concentration of credit risk currently exists. For further discussions of risks associated with market conditions, See “Part I — Item 1A — Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2011.
Cash Flows
| Nine Months Ended | |
| | | September 30, 2012 | | | September 30, 2011 | |
| | | | | | (restated) | |
| Net change in cash from: | | | | | | |
| Operating activities | | $ | (271,379 | ) | | $ | 142,231 | |
| Investing activities | | | (187,699 | ) | | | (176,231 | ) |
| Financing activities | | | 373,776 | | | | (71,780 | ) |
| Change in cash | | $ | (85,302 | ) | | $ | (105,780 | ) |
| | | | | | | | | |
| Cash at end of Period | | $ | 3,572 | | | $ | 98,556 | |
Net cash used in operating activities increased approximately $ 414,000 for the nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011 primarily as a result of an increases in depreciation expense of approximately $163,000, bad debt of approximately 278,000, amortization cost from debt issue and debt discount costs of approximately 172,000 and accounts payable and accrued expenses of approximately 253,000 offset by decreases of approximately 447,000 in stock based compensation expense, approximately $172,000 in accounts receivable, approximately $121,000 in inventory, approximately $56,000 in changes in fair value of derivative liabilities and approximately $69,000 in gains on AP and debt forgiveness.
Net cash used for investing activities increased approximately 11,000 for the nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011 primarily as a result of equipment purchases for the expansion of our DME sales.
Net cash provided by financing activities increased approximately 446,000 for the nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011 primarily due to the issuance of debt.
Liquidity and Capital Resources
At September 30, 2012, the Company had cash of $3,572 and working capital of approximately $313,000, compared to cash of $88,874 and working capital of approximately $749,000 at December 31, 2011. The working capital decrease of approximately $436,000 is primarily due to an increase in debt of approximately $601,000 and an increase in accounts payable and accrued liabilities of approximately $284,000 offset by an increase in accounts receivable of approximately $172,000, an increase in debt issue cost net of approximately $53,000 and an increase in inventory of approximately $121,000.
Our continued operations will primarily depend on whether we are able to generate revenues and profits and/or raise additional funds through various potential sources, such as equity and debt financing. Such additional funds may not become available on acceptable terms and there can be no assurance that any additional funding that we do obtain will be sufficient to meet our needs in the long term. We will continue to fund operations from cash on hand and through the similar sources of capital previously described. We can give no assurances that any additional capital that we are able to obtain will be sufficient to meet our needs.
Our recent sources of cash have been derived from the sale of our convertible secured notes. In addition, we recently entered into a $2,000,000 equity financing agreement, which will allow us to draw down on the line over a 2-year period, provided that certain conditions are met; however, there is no assurance that any such conditions will be met, and to date we have not met the conditions in order to drawn down against the line.
Furthermore, there is no guarantee that we will be successful in raising any additional capital. There can be no assurance that we will be able to raise these funds on terms acceptable to us, if at all.
Current and Future Financing Needs
We have spent, and expect to continue to spend, substantial amounts in connection with implementing our business strategy. Based on our current plans, we believe that our current cash may not be sufficient to enable us to meet our planned operating needs. However, the actual amount of funds we will need to operate is subject to many factors, some of which are beyond our control. We have based our estimate on assumptions that may prove to be wrong. We may need to obtain additional funds sooner or in greater amounts than we currently anticipate. Potential sources of financing include public or private sales of our shares or debt and other sources. We may seek to access the public or private equity markets when conditions are favorable due to our long-term capital requirements. We do not have any committed sources of financing at this time, and it is uncertain whether additional funding will be available when we need it on terms that will be acceptable to us, or at all. If we raise funds by selling additional shares of common stock or other securities convertible into common stock, the ownership interest of our existing stockholders will be diluted. If we are not able to obtain financing when needed, we may be unable to carry out our business plan. As a result, we may have to significantly limit our operations and our business, financial condition and results of operations would be materially harmed.
Critical Accounting Policies
The information required by this section is incorporated herein by reference to the information set forth under the caption “Summary of Significant Accounting Policies” in Note 2 of the Notes to Consolidated Financial Statements included in “Part I — Item 1 — Financial Statements” and is incorporated herein by reference.
Going Concern
As reflected in the accompanying unaudited interim consolidated financial statements, the Company had a net loss of approximately $593,000 and net cash used in operations of approximately $271,000 for the nine months ended September 30, 2012. These factors and raise substantial doubt about the Company’s ability to continue as a going concern.
The ability of the Company to continue its operations is dependent on management’s plans, which include the raising of capital through debt and/or equity markets with some additional funding from other traditional financing sources, including term notes, until such time that funds provided by operations are sufficient to fund working capital requirements. The Company may need to incur liabilities with certain related parties to sustain the Company’s existence.
The Company will require additional funding to finance the growth of its current and expected future operations as well as to achieve its strategic objectives. The Company believes its current available cash along with anticipated revenues may be insufficient to meet its cash needs for the near future. There can be no assurance that financing will be available in amounts or terms acceptable to the Company, if at all.
In response to these issues, management is taking the following actions:
| ● | increasing it sales presence in the community by sponsoring health related events |
| ● | hiring additional sales personnel to target specific market segments |
| ● | strengthening its internal controls, specifically targeting collections of its accounts receivables |
| ● | seeking additional third party debt and/or equity financing |
The accompanying unaudited interim consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. These financial statements do not include any adjustments relating to the recovery of the recorded assets or the classification of the liabilities that might be necessary should the Company be unable to continue as a going concern.
Off-Balance Sheet Arrangements
We do not have any unconsolidated special purpose entities and, we do not have exposure to any off-balance sheet arrangements. The term “off-balance sheet arrangement” generally means any transaction, agreement or other contractual arrangement to which an entity unconsolidated with us is a party, under which we have: (i) any obligation arising under a guarantee contract, derivative instrument or variable interest; or (ii) a retained or contingent interest in assets transferred to such entity or similar arrangement that serves as credit, liquidity or market risk support for such assets.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report and other documents that we file with the Securities and Exchange Commission contain forward-looking statements that are based on current expectations, estimates, forecasts and projections about our future performance, our business, our beliefs and our management’s assumptions. Statements that are not historical facts are forward-looking statements, including forward-looking information concerning pharmacy sales trends, prescription margins, number and location of new store openings, outcomes of litigation and the level of capital expenditures, industry trends, demographic trends, growth strategies, financial results, cost reduction initiatives, acquisition synergies, regulatory approvals, and competitive strengths. Words such as “expect,” “outlook,” “forecast,” “would,” “could,” “should,” “project,” “intend,” “plan,” “continue,” “sustain”, “on track”, “believe,” “seek,” “estimate,” “anticipate,” “may,” “assume,” and variations of such words and similar expressions are often used to identify such forward-looking statements, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are not guarantees of future performance and involve risks, assumptions and uncertainties, including, but not limited to, those described in Part I, Item 1A “Risk Factors” of our Annual Report on Form 10-K and in other reports that we file or furnish with the Securities and Exchange Commission. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those indicated or anticipated by such forward-looking statements. Accordingly, you are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date they are made. Except to the extent required by law, we undertake no obligation to update publicly any forward-looking statements after the date they are made, whether as a result of new information, future events, changes in assumptions or otherwise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable because the Company is a smaller reporting company.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures
Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 (“Exchange Act”), the Company carried out an evaluation, with the participation of the Company’s management, including the Company’s Chief Executive Officer (“CEO”), and Chief Financial Officer (“CFO”) of the effectiveness of the Company’s disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report. On May 28, 2012, the Company’s CEO and CFO and its Board of Directors concluded that its financial statements and notes thereto for the years ended December 31, 2011 and 2010 and the interim periods ended March 31, 2011, June 30, 2011, September 30, 2011 and March 31, 2012, were required to be restated to revise the initial treatment of the Reverse Merger from that of an acquisition to that of a reverse recapitalization. In light of the need to restate the financial statements the Company’s CEO and CFO have concluded that the disclosure controls were deficient and the deficiency constituted a material weakness. The Company’s CEO and CFO have since concluded that all material weaknesses have been remediated and significant deficiencies have been remediated. Based upon its current evaluation, the Company’s CEO and CFO have concluded that the Company’s current disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during our fiscal quarter ended September 30, 2012 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
From time to time, the Company may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business. Litigation is subject to inherent uncertainties, and an adverse result in these or other matters that may arise from time to time may harm its business. The Company is currently neither a party to nor is it aware of any such legal proceedings or claims to be filed against it.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the nine months ended September 30, 2012, the Company issued 273.204 shares of its common stock, with share prices ranging from $0.35 to $0.55, for debt issue costs and to consultants for services rendered; the shares have a fair value of $136,100. The fair value of stock issued for these services is based upon the quoted closing trading price of the Company’s common stock on the date if issue. The securities issued for services were offered and sold in reliance on the exemption from registration under Section 4(2) of the Act. The offering was not conducted in connection with a public offering, and no public solicitation or advertisement was made or relied upon by the individual in connection with the offering.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS
| 31.1 | Certification of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) * |
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| 31.2 | Certification of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) * |
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| 32.1 | Certification pursuant to Section 1350 of the Sarbanes-Oxley Act of 2002 * |
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| 32.2 | Certification pursuant to Section 1350 of the Sarbanes-Oxley Act of 2002 * |
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| EX-101.INS | XBRL Instance Document |
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| EX-101.SCH | XBRL Taxonomy Extension Schema |
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| EX-101.CAL | XBRL Taxonomy Extension Calculation Linkbase |
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| EX-101.DEF | XBRL Taxonomy Extension Definition Linkbase |
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| EX-101.LAB | XBRL Taxonomy Extension Label Linkbase |
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| EX-101.PRE | XBRL Taxonomy Extension Presentation Linkbase |
*Filed herewith
SIGNATURE
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.
| | PROGRESSIVE CARE INC. | |
| | | | |
| | By: | /s/ Vernon Watson | |
| | | Vernon Watson | |
| | | President and Chief Executive Officer | |
| | | (Principal Executive Officer) | |
| | | Date: November 21, 2012 | |
