10-Q 1 f10q0912_progressivecare.htm QUARTERLY REPORT f10q0912_progressivecare.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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 September 30, 2012
 
OR
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934
 
For the transition period from ____________ to ____________
 
Commission file number: 000-52684
 
Progressive Care Inc.
(Exact name of registrant as specified in its charter)
 
Delaware
 
32-0186005
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)

1111 Park Center Blvd., Suite 202, Miami Gardens, FL  33169
(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: 
1-786-657-2060
 
Indicate by check mark whether the issuer: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. 
Yes x No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  x  No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated file, a non-accelerated file, 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                                o
 Accelerated filer                                    o
 
 Non-Accelerated filer                                 o
 Smaller reporting company              x
 
 (Do not check if a smaller reporting company
 
                            
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No x

As of November 21, 2012, the Registrant had 24,413,602 shares of common stock outstanding.



 
 
 
 
 
PROGRESSIVE CARE INC.
 
FORM 10-Q
 
TABLE OF CONTENTS
 
   
Page
     
 
PART I.—FINANCIAL INFORMATION
 
     
Item 1.
Financial Statements
F-1
     
 
Consolidated Balance Sheets - unaudited
F-1
     
 
Consolidated Statements of Operations - unaudited
F-2
     
 
Consolidated Statement of Equity - unaudited
F-3
     
 
Consolidated Statement of Cash Flows - unaudited
F-4
     
 
Notes to Consolidated Financial Statements
F-5
     
Item 2.
Management’s Discussion and Analysis of Financial Conditions and Results of Operations
3
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risks
8
     
Item 4.
Controls and Procedures
8
     
 
PART II—OTHER INFORMATION
9
     
Item 1.
Legal Proceedings
9
     
Item 1A.
Risk Factors
9
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
9
     
Item 3.
Defaults Upon Senior Securities
9
     
Item 4.
Mine Safety Disclosures
9
     
Item 5.
Other Information
9
     
Item 6.
Exhibits
9
     
SIGNATURE
10

 
2

 
PART I.—FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS
 
Progressive Care Inc. and Subsidiaries
Consolidated Balance Sheets
 
   
September 30, 2012
   
December 31, 2011
 
         
(As Restated)
 
   
(unaudited)
   
(unaudited)
 
Assets
 
             
Current Assets
           
Cash
  $ 3,572     $ 88,874  
Accounts receivable - net
    1,295,198       1,006,835  
Income tax receivable
    3,849       -  
Inventory
    319,951       248,678  
Prepaids
    23,546       21,741  
Total Current Assets
    1,646,116       1,366,128  
                 
Property and equipment - net
    270,654       276,795  
                 
Other Assets
               
Debt issue costs - net
    105,051       22,259  
Deposits
    47,612       44,741  
Deferred tax asset
    156,268       156,268  
Total Other Assets
    308,931       223,268  
Total Assets
  $ 2,225,701     $ 1,866,191  
                 
Liabilities and Stockholders' Equity
 
                 
Current Liabilities
               
Cash overdraft
  $ -     $ 71,380  
Accounts payable and accrued liabilities
    515,642       248,785  
Deferred rent payable
    39,812       17,535  
Income taxes payable
    -       38,754  
Debt - net
    449,182       87,767  
Debt - related party
    85,000       73,329  
Accrued interest payable -  related party
    -       24,732  
Derivative liability
    187,974       -  
Deferred tax liability
    55,268       55,268  
Total Current Liabilities
    1,332,878       617,550  
                 
Long Term Liabilities
               
Debt
    150,000       150,000  
                 
Stockholders' Equity
               
Common stock, par value $0.0001; 100,000,000 shares authorized
               
24,413,602 and  36,348,830  issued and outstanding, respectively
    2,441       3,635  
Additional paid in capital
    93,340       (144,945 )
Retained Earnings
    647,042       1,239,951  
Total Stockholders' Equity
    742,823       1,098,641  
                 
Total Liabilities and Stockholders' Equity
  $ 2,225,701     $ 1,866,191  
 
See accompanying notes to consolidated financial statements
 
 
F-1

 
 
Progressive Care Inc. and Subsidiaries
 Consolidated Statements of Operations
(Unaudited)
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30, 2012
   
September 30, 2011
   
September 30, 2012
   
September 30, 2011
 
         
(As Restated)
         
(As Restated)
 
                         
Sales - net
  $ 2,532,257     $ 1,937,985     $ 7,502,263     $ 5,707,894  
                                 
Cost of sales
    1,749,911       1,085,814       5,337,783       2,917,767  
                                 
Gross profit
    782,346       852,171       2,164,480       2,790,127  
                                 
Selling, general and administrative expenses
    1,099,529       946,117       2,708,990       2,920,008  
                                 
Loss from operations
    (317,183 )     (93,946 )     (544,510 )     (129,881 )
                                 
Other Income (Expense)
                               
Change in fair value of derivative liability
    40,234       -       56,179       -  
Gain on accounts payable and debt forgiveness
    -       -       69,298       -  
Gain on debt settlement
    -       -       -       12,585  
Loss on sale of equipment
    -       (2,671     -       (2,671 )
Interest expense
    (127,181 )     (1,426 )     (213,575 )     (13,997 )
Total other income (expense) - net
    (86,947 )     (4,097 )     (88,098 )     (4,083 )
                                 
Loss from operations before provision for income taxes
    (404,130 )     (98,043 )     (632,608 )     (133,964 )
                                 
Income tax benefit
    39,699       (25,421     39,699       (76,195
                                 
Net loss
  $ (364,431 )   $ (123,464 )   $ (592,909 )   $ (210,159 )
                                 
Basic and diluted net loss per common share
    (0.01 )     (0.00 )     (0.02 )     (0.00 )
                                 
Weighted average number of common shares outstanding
                               
  during the period - basic and diluted
    29,573,281       34,161,539       34,132,251       35,137,928  
 
See accompanying notes to consolidated financial statements
 
 
F-2

 
 
Progressive Care Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity
Nine Months Ended September 30, 2012
(Unaudited)
 
   
Common Stock
   
Additional
         
Total
 
   
$0.0001 Par Value
   
Paid-in
   
Retained
   
Stockholders'
 
   
Shares
   
Amount
   
Capital
   
Earnings
   
Equity
 
                               
Balance, December 31, 2010 (as restated)
    33,562,000     $ 3,356     $ (1,197,393 )   $ 1,509,455     $ 315,418  
                                         
Issuance of common stock for services rendered
    302,261       30       83,213       -       83,243  
                                         
Issuance of common stock for services rendered - related parties
    1,385,596       139       524,861       -       525,000  
                                         
Issuance of common stock in connection with the conversions of debt and accrued interest
    1,098,973       110       439,479       -       439,589  
                                         
Issuance of warrants as debt issue cost - related party
    -       -       4,895       -       4,895  
                                         
Net loss - 2011 (as restated)
    -       -       -       (269,504 )     (269,504 )
                                         
Balance, December 31, 2011 (as restated)
    36,348,830       3,635       (144,945 )     1,239,951       1,098,641  
                                         
Issuance of common stock in connection with debt-treated as debt discount ($0.51)
    196,078       19       99,981       -       100,000  
                                         
Issuance of common stock for services rendered
    45,000       5       21,096       -       21,101  
                                         
Issuance of common stock for services rendered - related party
    32,126       3       14,997       -       15,000  
                                         
Retirement of cancelled shares
    (12,208,432 )     (1,221 )     1,221       -       -  
                                         
Gain on debt forgiveness - related party
    -       -       100,990       -       100,990  
                                         
Net loss for the nine months ended September 30, 2012
    -       -       -       (592,909 )     (592,909 )
                                         
Balance, September 30, 2012 (unaudited)
    24,413,602     $ 2,441     $ 93,340     $ 647,042     $ 742,823  
 
See accompanying notes to consolidated financial statements
 
 
F-3

 
 
Progressive Care Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
 
   
Nine Months Ended
 
   
September 30, 2012
   
September 30, 2011
 
         
(As Restated)
 
Cash Flows From Operating Activities:
           
             
Net loss
  $ (592,909 )   $ (210,159 )
                 
Adjustments to reconcile net loss to net cash
               
provided by (used in) operating activities:
               
Depreciation
    193,840       30,576  
Bad debt
    277,659       -  
Stock-based compensation
    21,101       483,243  
Stock-based compensation - related parties
    15,000       -  
Amortization of debt issue, costs, and debt discount
    172,052       -  
Change in fair value of derivative liability
    (56,179 )     -  
Gain on accounts payable and debt forgiveness
    (69,298 )     -  
Changes in operating assets and liabilities:
               
(Increase) decrease in:
               
Accounts receivable
    (566,022 )     (393,552 )
Income tax receivable
    (3,849 )     -  
Inventory
    (71,273 )     49,990  
Prepaids
    (1,805 )     -  
Deposits
    (2,871 )     (35,704 )
Increase (decrease) in:
               
Accounts payable and accrued liabilities
    426,723       142,571  
Deferred rent
    22,277       13,100  
Income tax payable
    (38,754 )     20,650  
Deferred tax liabilities - net     -       42,935  
Accrued interest payable - related party
    2,929       (1,419 )
Net Cash Provided by (Used in) Operating Activities
    (271,379 )     142,231  
                 
Cash Flows From Investing Activities:
               
Purchase of property and equipment
    (187,699 )     (176,231 )
Net Cash Used in Investing Activities
    (187,699 )     (176,231 )
                 
Cash Flows From Financing Activities:
               
Cash overdraft
    (71,380 )     -  
Proceeds from issuance of debt
    540,000       -  
Proceeds from issuance of debt - related party
    85,000       -  
Debt issue costs
    (52,500 )     -  
Repayment of debt
    (127,344 )     (71,780 )
Net Cash Provided by (Used in) Financing Activities
    373,776       (71,780 )
                 
Net decrease in cash
    (85,302 )     (105,780 )
                 
Cash at beginning of period
    88,874       204,336  
                 
Cash at end of period
  $ 3,572     $ 98,556  
                 
Supplemental disclosures of cash flow information:
               
Cash paid for interest
  $ 12,062     $ 6,787  
Cash paid for taxes
  $ 3,000     $ 12,610  
                 
Supplemental disclosures of non-cash financing activities:
               
Conversion of accounts payable to notes
  $ 153,335     $ -  
Debt discount recorded on convertible debt accounted for as a derivative liability
  $ 244,153     $ -  
Issuance of common stock for debt issue costs
  $ 100,000     $ -  
Gain on debt forgiveness - related party
  $ 100,990     $ -  
Conversion of notes payable into common shares
  $ -     $ 410,000  
Conversion of accrued interest into common shares
  $ -     $ 29,589  
 
See accompanying notes to consolidated financial statements
 
 
F-4

 
 
Progressive Care Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
September 30, 2012
(unaudited)
 
Note 1 Nature of Operations & Restatement
 
Organization
 
Progressive Training, Inc. (“Progressive Training”) was incorporated on October 31, 2006 in the State of Delaware. Pharmco, LLC a Florida limited liability company (“PharmCo”) was incorporated on November 29, 2005. On October 21, 2010, Progressive Training entered into an Agreement and Plan of Merger with PharmCo, and Pharmco Acquisition Corp. (“Acquisition Sub”), pursuant to which Acquisition Sub was merged with and into PharmCo, and PharmCo, as the surviving corporation, became the Company’s wholly-owned subsidiary (the “Reverse Merger”). As part of the Reverse Merger, Progressive Training was renamed Progressive Care Inc. (the “Company”).

Recapitalization
 
Immediately following the Reverse Merger, the shareholders of PharmCo owned a majority of the outstanding shares of the Company. In addition, as part of the transaction, the previous owners of Progressive Training retained the training video business; therefore, the transaction was accounted for as a reverse recapitalization. The assets and liabilities and the historical operations that are reflected in the financial statements are those of PharmCo. The historical consolidated financial statements reflect the impact of the change in capital structure that resulted from the recapitalization as if that capital structure was in place as of December 31, 2009.

Description of the Business
 
The Company is a retail pharmacy specializing in the sale of anti-retroviral medications and related patient care management, the sale and rental of durable medical equipment ("DME") and the supply of prescription medications and DME to nursing homes and assisted living facilities.
 
Basis of Presentation
 
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules and regulations of the United States Securities and Exchange Commission for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they may not include all the information and footnotes necessary for a comprehensive presentation of financial position, results of operations, or cash flows. It is management's opinion, however, that all material adjustments have been made which are necessary for a fair financial statement presentation. The results for the interim period are not necessarily indicative of the results to be expected for the full year.

The unaudited interim consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, which contains the audited financial statements and notes thereto, together with Management’s Discussion and Analysis of Financial Condition and Results of Operation, for the year ended December 31, 2011. The interim results for the period ended September 30, 2012 are not necessarily indicative of results for the full fiscal year.

The Company’s year ended December 31, 2011 and 2010 audited financial statements are currently being restated and therefore the Company has presented them herein as unaudited, since the related restatements have not yet been filed.

Restatement
 
On May 28, 2012, the Company concluded that the following financial statements required restatement: its audited financial statements for the year ended December 31, 2010 filed in an annual report on Form 10-K with the SEC on April 15, 2011; (ii) its audited financial statements for the year ended December 31, 2011, filed in an annual report on Form 10-K with the SEC on April 16, 2012; (iii) its unaudited financial statements for the period ended March 31, 2011, filed in a quarterly report on Form 10-Q with the SEC on May 23, 2011; (iv) its unaudited financial statements for the period ended June 30, 2011, filed in a quarterly report on Form 10-Q with the SEC on August 22, 2011; (v) its unaudited financial statements for the period ended September 30, 2011, filed in a quarterly report on Form 10-Q with the SEC on November 14, 2011, and (vi) its unaudited financial statements for the period ended March 31, 2012, filed in a quarterly report on Form 10-Q with the SEC on May 21, 2012.
 
 
F-5

 
 
Progressive Care Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
September 30, 2012
(unaudited)
 
The financial statements are being restated to properly account for the Reverse Merger as a reverse recapitalization, whereby for accounting purposes, PharmCo acquired Progressive and therefore the financial statements set forth above are required to be restated. The Company plans on completing the restatements in the next 30 days.

The following tables present the impact of the restatements on the Company’s year ended December 31, 2011 balance sheet and nine months ended September 30, 2011 statement of operations and statement of cash flows, which are used as comparative information to the Company’s current financial statement herein.

Unaudited and Restated Balance Sheet as of December 31, 2011:
 
   
December 31, 2011
 
   
As Originally Reported
   
Adjustments
   
As Restated
 
                   
Assets
                 
                   
Current Assets
                 
Cash
    88,874     $ -       88,874  
Accounts receivable - net
    1,006,835       -       1,006,835  
Inventory
    248,678       -       248,678  
Prepaids
    21,741       -       21,741  
Total Current Assets
    1,366,128       -       1,366,128  
                         
Property and equipment - net
    276,795       -       276,795  
                         
Other Assets
                       
Intangibles - net
    1,574,663       (1,574,663 )     -  
Goodwill
    1,348,402       (1,348,402 )     -  
Deposits
    44,741       -       44,741  
Debt issue costs
    22,259       -       22,259  
Deferred tax asset
    -       156,268       156,268  
Total Other Assets
    2,990,065       (2,766,797 )     223,268  
                         
Total Assets
    4,632,989     $ (2,766,797 )     1,866,191  
                         
Liabilities and Stockholders' Equity
                       
                         
Current Liabilities
                       
Cash overdraft
  $ 71,380     $ -     $ 71,380  
Accounts payable and accrued liabilities
    248,786       -       248,786  
Deferred rent payable
    17,535       -       17,535  
Income taxes payable
    42,656       (3,902 )     38,754  
Notes payable
    87,767       -       87,767  
Notes payable - related party
    73,329       -       73,329  
Accrued interest payable - related party
    24,732       -       24,732  
Deferred tax liability
    -       55,268       55,268  
Total Current Liabilities
    566,185       51,366       617,550  
                         
Long Term Liabilities
                       
Convertible Debt
    150,000       -       150,000  
                         
Stockholders' Equity
                       
Common stock, par value $0.0001; 100,000,000 shares authorized;
     36,348,830 issued and outstanding
    3,807       (172 )     3,635  
Additional paid in capital
    6,278,571       (6,423,516 )     (144,945 )
Accumulated deficit
    (2,365,574 )     3,605,525       1,239,951  
Total Stockholders' Equity
    3,916,804       (2,818,163 )     1,098,641  
                         
Total Liabilities and Stockholders' Equity
    4,632,989     $ (2,766,797 )     1,866,191  
 
 
F-6

 
 
Progressive Care, Inc. and Subsidiary
 Consolidated Statements of Operations
(Restated)
 
Unaudited and Restated Statement of Operations for the three and nine months ended September 30, 2011:
 
   
Three months ended
   
Nine months ended
 
   
September 30, 2011
   
September 30, 2011
 
   
As Originally Reported
   
Adjustments
   
As Restated
   
As Originally Reported
   
Adjustments
   
As Restated
 
                                     
Sales - net
    1,937,985     $ -     $ 1,937,985     $ 5,707,894     $ -     $ 5,707,894  
                                                 
Cost of sales
    1,085,814       -       1,085,814       2,917,767       -       2,917,767  
                                                 
Gross profit
    852,171       -       852,171       2,790,127       -       2,790,127  
                                                 
Selling, general and administrative expenses
    1,007,418       (61,301 )     946,117       3,101,911       (181,903 )     2,920,008  
                                                 
Income from operations
    (155,247 )     61,301       (93,946 )     (311,784 )     181,903       (129,881 )
                                                 
Other Income (Expense)
                                               
Gain on debt settlement
    -       -       -       12,585       -       12,585  
Loss on sale of equipment
    (2,671 )     -       (2,671 )     (2,671 )             (2,671 )
Interest expense
    (1,426 )     -       (1,426 )     (13,997 )     -       (13,997 )
Total other income - net
    (4,097 )     -       (4,097 )     (4,083 )     -       (4,083 )
                                                 
Loss from operations before provision for income taxes
    (159,344 )     61,301       (98,043 )     (315,867 )     181,903       (133,964 )
                                                 
Provision for income taxes
                                               
Current income tax expense
    -       (11,087 )     (11,087 )     -       (33,260 )     (33,260 )
Deferred income tax expense
    -       (14,334 )     (14,334 )     -       (42,935 )     (42,935 )
Income tax expense
    -       (25,421 )     (25,421 )     -       (76,195 )     (76,195 )
                                                 
Net loss
    (159,344 )     35,880       (123,464 )     (315,867 )     105,708       (210,159 )
                                                 
Basic and diluted loss per share:
    (0.00 )     0.00       (0.00 )     (0.01 )     0.00       (0.01 )
                                                 
Weighted average number of common shares outstanding
                                         
  during the period - basic and diluted
    35,879,539       -       34,161,539       35,137,928       -       35,137,928  
 
 
F-7

 
 
Progressive Care, Inc. and Subsidiary
Consolidated Statements of Cash Flows
(Restated)
 
 Unaudited and Restated Statement of Cash Flows for the nine months ended September 30, 2011:
 
   
September 30, 2011
 
   
As Originally Reported
   
Adjustments
   
As Restated
 
                   
Cash Flows From Operating Activities:
                 
Net loss
  $ (315,867 )   $ 105,708     $ (210,159 )
Adjustments to reconcile net loss to net cash
                       
provided by (used in) operating activities:
                       
Recognition of stock-based compensation
    483,243       -       483,243  
Depreciation
    30,576       -       30,576  
Amortization of intangibles
    181,904       (181,904 )     -  
Changes in operating assets and liabilities:
                       
Accounts receivable
    (393,552 )     -       (393,552 )
Inventory
    49,990       -       49,990  
Deposits
    (35,704 )     -       (35,704 )
Accounts payable and accrued liabilities
    142,570       1       142,571  
Deferred rent
    13,100       -       13,100  
Income tax payable
    (12,610 )     33,260       20,650  
Deferred tax liabilities - net     -       42,935       42,935  
Accrued interest payable - related parties
    (1,419 )     -       (1,419 )
Discontinued operations
    -       -       -  
Net Cash Provided by Operating Activities
    142,231       -       142,231  
                         
Cash Flows From Investing Activities:
                       
Purchase of property and equipment
    (176,231 )     -       (176,231 )
Net Cash Used in Investing Activities
    (176,231 )     -       (176,231 )
                         
Cash Flows From Financing Activities:
                       
Proceeds from note payable
    -       -       -  
Repayment of note payable
    (71,780 )     -       (71,780 )
Net Cash Used in Financing Activities
    (71,780 )     -       (71,780 )
                         
Net increase (decrease) in cash
    (105,780 )     -       (105,780 )
                         
Cash at beginning of period
    204,336       -       204,336  
                         
Cash at end of period
    98,556       -       98,556  
                         
Supplemental disclosures of cash flow information:
                       
Cash paid for interest
    6,787       -       6,787  
Cash paid for taxes
    12,610       -       12,610  
                         
Supplemental disclosures of non-cash financing activities:
                       
Conversion of notes payable into common shares
    410,000       -       410,000  
Conversion of accrued interest into common shares
    29,589       -       29,589  
 
 
F-8

 
 
Progressive Care Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
September 30, 2012
(unaudited)
 
Note 2 Summary of Significant Accounting Policies
 
Principles of Consolidation
 
All inter-company accounts and transactions have been eliminated in consolidation.

Reclassification
 
The Company has reclassified certain prior period amounts to conform to the current period presentation including the restatement previously mentioned. These reclassifications had no effect on the financial position, results of operations or cash flows for the periods presented.

Use of Estimates
 
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Such estimates and assumptions impact both assets and liabilities, including but not limited to: net realizable value of accounts receivable, estimated useful lives and potential impairment of property and equipment, estimated fair value of warrants and derivative liabilities using the Black-Scholes option pricing method and estimates of tax assets and liabilities.

Making estimates requires management to exercise significant judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation or set of circumstances that existed at the date of the financial statements, which management considered in formulating its estimate, could change in the near term due to one or more future confirming events. Accordingly, actual results could differ significantly from estimates.

Cash
 
The Company minimizes credit risk associated with cash by periodically evaluating the credit quality of its primary financial institution. The balance at times may exceed federally insured limits; however, at September 30, 2012 and December 31, 2011, respectively, the balances did not exceed the federally insured limit. The Company has no cash equivalents.
 
 
F-9

 
 
Progressive Care Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
September 30, 2012
(unaudited)
 
Risks and Uncertainties
 
The Company's operations are subject to intense competition, risk and uncertainties including financial, operational, regulatory and other risks including the potential risk of business failure. See Note 11 – Going Concern.
 
Billing Concentrations
 
The Company’s primary receivables are from prescription medication and DME equipment billed to various insurance providers.  Ultimately, the insured is responsible for payment should the insurance company not reimburse the Company. The Company generated reimbursements from significant insurance providers for the nine months ended September 30, 2012 and 2011 as shown below.

   
Nine months ended
 
Insurance Provider
 
September 30,
2012
   
September 30,
2011
 
A
    19%       9%  
B
    16%       14%  
C
    12%       10%  
D
    13%       -  
E
    -       18%  
F
    13%       1%  
 
Inventory
 
Inventory is valued on a lower of first-in, first-out (FIFO) cost or market basis.  Inventory primarily consists of prescription medications, DME and retail items.

Property and Equipment
 
Company used property and equipment is stated at cost, less accumulated depreciation. Expenditures for maintenance and repairs are charged to expense as incurred.

The Company provides DME on rent-to-own terms. Pursuant to Medicare guidelines (which are followed by private insurance carriers as well) DME equipment is “rented” to the insured for 13 months, after which title to the equipment transfers to the insured. Depreciation of DME equipment is recorded to cost of sales.
 
Depreciation is computed on a straight-line basis over estimated useful lives. Property and equipment is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. There were no impairment charges taken for the nine months ended September 30, 2012 or 2011.

Fair Value of Financial Instruments
 
The Company measures assets and liabilities at fair value based on an expected exit price as defined by the authoritative guidance on fair value measurements, which represents the amount that would be received on the sale of an asset or paid to transfer a liability, as the case may be, in an orderly transaction between market participants. As such, fair value may be based on assumptions that market participants would use in pricing an asset or liability. The authoritative guidance on fair value measurements establishes a consistent framework for measuring fair value on either a recurring or nonrecurring basis whereby inputs, used in valuation techniques, are assigned a hierarchical level.

The following are the hierarchical levels of inputs to measure fair value

Level 1 – Observable inputs that reflect quoted market prices in active markets for identical assets or liabilities.
 
Level 2 - Inputs reflect quoted prices for identical assets or liabilities in markets that are not active; quoted prices for similar assets or liabilities in active markets; inputs other than quoted prices that are observable for the assets or liabilities; or inputs that are derived principally from or corroborated by observable market data by correlation or other means.
 
Level 3 – Unobservable inputs reflecting the Company’s assumptions incorporated in valuation techniques used to determine fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available.
 
 
F-10

 
 
Progressive Care Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
September 30, 2012
(unaudited)
 
The following are the major categories of liabilities measured at fair value on a recurring basis as of September 30, 2012 and December 31, 2011, using quoted prices in active markets for identical liabilities (Level 1); significant other observable inputs (Level 2); and significant unobservable inputs (Level 3):
 
   
September 30, 2012
   
December 31, 
2011
 
Derivative Liabilities (Level 2)
  $ 187,974     $ -  

The Level 2 valuation relates to derivative liabilities measured using management's estimates of fair value as well as other significant inputs are unobservable.

The Company has determined the estimated fair value amounts presented in these financial statements using available market information and appropriate methodologies. However, considerable judgment is required in interpreting market data to develop the estimates of fair value. The estimates presented in the financial statements are not necessarily indicative of the amounts that could be realized in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

Fair value estimates are based upon pertinent information available as of the respective balance sheet dates and the Company has determined that the carrying value of all financial instruments approximates fair value. The Company's financial instruments consisted primarily of accounts receivable, prepaids, accounts payable and accrued liabilities, derivative liabilities and debt. The carrying amounts of the Company's financial instruments generally approximated their fair values as of September 30, 2012 and December 31, 2011, respectively, due to the short-term nature of these instruments.

Beneficial Conversion Feature and Debt Discount
 
For conventional convertible debt where the rate of conversion is below market value, the Company records a "beneficial conversion feature" ("BCF") and related debt discount.

When the Company records a BCF, the relative fair value of the BCF is recorded as a debt discount against the face amount of the respective debt instrument. The discount is amortized to interest expense over the life of the debt. At September 30, 2012 and 2011, the Company had no BCFs.

Derivative Liabilities
 
Fair value accounting requires bifurcation of embedded derivative instruments such as conversion features in convertible debt or equity instruments, and measurement of their fair value. In determining the appropriate fair value, the Company uses the Black-Scholes option-pricing model. In assessing the convertible debt instruments, management determines if the convertible debt host instrument is conventional convertible debt and further if there is a beneficial conversion feature requiring measurement. If the instrument is not considered conventional convertible debt, the Company will continue its evaluation process of these instruments as derivative financial instruments.
 
Once derivative liabilities are determined, they are adjusted to reflect fair value at the end of each reporting period. Any increase or decrease in the fair value is recorded in results of operations as an adjustment to fair value of derivatives. In addition, the fair value of freestanding derivative instruments such as warrants, are also valued using the Black-Scholes option-pricing model. Once a derivative liability ceases to exist any remaining fair value will be reclassified to additional paid in capital.
 
Revenue Recognition
 
The Company records revenue when all of the following have occurred: (1) persuasive evidence of an arrangement exists, (2) asset is transferred to the customer without further obligation, (3) the sales price to the customer is fixed or determinable, and (4) collectability is reasonably assured.

For the nine months ended September 30, 2012 and 2011, the Company had two revenue streams.
 
 
F-11

 
 
Progressive Care Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
September 30, 2012
(unaudited)
 
(i)  
Pharmacy

The Company recognizes its pharmacy revenue when a customer picks up or is delivered their prescription or merchandise.  Billings for most prescription orders are with third-party payers, including Medicare, Medicaid and other insurance carriers.  Customer returns are nominal. 

Total pharmacy revenues for the nine months ended September 30, 2012 and 2011 were approximately $6,510,000 (87%) and $5,033,000 (88%), respectively.

(ii)  
Durable Medical Equipment

The Company recognizes DME revenue from the date the equipment is picked up or delivered to the customer. Revenue from DME rentals is booked over a 13 month period. Customer returns are nominal. 

Total DME revenues for the nine months ended September 30, 2012 and 2011 were approximately $992,000 (13%) and $675,000 (12%), respectively.

Cost of Sales
 
Cost of pharmacy sales is derived based upon vendor purchases relating to prescriptions sold and point-of-sale scanning information for non-prescription sales, and is adjusted based on periodic inventories. All other costs related to sales are expensed as incurred.

Cost of DME sales is derived from depreciation of DME rentals. All other costs related to sales are expensed as incurred.
 
Vendor Concentrations
 
For the nine months ended September 30, 2012 and 2011, the Company had significant vendor concentrations as follows:

Vendor
 
Nine months ended
September 30, 2012
   
Nine months ended
September 30, 2011
 
A
    69 %     20 %
B
    16 %     37 %
C
    1 %     29 %

Due to a large selection of pharmaceutical wholesalers in the United States, management does not believe that losing any vendor relationship will have an impact on the Company’s business.

Selling, General and Administrative Expenses (SG&A)
 
SG&A primarily consists of salaries, contract labor, occupancy costs, and expenses directly related to the Company’s operations.  Other administrative costs include advertising, insurance and depreciation.

Advertising
 
Costs incurred for producing and communicating advertising for the Company are charged to operations as incurred and are as follows:

   Nine months
ended
September 30, 2012
     
Nine months
ended
September 30, 2011
 
  $ 19,153     $ 52,289  

 
F-12

 
 
Progressive Care Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
September 30, 2012
(unaudited)
 
Stock-Based Payment Arrangements
 
Generally, all forms of stock-based payments, including warrants, are measured at their fair value on the awards’ grant date either using the stock's closing price as quoted on a national market or by using a Black-Scholes pricing model, based on the estimated number of awards that are ultimately expected to vest. Stock-based compensation awards issued to non-employees for services rendered are recorded at either the fair value of the services rendered or the fair value of the stock-based payment, whichever is more readily determinable. The expense resulting from stock-based payments are recorded in general and administrative expense in the consolidated statement of operations.

Income Taxes
 
Income taxes are accounted for under the asset and liability method. 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 and operating loss and tax credit carry forwards. Deferred tax assets 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. The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained.

The Company does not believe it has any uncertain tax positions.

Earnings (Loss) per Share
 
Basic earnings/loss per share (“EPS”) is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding during the period, excluding the effects of any potentially dilutive securities. Diluted EPS gives effect to all dilutive potential of shares of common stock outstanding during the period including stock warrants, using the treasury stock method (by using the average stock price for the period to determine the number of shares assumed to be purchased from the exercise of warrants), and convertible debt, using the if-converted method. Diluted EPS excludes all dilutive potential of shares of common stock if their effect is anti-dilutive.

The Company had the following potential common stock equivalents at September 30, 2012:
 
   
Shares
 
       
Convertible debt – face amount of $150,000; fixed conversion price ; $0.40
    375,000  
Convertible debt – face amount of $500,000; variable conversion price; $0.46 at September 30, 2012
    1,096,491  
Common stock warrants - 15,000; exercise price of $0.40
    15,000  
Total common stock equivalents
    1,486,491  
 
The Company had no common stock equivalents at September 30, 2011.

The Company reflected a net loss for the nine months ended September 30, 2012 and 2011; therefore, the effect of considering any common stock equivalents, if outstanding, would be anti-dilutive; consequently, a separate computation of diluted earnings (loss) per share is not presented.

In connection with the Reverse Merger, all share and per share amounts have been retroactively restated.

Recent Accounting Pronouncements
 
There are no new accounting pronouncements that have any impact on the Company’s financial statements.

 
F-13

 
 
Progressive Care Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
September 30, 2012
(unaudited)
 
Note 3 Accounts Receivable
 
Accounts receivable consisted of the following at September 30, 2012 and December 31, 2011.

   
September 30, 2012
   
December 31, 2011
 
Gross accounts receivable
  $ 1,362,880     $ 1,057,696  
Allowance
    (67,682 )     (50,861 )
Accounts receivable – net
  $ 1,295,198     $ 1,006,835  

The Company recorded an approximate 5% allowance for bad debt for estimated differences between expected and actual payment of accounts receivables. These reductions are made based upon estimates that are determined by historical experience, contractual terms, and current conditions. Each quarter, the Company reevaluates its estimates to assess the adequacy of its allowance, adjusting the amounts as necessary.

For the nine months ended September 30, 2012, the Company wrote off $239,348 of its accounts receivable as bad debt expense. In the first quarter of 2012, Medicare began a standard fraud prevention review processes of almost all the Company’s related billings. As a result, the Company experienced much higher than normal initial denial rates and has had to resubmit (appeal) numerous claims. In some cases, this process can take up to 15 months to complete, and although some payments of appealed claims have been received, the Company believes it is more likely than not that a large number of claims will ultimately be uncollectable. However, should payments be later received, the Company will record these payments as other income.

Note 4 Property and Equipment
 
Property and equipment consisted of the following.

   
September 30,
2012
   
December 31,
2011
 
Estimated Useful Life
            (As Restated)    
DME rental equipment
  $ 223,055     $ 223,685  
Life of the lease
Leasehold improvements and fixtures
    202,036       139,008  
5 years
Vehicles
    90,046       90,046  
3 years
Computer equipment and software
    56,407       56,407  
3-5 years
Furniture and equipment
    30,575       28,486  
13 months
     Total
    602,119       537,632    
Less: accumulated depreciation
    (331,465 )     (260,837 )  
Property and equipment – net
  $ 270,654     $ 276,795    
 
As part of the restated financials, the Company recorded the assets of Pharmco at cost and recorded depreciation from the purchase date. Originally, the Company had recorded these assets at their fair value on October 21, 2010, the date of the merger.
 
Depreciation expense for non DME assets the nine months ended September 30, 2012 and 2011 was $30,464 and $30,576, respectively. Depreciation of DME for the nine months ended September 30, 2012 and 2011 was $158,054 and $51,486 respectively, and was recorded to cost of sales.

Note 5 Debt
 
Debt consists of the following:
 
   
September 30, 2012
   
December 31, 2011
 
A. Convertible debt - Secured
  $ 500,000     $ -  
     Less: debt discount
    (141,810 )     -  
     Convertible debt - net
    358,190       -  
                 
B. Convertible debt - Unsecured
    150,000       150,000  
C. Notes - Secured
    36,327       -  
D. Notes – Unsecured
    139,665       161,096  
Total debt
  $
684,182
    $ 311,096  
                 
Current portion
  $
449,182
    $ 87,767  
Current portion – related party
  $ 85,000     $ 73,329  
Long term portion
    150,000       150,000  
 
 
F-14

 
 
Progressive Care Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
September 30, 2012
(unaudited)
 
The corresponding debts above are more fully discussed below:

(A) Convertible Debt – Secured
 
During the nine months ended September 30, 2012 the Company issued a secured convertible note for $500,000. The note bears interest of 12% per annum (1% per month), of which 1/2% is paid monthly and 1/2% is accrued and due in a balloon payment at maturity. At September 30, 2012, $12,500 had accrued against this note. The note has a default interest rate of 18%, a maturity date of April 30, 2013 and is secured by all of the assets of the Company and its subsidiaries.  The debt holder is entitled, at their option, to convert all or part of the principal and accrued interest into shares of the Company’s common stock. The note is convertible at 95% of the volume weighted average price of the Company’s common stock for the 5 days preceding conversion. The embedded conversion feature within this note classifies it as a derivative liability. See Note 6.

The Company incurred debt issue costs of $152,500 in connection with the note; of which $100,000 was in stock and the remaining $52,500 in cash. See Note 5(E).

(B) Convertible Debt – Unsecured

On November 28, 2011, the Company entered into a $150,000 3-year 8% convertible note with an investor. Under the terms of the note, the investor has the option to convert their note into shares of the Company’s common stock at an exercise price of $0.40/share. In connection with this note, the Company paid debt issue costs of $18,000 and issued 15,000, 3-year warrants exercisable at $0.40 per share, having a fair market value of $4,895, as calculated using the Black Scholes valuation method.  The warrants vested on the date of issuance and expire November 27, 2014. See Note 7 – Stock Warrants.

(C) Notes - Secured

The Company has two secured one year non-interest bearing notes with a single DME vendor, that mature on January 15, 2013. The notes are secured only by the DME equipment to which the note relates. Secured notes consist of the following:

Balance, December 31, 2011
 
$
-
 
Reclassification from Accounts Payable to Notes Payable
  $
80,135
 
Repayments
   
(43,808
)
Balance, September 30, 2012
 
$
36,327
 

(D) Notes - Unsecured

The Company has two short term notes (totaling $29,664) with two vendors that bear no interest, both of which are in default; however no default terms are set out in the agreements. The Company also has a note with a related party of $85,000 which bears no-interest and is due on demand and owes $25,000 to an investor, which has gone unclaimed. Unsecured notes consist of the following:
 
Balance , December 31, 2011
  $ 161,096  
Reclassification from Accounts Payable to Notes Payable
    73,200  
Additional borrowings – related party
    125,000  
Repayments
    (83,535 )
Debt forgiveness
    (62,767 )
Debt forgiveness – related party
  $ (73,329 )
Balance, September 30, 2012
    139,665  
 
Of the $125,000 in additional borrowings and the $83,535 in repayments, for the nine months ended September 30, 2012, $40,000 was borrowed from and repaid to the Company's former COO. The remaining $85,000 is borrowed from the Company's current largest shareholder.

Debt forgiveness consisted of a note from the former CEO of Progressive Training (see Note 1); debt forgivingness -related party consisted of a note with an affiliate of the current largest shareholder.
 
 
F-15

 
 
Progressive Care Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
September 30, 2012
(unaudited)
 
During the nine months ended September 30, 2012, a party related to a controlling investor of the Company agreed to forgive debt of $73,329 (see above) and accrued interest of $27,661, which was recorded in the aggregate as an addition to paid-in capital.

(E) Debt Issue Costs

The Company paid debt issue costs in connection with raising funds through the issuance of convertible debt.  These costs are being amortized over the life of the debt and recorded as interest expense. If a conversion of the underlying debt occurs, the proportionate share of the unamortized amounts will be immediately expensed.

For the nine months ended September 30, 2012 the Company incurred debt issue costs and amortization expense of $152,500 and $69,707, respectively. For the nine months ended September 30, 2011 the Company paid no debt issue costs and incurred no amortization expense.

The following is a summary of the Company’s debt issue costs.

   
September 30, 2012
   
December 31, 2011
 
Debt issue costs
 
$
175,395
   
$
22,895
 
Accumulated amortization of debt issue costs
   
(70,344
)
   
(636
)
Debt issue costs – net
 
$
105,051
   
$
22,259
 
 
Future amortization of debt issue costs for the fiscal years 2012 through 2014 are as follows:

Year
 
Amount
 
2012 (3 months remaining)
 
$
40,362
 
2013
   
57,769
 
2014
   
6,920
 
   
$
105,051
 

(F) Debt Discount
 
The Company recorded debt discounts in connection with the issuance of convertible debt that contains an embedded conversion option. These costs are amortized over the life of the debt to interest expense. If a conversion of the underlying debt occurs, a proportionate share of the unamortized amounts will be immediately expensed.

The following is a summary of the Company’s debt discount.
 
   
September 30, 2012
   
September 30, 2012
 
Debt discount
  $ 244,153       -  
Accumulated amortization of debt discounts
    (102,343 )     -  
Debt discount – net
  $ 141,810       -  
 
Note 6 Derivative Liabilities
 
The Company identified a conversion feature embedded within one of its convertible debt instruments and has determined that it should be accounted for at fair value as a derivative liability.

The fair value of the conversion feature is summarized as follow:
 
Derivative liability - December 31, 2011
  $ -  
Fair value at the commitment date for debt instruments
    244,153  
Fair value mark to market adjustment for debt instruments
    (56,179 )
Derivative liability – September 30,2012
  $ 187,974  
 
 
F-16

 
 
Progressive Care Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
September 30, 2012
(unaudited)
 
The fair value at the commitment and re-measurement dates for the Company’s derivative liabilities were based upon the following management assumptions during 2012:
 
   
Commitment 
Date
   
Re-measurement 
Date
 
Exercise price
  $ 0.52     $ 0.46  
Expected dividends
    0 %     0 %
Expected volatility
    119 %     115 %
Expected term
 
12 months
   
7 months
 
Risk free interest rate
    0.18 %     0.17 %
Forfeiture rate
    0 %     0 %
 
Note 7 Stock Warrants
 
A summary of warrant activity for the Company for the periods ended September 30, 2012 and December 31, 2011 is as follows:
 
   
Number of 
Warrants
   
Weighted 
Average Exercise 
Price
 
Balance at December 31, 2011
  $ 15,000     $ 0.40  
Granted
    -       -  
Exercised
    -       -  
Forfeited
    -       -  
Balance at September 30, 2012
  $ 15,000     $ 0.40  
 
A summary of all outstanding and exercisable warrants as of September 30, 2012 is as follows:
 
Exercise  Price
Warrants 
Outstanding
 
Warrants 
Exercisable
 
Weighted Average 
Remaining 
Contractual Life
 
Aggregate
Intrinsic
Value
 
$ 0.40     15,000       15,000  
2.16 years
  $ 1,200  
 
Note 8 Commitments and Contingencies
 
Operating Leases
 
The Company leases approximately 5,100 square feet of pharmacy space under a 10-year lease executed January 11, 2011. The Company also leases approximately 1,200 square feet of office space under a 2-year lease executed November 15, 2010.

On July 1, 2011 the Company entered into a 5 year lease of approximately 4,200 square feet in Miami, Florida. Under the term of this lease the Company is not responsible for lease payments until the lessor has completed the build out of this location which is anticipated in late 2012.

On October 6, 2011 the Company also entered into a 5 year lease of approximately 3,100 square feet in Opa Locka, Florida. Under the term of this lease the Company’s lease payments commenced February 1, 2012.

Rent expense was $192,433 and $86,053 for the nine months ended September 30, 2012 and 2011.
 
 
F-17

 
 
Progressive Care Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
September 30, 2012
(unaudited)
 
Deferred rent payable at September 30, 2012 and December 31, 2011 was $39,812 and $17,535, respectively. Deferred rent payable is the sum of the difference between the monthly rent payment and the monthly rent expense of an operating lease that contains escalated payments in future periods.

Rental commitments for currently occupied space for the fiscal years of 2012 through 2020 are approximately as follows:

Year
 
Amount
 
2012 (3 months remaining)
  $ 55,000  
2013
    251,000  
2014
    234,000  
2015
    222,000  
2016
    230,000  
Thereafter
    763,000  
    $ 1,755,000  

Legal Matters
 
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.

Note 9 Stockholders’ Equity
 
During the nine months ended September 30, 2012, the Company issued 274,204 shares of its common stock, with share prices ranging from $0.35 to $0.55, to consultants for services rendered and the acquisition of debt; 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, or the value of the services provided, whichever is more readily determinable.
 
Note 10 Taxes
 
A summary of the Company’s tax liability (receiveble) from December 31, 2011 through September 30, 2012 is as follows:

Balance, December 31, 2011
  $ 38,754  
Payments made
    (3,000 )
Refunds/Adjustments
    96  
Net operating loss carry back - federal
    (39,699 )
Balance, September 30, 2012
  $ (3,849 )
 
 
F-18

 
 
The Company’s provision for income taxes consists of the following:
 
   
September 30, 2012
   
September 30, 2011
 
Income Tax Expense:
   -     (33,260 )
Deferred Tax Benefit (Expense):
    39,699       (43,002 )
Provision for income taxes
  $ 39,699     $ (76,262 )
 
Deferred tax assets and liabilities for the estimated tax impact of temporary differences between the tax and book basis of assets and liabilities are recognized based on the enacted statutory tax rates for the year in which the Company expects the differences to reverse. A valuation allowance is established against a deferred tax asset when it is more likely than not that the asset or any portion thereof will not be realized. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized. The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred income tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Management has also considered its historical taxable income and factors that have led to its current year projected taxable loss. Based on historical differences between book and tax income (which in past years resulted in taxable income) despite corresponding book losses, the Company believes that it will have taxable income in 2013 and for the forseeable future that will enable it to utilize its carry forward NOL. As such the Company has not reduced its deferred tax asset.
 
The approximate components of the Company’s net deferred tax assets are as follows:
 
   
September 30, 2012
   
December 31, 2011
 
Deferred tax assets:
           
Net operating loss
  $ 156,000     $ 156,000  
Deferred tax assets
    156,000       156,000  
 
               
Deferred tax liabilities:
               
Property and equipment
    (55,000 )     (55,000 )
Deferred tax liabilities
    (55,000 )     (55,000 )
                 
Less: valuation allowance
    -       -  
                 
Deferred tax assets - net
  $ 101,000     $ 101,000  
                 
Current
  $ (55,000 )   $ (55,000 )
Non-current portion
  $ 156,000     $ 156,000  

Note 11 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.
 
Note 12 Subsequent Events
 
Pursuant to a Registration Rights Agreement dated April 30, 2012, the Company was to file and have declared effective an S-1 registration statement with the SEC no later than November 11, 2012. The Company has been unable to complete the registration process because it has had to restate certain financial as discussed in Note 1. As a result of not filing the S-1 by November 11, 2012, the Company may have to pay a monthly fee of $5,000, beginning December 11, 2012, said fee not to exceed $30,000 in the aggregate.
 
 
F-19

 
 
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.

 
3

 
 
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