HASCO MEDICAL, INC. – 10-Q/A – Management’s Discussion and Analysis of Financial Condition and Results of Operations

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

   Overview  

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

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

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

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

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

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

Prior to the merger, we were a shell company with no business operations.

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

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

On May 13, 2011Hasco Medical, Inc. completed the acquisition of Mobility Freedom, Inc., including its rental operations conducted under the trade name Wheelchair Vans of America. The purchase price consisted of $2,000,000 cash, a Promissory Note of $1,850,000 and 250,000 shares of common stock with a fair market value of $6,250 for a total purchase price of $3,856,250. Hasco acquired 100% of the shares outstanding of Mobility Freedom.

Historically, our operations were focused on the provision of a diversified range of home health care services and products. Following our May 13, 2011 acquisition of Mobility Freedom, our operations are conducted within two business units:

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     •   Wheelchair Vans - which conducts sales of handicap accessible vans, parts         and service and rental operations.  This business unit is conducted through         Mobility Freedom, including its rental operations conducted under the trade         name Wheelchair Vans of America located in Northern Florida, and      •   Home Health Care - which conducts sales of medical equipment and supplies.          This business unit is conducted through Southern Medical & Mobility         located in Mobile Alabama.   

Our objective is to continue to grow both intrinsically and through acquisitions in areas that we currently offer products and services in, as well in areas that are complementary. As Mobility Freedom is significantly larger than Southern Mobility, we anticipate that Mobility Freedom will drive our near term financial results.

Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Significant estimates in 2011 and 2010 include the allowance for doubtful accounts, the valuation of inventory, the useful life of property and equipment and the assumptions used to calculate stock-based compensation.

A summary of significant accounting policies is included in Note 1 to the audited consolidated financial statements for the year ended December 31, 2010 and notes thereto contained in this report as filed with the Securities and Exchange Commission. Management believes that the application of these policies on a consistent basis enables us to provide useful and reliable financial information about the Company's operating results and financial condition.

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

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

Revenue Recognition - The Company follows the guidance of the FASB ASC 605-10-S99 "Revenue Recognition". The Company records revenue when persuasive evidence of an arrangement exists, services have been rendered or product delivery has occurred, the sales price to the customer is fixed or determinable, and collectability is reasonably assured. The following policies reflect specific criteria for the various revenues streams of the Company:

     •   Revenues are recognized under fee for service arrangements through vans        that the Company rents to disabled individuals visiting Florida. Revenue        generated from vans that the Company rents to individuals is recognized        over the rental period and commences on delivery of the van to the        customer.     •   Revenue related to sales of vans, and supplies is recognized on the date of        delivery to the customer.     •   Revenues from sales of products are generally recognized when products are        shipped unless the Company has obligations remaining under sales or        licensing agreements, in which case revenue is either deferred until all        obligations are satisfied or recognized ratably over the term of the        contract.                                         - 21 - 

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    •   Revenue from services is recorded as it is earned. Customers are generally        billed every two weeks based on the units of production for the project.        Each project has an estimated total which is based on the estimated units        of production and agreed upon billing rates.     •   Amounts billed in advance of services being provided are recorded as        deferred revenues and recognized in the consolidated statement of        operations as services are provided.   

Stock Based Compensation - In December 2004, the Financial Accounting Standards Board, or FASB, issued FASB ASC Topic 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. Companies may elect to apply this statement either prospectively, or on a modified version of retrospective application under which financial statements for prior periods are adjusted on a basis consistent with the pro forma disclosures required for those periods under ASC 718. Upon adoption of ASC 718, the Company elected to value employee stock options using the Black-Scholes option valuation method that uses assumptions that relate to the expected volatility of the Company's common stock, the expected dividend yield of our stock, the expected life of the options and the risk free interest rate. Such compensation amounts, if any, are amortized over the respective vesting periods or period of service of the option grant.

Accounts Receivable - Management performs ongoing evaluations of its accounts receivable. Due to the nature of the industry and the reimbursement environment in which the Company operates, certain estimates are required to record net revenues and accounts receivable at their net realizable values. Inherent in these estimates is the risk that they will have to be revised or updated as additional information becomes available. Specifically, the complexity and uncertainty of reimbursement amounts for certain services from certain payers may result in adjustments to amounts originally recorded. Such adjustments are typically identified and recorded at the point of cash application, claim denial or account review. Management performs periodic analyses to evaluate accounts receivable balances to ensure that recorded amounts reflect estimated net realizable value. Specifically, management considers historical realization data, accounts receivable aging trends, and other operating trends. Also considered are relevant business conditions such as governmental and managed care payer claims processing procedures and system changes. Accounts receivable are reduced by an allowance for doubtful accounts which provides for those accounts from which payment is not expected to be received, although services were provided and revenue was earned. Upon determination that an account is uncollectible, it is written-off and charged to the allowance.

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

Long-Lived Assets - The Company reviews for impairment whenever events or circumstances indicate that the carrying amount of assets may not be recoverable, pursuant to guidance established in ASC 360-10-35-15, "Impairment or Disposal of Long-Lived Assets" . The Company reviews, long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable, or at least annually. The Company recognizes an impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset. The amount of impairment is measured as the difference between the asset's estimated fair value and its book value.

Reimbursement by Third Party Payers

With the acquisition of Mobility Freedom & Wheelchairs of America on May 13, 2011 the revenue mix has changed significantly. Mobility Freedom revenues are recognized under fee for service arrangements through vans that the Company rents to disabled individuals visiting Florida. Revenue generated from vans that the Company rents to individuals is recognized over the rental period and commences on delivery of the van to the customer. Revenue related to sales of vans, and supplies is recognized on the date of delivery to the customer.

We no longer derive substantially all of our revenues from reimbursement by third party payers, including Medicare, Medicaid, and private insurers. However, our business has been, and may continue to be, significantly impacted by changes mandated by Medicare legislation

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

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

Recent legislation, each of which has been signed into law, including the Patient Protection and Affordable Care Act ("PPACA"), Medicare Improvement for Patients and Providers Act of 2008 (MIPPA), Medicare, Medicaid and State Children's Health Insurance Program Extension Act of 2007 ("SCHIP Extension Act"), the Deficit Reduction Act of 2005 (DRA) and the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA), contain provisions that negatively impact reimbursement for the primary HME products that we provide. MIPPA retroactively delayed the implementation of competitive bidding for eighteen months and decreased the 2009 fee schedule payment amounts by 9.5 percent for product categories included in competitive bidding. The SCHIP Extension Act reduced Medicare reimbursement amounts for covered Medicare Part B drugs, including inhalation drugs that we provide, beginning April 1, 2008. The DRA caps the Medicare rental period for oxygen equipment at 36 months of continuous use, after which time title of the equipment would transfer to the beneficiary. For purposes of this cap, the DRA provides for a new 36-month rental period that began January 1, 2006 for all oxygen equipment. With the passage of MIPPA, transfer of title of oxygen equipment at the end of the 36-month rental cap was repealed, although the rental cap remained in place. The MMA significantly reduced reimbursement for inhalation drug therapies beginning in 2005, reduced payment amounts for five categories of HME, including oxygen, beginning in 2005, froze payment amounts for other covered HME items through 2007, established a competitive acquisition program for HME and implemented quality standards and accreditation requirements for HME suppliers. PPACA was signed into law on March 23, 2010. Together with the Health Care and Education Reconciliation Act of 2010 (signed into law on March 30, 2010) which amended the statute, PPACA is a comprehensive health care law that is intended to expand access to health insurance, reform the health insurance market to provide additional consumer protections, and improve the health care delivery system to reduce costs and produce better outcomes through a combination of cost controls, subsidies and mandates. These legislative provisions, as currently in effect and when fully implemented, have had and will have a material adverse effect on our business, financial condition, operating results and cash flows. We cannot predict the impact that any federal legislation enacted in the future will have on our revenues, profit margins, profitability, operating cash flows and results of operations.

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

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(1) Competitive Bidding Program for HME. On April 2, 2007, CMS issued its final rule implementing a competitive bidding program for certain HME products under Medicare Part B. This nationwide competitive bidding program is designed to replace the existing fee schedule payment methodology. Under the competitive bidding program, suppliers compete for the right to provide items to beneficiaries in a defined region. CMS selects contract suppliers that agree to receive as payment the "single payment amount" calculated by CMS after bids are submitted. Round one of the competitive bidding program began on July 1, 2008 in ten high-population competitive bidding areas (CBAs). On July 15, 2008, Congress enacted the MIPPA legislation which retroactively delayed the implementation of competitive bidding and reduced Medicare prices nationwide by 9.5% beginning in 2009 for the product categories, including oxygen, that were initially included in competitive bidding. As a result of the delay, CMS cancelled all contract awards retroactively to June 30, 2008. In 2009, CMS reinstituted the bidding process in the nine largest MSA markets. Reimbursement rates from the re-bidding process were publicly released by CMS on June 30, 2010. CMS announced average savings of approximately 32% off the current payment rates in effect for the product categories included in competitive bidding. These payment rates are now in effect in the nine markets only, as of January 1, 2011. CMS will undertake a second round of competitive bidding in up to 91 additional markets, with contracts expected to be effective as of January 1, 2013. It is not certain at this time whether CMS intends to implement competitive bidding in all 91 markets simultaneously, or whether the program will be phased in over several years. The PPACA legislation requires CMS to expand competitive bidding further to all geographic markets (certain markets may be excluded at the discretion of CMS) or to use competitive bid pricing information to adjust the payment amounts otherwise in effect for areas that are not competitive acquisition areas by January 1, 2016. We will continue to monitor developments regarding the implementation of the competitive bidding program. While we cannot predict the outcome of the competitive bidding program on our business when fully implemented nor the Medicare payment rates that will be in effect in future years for the items subjected to competitive bidding, it is likely that the program will materially adversely affect our financial position and operating results.

On July 15, 2008, Congress enacted the MIPPA legislation which reduced Medicare payment rates nationwide for certain DME items, including oxygen equipment, by 9.5% beginning in 2009. In addition to the 9.5% reduction, CMS subjected the monthly payment amount for stationary oxygen equipment to additional cuts of 2.3% in 2009, thereby reducing the monthly payment rate from $199.28 in 2008 to $175.79 in 2009. The monthly payment amount was reduced by 1.5% in 2010, to $173.17. We estimate that this reduction negatively impacted our revenues in 2010. The stationary oxygen payment rate for 2011 has been established by CMS at $173.31 per month, an increase of 0.1%.

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

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

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

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

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

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

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

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

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

Results of Operations

   The following table provides an overview of certain key factors of our results of operations for the three and nine months ended September 30, 2011 as compared to September 30, 2010:                                      Three months ended          Nine months ended                                      September 30,               September 30,                                    2011          2010         2011          2010 Net Revenues                    $ 3,113,836   $  558,567   $ 5,459,948   $ 1,788,407 Cost of sales                     1,883,919      148,472     3,287,036       534,589 Operating Expenses: Depreciation                        106,736        7,302       135,947        21,906 General and administrative          962,703      623,034     2,082,072     1,946,770 Total operating expenses          1,069,439      630,336     2,218,019     1,968,676 Income (loss) from operations       160,478     (220,241 )     (45,107 )    (714,858 ) Total other income (expense)        (69,031 )    (53,317 )     (56,792 )     (63,295 ) Provision for income taxes                -            -             -       (15,846 ) Net income (loss)               $    91,447   $ (273,558 ) $  (101,899 ) $  (793,999 )    Other Key Indicators:                                               Three months ended         Nine months ended                                               September 30,              September 30,                                             2011         2010          2011         2010 Cost of sales as a percentage of revenues                                     60.5%         26.6%        60.2%         29.9% Gross profit margin                          39.5%         73.4%        39.8%         70.1% General and administrative expenses as a percentage of revenues                     30.9%        111.5%        38.1%        108.9% Total operating expenses as a percentage of revenues                       34.3%        112.8%        40.6%        110.1%   

The following table provides comparative data regarding the source of our net revenues in each of these periods:

                          Three months ended          Nine months ended                            September 30,              September 30,                          2011         2010         2011          2010 Product Sales         $ 2,637,064   $ 283,524   $ 4,492,199   $   911,879 Service Revenue                 -           -        12,089             - Rental Revenue            476,772     275,043       955,660       876,528 Total Net Revenues:   $ 3,113,836   $ 558,567   $ 5,459,948   $ 1,788,407                                               Three months ended          Nine months ended                                              September 30,               September 30, Gross profit as a Percentage of Net Revenues                                  2011           2010          2011         2010 Product sales                             84.7%          50.8%        82.3%        51.0% Rental Revenue                              -              -           0.3%          - Service Revenue                           15.3%          49.2%        17.4%        49.0%                                         - 26 - 

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Nine Month Period ended September 30, 2011 and 2010

Net Revenues

For the nine months ended September 30, 2011, we reported revenues of $5,459,948 as compared to revenues of $1,788,407 for the nine months ended September 30, 2010, an increase of $3,671,541 or approximately 205 %. Product sales for the nine months ended September 30, 2011 increased by $3,580,320 or approximately 393 % as compared to the nine months ended September 30, 2010. Rental revenue for the nine months ended September 30, 2011 increased by $12,089 as compared to the nine months ended September 30, 2010. The increase in product sales, which drove the increase in overall sales, is due to the acquisition of Mobility Freedom on May 13, 2011.

   Cost of Sales   

Our cost of sales consists of the depreciation of rental assets and products purchased for resale. For the nine months ended September 30, 2011, cost of sales was $3,287,036 or approximately 60.2% of revenues, compared to $534,589, or approximately 29.9% of revenues, for the nine months ended September 30, 2010. During the nine months ended September 30, 2011, cost of sales as a percentage of net revenues increased due to the acquisition of Mobility Freedom, which traditionally has a higher cost of sales percentage than that of home health care products.

   Gross Profit   

During the nine months ended September 30, 2011, our gross profit as a percentage of net revenues decreased by approximately 30.3% as compared to the nine months ended September 30, 2010. The decrease is due to the wheelchair van sales which have a lower gross profit than that of home health care products.

Total Operating Expenses

Our total operating expenses increased slightly at approximately 12.7% to $2,218,019 for the nine months ended September 30, 2011 as compared to $1,968,676 for the nine months ended September 30, 2010. These changes include:

• Depreciation and amortization expense. For the nine months ended September 30, 2011, depreciation and amortization expense amounted to $135,947 as compared to $21,906 for the nine months ended September 30, 2010, an increase of $114,041 due to the acquisition of Mobility Freedom.

• General and administrative expense. For the nine months ended September 30, 2011, general and administrative expenses were $2,082,072 as compared to $1,946,770 for the nine months ended September 30, 2010, an increase of $135,302. For the nine months ended September 30, 2011 and 2010 general and administrative expenses consisted of the following:

                                             Nine Months Ended September 30,                                               2011                 2010        Rent                             $        131,703     $         49,366        Employee compensation                   1,497,666            1,067,858        Professional fees                         180,214              133,116        Internet/Phone                             54,219               24,631        Travel/Entertainment                       46,368               38,325        Bad debt expense                          (42,546 )            203,620        Insurance                                 115,143               43,411        Management fee                                  -              270,000        Other general and administrative           99,305              116,443                                         $      2,082,072     $      1,946,770        •   For the nine months ended September 30, 2011, Rent expense increased by         $82,337 over the same period in 2010.  The increase is due to the addition         of the Mobility Freedom locations      •   For the nine months ended September 30, 2011, employee compensation,         related taxes and stock-based compensation expenses increased to $1,497,666         as compared to $1,067,858, a 40.3% increase.  The increase relates to the         Mobility Freedom acquisition.                                         - 27 - 

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     •   For the nine months ended September 30, 2011, professional fees increased         to $180,214 as compared to $133,116, an increase of $47,098 or 35.4%. The         increase is primarily related to increase in audit and accounting fees         related to the Mobility Freedom acquisition.      •   For the nine months ended September 30, 2011, internet/telephone expense         increased to $54,219 as compared to $24,631, an increase of $29,588 or         120.1%. This increase is attributable to the acquisition of Mobility         Freedom.      •   For the nine months ended September 30, 2011, travel and entertainment         expense increased to $46,368 as compared to $38,325.This 21.0% increase is         due to the acquisition of Mobility Freedom and its multiple offices.      •   For the nine months ended September 30, 2011 bad debt expense was reduced         to ($42,546) as compared to $203,620 for the nine months ended September         30, 2010, a decrease of $246,166. The decrease was due to a detailed review         of Accounts Receivable aging by senior management, which determined that         the provision for bad debt was overstated.      •   For the nine months ended September 30, 2011 Insurance expense increased to         $115,143 as compared to $43,411 for the nine months ended September 30,         2010, an increase of $71,732 or 165.2%. Insurance expense increased due to         added coverage and higher sales related premiums as compared to 2010, in         addition to the inclusion of the Mobility Freedom insurance from the date         of acquisition through September 30, 2011.      •   For the nine months ended September 30, 2011 Management fee expense was         eliminated as compared to $270,000 for the nine months ended September 30,         2010.  In January 2011, in consultation with Senior Management, the         Chairman & principal investor voluntarily chose to forego contractual         binding management fees.      •   For the nine months ended September 30, 2011 other general and         administrative expense decreased to $99,305 as compared to $116,443 for the         nine months ended September 30, 2010, a decrease of $17,138.  This decrease         is due to numerous cost reduction efforts as well as certain refunds         related to the Mobility Freedom acquisition.    INCOME (LOSS) FROM OPERATIONS   

We reported loss from operations of $(45,107) for the nine months ended September 30, 2011 as compared to a loss from operations of $(714,858) for the nine months ended September 30, 2010.

OTHER INCOME (EXPENSES)

Interest expense. For the nine months ended September 30, 2011, interest expense was $136,884 as compared to $63,295 for the nine months ended September 30, 2010, an increase of $73,589. This increase is due to the acquisition of Mobility Freedom and the additional debt related to that acquisition.

NET INCOME (LOSS)

Our net loss was $(101,899) for the nine months ended September 30, 2011 compared to net loss of $(793,999) for the nine months ended September 30, 2010.

Three Month Period ended September 30, 2011 and 2010

Net Revenues

For the three months ended September 30, 2011, we reported revenues of $3,113,836 as compared to revenues of $558,567 for the three months ended September 30, 2010, an increase of $2,555,269 or approximately 457.5%. This increase is due to the acquisition of Mobility Freedom on May 13, 2011 and the inclusion of their revenue for the entire quarter ended September 30, 2011.

Product sales for the three months ended September 30, 2011 increased by $2,353,540 or approximately 830.1% as compared to the three months ended September 30, 2010. Rental revenue for the three months ended September 30, 2011 increased by $201,729 or approximately 73.3% as compared to the three months ended September 30, 2010. The product revenues increase in 2011 are directly attributable to the acquisition of Mobility Freedom. The overall increase of rental revenue is due to Mobility Freedom rental revenue partially offset by the impact of the 9.5% MIPAA reduction, lower reimbursement rates from third party payers and lower hospital census levels.

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Cost of Sales

Our cost of sales consists of the cost of products purchased for resale and the depreciation of rental assets and. For the three months ended September 30, 2011, cost of sales was $1,883,919, or approximately 60.5% of revenues, compared to $148,472, or approximately 26.6% of revenues, for the three months ended September 30, 2010. During the three months ended September 30, 2011, cost of sales increased due to increased revenues as compared to the three months ended September 30, 2010. During the three months ended September 30, 2011, cost of sales as a percentage of net revenues increased due to the revenue mix as compared to the three months ended September 30, 2010. Wheelchair van sales have a higher cost of sales than home medical equipment.

Total Operating Expenses

Our total operating expenses increased approximately 69.7% to $1,069,439 for the three months ended September 30, 2011 as compared to $630,336 for the three months ended September 30, 2010. These changes include:

• Depreciation and amortization expense. For the three months ended September 30, 2011, depreciation and amortization expense amounted to $106,736 as compared to $7,302 for the three months ended September 30, 2010, an increase of $99,434 due to the acquisition of Mobility Freedom.

• General and administrative expense. For the three months ended September 30, 2011, general and administrative expenses were $962,703 as compared to $623,034 for the three months ended September 30, 2010, an increase of $339,669 or 54.5%. For the three months ended September 30, 2011 and 2010 general and administrative expenses consisted of the following:

                                             Three Months Ended September 30,                                                       Fiscal Q1                                               2011                 2010        Rent                             $          67,272    $          16,500        Employee compensation                      670,020              345,480        Professional fees                              282               34,014        Internet/Phone                              18,818                9,223        Travel/Entertainment                        25,669               10,348        Bad debt expense                               496               61,446        Insurance                                   51,125               18,209        Management fee                                   -               90,000        Other general and administrative           129,021               37,814                                         $         962,703    $         623,034        •   For the three months ended September 30, 2011, Rent expense increased to         $67,272 as compared to $16,500 for the three months ended September 30,         2010. The change relates to rent expense on the Mobility Freedom locations.      •   For the three months ended September 30, 2011, employee compensation,         related taxes and stock-based compensation expenses increased to $670,020         as compared to $345,480 for the three months ended September 30, 2010, an         increase of $324,540 or 93.9%.   The increase is due to the addition of         Mobility Freedom on May 13, 2011.      •   For the three months ended September 30, 2011, professional fees decreased         to $282 as compared to $34,014 for the three months ended September 30,         2010, a decrease of $33,732. The decrease is primarily related to decreased          legal and consulting fees since the Mobility Freedom acquisition.      •   For the three months ended September 30, 2011, internet/telephone expense         increased to $18,818 as compared to $9,223 for the three months ended         September 30, 2010, an increase of $9,595.  The addition of the Mobility         Freedom locations created additional phone and internet expenses.  Prior to         the acquisition, HASCO Medical operated out of one location.      •   For the three months ended September 30, 2011, travel and entertainment         expense increased to $25,669 as compared to $10,348 for the three months         ended September 30, 2010.  The $15,321 or 148.1% increase is due to the         Mobility Freedom acquisition.      •   For the three months ended September 30, 2011 bad debt expense was reduced         to $496 as compared to a provision of $61,446 for the three months ended         September 30, 2010, a change of $60,950 or 99.23%.  The decrease was due to         a detailed review of Accounts Receivable aging by senior management, which         determined that the provision for bad debt was overstated.                                         - 29 - 

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     •   For the three months ended September 30, 2011 Insurance expense increased         to $51,125 as compared to $18,209 for the three months ended September 30,         2010, an increase of $32,916, or 180.8%. Insurance expense increased due to         the Mobility Freedom acquisition, as well as added coverage and higher         sales related premiums as compared to 2010.      •   For the three months ended September 30, 2011 other general and         administrative expense decreased $91,207 to $129,021 as compared to $37,814         for the three months ended September 30, 2010. The increase is due to the         acquisition of Mobility Freedom.    INCOME (LOSS) FROM OPERATIONS   

We reported income from operations of $160,478 for the three months ended September 30, 2011 as compared to a loss from operations of $(220,241) for the three months ended September 30, 2010.

NET INCOME ( LOSS)

Net income was $91,447 for the three months ended September 30, 2011 compared to net loss of $(273,558) for the three months ended September 30, 2010.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations and otherwise operate on an ongoing basis. The following table provides an overview of certain selected balance sheet comparisons between September 30, 2011 and December 31, 2010:

                                              September 30,   December 31,       $                                                2011            2010        Change Working capital surplus (deficit)              2,151,577       (356,324 ) 2,507,901  Cash                                             187,895            423     187,472 Accounts receivable, net                         906,874        254,362     652,512 Inventory                                      3,066,094         76,356   2,989,738 Total current assets                           4,346,918        349,986   3,996,932 Property and equipment, net                      778,084        147,769     630,315 Total assets                                   6,760,338        498,175   6,262,163  Accounts payable and accrued liabilities       1,545,542        612,282     933,260 Notes payable-current                            328,651         48,005     280,646 Total current liabilities                      2,195,341        706,310   1,489,031 Notes payable-long term                        4,697,304        152,509   4,544,795 Total liabilities                              6,892,645        858,819   6,033,826 Accumulated deficit                           (4,426,582 )   (4,324,683 )  (101,899 ) Stockholders' equity (deficit)                  (132,307 )     (360,644 )   228,337    

Net cash used in operating activities was $458,367 for the nine months ended September 30, 2011 as compared to net cash used in operating activities of $125,019 for the nine months ended September 30, 2010, an increase of $333,348.

For the nine months ended September 30, 2011, we had a net loss of $(101,899) offset by non-cash items such as depreciation and amortization expense of $181,535 and stock-based compensation of $85,286 and decreases from changes in assets and liabilities of $623,289.

Net cash used in investing activities for the nine months ended September 30, 2011 was $262,237 as compared to net cash used in investing activities of $39,146 for the nine months ended September 30, 2010. During the nine months ended September 30, 2011 and 2010, we used cash for property and equipment purchases.

Net cash provided by financing activities for the nine months ended September 30, 2011 was $908,076 as compared to $207,288 for the nine months ended September 30, 2010. For the nine months ended September 30, 2011, net cash provided by financing activities related to proceeds from note and loans payable of $982,206, offset by payments of notes totaling $133,630 and by proceeds from sale of common stock of $59,500. For the nine months ended September 30, 2010, net cash proceeds from note and loans payable of $170,513, proceeds from sale of common stock of $103,000, offset by payments of notes of $63,225 and debt issuance costs of $3,000.

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At September 30, 2011 we had a working capital surplus of $2,151,577 and accumulated deficit of $(4,426,582).

Contractual Obligations and Off-Balance Sheet Arrangements

Contractual Obligations

   The following tables summarize our contractual obligations as of September 30, 2011:                                                     Payments Due by Period                                           Less than                              Total         1 year        1-3 Years     3-5 Years      5 Years + Contractual Obligations : Operating Lease           $   643,870    $    72,655    $   520,552    $   50,663    $         -  Line of Credit                601,906        601,906              -             -              - Notes payable                 463,651        463,651              -             -              - Notes payable - related party                       3,960,398        203,380        526,672       586,067      2,644,279  Total Contractual Obligations:              $ 5,669,825    $ 1,341,592    $ 1,047,224    $  636,730    $ 2,644,279   

Off-balance Sheet Arrangements

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

Recently Issued Accounting Pronouncements

We have reviewed the FASB issued Accounting Standards Update ("ASU") accounting pronouncements and interpretations thereof that have effectiveness dates during the periods reported and in future periods. The Company has carefully considered the new pronouncements that alter previous generally accepted accounting principles and does not believe that any new or modified principles will have a material impact on the corporation's reported financial position or operations in the near term. The applicability of any standard is subject to the formal review of our financial management and certain standards are under consideration. Reference is made to these recent accounting pronouncements as if they are set forth therein in their entirety.

                            PART II - OTHER INFORMATION   Item 6. Exhibits    Exhibit Number   Description  31.1     Certification of the Chief Executive Officer pursuant to Section 302 of          the Sarbanes-Oxley Act of 2002* 31.2     Certification of the Chief Financial Officer pursuant to Section 302 of          the Sarbanes-Oxley Act of 2002* 32.1     Certification of Chief Executive Officer pursuant to Section 906 of the          Sarbanes-Oxley Act of 2002* 32.2     Certification of Chief Financial Officer pursuant to Section 906 of the          Sarbanes-Oxley Act of 2002* 101      Interactive Data files of Financial Statements and Notes contained in          this Quarterly Report on Form 10-Q.**    * Filed herein   

** In accordance with Regulation S-T, the Interactive Data Files in Exhibit 101 to the Quarterly Report on Form 10-Q shall be deemed "furnished" and not "filed".

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