See accompanies notes to consolidated financial statements.
BIO BALANCE CORP. AND SUBSIDIARY
BIOBALANCE CORP. & SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF NEW YORK HEALTH CARE, INC.
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2010 AND 2009
NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
| Organization and Basis of Consolidation and Presentation |
BioBalance Corp. ("BioBalance"), a development stage entity, was formed during May 2001 in the State of Delaware. BioBalance is a biopharmaceutical company focused on the development of treatments for gastrointestinal diseases that are poorly addressed by current therapies. BioBalance is currently pursuing prescription drug development of its lead product, PROBACTRIX® for the prevention of pouchitis. On March 24, 2006, the Company received approval from the Food and Drug Administration (the "FDA") to start Phase II clinical trials. There can be no assurance that BioBalance will be successful in obtaining regulatory approval or in marketing any such products. BioBalance, LLC (“LLC”), a Delaware limited liability company was formed in July 2008. Upon the formation of the LLC, BioBalance transferred its intellectual property into the LLC. Pursuant to an agreement with a claimant (See Note 4), BioBalance transferred a 1/3 interest in LLC as settlement of a claim against BioBalance and the parent company of BioBalance, New York Health care, Inc. The consolidated entity, collectively referred to, unless the context otherwise requires, as the “Company”, “we”, “our” or similar pronouns, includes BioBalance and LLC which is 66-2/3% owned by BioBalance. On January 2, 2003, BioBalance consummated a business combination with New York Health Care, Inc., a public company. As a result of the merger, BioBalance shareholders exchanged all of their BioBalance shares for 21,443,821 shares of common stock of New York Health Care. Basis of Presentation The financial statements have been prepared on the accrual basis of accounting. Cash and Equivalents The Company considers all highly liquid investments with maturities of three months or less when purchased to be cash equivalents. |
BIOBALANCE CORP. & SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF NEW YORK HEALTH CARE, INC.
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2010 AND 2009
Goodwill and Other Intangible Assets
ASC topic 350 of the Accounting Standards Codification, "Intangibles - Goodwill and Other” requires that goodwill and intangible assets having indefinite lives not be amortized, but instead be tested for impairment at least annually. Intangible assets determined to have definite lives are amortized over their remaining useful lives.
Income Taxes
The Company adopted FASB ASC 740, Income Taxes, at its inception. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets, including tax loss and credit carry forwards, and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred income tax expense represents the change during the period in the deferred tax assets and deferred tax liabilities. The components of the deferred tax assets and liabilities are individually classified as current and non-current based on their characteristics. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. No deferred tax assets or liabilities were recognized as of December 31, 2010 and 2009.
Uncertain Tax Positions
The Company adopted the provisions of Accounting for Uncertainty in Income Taxes (“Uncertain Tax Positions”) of the ASC. Uncertain Tax Positions prescribes recognition thresholds that must be met before a tax position is recognized in the financial statements and provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. Under “Uncertain Tax Positions”, an entity may only recognize or continue to recognize tax positions that meet a ““more-than-likely-than-not” threshold. All related interest and penalties would be expensed as incurred. The Company has evaluated its tax position for the period ended December 31, 2010 and 2009 and such evaluation did not require a material adjustment to the financial statements. The returns as filed are consolidated returns and are subject to audit by the Internal Revenue Service and New York State Department of Finance. The returns for the years ended December 31, 2007 to December 31, 2010 are subject to examination.
BIOBALANCE CORP. & SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF NEW YORK HEALTH CARE, INC.
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2010 AND 2009
| | | December 31, 2010 | | | December 31, 2009 | |
| | | | | | | |
| Expected income tax expense at the statutory rate of 39.74% | | $ | (292,946 | ) | | $ | (381,068 | ) |
| Tax effect of expenses that are not deductible for income tax purposes (net of other amounts deductible for tax purposes) | | | (49,473 | ) | | | (64,356 | ) |
| Tax effect of differences in the timing of deductibility of items for income tax purposes | | | - | | | | - | |
| Change in valuation allowance | | | 342,419 | | | | 445,423 | |
| Provision for income taxes | | $ | - | | | $ | - | |
| The components of deferred income taxes are as follows: | | | | | | | | |
| | | | | | | | | |
| | | December 31, 2010 | | | December 31, 2009 | |
| Deferred income tax asset: | | | | | | | | |
| Net operating loss carryforward | | $ | (11,952,701 | ) | | $ | (11,610,282 | ) |
| Valuation allowance | | | 11,952,701 | | | | 11,610,282 | |
| Deferred income taxes | | $ | - | | | $ | - | |
As of December 31, 2010 and 2009 the Company has a net operating loss carryforward of approximately $11,952,701 and $11,610,282, respectively, available to offset future taxable income through 2030. The valuation allowance at December 31, 2010 was $11,952,701. The valuation allowance at December 31, 2009 was $11,610,282. The net change in the valuation allowance for the year ended December 31, 2010 was an increase of $342,419.
Stock-Based Compensation
In December 2004, the FASB issued ASC No. 718, Compensation – Stock Compensation (“ASC 718”). Under ASC 718, companies are required to measure the compensation costs of share-based compensation arrangements based on the grant-date fair value and recognize the costs in the financial statements over the period during which employees are required to provide services. Share-based compensation arrangements include stock options, restricted share plans, performance-based awards, share appreciation rights and employee share purchase plans. As such, compensation cost is measured on the date of grant at their fair value. Such compensation amounts, if any, are amortized over the respective vesting periods of the option grant. The Company applies this statement prospectively.
Equity instruments (“instruments”) issued to persons other than employees are recorded on the basis of the fair value of the instruments, as required by ASC 718. ASC No. 505, Equity Based Payments to Non-Employees (“ASC 505”) defines the measurement date and recognition period for such instruments. In general, the measurement date is (a) when a performance commitment, as defined, is reached or (b) when the earlier of (i) the non-employee performance is complete or (ii) the instruments are vested. The measured value related to the instruments is recognized over a period based on the facts and circumstances of each particular grant as defined in the ASC 505.
BIOBALANCE CORP. & SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF NEW YORK HEALTH CARE, INC.
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2010 AND 2009
Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that could affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include value of Deferred Tax Assets and valuation of Intangible Assets.
Fair Value of Financial Instruments
The carrying amounts of the Company’s accounts payable and accrued expenses approximate fair value due to the relatively short period to maturity for these instruments
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist of temporary cash equivalents, which from time to time exceed the federal depository insurance coverage and commercial accounts receivable. The Company has cash investment policies that restrict placement of these investments to financial institutions evaluated as highly creditworthy.
Loss Per Share
Basic and diluted net loss per common share is computed based upon the weighted average common shares outstanding as defined by FASB Accounting Standards Codification Topic 260, “Earnings Per Share.”
Business Segments
The Company operates in one segment and therefore segment information is not presented.
Revenue Recognition
The Company will recognize revenue on arrangements in accordance with FASB ASC No. 605, “Revenue Recognition”. In all cases, revenue is recognized only when the price is fixed and determinable, persuasive evidence of an arrangement exists, the service is performed and collectability of the resulting receivable is reasonably assured
Research and Development
Under ASC No 350, goodwill and any other intangible assets deemed to have indefinite lives are not subject to amortization; however, goodwill is subject to impairment reviews, which must be performed at least annually or more frequently if events or circumstances indicate that goodwill or other indefinite lives intangibles might be impaired.
BIOBALANCE CORP. & SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF NEW YORK HEALTH CARE, INC.
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2010 AND 2009
Recent Accounting Pronouncements
ASU No. 2011-03; Reconsideration of Effective Control for Repurchase Agreements. In April, 2011, the FASB issued ASU No. 2011-03. The amendments in this ASU remove from the assessment of effective control the criterion relating to the transferor’s ability to repurchase or redeem financial assets on substantially the agreed terms, even in the event of default by the transferee. The amendments in this ASU also eliminate the requirement to demonstrate that the transferor possesses adequate collateral to fund substantially all the cost of purchasing replacement financial assets.
The guidance in this ASU is effective for the first interim or annual period beginning on or after December 15, 2011. The guidance should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted. The Company will adopt the methodologies prescribed by this ASU by the date required, and does not anticipate that the ASU will have a material effect on its financial position or results of operations.
ASU No. 2011-04; Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. In May, 2011, the FASB issued ASU No. 2011-04. The amendments in this ASU generally represent clarifications of Topic 820, but also include some instances where a particular principle or requirement for measuring fair value or disclosing information about fair value measurements has changed. This ASU results in common principles and requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. GAAP and IFRSs. The amendments in this ASU are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. Early application by public entities is not permitted.
The Company will adopt the methodologies prescribed by this ASU by the date required, and does not anticipate that the ASU will have a material effect on its financial position or results of operations.
ASU No. 2011-05; Amendments to Topic 220, Comprehensive Income. In June, 2011, the FASB issued ASU No. 2011-05. Under the amendments in this ASU, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. This ASU eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders' equity. The amendments in this ASU do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income.
The amendments in this ASU should be applied retrospectively. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Early adoption is permitted, because compliance with the amendments is already permitted. The amendments do not require any transition disclosures. Due to the recency of this pronouncement, the Company is evaluating its timing of adoption of ASU 2011-05, but will adopt the ASU retrospectively by the due date.
BIOBALANCE CORP. & SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF NEW YORK HEALTH CARE, INC.
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2010 AND 2009
On September 15, 2011, the FASB issued ASU 2011-08, Intangibles – Goodwill and Other, which simplifies how an entity is required to test goodwill for impairment. This ASU would allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under the ASU, an entity would not be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The ASU includes a number of factors to consider in conducting the qualitative assessment. The ASU is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted. This standard is not expected to have a material impact on the Company’s reported results of operations or financial position.
| NOTE 2 - | ACCOUNTS PAYABLE AND ACCRUED EXPENSES | |
| | | |
| | Accounts payable and accrued expenses consist of the following: | |
| | | |
| | | |
| | | | December 31, | | | December 31, | |
| | | | 2010 | | | 2009 | |
| | | | | | | | |
| | Accounts Payable | | $ | 39,599 | | | $ | 86,206 | |
| | Accrued Expenses | | | 133 | | | | 62,451 | |
| | | | $ | 39,732 | | | $ | 148,657 | |
NOTE 3 – RELATED PARTY TRANSACTIONS
The Company has received advances totaling $23,771,063 through December 31, 2010 from New York Health Care, Inc. (“NYHC”), the Company’s parent entity, primarily to fund the operations of the Company. The advances bear no interest.
Certain allocated overhead and administrative expenses have been charged by NYHC, the Company’s parent entity. These expenses generally consist of salaries and related benefits paid to corporate personnel and professional fees allocable to the Company. Allocations of personnel costs and professional fees have been based primarily on actual time spent by Company employees with respect to the operations of the Company. The Company believes that such allocation methods are reasonable.
NOTE 4 - EMERALD SETTLEMENT AGREEMENT
On August 12, 2008, the Company entered into a settlement agreement (“Emerald Settlement Agreement”) with Emerald Asset Management, Inc. (“Emerald”) and Yitz Grossman related to the resolution of disputes under a consulting agreement dated June 1, 2001 between BioBalance and Emerald relating to the consulting agreement dated June 1, 2001 between the Company and Emerald, whereby the Company settled its obligations under the Emerald Settlement Agreement
BIOBALANCE CORP. & SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF NEW YORK HEALTH CARE, INC.
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2010 AND 2009
The parties agreed to the following settlement terms: termination of the prior 2006 settlement agreement among the Company, Emerald and Grossman and a release by each party of prior claims against the other; an immediate cash payment by the Company to Grossman of $650,000; and a 33-1/3% interest in BioBalance LLC, a newly formed Delaware limited liability company ("the LLC") into which BioBalance contributed its interest in intellectual property and patents (valued at $600,000 at the date of the agreement), with BioBalance retaining the remaining 66-2/3% interest in the LLC. Contemporaneously with the settlement, the LLC entered into a one-year consulting agreement with Grossman under which Grossman will be paid a base consulting fee of $180,000 and be reimbursed for approved expenses, with the opportunity to earn up to an additional $180,000 contingent on an increase in the valuation of the LLC over the agreed-upon base valuation of $628,056, based on a specified formula. During the years ended December 31, 2010 and 2009, Mr. Grossman received approximately $326,000 and $296,000 in consulting fees and expenses.
The Company has advanced $2 million as a loan to the newly formed limited liability company to fund product development and administrative expenses (See Note 7).
NOTE 5 – COMMITMENTS AND CONTINGENCIES
Cautionary Statement
BioBalance operates in a competitive environment that involves a number of risks, some of which are beyond its control. Although we believe the expectations for BioBalance are based on reasonable assumptions, we can give no assurance that our expectations will be attained. Factors that could cause actual events or results to differ materially from expected results involve both known and unknown risks. Key factors include, among others: our need to secure additional financing and at acceptable terms; the high cost and uncertainty of clinical trials and other development activities involving pharmaceutical products; the dependence on third parties to manufacture its products; the unpredictability of the duration and results of regulatory approval for our products; our dependence on our lead biotherapeutic agent, PROBACTRIX® and the uncertainty of its market acceptance; the possible impairment of, or inability to enforce, intellectual property rights and the subsequent costs of defending these rights; and the loss of key executives or consultants.
Litigation
We are subject to various legal proceedings and claims, either asserted or unasserted, which arise in the ordinary course of business. While the outcome of these claims cannot be predicted with certainty, management does not believe that the outcome of any of these legal matters will have a material adverse effect on our results of operations or financial position, except as follows:
BIOBALANCE CORP. & SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF NEW YORK HEALTH CARE, INC.
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2010 AND 2009
On April 3, 2009, New York Health Care, Inc. (“NYHC”), the parent company of BioBalance and its directors were served with a shareholder derivative complaint seeking to set aside the Emerald Agreement entered into during the year ended December 31, 2008. This complaint was amended on July 7, 2009 to include Yitz Grossman as a defendant. On January 21, 2010, the court dismissed the complaint with the right to re-plead, while the plaintiffs have filed a second amended complaint. On March 8, 2010, the plaintiffs in the derivative action from April 2009 re-filed the complaint naming the NYHC and BioBalance as nominal defendants.
In July 2010 the directors of NYHC, NYHC, and BioBalance were served on a continuation of the derivative complaint of March 2010 seeking an injunction preventing the Company from selling its intellectual property owned by BioBalance, LLC pursuant to a letter of intent entered into during June 2010. The injunction was not granted by the court to the plaintiffs. A stipulation to withdraw the matter has been has been approved by the court on December 5, 2011.
NOTE 6 - SUBSEQUENT EVENTS
Sale of BioBalance
On September 6, 2011, the Company finalized a stock purchase agreement in which the New York Health Care, Inc. (“NYHC”) sold the outstanding capital stock in BioBalance to Enterologics, Inc. “Enterologics”, a public entity related through common ownership for a purchase price comprised of the following:
| (ii) | The assumption by Enterologics up to $25,000 of liabilities of BioBalance and/or BioBalance LLC, which liabilities shall be designated by the Company |
| (iii) | A number of shares of restricted common stock of Enterologics with an aggregate fair value of $150,000, provided that the number of restricted common shares will not be less than 300,000 share |
| (iv) | A three-year promissory note in the original principal amount of $100,000 issued by Enterologics to the NYHC. The promissory note is an unsecured obligation of Enterologics that bears interest on the outstanding principal balance at the annual rate of 5%, payable semi-annually. Principal is payable in three equal annual installments of $33,333, commencing on the first anniversary of the date of issuance. |
As a condition to the closing of the BioBalance Sale, NYHC purchased the 1/3 interest owned by Yitz Grossman in BioBalance, LLC (of which the Company owns the remaining 2/3) for a total of up to $75,000 in future indemnification expenses.
The Company has evaluated all subsequent events from the date of the balance sheet through February 29, 2012, which represents the date these consolidated financial statements are available to be issued.
