Concurrently with the closing of the Merger and in contemplation of the Merger, we sold 2,676,255 shares of our common stock, $0.001 par value, (the “Shares”) for gross proceeds of $663,908, at a purchase price of $0.25 per share (the “Purchase Price”), in a private placement offering (the “Offering”). The Offering was being offered withsubject to a minimum offering amount of $470,000 (the “Minimum Offering Amount”) and up to a maximum offering amount of $1,500,000 (the “Maximum Offering Amount”). We agreed to file a registration statement on Form S-1 registering the resale under the Securities Act of all shares sold in the Offering within 60 days after the Maximum Offering Amount was sold.
On April 12, 2012, we closed the Offering by selling an additional $349,000 at the purchase price of $0.25 and issuing 1,394,909 shares of Common Stock.common stock. The total raised in the Offering was $1,012,908.
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Overview
The Company is a provider of revenue cycle services to a broad range of healthcare providers. We offer our customers integrated solutions designed around their specific business needs, including revenue cycle data analysis, contract and outsourced coding; billing, coding and compliance audits, coding education, coding consulting, physician coding services and ICD-10 education and transition services. With this approach, our customers benefit from integrated service offerings that we believe enhances their revenue integrity. As a result, we believe we help our customers achieve their business objectives and patient care objectives.
Our Services
We provide the following categories of services to our customers either on a standalone basis or bundled within a comprehensive solution. Depending on a customer’s needs, we offer a mix of the following services as part of our solutions:
| ● | Coding services | |
| ● | Coding consulting services | |
| ● | Education services |
Coding Services
Coding services can be performed under short term or multi-year contracts in which we assume operational responsibility for various aspects of our customers’ coding operations, including departmental or physician specialty coding, staff augmentation, or full outsource of a hospital or physician group coding operation. In the outsource contracts we typically hire part or all of the customer’s coding staff that supported these functions prior to the transition of services. We then apply our coding expertise and operating methodologies and utilize technology to increase the efficiency of the operations, which usually results in increased coding quality at a lower cost.
Coding Consulting Services
Coding consulting services are typically performed under short term contracts in which we conduct billing and coding audits. In connection with such audits, we collect and analyze the Merger were not registered underclients’ clinical documentation, the Securities Act of 1933, as amended (the “Securities Act”), in reliance upon the exemption from registration provided by Section 4(2) of the Securities Actcoding applied, reimbursements and Regulation D promulgated thereunder, which exempts transactions by an issuer not involving any public offering. These securities may not be offered or sold absent registration or an applicable exemption from the registration requirements. provide recommendations for improvement.
| · | Billing and Coding Audits – We apply proven audit techniques to the review of medical records and revenue cycle operations. We assess all components of the medical record to include operative reports, nurses’ & doctors’ notes, records, and other ancillary tests and orders. Our methodology enhances our ability to identify procedures and diagnoses that may not be documented by the medical staff. The information derived these reviews enables our customers to analyze medical staff documentation and review the coding accuracy that drives reimbursements and contributes to resource utilization. In addition, the results provide a baseline for follow-on assessments enabling continuous improvement and customized coding and compliance training for departmental staff. |
| · | Consulting – Our consultants assist our customers keep pace with industry and regulatory changes, including consulting in health information management and revenue integrity. |
Education Services
We have not committedoffer various training and educational solutions to registering these shares for resale. Certificates representing these shares contain a legend stating the restrictions applicable to such shares.our customers including on-site training, coding boot camps, workshops, video training, and on demand webinars.
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Our collaborative approach provides the right solutions for our clients’ needs with the highest regard for ethical standards and responsibility.Significant Customers
Sales to four (4) hospital customers represented approximately 60% of our revenues for the year ended December 31, 2013. We are subject to risks common to service providers and consulting companies, including competitionhave direct relationships with the individual hospitals and the ability to recruit, train, and put in place a sufficient quantity of proficient consultants and medical coders familiar with the requirements of IDC-10-CM/PCS, the uncertainty of future regulatory approvals and laws, the need for future capital and the retention of key employees. We cannot provide assurance that we will generate revenues sufficient to sustain profitability in the future.
| 42.0% | ||||
| 6.0% | ||||
| Hospital Customer C | 6.0% | |||
| Hospital Customer D | 6.0% | |||
| Total | 60.0% |
Four and one customers represented approximately 64% and 62% of our accounts receivable as of December 31, 2013 and December 31, 2012, respectively.
Our People
The markets for medical coding and billing personnel and consulting professionals are intensely competitive. A key part of our business strategy is the company to meet the changing needshiring, training, and retaining of the healthcare communityhighly motivated personnel with strong character, above average competence and her accomplishmentsleadership traits. We believe that employing people with such traits is — and will continue to be acknowledged. A few recent awards include:— an integral factor in differentiating us from our competitors in the revenue cycle industry. In seeking such employees, we screen candidates for employment through a rigorous interview process, skills testing and other profiling to ensure both a cultural/role fit and demonstrable skills. We continue to mature our various compensation programs to remain competitive for talented people resources.
Competition
We compete on the basis of a number of factors, including the attractiveness and focused professional services that we offer, pricing, brand recognition, utilization of technology, industry expertise, and quality and reliability of service. Our consulting practice also competes on our tools, process methodologies and our past successes in executing assignments. For hospitals and physician groups, we frequently compete in an environment of declining budgets and reimbursements, which creates pressure to lower our prices. In addition, the market for coding services is affected by an undersupply of coding talent, which results in upward cost pressure on our services. All of these factors may increase pricing and profit pressure on us.
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We believe that the following tasks are essential to achieve ongoing success:
Direct Sales – In additionWe sell direct to our management building sales nationwide, we plantargeted hospitals and physician groups with a focus on hiring additional sales people who will target direct institutional healthcare facilities accordingsmall hospital systems, independent community hospitals and medium to geographic area.large physician groups.
Local, Federal and State Industry Associations – We plan on actively developing relationships with the hundreds ofparticipate in several medical associations throughout the United States.association events and our subject matter experts are published and/or speak at their events.
Trade Shows and Conferences – We plan on highlighting our products and servicesexhibit at select trade shows and industry conferences across the United States, which provide access to key healthcare decision makersclients, prospects and client leads.aid our talent recruitment.
Internet Marketing & E-commerce Strategy – We plan to utilize web-based tools and Internet marketing methods to increase the brand name by search engine optimization, mining and partner links.
Public Relations and Branding – Our reputation has been well established in the industry as a result of the success of–We actively communicate our founder, Andrea Clark. We planbrand and position on expandingmatters important to our presence in the public visionbusiness through press releases and in the healthcare industry by working hand in hand with a top public relations firm.our website.
Subsidiaries
Following the Merger, HRAA became our wholly-owned subsidiary.
Dream Reachers, LLC, a Florida limited liability company (“Dream Reachers”), owns an office utilized by the Company’s officesCompany for employees and training and is the borrower on a mortgage loan related to such offices.that office. Dream Reachers does not engage in the real estate rental business. Its offices areoffice is occupied by HRAAthe Company at no cost and HRAAthe Company pays the related mortgage’s principal and interest, taxes and maintenance. Dream Reachers was previously treated asis a VIE, but became a wholly ownedwholly-owned subsidiary in May 2011, and has been treated as such for accounting purposes inof the Company’s consolidated financial statements.Company.
Regulatory Matters/Compliance
Intellectual Property
APC AuditPro™ is our registered trademark. This Annual Report on Form 10-K contains trademarks and trade names of other organizations and corporations.
Research and Development
Employees
As of February 28, 2013,April 8, 2014, we had one hundred and sixteen (116)109 employees, of these employees, 94 were full-time employees. None of these employees are represented by collective bargaining agreements and the Company considers it relations with its employees to be good.
Corporation Information
Our principal executive offices are located at 8551 West Sunrise Blvd., SuiteBoulevard, Unit 304, Plantation, FL 33322. Our telephone number is (954) 472-2340 and our fax number is (954) 370-0157. Our website is www.healthrevenue.com .www.healthrevenue.com.
Other Information
News and information about Health Revenue Assurance Holdings, Inc.us and our wholly owned subsidiarieswholly-owned subsidiary is available on and/or may be accessed through our website, www.healthrevenue.com. In addition to news and other information about our company,us, we have provided access through this site to our filings with the Securities and Exchange Commission (“SEC”) as soon as reasonably practicable after we file or furnish them electronically. Information on our website does not constitute part of and is not incorporated by reference into this Annual Report on Form 10-K or any other report we file or furnish with the SEC. You may also read and copy any document that we file at the public reference facilities of the SEC in Washington, D.C. You may call the SEC at 1-800-SEC-0330 for further information on the public reference rooms. Our SEC filings are also available to the public from the SEC’s website at http://www.sec.gov.
RISK FACTORS
The following risks and the risks described elsewhere in this Annual Report on Form 10-K, including the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” could materially affect our business, prospects, financial condition, operating results and cash flows. If any these risks materialize, the trading price of our common stock could decline, and you may lose all or part of your investment.
Risks Related to Our Business
We believe that there is substantial doubt about our ability to continue as a going concern.
Our future success is dependent upon our ability to achieve profitable operations and generate cash from operating activities, and upon additional financing. Management believes they can raise the appropriate funds needed to support their business plan and develop an operating company which is cash flow positive. We have not been able to generate sufficient cash from operating activities to fund its ongoing operations. There is no guarantee that we will be able to generate enough revenue and/or raise capital to support our operations. These factors raise substantial doubt about our ability to continue as a going concern.
Key employees are essential to expanding our business.
Tim Lankes, our chief executive officer, Evan McKeown, our chief financial officer and chief administrative officer, Denise Williams, our senior vice president of revenue integrity services, and Todd Willis, our senior vice president of coding business unit are essential to our ability to continue to grow and expand our business. They have established relationships within the industry in which we operate. If they were to leave us, our growth strategy might be hindered, which could materially affect our business and limit our ability to increase revenue.
If we are unable to establish appropriate internal financial reporting controls and procedures, it could cause us to fail to meet our reporting obligations, result in the restatement of our financial statements, harm our operating results, subject us to regulatory scrutiny and sanction, cause investors to lose confidence in our reported financial information and have a negative effect on the market price for shares of our common stock.
Effective internal controls are necessary for us to provide reliable financial reports and to effectively prevent fraud. We currently do not maintain a system of internal control over financial reporting, which is defined as a process designed by, or under the supervision of, our principal executive officer and principal financial officer, or persons performing similar functions, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
As a public company, we have significant requirements for financial reporting and internal controls. We are required to implement, document and test internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, which requires annual management assessments of the effectiveness of our internal controls over financial reporting. The process of designing and implementing effective internal controls is a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environments and to expend significant resources to maintain a system of internal controls that is adequate to satisfy our reporting obligations as a public company.
We cannot assure you that we will, in the future, be able to successfully implement proper internal control over financial reporting. We cannot assure you that the measures we will take to implement in any area of financial reporting in need of internal controls will be successful or that we will implement and maintain adequate controls over our financial processes and reporting in the future as we continue our growth. If we are unable to establish appropriate internal financial reporting controls and procedures, it could cause us to fail to meet our reporting obligations, result in the restatement of our financial statements, harm our operating results, subject us to regulatory scrutiny and sanction, cause investors to lose confidence in our reported financial information and have a negative effect on the market price for shares of our common stock.
In order to improve our internal controls and procedures we began to take steps to address and improve these matters. As of the date of this Annual Report, we have hired an internal control consultant to assist in the design, implementation, and test of adequate controls. We have made pivotal progress to mitigate internal control weaknesses; however, we must still complete the process of design-specific control procedures and test their effectiveness, and maintaining sufficient personnel to implement these tasks before we can report that this weakness has been fully remediated.
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Lack of experience as officers of publicly-traded companies of our management team may hinder our ability to comply with Sarbanes-Oxley Act.
It may be time consuming, difficult and costly for us to develop and implement the internal controls and reporting procedures required by the Sarbanes-Oxley Act. We may need to hire additional financial reporting, internal controls and other finance staff or consultants in order to develop and implement appropriate internal controls and reporting procedures.
Our growth is dependent on the willingness of new customers to outsource their coding work to us.
We plan to grow, in part, by capitalizing on perceived market opportunities to provide our services to new customers. These new customers must be willing to outsource functions which may otherwise have been performed within their organizations. Many customers may prefer to remain with their current provider or keep their coding in-house rather than outsource such services to us. Also, as the maintenance of accurate medical records is a critical element of a healthcare provider’s ability to deliver quality care to its patients and to receive proper and timely reimbursement for the services it renders, potential customers may be reluctant to outsource or change providers of such an important function.
Our largest customers account for a substantial portion of our revenue and profits, and the loss of any of these customers could result in decreased revenue and profits.
Our 4 largest customers accounted for 60% of our revenue for 2013. Generally, we may lose a customer as a result of a merger or acquisition, contract expiration, the selection of another provider of revenue cycle services, business failure or bankruptcy, or our performance. Our staffing and outsourcing contracts typically require us to maintain specified performance levels with respect to the services that we deliver to our customer, with the result that if we fail to perform at the specified levels, we may be required to pay or credit the customer with amounts specified in the contract. In the event of significant failures to deliver the services at the specified levels, a number of these contracts provide that the customer has the right to terminate the agreement. In addition, some of these contracts provide the customer the right to terminate the contract at the customer’s convenience. The customer’s right to terminate for convenience typically requires the customer to pay us a fee. We may not retain long-term relationships or secure renewals of short-term relationships with our large customers in the future.
If we fail to comply with the various covenants contained in our bank financing documents, we may be in default thereunder, which could limit our ability to fund our operations.
As of December 31, 2013, we had borrowed approximately $859,000 under that certain term loan, factoring agreement and mortgage. If we default on any of the financial or operating covenants in any of our agreements evidencing such indebtedness and are unable to obtain an amendment or waiver, the lenders could cause all amounts outstanding under these agreements to be due and payable immediately and, if secured, proceed to foreclose on the collateral securing the indebtedness. Our assets or cash flow may not be sufficient to repay fully the borrowings under our different forms of indebtedness, either upon maturity or if accelerated upon an event of default. A default or potential acceleration could impact our ability to attract and retain customers and could negatively impact trade credit availability and terms, which could have a material adverse effect on our business, financial condition or results of operations.
Profitability of our contracts may be materially, adversely affected if we do not accurately estimate the costs of services and the timing of the completion of projects.
The services that we provide, and projects we undertake, pursuant to our contracts are sometimes complex. Our success in accurately estimating the costs of services and the timing of the completion of projects and other initiatives to be provided pursuant to our contracts is critical to our ability to price our contracts for long-term profitability. While these estimates reflect our best judgment regarding preexisting costs, efficiencies that we will be able to deliver, and resources that will be required for implementation and performance, any increased or unexpected costs, delays or failures to achieve anticipated cost reductions could materially, adversely affect the profitability of these contracts.
Our ability to perform on contracts on which we partner with third parties may be materially and adversely affected if these third parties fail to successfully or timely deliver their commitments.
Our engagements often require that our services incorporate or coordinate with the services, software or systems of other vendors and service providers. Our ability to deliver our commitments may depend on the delivery by these vendors and service providers of their commitments. If these third parties fail to deliver their commitments on time or at all, our ability to perform may be adversely affected, which could have a material adverse effect on our business, revenue, profitability or cash flow. In addition, in some cases, we may be responsible for the performance of other vendors or service providers delivering software, systems or other requirements for our services.
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Our contracts generally contain provisions that could allow customers to terminate the contracts and sometimes contain provisions that enable the customer to require changes in pricing, decreasing our revenue and profits and potentially damaging our business reputation.
Our contracts with customers generally permit termination in the event our performance is not consistent with service levels specified in those contracts. The ability of our customers to terminate contracts creates an uncertain revenue and profit stream. If customers are not satisfied with our level of performance, our reputation in the industry may suffer, which may also adversely affect our ability to market our services to other customers.
If we fail to compete successfully in the highly competitive markets in which we operate, our business, financial condition, and results of operations will be materially and adversely affected.
We operate in an extremely competitive market, and the resources required to meet our customers’ needs changes with market and regulatory changes. In all of our service lines, we frequently compete with companies that have greater financial resources; sales, and marketing capacity; and larger customer bases than we do. Because many of the factors on which we compete are outside of our control, we cannot be sure that we will be successful in the markets in which we compete. If we fail to compete successfully, our business, financial condition, and results of operations will be materially and adversely affected.
Increasingly complex regulatory environments may increase our costs.
Our customers are subject to complex and constantly changing regulatory environments. These regulatory environments change and in ways that cannot be predicted. For example, our customers in the hospital sector have been made subject to increasingly complex and pervasive privacy laws and regulations as well as changes to code sets used by our coders and consultants. These regulations may increase our potential liabilities if our services contribute to a failure by our customers to comply with the regulatory regime and may increase the cost to comply as regulatory requirements increase or change.
If we are unable to collect our receivables, our results of operations and cash flows could be adversely affected.
Our business depends on our ability to successfully obtain payment from our clients of the amounts they owe us for work performed. We evaluate the financial condition of our clients and usually bill and collect on relatively short cycles. We maintain allowances against receivables, but actual losses on client balances could differ from those that we currently anticipate and as a result we might need to adjust our allowances. There is no guarantee that we will accurately assess the creditworthiness of our clients. In addition, timely collection of client balances depends on our ability to complete our contractual commitments and bill and collect our contracted revenues. If we are unable to meet our contractual requirements, we might experience delays in collection of and/or be unable to collect our client balances, and if this occurs, our results of operations and cash flows could be adversely affected.
Technology innovations in the markets that we serve may create alternatives to our products and result in reduced sales.
Technology innovations to which our current and potential customers might have access could reduce or eliminate their need for our services. A new or other disruptive technology that reduces or eliminates the use of one or more of our services could negatively impact the need for our services. Our failure to develop, introduce or enhance our services able to compete with new technologies in a timely manner could have an adverse effect on our business, results of operation and financial condition.
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Our growth objectives are largely dependent on the timing and market acceptance of our new service offerings, including our ability to continually enhance our service offerings and to bring those services to market.
Our ability to continually enhance our service offerings and bring those services to market may be adversely affected by difficulties or delays in service implementation, such as the inability to identify viable new services, or gain market acceptance of new services. There are no guarantees that new services will prove to be commercially successful.
The Department of Health and Human Services has announced a delay in initiating the implementation of the ICD-10 system.
In January 2009, the United States Department of Health and Human Services (“HHS”) published a final rule which mandated a change in medical coding in United States health care settings from the current system, International Classification of Diseases, 9th Edition, Clinical Modification (“ICD-9-CM”), to the International Classification of Diseases, 10th Edition, Clinical Modification/Procedure Coding System (“ICD-10-CM/PCS”). Compliance with this ruling was to be achieved by October 1, 2013. The new, mandated version expands the number of codes from 24,000 to 155,000, making it more precise and descriptive and more accurately describing the diagnoses and inpatient procedures of care delivered. The transition to ICD-10-CM/PCS requires significant business and systems changes throughout the health care industry and impacts both business and clinical processes.
On April 9, 2012, as published in the Federal Register, citing concerns about the ability of provider groups to meet the looming compliance deadline to adopt ICD-10-CM/PCS, HHS announced a proposed rule, which would delay the implementation date to October 1, 2014. Interested parties had the ability to comment during a period ending 30 days after the date of the announcement. On August 27, 2012 HHS Secretary Kathleen Sebelius announced the release of a rule that made final a one-year proposed delay—from October 1, 2013 to October 1, 2014 — in the compliance date for the industry's transition to ICD-10 codes. On April 1, 2014, the President signed into law legislation delaying the implementation date of ICD-10-CM/PCS until at least October 1, 2015.
If we are not able to offer new and valuable services, we may not remain competitive and our revenue and results of operations may suffer.
Our success depends on providing services that healthcare providers use to improve financial performance. Our competitors are constantly developing products and services that may become more efficient or appealing to our clients. Our services may become obsolete in light of rapidly evolving industry standards, technology and client needs, including changing regulations and provider reimbursement policies, such as the transition from fee-for-service reimbursement models to value-based payment, bundled payment and episodic care models. Additionally, some healthcare information technology providers have begun to incorporate enhanced revenue cycle management analytical tools and services into their core product and service offerings used by healthcare providers. These developments may adversely impact the demand for our services. We must invest appropriately proportional to our revenue in order to enhance our existing services, maintain or improve our service capability, competence and breadth; and introduce new high-quality services that clients and potential clients will want.
We may experience significant delays in generating, or an inability to generate, revenues if potential clients take a long time to evaluate our products and services.
Our strategy is to market our strategic outsource services directly to small and medium size healthcare providers, such as small health systems and acute care hospitals; and to increase the breadth of our services utilized by existing clients. The evaluation process is often lengthy and involves significant business risk and business case evaluation and commitment of personnel by these organizations. The use of our services may also be delayed due to an inability or reluctance to change or modify existing procedures or outsource existing functions done internally. Additionally, healthcare providers’ resources may be focused on other mission critical initiatives which could delay their evaluation of our services. If we are unable to sell additional services to existing clients, or enter into and maintain favorable relationships with other similar size healthcare providers, our revenue could grow at a slower rate or even decrease.
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Unsuccessful implementation of our products and services with our clients may harm our future financial success.
Some of our new-client engagements are complex and require lengthy and significant work to implement our services. Each client’s situation may be different, and unanticipated difficulties and delays may arise as a result of failure by us or by the client to meet respective implementation responsibilities. If the client implementation process is not executed successfully or if execution is delayed, our relationships with some of our clients, and our results of operations may be adversely impacted. In addition, cancellation of any implementation of our services after it has begun may involve the loss to us of time, effort and resources invested in the cancelled implementation as well as lost opportunity for acquiring other clients over that same period of time. These factors may contribute to substantial fluctuations in our quarterly operating results.
If our services fail to provide accurate information, or if any other element of our services is associated with incorrect, inaccurate or faulty coding, billing, or claims submissions to Medicare or any other third-party payor, we could be liable to clients or the government which could adversely affect our business.
Our services and content were developed based on the laws, regulations and third-party payor rules in existence at the time such content was developed. If we interpret those laws, regulations or rules incorrectly; the laws, regulations or rules materially change at any point after the content was developed; we fail to provide up-to-date, accurate information; or our services are otherwise associated with incorrect, inaccurate or faulty coding, billing or claims submissions, then clients could assert claims against us or the government or qui tam relators on behalf of the government could assert claims against us under the Federal False Claims Act or similar state laws. The assertion of such claims and ensuing litigation, regardless of its outcome, could result in substantial costs to us, divert management’s attention from operations, damage our reputation and decrease market acceptance of our services. We attempt to limit by contract our liability to clients for damages. We cannot, however, limit liability the government could seek to impose on us under the False Claims Act. Further, the allocations of responsibility and limitations of liability set forth in our contracts may not be enforceable or otherwise protect us from liability for damages.
If we are unable to establish and maintain healthcare strategic alliances, we may be unable to grow our current base business.
Our business strategy includes entering into strategic alliances and affiliations with leading healthcare service and information technology providers. We work closely with our strategic partners to either expand our penetration in certain areas of the revenue cycle operations for hospitals and physician groups, or expand our market capabilities. We may not achieve our objectives through these alliances. Many of these companies have multiple relationships and they may not regard us as significant to their business. These companies may pursue relationships with our competitors or develop or acquire products and services that compete with our products and services. In addition, in many cases, these companies may terminate their relationships with us with little or no notice. If existing alliances are terminated or we are unable to enter into alliances with leading healthcare service and information technology providers, we may be unable to maintain or increase our market presence.
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If we are alleged to have infringed on the rights of others, we could incur unanticipated costs and be prevented from providing our products and services.
We could be subject to intellectual property infringement claims as the number of our competitors grows and our applications’ content overlaps with competitor products. While we do not believe that we have infringed or are infringing on any proprietary rights of third parties, we cannot assure you that infringement claims will not be asserted against us or that those claims will be unsuccessful. Any intellectual property rights claim against us or our clients, with or without merit, could be expensive to litigate, cause us to incur substantial costs and divert management resources and attention in defending the claim. Furthermore, a party making a claim against us could secure a judgment awarding substantial damages, as well as injunctive or other equitable relief that could effectively block our ability to provide products or services. In addition, we cannot assure you that licenses for any intellectual property of third parties that might be required for our products or services will be available on commercially reasonable terms, or at all. As a result, we may also be required to develop alternative non-infringing technology, which could require significant effort and expense.
In addition, a number of our contracts with our clients contain indemnity provisions whereby we indemnify them against certain losses that may arise from third-party claims that are brought in connection with the use of our services.
Our exposure to risks associated with the use of intellectual property may be increased as a result of acquisitions, as we have limited visibility into the development process with respect to such technology or the care taken to safeguard against infringement risks. In addition, third parties may make infringement and similar or related claims after we have acquired technology that had not been asserted prior to our acquisition.
Our sources of data might restrict our use of or refuse to license data, which could adversely impact our ability to provide certain products or services.
Some of the data that we may use from time to time may either be purchased or licensed from third parties or may be obtained from our clients for specific client engagements. We may also obtain a portion of the data that we use from public records. We believe that we have all rights necessary to use the data that is incorporated into our training programs and our services. However, in the future, data providers could withdraw their data from us if there is a competitive reason to do so; if legislation is passed restricting the use of the data; or if judicial interpretations are issued restricting use of the data that we currently use in our training programs and services. Further, we cannot assure you that our licenses for information will allow us to use that information for all potential or contemplated uses. If a substantial number of data providers were to withdraw their data, our ability to provide training and services to our clients could be materially adversely impacted.
Risks Related to Regulatory Matters/Compliance
The healthcare industry is highly regulated. Any material changes in the political, economic or regulatory healthcare environment that affect the purchasing practices and operations of healthcare organizations, or that lead to consolidation in the healthcare industry, could require us to modify our services or reduce the funds available to providers to purchase our products and services.
Our business, financial condition and results of operations depend upon conditions affecting the healthcare industry generally and hospitals and health systems particularly. Our ability to grow will depend upon the economic environment of the healthcare industry generally as well as our ability to increase the number of programs and services that we sell to our clients. The healthcare industry is highly regulated and is subject to changing political, economic and regulatory influences. Factors such as changes in reimbursement policies for healthcare expenses; consolidation in the healthcare industry; regulation; litigation; and general economic conditions affect the purchasing practices, operations and the financial health of healthcare organizations.
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In March 2010, President Obama signed into law the Patient Protection and Affordable Care Act, amended by the Health Care and Education and Reconciliation Act of 2010 (collectively, the “Affordable Care Act”). The Affordable Care Act is a sweeping measure designed to expand access to affordable health insurance, control health care spending, and improve health care quality. The law includes provisions to tie Medicare provider reimbursement to health care quality and incentives; mandatory compliance programs; enhanced transparency disclosure requirements; increased funding and initiatives to address fraud and abuse; and incentives to state Medicaid programs to promote community-based care as an alternative to institutional long-term care services. In addition, the law provides for the establishment of a national voluntary pilot program to bundle Medicare payments for hospital and post-acute services, which could lead to changes in the delivery of health care services. Likewise, many states have adopted or are considering changes in health care policies in part due to state budgetary shortfalls. While many of the provisions of the Affordable Care Act have begun to be implemented, we do not know what long-term effect the federal Affordable Care Act or other future changes to federal or state laws may have on our business.
The Budget Control Act of 2011, as amended by the American Taxpayer Relief Act of 2012 and the Bipartisan Budget Act of 2013, established a budget process known as sequestration that imposes across-the-board federal spending cuts (with certain exceptions) to meet budget targets. Under this process, a two percent reduction to Medicare provider and plan payments has been in effect since April 1, 2013, and this reduction will continue through 2023 unless additional Congressional action is taken to achieve alternative budget savings or otherwise modify the terms of sequestration. There can be no assurances that reimbursement reductions under sequestration or alternative federal or state budgetary actions will not have an adverse impact on our clients and in turn our business.
If our clients who operate as not-for profit entities lose their tax-exempt status, those clients would suffer significant adverse tax consequences which, in turn, could adversely impact their ability to purchase products or services from us.
State tax authorities have challenged the tax-exempt status of hospitals and other healthcare facilities claiming such status on the basis that they are operating as charitable and/or religious organizations. The outcome of these cases has been mixed with some facilities retaining their tax-exempt status while others have been denied the ability to continue operating as not-for profit, tax-exempt entities under state law. In addition, many states have removed sales tax exemptions previously available to not-for-profit entities, and both the internal revenue service (“IRS”) and the United States Congress are investigating the practices of not-for profit hospitals. The Affordable Care Act added new requirements for hospitals operating as charitable organizations, which the IRS is in the process of implementing through regulations. Those facilities denied tax exemptions could be subject to the imposition of tax penalties and assessments which could have a material adverse impact on their cash flow, financial strength and possibly ongoing viability. If the tax exempt status of any of our clients is revoked or compromised by new legislation, regulation, or interpretation of existing legislation or regulation, that client’s financial health could be adversely affected, which could adversely impact our sales and revenue.
If we fail to comply with federal and state laws governing submission of false or fraudulent claims to government healthcare programs and financial relationships among healthcare providers, we may be subject to civil and criminal penalties or loss of eligibility to participate in government healthcare programs.
We are subject to federal and state laws and regulations designed to protect patients, governmental healthcare programs, and private health plans from fraudulent and abusive activities. These laws include anti-kickback restrictions and laws prohibiting the submission of false or fraudulent claims. These laws are complex and their application to our specific products, services and relationships may not be clear and may be applied to our business in ways that we do not anticipate. Federal and state regulatory and law enforcement authorities have recently increased enforcement activities with respect to Medicare and Medicaid fraud and abuse regulations and other reimbursement laws and rules. From time to time participants in the healthcare industry have received inquiries or subpoenas to produce documents in connection with such activities. We could be required to expend significant time and resources to comply with these requests, and the attention of our management team could be diverted to these efforts. Furthermore, if we are found to be in violation of any federal or state fraud and abuse laws, we could be subject to civil and criminal penalties, and we could be excluded from participating in federal and state healthcare programs such as Medicare and Medicaid. The occurrence of any of these events could significantly harm our business and financial condition.
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Provisions in Title XI of the Social Security Act, commonly referred to as the federal Anti-Kickback Statute, prohibit the knowing and willful offer, payment, solicitation or receipt of remuneration, directly or indirectly, in return for the referral of patients or arranging for the referral of patients, or in return for the recommendation, arrangement, purchase, lease or order of items or services that are covered, in whole or in part, by a federal healthcare program such as Medicare or Medicaid. The definition of “remuneration” has been broadly interpreted to include anything of value such as gifts, discounts, rebates, waiver of payments or providing anything at less than its fair market value. Many states have adopted similar prohibitions against kickbacks and other practices that are intended to induce referrals which are applicable to all patients regardless of whether the patient is covered under a governmental health program or private health plan. We attempt to scrutinize our business relationships and activities to comply with the federal anti-kickback statute and similar laws; and we attempt to structure our arrangements in a manner that is consistent with the requirements of applicable safe harbors to these laws. We cannot assure you, however, that our arrangements will be protected by such safe harbors or that such increased enforcement activities will not directly or indirectly have an adverse effect on our business financial condition or results of operations. Any determination by a state or federal agency that any of our activities or those of our vendors or clients violate any of these laws could subject us to civil or criminal penalties; could require us to change or terminate some portions of or operations or business, or could disqualify us from providing services to healthcare providers doing business with government programs; and, thus could have an adverse effect on our business.
Our business, particularly our provision of contract billing and coding services, is also subject to numerous federal and state laws that forbid the submission or “causing the submission” of false or fraudulent information or the failure to disclose information in connection with the submission and payment of claims for reimbursement to Medicare, Medicaid, federal healthcare programs or private health plans. These laws and regulations may change rapidly, and it is frequently unclear how they apply to our business. Errors created by our products or services that relate to entry, formatting, preparation or transmission of claim or cost report information may be determined or alleged to be in violation of these laws and regulations. Any failure of our products or services to comply with these laws and regulations could result in substantial civil or criminal liability; could adversely affect demand for our services; could invalidate all or portions of some of our client contracts; could require us to change or terminate some portions of our business; could require us to refund portions of our services fees; could cause us to be disqualified from serving clients doing business with government payors; and could have an adverse effect on our business.
Federal and state privacy and security laws may increase the costs of operation and expose us to civil and criminal sanctions.
We must comply with extensive federal and state requirements regarding the use, disclosure, retention and security of patient healthcare information. The Health Insurance Portability and Accountability Act of 1996 and its implementing regulations, as amended by the regulations promulgated pursuant to the HITECH Act, which we refer to collectively as HIPAA, contain substantial restrictions and requirements with respect to the use and disclosure of individuals’ protected health information. These restrictions and requirements are set forth in the HIPAA Privacy, Security and Breach Notification Rules. The HIPAA Privacy Rule prohibits a covered entity from using or disclosing an individual’s protected health information unless the use or disclosure is subject to the terms of a business associate agreement; is authorized by the individual; or is specifically required or permitted under the Privacy Rule. The Privacy Rule imposes a complex set of requirements on covered entities for complying with this basic standard. Under the HIPAA Security Rule, covered entities must establish administrative, physical and technical safeguards to protect the confidentiality, integrity and availability of electronic protected health information created, received, maintained or transmitted by them or by others on their behalf. The Breach Notification Rule requires covered entities to report breaches of unsecured protected health information to affected individuals, the Secretary of HHS, and, in some circumstances, the media.
12
Our healthcare provider clients that engage in HIPAA-defined standard electronic transactions, and our own business operations as a healthcare clearinghouse, are directly subject to the HIPAA Privacy, Security and Breach Notification Rules governing “covered entities.” Additionally, because some of our clients are covered entities who disclose protected health information to us so that we may use that information to provide certain consulting or other services to those clients, we are a “business associate” of those clients. In these cases, in order to provide clients with services that involve the use or disclosure of protected health information, the HIPAA Privacy and Security Rules require us to enter into business associate agreements with our clients. Such agreements must, among other things, provide adequate written assurances:
| as to how we will use and disclose the protected health information; | ||
| · | that we will implement reasonable administrative, physical and technical safeguards to protect such information from misuse; | |
| · | that we will enter into agreements with our subcontractors that create, receive, maintain or transmit the information on our behalf that impose the same restrictions and conditions that apply to us with respect to such information; | |
| · | that we will report breaches of unsecured protected health information, security incidents and other inappropriate uses or disclosures of the information; and | |
| · | that we will assist the covered entity with certain of its duties under the Privacy Rule. |
Any failure or perceived failure of our products or services to meet HIPAA standards and related regulatory requirements could expose us to certain notification, penalty and/or enforcement risks and could adversely affect demand for smallerour products and services, and force us to expend significant capital, research and development and other resources to modify our products or services to address the privacy and security requirements of our clients and HIPAA.
In addition to our obligations under HIPAA, most states have enacted patient confidentiality laws that protect against the disclosure of confidential medical information, and many states have adopted or are considering adopting further legislation in this area, including privacy safeguards, security standards, and data security breach notification requirements. These state laws, if more stringent than HIPAA requirements, are not preempted by the federal requirements, and we are required to comply with them as well.
We are unable to predict what changes to HIPAA or other federal or state laws or regulations might be made in the future or how those changes could affect our business or the associated costs of compliance. For example, the federal Office of the National Coordinator for Health Information Technology (“ONCHIT”), created in 2004, through an Executive Order, and legislatively mandated in the Health Information Technology for Economic and Clinical Health Act (HITECH Act) of 2009, is coordinating the development of national standards for creating an interoperable health information technology infrastructure based on the widespread adoption of EHRs in the healthcare sector. Several organizations, selected as ONCHIT-Authorized Testing and Certification Bodies for EHR certification, test and certify that EHR products are compliant with the standards, implementation specifications, and certification criteria adopted by the U.S. Department of Health and Human Services. Certified EHR technologies are eligible to be used for the CMS EHR Incentive Programs. Eligible providers may use EHR technology that is certified to 2011 edition certification criteria, 2014 edition certification criteria, or a combination of 2011 and 2014 edition certification criteria. We are yet unable to predict what, if any, impact the development and ongoing refinement of such standards and related ONCHIT activities will have on our products, services or compliance costs.
Failure by us to comply with any of the federal and state standards regarding patient privacy, identity theft prevention and detection, and data security may subject us to penalties, including civil monetary penalties and in some circumstances, criminal penalties. In addition, such failure may injure our reputation and adversely affect our ability to retain clients and attract new clients.
HIPAA and its implementing regulations also mandate format, data content and provider identifier standards that must be used in certain electronic transactions, such as claims, payment advice and eligibility inquiries. Although our systems are fully capable of transmitting transactions that comply with these requirements, some payers and healthcare clearinghouses with which we conduct business may interpret HIPAA transaction requirements differently than we do or may require us to use legacy formats or include legacy identifiers as they make the transition to full compliance. In cases where payers or healthcare clearinghouses require conformity with their interpretations or require us to accommodate legacy transactions or identifiers as a condition of successful transactions, we attempt to comply with their requirements, but may be subject to enforcement actions as a result.
13
Risks Related to Our Securities
The market price of our common stock may be volatile.
The market price of our common stock has been and will likely continue to be highly volatile, as is the stock market in general, and the market for OTC Bulletin Board quoted stocks in particular. Some of the factors that may materially affect the market price of our common stock are beyond our control, such as changes in financial estimates by industry and securities analysts, conditions or trends in the industry in which we operate or sales of our common stock. These factors may materially adversely affect the market price of our common stock, regardless of our performance. In addition, the public stock markets have experienced extreme price and trading volume volatility. This volatility has significantly affected the market prices of securities of many companies for reasons frequently unrelated to the operating performance of the specific companies. These broad market fluctuations may adversely affect the market price of our common stock.
Because we were engaged in a reverse merger, it may not be able to attract the attention of major brokerage firms.
Additional risks may exist since we were engaged in a “reverse merger.” Securities analysts of brokerage firms may not provide coverage of the Company since there is little incentive to brokerage firms to recommend the purchase of the common stock. No assurance can be given that brokerage firms will want to conduct any secondary offerings on behalf of the Company in the future.
Our common stock will be considered a “penny stock” which may be subject to restrictions on marketability, so you may not be able to sell your shares.
If our common stock becomes tradable in the secondary market, we will be subject to the penny stock rules adopted by the SEC that require brokers to provide extensive disclosure to their customers prior to executing trades in penny stocks. These disclosure requirements may cause a reduction in the trading activity of our common stock, which in all likelihood would make it difficult for our stockholders to sell their securities.
Penny stocks generally are equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges or quoted on the NASDAQ system). Penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document that provides information about penny stocks and the risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, and monthly account statements showing the market value of each penny stock held in the customer’s account. The broker-dealer must also make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These requirements may have the effect of reducing the level of trading activity, if any, in the secondary market for a security that becomes subject to the penny stock rules. The additional burdens imposed upon broker-dealers by such requirements may discourage broker-dealers from effecting transactions in our securities, which could severely limit the market price and liquidity of our securities. These requirements may restrict the ability of broker-dealers to sell our common stock and may affect your ability to resell our common stock.
14
The market for penny stocks has experienced numerous frauds and abuses which could adversely impact investors in our stock.
OTCBB securities are frequent targets of fraud or market manipulation, both because of their generally low prices and because OTCBB reporting requirements are less stringent than those of the listed stock exchanges.
Patterns of fraud and abuse include:
| ● | Control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer; | |
| ● | Manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases; | |
| ● | “Boiler room” practices involving high pressure sales tactics and unrealistic price projections by inexperienced sales persons; | |
| ● | Excessive and undisclosed bid-ask differentials and markups by selling broker-dealers; and | |
| ● | Wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the inevitable collapse of those prices with consequent investor losses. |
Our management is aware of the abuses that have occurred historically in the penny stock market.
We have not paid dividends in the past and do not expect to pay dividends in the future, and any return on investment may be limited to the value of our stock.
We have never paid any cash dividends on our common stock and do not anticipate paying any cash dividends on our common stock in the foreseeable future and any return on investment may be limited to the value of our common stock. We plan to retain any future earning to finance growth.
We are an “Emerging Growth Company,” and any decision on our part to comply only with curtained reduced disclosure requirements applicable to “Emerging Growth Company” could make our common stock less attractive to investors.
We are an “emerging growth company,” as defined in the JOBS Act, and, for as long as we continue to be an “emerging growth company,” we may choose to take advantage of exemptions from various reporting requirements applicable to other public companies but not to “emerging growth companies,” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We could be an “emerging growth company” for up to five years, or until the earliest of (i) the last day of the first fiscal year in which our annual gross revenues exceed $1 billion, (ii) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter, or (iii) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three year period.
In addition, Section 107 of the JOBS Act also provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to opt in to the extended transition period for complying with the revised accounting standards.
Because we have elected to defer compliance with new or revised accounting standards, our financial statement disclosure may not be comparable to similar companies.
We have elected to use the extended transition period for complying with new or revised accounting standards under Section 102(b)(1) of the JOBS Act. This allows us to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies. As a result of our election, our consolidated financial statements may not be comparable to companies that comply with public company effective dates.
15
Our status as an “Emerging Growth Company” under the JOBS Act of 2012 may make it more difficult to raise capital as and when we need it.
Because of the exemptions from various reporting requirements provided to us as an “emerging growth company” and because we will have an extended transition period for complying with new or revised financial accounting standards, we may be less attractive to investors and it may be difficult for us to raise additional capital as and when we need it. Investors may be unable to compare our business with other companies in our industry if they believe that our financial accounting is not as transparent as other companies in our industry. If we are unable to raise additional capital as and when we need it, our financial condition and results of operations may be materially and adversely affected.
None.
The Company’s corporate headquarters is located at 8551 West Sunrise Boulevard, Unit 304, Plantation, Florida 33322, and is owned by the Company's subsidiary, Dream Reachers. There is a mortgage on the property in Plantation, Florida. the original principal amount of $192,500.
The Company also currently leases 3,293 square feet of office space located at 8551 W.West Sunrise Boulevard, Unit 305, Plantation, Florida 33322. The33322, pursuant to a commercial lease is for a term of one-year beginning onagreement dated September 1, 2012 and ending August 31, 2013. We have an option to renew the lease at the end of the one-year term. Our lease payments are a total of $60,097 for the entire term (or, $5,008 per month).
PART II
Price Range of Common Stock
Our common stock ishas been quoted on the OTCBBOTC Bulletin Board since July 2012 under the symbol “HRAA.” The OTCBB is a quotation service that displays real-time quotes, last-sale prices, and volume information in over-the-counter equity securities. An OTCBB equity security generally is any equity that is not listed or traded on a national securities exchange.“HRAA”. On April 11, 2014, the last reported bid price of our common stock was $0.15 per share. The following table shows, for the periods indicated,presents the high and low bid prices per share ofsales price for our common stock as reported byfor the OTCBB quotation service. These bid prices represent prices quoted by broker-dealers on the OTCBB quotation service. The quotations reflect inter-dealer prices, without retail mark-up, mark-down or commissions, and may not represent actual transactions.periods indicated:
| Fiscal 2014 | ||||||||||||||||
| High | Low | |||||||||||||||
| First Quarter (January 1 - March 31) | $ | 0.29 | $ | 0.18 | ||||||||||||
| Second Quarter (April 1 through April 11) | $ | 0.20 | $ | 0.15 | ||||||||||||
| Fiscal 2012 | Fiscal 2013 | |||||||||||||||
| High | Low | High | Low | |||||||||||||
| First Quarter (January 1 - March 31) | $ | - | $ | - | $ | 0.52 | $ | 0.25 | ||||||||
| Second Quarter (April 1 - June 30) | $ | - | $ | - | $ | 0.62 | $ | 0.25 | ||||||||
| Third Quarter (July 1 - September 30) | $ | 0.29 | $ | 0.29 | $ | 0.52 | $ | 0.20 | ||||||||
| Fourth Quarter (October 1 - December 31) | $ | 0.35 | $ | 0.10 | $ | 0.30 | $ | 0.11 | ||||||||
| Fiscal 2012 | ||||||||
| High | Low | |||||||
| Third Quarter (July 12 - September 30) | $ | 0.40 | $ | 0.15 | ||||
| Fourth Quarter (October 1 - December 31) | $ | 0.35 | $ | 0.10 | ||||
Stockholders
The approximate number of holders of record of our common stock as of December 31, 2012April 10, 2014 was 75400 including those brokerage firms and/or clearing houses holding shares of common stock for their clientele (with each such brokerage house and/or clearing house being considered as one holder). As of December 31, 2012,April 10, 2014, we had 39,054,86754,752,294 shares of common stock outstanding.
Dividends
We have never declared or paid dividends on our common stock. We do not intend to declare dividends in the foreseeable future because we anticipate that we will reinvest any future earnings into the development and growth of our business. Any decision as to the future payment of dividends will depend on our results of operations and financial position and such other factors, as our Boardboard of Directorsdirectors in its discretion deems relevant.
Equity Compensation Plan Information
See Part III, Item 12, under the heading, “Securities Authorized for Issuance Under Equity Compensation Plans” for information on compensation plans under which our equity securities are authorized for issuance.
Not required for smaller reporting companies.
The following discussion and analysis of the results of operations and financial condition of Health Revenue Assurance Holdings, Inc.the Company for the fiscal years ended December 31, 20122013 and 2011,2012 should be read in conjunction with the Selected Consolidated Financial Data, Health Revenue Assurance Holdings’Company’s financial statements, and the notes to those financial statements that are included elsewhere in this Annual Report. Our discussion includes forward-looking statements based upon current expectations
Overview
The Company is a provider of revenue cycle services to a broad range of healthcare providers. We offer our customers integrated solutions designed around their specific business needs, including revenue cycle data analysis, contract and outsourced codings, billing, coding and compliance audits, coding education, coding consulting, physician coding services and ICD-10 education and transition services. With this approach, our customers benefit from integrated service offerings that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements aswe believe enhances their revenue integrity. As a result, of a number of factors, including those set forth under the Cautionary Notice Regarding Forward-Looking Statementswe believe we help our customers achieve their business objectives and Business sections in this Annual Report. We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions to identify forward-looking statements.
On February 10, 2012, wethe Company entered into anthe Merger Agreement with Acquisition Sub and Plan of Merger and Reorganization with Health Revenue Acquisition Corp., a Maryland corporation and our wholly-owned subsidiary (“Acquisition Sub”), and Health Revenue Assurance Associates, Inc., a Maryland corporation (“HRAA”),HRAA, pursuant to which Acquisition Sub was merged with and into HRAA, and HRAA, as the surviving corporation, became oura wholly-owned subsidiary (the “Merger”).of the Company. Before the entry into the Merger Agreement, no material relationship existed between the Company and the Acquisition Sub or HRAA.
Pursuant to the terms and conditions of the Merger Agreement, and upon the consummation of the Merger:
| ● | Each share of HRAA’s common stock issued and outstanding immediately prior to the closing of the Merger was converted into the right to receive 1,271.111 shares of the Company’s common stock. An aggregate of 1,271,111 shares of the Company’s common stock were issued to the holders of HRAA’s common stock. Immediately prior to the Merger, HRAA had no outstanding securities other than shares of its common stock. | |
| ● | Anna Vechera resigned as the Company’s sole officer and director, and simultaneously with the Merger, a new board of directors and new officers were appointed. The Company’s new board of directors consisted of Robert Rubinowitz, Andrea Clark and Keith Siddel, previously the directors of HRAA. In addition, immediately following the Merger, Andrea Clark was appointed as the Company’s President and Chief Executive Officer, Robert Rubinowitz was appointed as the Company’s Chief Operating Officer, Secretary and Treasurer and Keith Siddel was appointed as the Company’s Chief Marketing Officer. Andrea Clark, Robert Rubinowitz and Keith Siddel no longer hold these positions. |
On April 13, 2012, the Board unanimously approved a change in the Company’sCompany changed its name from Anvex International, Inc. to Health Revenue Assurance Holdings, Inc. (“HRAH”)
On April 13, 2012, the board of directors authorized the Stock Split. The shares resulting from the Stock Split were issued on April 26, 2012. All share and per share amounts for all periods presented have been retroactively adjusted to be consistent with our current business followingreflect the Merger.
Stock Split.18
Recent Developments
Certain significant items or events must be considered to better understand differences in our results of operations from period to period. We believe that the following items have had a material impact on our results of operations for the periods discussed below or may have a material impact on our results of operations in future periods.
In the short term, the main focus of our business will be with respect to the ICD-10 coding transition. In that regard, our potential clients are all hospitals and medical providers, which currently maintain coding personnel in some form that are primarily responsible for seeking reimbursement for patients’ procedures. The current system in place that drives the appropriate medical codes from hospitals/medical facilities to insurance companies is called ICD-9, which was implemented over 30 years ago.
In January 2009, the United States Department of Health and Human Services (“HHS”) published a final rule which mandated a change in medical coding in United States health care settings from the current system, International Classification of Diseases, 9th Edition, Clinical Modification (ICD-9-CM)(“ICD-9-CM”), to the International Classification of Diseases, 10th Edition, Clinical Modification/Procedure Coding System (ICD-10-CM/PCS)(“ICD-10-CM/PCS”). Compliance with this ruling was to be achieved by October 1, 2013. The new, mandated version expands the number of codes from 24,000 to 155,000, making it more precise and descriptive and more accurately describing the diagnoses and inpatient procedures of care delivered. The transition to ICD-10-CM/PS will requirePCS requires significant business and systems changes throughout the health care industry and will impact all processesimpacts both business and people from finance to compliance to doctors. clinical processes.
On April 9, 2012, as published in the Federal Register, citing concerns about the ability of provider groups to meet the looming compliance deadline to adopt ICD-10-CM/PCS, HHS announced a proposed rule, which would delay the implementation date by 1 year to October 1, 2014. Interested parties now havehad the ability to comment during a period ending 30 days after the date of the announcement. On August 27, 2012 HHS then hasSecretary Kathleen Sebelius announced the release of a 60 day periodrule that made final a one-year proposed delay—from October 1, 2013 to reviewOctober 1, 2014 — in the compliance date for the industry's transition to ICD-10 codes. On April 1, 2014, the President signed into law legislation delaying the implementation date of ICD-10-CM/PCS until at least October 1, 2015.
We believe the impacts to the ICD-10 delay will have minimal impacts on our near term coding staffing and issue its final decision regarding the final implementation date.consulting services and do not affect our ability to acquire long term coding outsourcing service contracts.
Securities Purchase Agreement
On November 12, 2013, the Company entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with certain investors named therein (each a “Purchaser” and, collectively, the “Purchasers”) for an aggregate of $5,400,000. Pursuant to the Securities Purchase Agreement, the Company issued the following to the Purchasers: (i) 13,500,000 shares of its Series A 8% Redeemable Convertible Preferred Stock (the “Series A Preferred Stock”) and (ii) 5-year warrants (the “Warrants”) to purchase an aggregate of 27,000,000 shares of common stock for an exercise price of $0.30 per share. The Series A Preferred Stock is convertible into common stock on a 2 for 1 basis and is redeemable by the Company, at the option of the investor, 48 months from November 12, 2013 at the stated value of $0.30 per share or a total of $5,400,000 plus accumulated but unpaid dividends, whether declared or not. The Company anticipates implementationalso issued 1,890,000 warrants as a fee to the placement agent at an exercise price of ICD-10-CM/PCS$0.30 per share.
In connection with the Securities Purchase Agreement, the Company entered into a registration rights agreement with the Purchasers, pursuant to which the Company agreed to register all of the shares of common stock underlying the Series A Preferred Stock and the shares of common stock underlying the Warrants on a registration statement on Form S-1 (the “Registration Statement”) to be completed byfiled with the newly proposedSEC within 30 calendar days following the Closing Date (the “Filing Deadline”) and to use its best efforts to cause the Registration Statement to be declared effective date of October 1, 2014.under the Securities Act within 90 calendar days following the Filing Deadline. The Registration Statement was filed on December 11, 2013, as amended December 20, 2013 and declared effective on December 24, 2013.
Separation Agreement with Robert Rubinowitz
Directors Mitchell D. Kaye and David Kroin resigned from the board of directors on April 2, 2014 and April 4, 2014, respectively. See Part II, “Item 9B, Other Information,” included elsewhere in this Form 10-K.
Appointment of Tim Lankes as Director
On April 12, 2014, Tim Lankes, the Company's chief executive officer was appointed to the board of directors of the Company. See Part II, "Item 9B, Other Information," included elsewhere in this Form 10-K.
Year ended December 31, 20122013 compared to the year ended December 31, 20112012
Results of OperationOperations
The following table presents a summary of operating information for the year ended December 31, 20122013 and 2011:2012:
| Year-ended | Year-ended | Increase/ | Increase/ | For the years ended | ||||||||||||||||||||||||||||
| December 31, | December 31, | (Decrease) | (Decrease) | December 31, 2013 | December 31, 2012 | Increase/ (Decrease) $ | Increase/ (Decrease) % | |||||||||||||||||||||||||
| 2012 | 2011 | ($) | (%) | |||||||||||||||||||||||||||||
| Revenues | $ | 5,806,848 | $ | 1,432,773 | $ | 4,374,075 | 305.3 | % | ||||||||||||||||||||||||
| Cost of Revenues | 2,830,008 | 473,719 | 2,356,289 | 497.4 | % | |||||||||||||||||||||||||||
| Revenue | $ | 7,099,514 | $ | 5,806,848 | $ | 1,292,666 | 22.26 | % | ||||||||||||||||||||||||
| Revenue – Related Party | 211,239 | - | 211,239 | 100.00 | % | |||||||||||||||||||||||||||
| Total Revenue | 7,310,753 | 5,806,848 | 1,503,905 | 25.90 | % | |||||||||||||||||||||||||||
| Costs of Revenues | 4,061,644 | 2,830,008 | 1,231,636 | 43.52 | % | |||||||||||||||||||||||||||
| Gross profit | 2,976,840 | 959,054 | 2,017,786 | 210.4 | % | 3,249,109 | 2,976,840 | 272,269 | 9.15 | % | ||||||||||||||||||||||
| Selling and administrative expenses | 3,853,820 | 1,976,655 | 1,877,165 | 95.0 | % | 7,016,533 | 3,853,820 | 3,162,713 | 82.07 | % | ||||||||||||||||||||||
| Research and development expenses | 64,386 | 93,489 | (29,103 | ) | -31.1 | % | - | 64,386 | (64,386 | ) | (100.00 | )% | ||||||||||||||||||||
| Asset impairment | 946,931 | - | 946,931 | 100.00 | % | |||||||||||||||||||||||||||
| Depreciation and amortization | 50,765 | 31,362 | 19,403 | 61.9 | % | 83,900 | 50,765 | 33,135 | 65.27 | % | ||||||||||||||||||||||
| Other expenses, net | 465,339 | 29,468 | 435,871 | 1479.1 | % | |||||||||||||||||||||||||||
| Net income (loss) | $ | (1,457,470 | ) | $ | (1,171,921 | ) | $ | (285,549 | ) | 24.4 | % | |||||||||||||||||||||
| Total operating expenses | 8,047,364 | 3,968,971 | 4,078,393 | 102.76 | % | |||||||||||||||||||||||||||
| Operating income (loss) | (4,798,255 | ) | (992,131 | ) | (3,806,124 | ) | 383.63 | % | ||||||||||||||||||||||||
| Other expense, net | (674,985 | ) | (465,339 | ) | (209,646 | ) | 45.05 | % | ||||||||||||||||||||||||
| Net Income (loss) | $ | (5,473,240 | ) | $ | (1,457,470 | ) | $ | (4,015,770 | ) | 275.53 | % | |||||||||||||||||||||
| Cumulative preferred stock dividend | (60,000 | ) | - | (60,000 | ) | 100 | % | |||||||||||||||||||||||||
| Deemed dividend for beneficial conversion feature of preferred stock | (2,634,185 | ) | - | (2,634,185 | ) | 100 | % | |||||||||||||||||||||||||
| Net Income (loss) available to common stockholders | (8,167,425 | ) | (1,457,470 | ) | (6,709,955 | ) | 460 | % | ||||||||||||||||||||||||
Revenue:
Revenue increased by approximately $4,374,000$1,503,905 or approximately 305%26%, from approximately $1,433,000$5,806,848 for the year ended December 31, 20112012 to $5,807,000$7,310,753 for the year ended December 31, 2012.2013. The increase was due primarily to increased revenue generated as a result of an increase inthe growing business development and marketing efforts put forth by HRAA.the Company.
Cost of Revenues:
Cost of revenues increased by approximately $2,356,000$1,231,636 or approximately 497%44%, from approximately $474,000$2,830,008 for the year ended December 31, 20112012 to approximately $2,830,000$4,061,644 for the year ended December 31, 2012.2013. The increase was due primarily to greateradditional personnel and related training costs associated with the buildupbuild-up of the Company’s audit and coding service provider personnel required to service the anticipated increase in service contracts in future periods. Specifically, as of December 31, 2012, the Company employed 77 service providers, who have to go through a period of training, as compared to 5 service providers as of December 31, 2011.
Gross profit:
Gross profit increased by approximately $2,018,000,$272,269, or approximately 210%9%, from approximately $959,000$2,976,840 for the year ended December 31, 20112012 to approximately $2,977,000$3,249,109 for the year ended December 31, 2012.2013. The increase in gross profit was dueprimarily attributable to the increase in business experienced induring the year.
Selling and Administrative Expenses:
Selling and administrative expenses were approximately $3,854,000$7,016,533 for the year ended December 31, 2012,2013, an increase of $3,162,713 or approximately $1,877,000 or 95%82%, from approximately $1,977,000$3,853,820 for the year ended December 31, 2011.2012. The change in the 20122013 period compared to the 20112012 period was primarily due to:
| ● | Personnel costs have increased by approximately |
| ● | Travel/ |
| ● | Professional fees have increased from |
| ● | The remainder of the increase in |
20
Research and Development Expenses:
Asset Impairment:
At the end of expenses relatedSeptember 2013, the Company re-evaluated the capitalized research and development costs associated with the Visualizer software suite of multiple offerings and the OMC (Outsourced Medical Coding) Initiater after an evaluation based in part on the lack of cash flow and customer demand in ICD Visualizer after the general acceptance release date of July 15, 2013. In addition, the Company also considered its going concern risk and cash liquidity concerns that restrain the ability to make capital investments in research and development to complete existing products in the developmentpipeline as the available cash is needed to fund normal operating expenses. As a result of this evaluation, the Visualizer™ suite.Company recorded a loss of $946,931 for that is presented as a line item entitled “asset impairment” on the consolidated statement of operations. The Company will continue to use the Visualizer suite of functionality as internally developed software to generate customized reports for revenue integrity auditing and compliance services but the Company no longer intends to market or sell internally developed software on a stand alone basis.
Depreciation and Amortization Expenses:
Depreciation and amortization expenses were approximately $84,000 for the year ended December 31, 2013, an increase of approximately $33,000, or 65%, from approximately $51,000 for the year ended December 31, 2012, an increase of approximately $19,000, or 62%, from approximately $31,000 for the year ended December 30, 2011.2012. The increase was primarily due to depreciation costs associated with the Company’s purchases for office furniture and computercomputers necessary to support the increase in personnel.
Other Expenses, net:
Total other expenses, net of other income and gains were $674,985 and $465,339 for the years ended December 31, 2013 and December 31, 2012, respectively. The 2013 amount includes a gain of $365,255 from the change in fair value of warrant liability, $33,364 from the gain on extinguishment of debt relating to a put premium, $146,624 loss on extinguishment of debt, other income of $67 and interest expense of $927,047 while the 2012 amount is primarily interest expense.
Interest Expense (included in other expenses, net):
Net Income (loss):
and net income (loss) available to common stockholders:As a result of the above factors, a net loss of approximately $1,457,000$5,473,240 was recognized for the year ended December 31, 20122013 as compared to net loss of approximately $1,172,000$1,457,470 for the year ended December 31, 2011, a decrease in income2012, an increase of approximately $286,000$4,015,770 or approximately 24%276%. The increase in net loss is outlined above.However, the net loss available to common stockholders was $8,167,425 as a result of $60,000 in undeclared Series A preferred stock dividends and a $2,634,185 deemed dividend relating to the value of the beneficial conversion feature on the Series A preferred stock.
Non-GAAP – Financial Measures
The following discussion and analysis includes both financial measures in accordance with GAAP, as well as a non-GAAP financial measure. Generally, a non-GAAP financial measure is a numerical measure of a company’s performance, financial position or cash flows that either excludes or includes amounts that are not normally included or excluded in the most directly comparable measure calculated and presented in accordance with GAAP. Non-GAAP financial measures should be viewed as supplemental to, and should not be considered as alternatives to net income, operating income, and cash flow from operating activities, liquidity or any other financial measures. They may not be indicative of the historical operating results of the Company nor is it intended to be predictive of potential future results. Investors should not consider non-GAAP financial measures in isolation or as substitutes for performance measures calculated in accordance with GAAP.
We believe that both management and shareholdersstockholders benefit from referring to the following non-GAAP financial measure in planning, forecasting and analyzing future periods. Our management uses this non-GAAP financial measure in evaluating its financial and operational decision makingdecision-making and as a means to evaluate period-to-period comparison. Our management uses and relies on the following non-GAAP financial measure:
Adjusted EBITDA from continuing operations
Our management believes Adjusted EBITDAearnings before interest tax depreciation and amortization (EBITDA) from continuing operations is an important measure of our operating performance because it allows management, investors and analysts to evaluate and assess our core operating results from period to period after removing the impact of items of a non-operational nature that affect comparability. Our management recognizes that Adjusted EBITDA from continuing operations, like EBITDA from continuing operations, has inherent limitations because of the excluded items.
We have included a reconciliation of our non-GAAP financial measures to the most comparable financial measure calculated in accordance with GAAP. We believe that providing the non-GAAP financial measure, together with the reconciliation to GAAP, helps investors make comparisons between the Company and other companies. In making any comparisons to other companies, investors need to be aware that companies use different non-GAAP measure to evaluate their financial performance. Investors should pay close attention to the specific definition being used and to the reconciliation between such measure and the corresponding GAAP measure provided by each company under applicable SEC rules.
21
The Company defines Adjusted EBITDA from continuing operations as earnings (or loss) before interest expense, income taxes, depreciation and amortization, asset impairment, loss on early extinguishment of debt, and non-cash stock-based compensation. The Company excludes stock-based compensation because it is non-cash in nature. The following table presents a reconciliation of Adjusted EBITDA from continuing operations to Net Income (loss) from continuing operations allocable to common shareholders,stockholders, a GAAP financial measure:
| For the year ended | ||||||||||||||||
| For the year ended | December 31, | December 31, | ||||||||||||||
| December 31, 2012 | December 31, 2011 | 2013 | 2012 | |||||||||||||
| Net loss | $ | (1,457,470 | ) | $ | (1,171,921 | ) | $ | (5,473,240 | ) | $ | (1,457,470 | ) | ||||
| Interest expense | 465,349 | 29,468 | 927,047 | 465,349 | ||||||||||||
| Asset Impairment | 946,931 | - | ||||||||||||||
| Loss on early extinguishment of debt | 146,624 | - | ||||||||||||||
| Depreciation and amortization | 50,765 | 31,362 | 148,037 | 50,765 | ||||||||||||
| Stock based compensation expense | - | 818,595 | ||||||||||||||
| Share based compensation expense | 639,328 | - | ||||||||||||||
| Gain on put premium extinguishment of debt | (33,364 | ) | - | |||||||||||||
| Change in fair value of warrant liability | (365,255 | ) | - | |||||||||||||
| Adjusted EBITDA (loss) from operations | $ | (941,356 | ) | $ | (292,496 | ) | $ | (3,063,892 | ) | $ | (941,356 | ) | ||||
Liquidity and Capital Resources
The Company’s principal sources of liquidity include proceeds from long termlong-term debt and private placement of its shares. Overall, for the year ended December 31, 2012,2013, the Company generated approximately $2,803,000a net $6,287,000 from its financing activities primarily associated with the debt and equity financing. Such proceeds, coupled with its beginning cash balances, were utilized by the Company to fund its negative cash flow from operating activities in the amount of approximately $1,699,000$3,365,005 and investment in capitalized software, property and equipment of approximately $280,000.$762,439.
As of December 31, 2012,2013, the Company had cash balances of approximately $894,000$3,053,485 as compared to approximately $199,000$893,458 as of December 31, 2011,2012, an increase of approximately $695,000.$2,160,027 or 242%.
Net cash used in operating activities was approximately $1,699,000$3,365,005 for the year ended December 31, 2012.2013. This compared to net cash used by operating activities of approximately $66,000$1,699,466 for the year ended December 31, 2011.2012. The decreaseincrease of $1,633,000$1,665,539 was primarily dueused to higher personnel costs, greater travelfund a net loss of $8,167,425 reduced by non-cash depreciation and business development costs,amortization of $148,037, software impairment of $946,931, loss on early extinguishment of debt of $146,624 stock based compensation expense of $173,827, amortization of prepaid shares issued for services of $465,501, accretion of premium on debt $33,364, amortization of debt discount of $556,028, cumulative preferred stock dividend of $60,000, deemed dividend for beneficial conversion feature of preferred stock of $2,634,185, bad debt of $26,116, gain from change in fair market value of warrant of $365,255 and professional fees connected to the Company’s merger with HRAA which occurredchanges in February 2012 along with non-cash charges of $355,573.operating assets and liabilities totaling ($22,938).
Net cash used in investing activities for the year ended December 31, 20122013 was approximately $280,000$762,439 compared to approximately $47,000$279,918 for the year ended December 31, 2011.2012. The increase is primarily attributable to the development of software.
Net cash provided by financing activities amounted to approximately $2,674,000$6,287,471 for the year ended December 31, 2012,2013, compared to net cash provided in the year ended December 31, 20112012 of approximately $256,000,$2,674,342, representing an increase in net cash flow from financing activities of approximately $2,418,000.$3,613,129. This was due to the receipt of net proceeds from the Company’s issuance of stock, advances on convertible promissory notes, andequity capital raises, net borrowings from new and existing debt obligations, offset by various debt repayments.
Financing:
The Company hasand HRAA have the following financing arrangements:
| 1. | The Company entered into a revolving line of credit for $150,000 with Bank of America in December 2008, for its general working capital |
| 2. |
| 3. | On September 19, 2013, The Company consolidated the term loan with the line of credit. The outstanding balance for the term loan and the line of credit prior to consolidation was $20,697 and $133,334, respectively. The new consolidated term loan is personally guaranteed by Robert Rubinowitz and Andrea Clark and contains restrictive covenants, which among other things, prohibit the Company from granting any security interests or liens on the assets of the Company. Payments of principal and interest are approximately $3,200 per month. The new consolidated term loan matures on September 19, 2017 and incurs interest at a rate per year equal to the bank’s prime rate plus 3.5%. The balance due as of December 31, 2013 for the new consolidated term loan was approximately $142,000. Although the Company is current in its payments on this loan, management believes the Company may be in default of certain non-financial covenants. The bank has not notified the Company of any default. |
| 4. | A mortgage made to |
22
| The Company leases certain office equipment under |
| On May 14, 2012, the Company entered into a round of |
During December 2012, January 2013 and |
The Company’s recent mergerMerger yielded cash from the sale of common stock that was approximately $600,000 short of the expected amount to be raised in order in order to execute its growth plan for the near future. Since the time of the Merger, the Company has transacted equity capital raises totaling approximately $1,060,000$6,643,000 of additional capital infusion. The Company has continued its buildupbuild-up of the personnel and business development efforts and has incurred operating losses.losses As a result, the Company possesses a negative working capital of approximately $157,000$2,292,754, at December 31, 2012 and continues to hold discussions with interested parties regarding additional investment in the Company’s common stock in amounts which approximate its current estimated working capital shortfall. Should efforts to raise additional capital prove to be unsuccessful; the Company will reduce its growth plans accordingly.
The delayCompany’s ability to continue as a going concern is dependent upon its ability to generate cash from operating activities and obtain additional financing to fund its business plan and to support working capital requirements.
However, as of December 31, 2013, the Company had a working capital deficit, stockholders deficit and accumulated deficit and for the year ended December 31, 2013, incurred net losses, and has used net cash in implementationoperations. The Company has not been able to generate sufficient cash from operating activities to fund its on-going operations. There is no guarantee that the Company will be able to generate enough revenue and/or raise capital to support its operations. These factors raise substantial doubt about the Company’s ability to continue as a going concern.
On November 12, 2013, the Company entered into a Securities Purchase Agreement for the equity sale of ICD-10-CM/PCS$5.4 million in Series A Preferred Stock and Warrants to purchase shares of the Company’s common stock. The net proceeds to the Company after commissions and professional fees was $4,903,652. The net raise is sufficient to fund on-going operations for the next several months. However, the funding is not expected to materially impact the revenues of the Company. Servicing this anticipated expansion in customer base will require the recruitment, training and on boarding of several hundred medical coders by the date of implementation. Over the next two years, we will focus mainly on new customer acquisition, expanding services to our existing client base, and expanding our medical coding staff. We plan to use a portion of the proceeds from the Offering to implement this planned growth. The proceeds raised in the Offering may not be sufficient to fully implement our growth plans and we may need additional resources and future financings to complete our growth.alleviate the going concern issue.
Off-Balance Sheet Arrangements
None.
Critical Accounting Policies
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires our management to make assumptions, estimates, and judgments that affect the amounts reported, including the notes thereto, and related disclosures of commitments and contingencies, if any. We have identified certain accounting policies that are significant to the preparation of our consolidated financial statements. These accounting policies are important for an understanding of our financial condition and results of operations. Critical accounting policies are those that are most important to the portrayal of our financial condition and results of operations and require management’s difficult, subjective, or complex judgment, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Certain accounting estimates are particularly sensitive because of their significance to financial statements and because of the possibility that future events affecting the estimate may differ significantly from management’s current judgments. We believe the following critical accounting policies involve the most significant estimates and judgments used in the preparation of our consolidated financial statements.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Health Revenue Assurance Associates, Inc.HRAA and Dream Reachers, LLC.Reachers. All significant inter-company transactions and balances are eliminated in consolidation.
Allowance for doubtful accounts
Accounts receivable balances are subject to credit risk. Management has reserved for expected credit losses, sales returns and allowances, and discounts based upon past experience, as well as knowledge of current customer information. The Company believes that its reserves are adequate. It is possible, however, that the accuracy of our estimation process could be impacted by unforeseen circumstances. The Company continuously reviews its reserve balance and refines the estimates to reflect any changes in circumstances.
Software
Costs incurred in connection with the development of software products are accounted for in accordance with the Financial Accounting Standards Board Accounting Standards Codification ("ASC") 985 Costs of Software to Be Sold, Leased or Marketed.” Costs incurred prior to the establishment of technological feasibility are charged to research and development expense. Software development costs are capitalized after a product is determined to be technologically feasible and is in the process of being developed for market and capitalization ceases after the general release of the software. Amortization of capitalized software development costs begins upon initial product shipment after general release. Capitalized software development costs are amortized over the estimated life of the related product (generally thirty-six months) using the straight-line method. The Company evaluates its software assets for impairment whenever events or change in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of software assets to be held and used is measured by a comparison of the carrying amount of the asset to the future net undiscounted cash flows expected to be generated by the asset. If such software assets are considered to be impaired, the impairment to be recognized is the excess of the carrying amount over the fair value of the software asset.
Software maintenance costs are charged to expense as incurred. Expenditures for enhanced functionality are capitalized. The cost of the software and the related accumulated amortization are removed from the accounts upon retirement of the software with any resulting loss being recorded in operations.
Asset Impairment
At the end of September 2013, the Company re-evaluated the capitalized research and development costs for the Visualizer software suite of multiple offerings and the OMC Initiater after an evaluation based in part on the lack of cash flow and customer demand in ICD Visualizer after the general acceptance release date of July 15, 2013. In addition, the Company also considered its going concern opinion and cash liquidity concerns that restrain the ability to make capital investments in research and development to complete existing products in the pipeline as the available cash is needed to fund normal operating expenses. As a result of this evaluation, the Company recorded a loss of $946,931 that is presented as a line item entitled “asset impairment” on the consolidated statement of operations. The Company will continue to use the Visualizer suite of functionality as internally developed software to generate customized reports for revenue integrity auditing and compliance services but the Company no longer intends to market or sell internally developed software on a stand alone basis.
Use of Estimates
Management uses estimates and assumptions in preparing financial statements. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could differ from those estimates. Significant accounting estimates reflected in the Company’s consolidated financial statements include valuation of accounts receivable, valuation of property and equipment, valuation and amortization period of software, valuation of beneficial conversion features in convertible debt, valuation of equity based instruments issued for other than cash, revenue recognition, and the valuation allowance on deferred tax assets.
24
Revenue Recognition
The Company recognizes medical coding audit services revenue based on the proportional performance method of recognizing revenue.
A portion of the Company’s revenue is generated from medical coding audit services. Auditing revenue is invoiced in accordance with the contract, generally at three benchmark time periods which coincide with when specific, obligatory field work services have been rendered and completed, the value of this portion of the contract price has been predetermined and agreed upon, and the client has received benefit or value in the form of the independent identification of system weaknesses and risk analysis. Further, collectability is reasonably assured due to the existence of a fixed fee contract and the size and financial health of the Company’s clients. Below is a description of the general benchmarks and work phases associated with the Company’s audit services:
| ● | Planning Phase - work commences prior to and as soon as the contract is signed and includes setting the audit scope, scheduling of the job, assignment of audit staff, understanding the client and their systems, determination of sample size and sampling methods to be employed, and other specific items as outlined in the contract. The planning phase includes the determination of deliverables as defined in the contract, generally consisting of a listing of errors, training and a final report. The Company generally invoices and recognizes 50% of the contract value at the completion of the Planning Phase. Although all of the contracts contain a clause making the first 50% of the engagement fee due and non-refundable at this point, the Company does not deem this initial fee to be recognized as deferred revenue under SAB 104 due to the extensive amount of work to be done prior to accepting the contract. |
| ● | Field Work Phase – is performed at the client location and generally lasts one week and encompasses actual testing of sample claims preselected in the Planning Phase. The auditor generally preloads the selected claims into the Company’s proprietary software and audits the claim records by reviewing actual medical records. The software assists the auditor in determining proper classifications and allows the auditor to compare the proper classification against what was filed in the submission made by the client to Medicare. Notes and comments are recorded and audit reports are generated. The Company generally invoices and recognizes 40% of the contract value at the completion of the Field Work Phase. |
| ● | Reporting Phase – includes a summary of audit findings, exit conference with clients, and any other specific deliverables as determined by the contract. The Company generally invoices and recognizes the remaining 10% of the contract value at the completion of the |
A portion of the Company’s revenue is derived from consulting training and coding services provided. Revenue from these revenue streams is recognized after services are performed based on the quoted and agreed upon fee contained in its contracts.
Arrangements with customers may involve multiple elements including software sales,products, education products, training, software product maintenance, coding services, coding audit services and other consulting services. Training and maintenance on software products will generally occur after the software product sale while othersale. Other services may occur before or after the software product salesales and may not relate to the software product.products. Revenue recognition for multiple element arrangementarrangements is as follows:
| HEALTH REVENUE ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES | ||||||||
| CONSOLIDATED BALANCE SHEETS | ||||||||
| December 31, | December 31, | |||||||
| 2012 | 2011 | |||||||
| Assets | ||||||||
| Cash | $ | 893,458 | $ | 198,500 | ||||
| Accounts receivable | 1,246,814 | 143,557 | ||||||
| Prepaid expenses | 3,600 | 24,512 | ||||||
| Other current assets | 688 | 5,842 | ||||||
| Total Current Assets | 2,144,560 | 372,411 | ||||||
| Property and Equipment, net | 365,017 | 352,499 | ||||||
| Software | 258,933 | - | ||||||
| Other assets | 8,871 | 8,865 | ||||||
| Finance costs, net | 2,477 | 2,803 | ||||||
| Total Other Assets | 270,281 | 11,668 | ||||||
| Total Assets | $ | 2,779,858 | $ | 736,578 | ||||
| Liabilities and Stockholders' Equity (Deficit) | ||||||||
| Accounts payable | $ | 207,741 | $ | 195,901 | ||||
| Due to officer | 75,000 | - | ||||||
| Accrued expenses | 64,077 | 23,266 | ||||||
| Accrued payroll | 412,186 | 73,685 | ||||||
| Loan payable to factor | 827,075 | - | ||||||
| Accrued interest | 4,524 | - | ||||||
| Line of credit, current portion | 25,000 | 98,500 | ||||||
| Capital Leases, current portion | 16,923 | - | ||||||
| Notes payable, current portion, net of discount | 202,557 | - | ||||||
| Long term debt, current portion | 37,513 | 283,640 | ||||||
| Advances on convertible promissory notes | - | 170,000 | ||||||
| Settlement Payable | 115,278 | - | ||||||
| Unearned revenue | - | 32,988 | ||||||
| Total Current Liabilities | 1,987,874 | 877,980 | ||||||
| Capital Leases (net of current portion) | 23,974 | - | ||||||
| Line of credit (net of current portion) | 125,000 | - | ||||||
| Notes payable (net of current portion), net of discount | 273,751 | - | ||||||
| Long term debt (net of current portion) | 181,457 | 218,417 | ||||||
| Total Liabilities | $ | 2,592,056 | $ | 1,096,397 | ||||
| Commitments and Contingencies (see Note 11) | ||||||||
| Stockholders' Equity (Deficit): | ||||||||
| Common stock ($0.001 par value, 75,000,000 shares authorized, | ||||||||
| 39,054,867 shares and 16,499,021 issued and outstanding at | ||||||||
| December 31, 2012 and 2011, respectively) | 39,055 | 16,499 | ||||||
| Additional paid-in capital | 2,738,545 | 751,010 | ||||||
| Subscription receivable | (5,000 | ) | - | |||||
| Accumulated deficit | (2,584,798 | ) | (1,127,328 | ) | ||||
| Total Stockholders' Equity (Deficit) | 187,802 | (359,819 | ) | |||||
| Total Liabilities and Stockholders' Equity (Deficit) | $ | 2,779,858 | $ | 736,578 | ||||
| The accompanying notes are an integral part of these consolidated financial statements. | ||||||||
| For the Year-Ended | ||||||||
| December 31, | December 31, | |||||||
| 2012 | 2011 | |||||||
| Revenues | $ | 5,806,848 | $ | 1,432,773 | ||||
| Cost of Revenues | 2,830,008 | 473,719 | ||||||
| Gross Profit | 2,976,840 | 959,054 | ||||||
| Operating Expenses | ||||||||
| Selling and administrative expenses (includes stock compensation of $0 and $818,595 in 2012 and 2011, respectively) | 3,853,820 | 1,976,655 | ||||||
| Research and development | 64,386 | 93,489 | ||||||
| Depreciation and amortization | 50,765 | 31,362 | ||||||
| Total Operating Expenses | 3,968,971 | 2,101,506 | ||||||
| Operating Loss | (992,131 | ) | (1,142,453 | ) | ||||
| Other Income (Expense) | ||||||||
| Other income | 10 | - | ||||||
| Interest expense | (465,349 | ) | (29,468 | ) | ||||
| Total Other Income (Expense), net | (465,339 | ) | (29,468 | ) | ||||
| Income (Loss) before provision for income taxes | (1,457,470 | ) | (1,171,921 | ) | ||||
| Provision for income taxes | - | - | ||||||
| Net Income (Loss) | $ | (1,457,470 | ) | $ | (1,171,921 | ) | ||
| Net Loss Per Share | ||||||||
| basic and diluted | $ | (0.04 | ) | $ | (0.08 | ) | ||
| Weighted Average Number of Shares Outstanding | ||||||||
| basic and diluted | 32,730,809 | 14,450,235 | ||||||
| HEALTH REVENUE ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES | ||||||||||||||||||||||||
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) | ||||||||||||||||||||||||
| FOR THE YEARS ENDED DECEMBER 31, 2012 and 2011 | ||||||||||||||||||||||||
| Total | ||||||||||||||||||||||||
| Common Stock | Additional | Subscription | Accumulated | Stockholders' | ||||||||||||||||||||
| Shares | Amount | Paid-in Capital | Receivable | Deficit | Equity (deficit) | |||||||||||||||||||
| Balance at December 31, 2010 | 13,199,206 | $ | 13,199 | $ | 73,210 | $ | - | $ | 44,593 | $ | 131,002 | |||||||||||||
| Issuance of stock for services to officer | 3,299,815 | 3,300 | 815,295 | - | - | 818,595 | ||||||||||||||||||
| S-corp distributions | - | - | (137,495 | ) | - | - | (137,495 | ) | ||||||||||||||||
| Net loss 2011 | - | - | - | - | (1,171,921 | ) | (1,171,921 | ) | ||||||||||||||||
| Balance at December 31, 2011 | 16,499,021 | 16,499 | 751,010 | - | (1,127,328 | ) | (359,819 | ) | ||||||||||||||||
| Recapitalization | 13,499,226 | 13,499 | (13,499 | ) | - | - | - | |||||||||||||||||
| 2011 bridge note converted in 2012 related to reverse merger | 1,343,729 | 1,344 | 248,656 | - | - | 250,000 | ||||||||||||||||||
| Issuance of common stock for cash | 4,352,312 | 4,352 | 1,051,742 | - | - | 1,056,094 | ||||||||||||||||||
| Repayment of advances with shares | 1,265,381 | 1,266 | 312,642 | - | - | 313,908 | ||||||||||||||||||
| Value of beneficial conversion feature in convertible debt | - | - | 300,000 | - | - | 300,000 | ||||||||||||||||||
| Repurchase of shares pursuant to settlement agreement | (3,299,802 | ) | (3,300 | ) | (229,200 | ) | - | (232,500 | ) | |||||||||||||||
| Conversion of convertible debt | 3,000,000 | 3,000 | 297,000 | - | - | 300,000 | ||||||||||||||||||
| Shares issued to lender as fees | 2,375,000 | 2,375 | 341,125 | - | - | 343,500 | ||||||||||||||||||
| Offering costs paid | - | - | (325,911 | ) | - | - | (325,911 | ) | ||||||||||||||||
| Subscription receivable | 20,000 | 20 | 4,980 | (5,000 | ) | - | - | |||||||||||||||||
| Net Loss 2012 | (1,457,470 | ) | (1,457,470 | ) | ||||||||||||||||||||
| Balance at December 31, 2012 | 39,054,867 | $ | 39,055 | $ | 2,738,545 | $ | (5,000 | ) | $ | (2,584,798 | ) | $ | 187,802 | |||||||||||
| The accompanying notes are an integral part of these consolidated financial statements. | ||||||||||||||||||||||||
| For the Year-Ended | ||||||||
| December 31, | December 31, | |||||||
| 2012 | 2011 | |||||||
| Cash flows from Operating Activities: | ||||||||
| Net loss | $ | (1,457,470 | ) | $ | (1,171,921 | ) | ||
| Adjustments to reconcile net loss to net cash | ||||||||
| used in operating activities: | ||||||||
| Depreciation and amortization | 50,765 | 31,362 | ||||||
| Stock issued for compensation | - | 818,595 | ||||||
| Amortization of debt discount | 304,808 | - | ||||||
| Change in operating assets and liabilities: | ||||||||
| Accounts receivable, net | (1,103,257 | ) | 50,693 | |||||
| Prepaid expenses | 20,912 | (24,512 | ) | |||||
| Other assets | 5,146 | (7,389 | ) | |||||
| Accounts Payable Related Party | 75,000 | - | ||||||
| Accounts payable | 53,783 | 204,618 | ||||||
| Unearned revenue | (32,988 | ) | 32,988 | |||||
| Accrued liabilities | 383,835 | - | ||||||
| Net Cash used in operating activities | (1,699,466 | ) | (65,566 | ) | ||||
| Cash flows from Investing Activities: | ||||||||
| Capitalization of internally developed software | (258,933 | ) | - | |||||
| Purchases of property and equipment | (20,985 | ) | (47,016 | ) | ||||
| Net Cash used in investing activities | (279,918 | ) | (47,016 | ) | ||||
| Cash flows from Financing Activities: | ||||||||
| Borrowings fom long-term debt obligations | 51,500 | 262,500 | ||||||
| Payment for repurchase of common stock | (94,165 | ) | - | |||||
| Loan proceeds | 1,193,908 | - | ||||||
| Loan proceeds from factor, net | 827,075 | - | ||||||
| Repayments of debt obligations | (33,087 | ) | (38,715 | ) | ||||
| Proceeds from convertible promissory notes | - | 170,000 | ||||||
| Issuance of stock for cash net of offering cost | 730,183 | - | ||||||
| Payments on Capital Leases | (1,072 | ) | - | |||||
| Payments of stockholder distributions | - | (137,495 | ) | |||||
| Net Cash provided by (used in) financing activities | 2,674,342 | 256,290 | ||||||
| Net Increase (decrease) in cash | 694,958 | 143,708 | ||||||
| Cash at beginning of year | 198,500 | 54,792 | ||||||
| Cash at end of year | $ | 893,458 | $ | 198,500 | ||||
| Supplemental schedule of cash paid during the year for: | ||||||||
| Interest | $ | 36,156 | $ | 24,407 | ||||
| Income Taxes | $ | - | $ | - | ||||
| Supplemental schedule of non-cash investing and financing activities: | ||||||||
| Issuance of stock to repay debt | $ | 563,908 | $ | - | ||||
| Capital lease obligation incurred for use of equipment | $ | 38,704 | $ | - | ||||
| Beneficial conversion feature on convertible debt charged to additional paid in capital | $ | 300,000 | $ | - | ||||
| Shares issued as loan fee | $ | 343,500 | $ | - | ||||
| Conversion of $300,000 notes to common stock | $ | 300,000 | $ | - | ||||
| Transfer of accounts payable to notes payable | $ | 65,000 | $ | - | ||||
| December 31, | ||||||||
| 2012 | 2011 | |||||||
| Total assets | $ | 211,000 | $ | 230,000 | ||||
| Total liabilities | $ | 182,000 | $ | 185,000 | ||||
Each element is accounted for separately when each element has value to the customer on a standalone basis and there is Company specific objective evidence of selling price of each deliverable. For revenue arrangements with multiple deliverables, the Company allocates the total customer arrangement to the separate units of accounting based on their relative selling prices as determined by the price of the items when sold separately. Once the selling price is allocated, the revenue for each element is recognized using the general and specific criteria under GAAP as discussed above for elements sold in non-multiple element arrangements. A delivered item or items that do not qualify as a separate unit of accounting within the arrangement are combined with the other applicable undelivered items within the arrangement. The allocation of arrangement consideration and the recognition of revenue is then determined for those combined deliverables as a single unit of accounting. The Company has historically sold its services with established rates, which it believes is Company specific objective evidence of selling price. For the new software products, management has established selling prices, which qualifies as Company specific objective evidence of selling price. Generally all elements in multiple element arrangements with Company customers qualify as separate units of
For our education products sold we have determined to account for the course materials and training components as one unit of accounting. Accordingly, revenue is recognized for the single unit upon delivery of the training through our online webinars.
On July 15, 2013, the Company issued a general release for one of its products Visualizer. Software sales on a standalone basis will be recognized upon delivery of the software when evidence of the purchase arrangement exists and the price is determinable, and when collectability is reasonably assured. The Company will continue to use the Visualizer suite of functionality as internally developed software to generate customized reports for revenue integrity auditing and compliance services but the Company no longer intends to market or sell internally developed software on a stand alone basis.
Share Based Compensation
Compensation expense for all stock-based employee and director compensation awards granted is based on the grant date fair value estimated in accordance with the provisions of ASC Topic 718, Stock Compensation. The Company recognizes these compensation costs on a straight-line basis over the requisite service period of the award, which is generally the option vesting term. Vesting terms vary based on the individual grant terms.
The Company estimates the fair value of stock-based compensation awards on the date of grant using the Black-Scholes-Merton (“BSM”) option pricing model, which was developed for use in estimating the value of traded options that have no vesting restrictions and are freely transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. The BSM option-pricing model considers, among other factors, the expected term of the award and the expected volatility of the Company’s stock price. Expected terms are calculated using the Simplified Method, volatility is determined based on the Company's historical stock price trends and the discount rate is based upon treasury rates with instruments of similar expected terms. Warrants granted to non-employees are accounted for in accordance with the measurement and recognition purposes.criteria of ASC Topic 505-50, Equity Based Payments to Non-Employees.
Segment Reporting
Financial Accounting Standards Board ASC Topic 280, Segment Reporting (“ASC 280”), establishes standards for the way public business enterprises report information about operating segments. ASC 280 also establishes standards for related disclosures about products and services, geographic areas and major customers. The Company has determined that based on these criteria it only operates one segment, consulting services, as all other services do not meet the minimum threshold for separate reporting of a segment.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not required for smaller reporting companies.
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F-1
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of:
Health Revenue Assurance Holdings, Inc.
We have audited the accompanying consolidated balance sheets of Health Revenue Assurance Holdings, Inc. and Subsidiaries as of December 31, 2013 and 2012, and the related consolidated statements of operations, changes in stockholders’ equity (deficit) and cash flows for each of the two years in the period ended December 31, 2013. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Health Revenue Assurance Holdings, Inc. and Subsidiaries as of December 31, 2013 and 2012, and the consolidated results of its operations and its cash flows for each of the two years in the period ended December 31, 2013 in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has a net loss available to common stockholders and net cash used in operating activities in 2013 of $8,167,425 and $3,365,005, respectively, and has a working capital deficiency, stockholders’ deficiency and accumulated deficit of $2,292,754, $4,154,247 and $10,752,223, respectively at December 31, 2013. These matters raise substantial doubt about the Company's ability to continue as a going concern. Management’s Plan in regards to these matters is also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Salberg & Company, P.A.
SALBERG & COMPANY, P.A.
Boca Raton, Florida
April 15, 2014
2295 NW Corporate Blvd., Suite 240 • Boca Raton, FL 33431-7328
Phone: (561) 995-8270 • Toll Free: (866) CPA-8500 • Fax: (561) 995-1920
www.salbergco.com • info@salbergco.com
Member National Association of Certified Valuation Analysts • Registered with the PCAOB
Member CPA Connect with Affiliated Offices Worldwide • Member AICPA Center for Audit Quality
F-2
HEALTH REVENUE ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES | ||||||||
| CONSOLIDATED BALANCE SHEETS | ||||||||
| December 31, | December 31, | |||||||
| 2013 | 2012 | |||||||
| Assets | ||||||||
| Cash | $ | 3,053,485 | $ | 893,458 | ||||
| Accounts receivable | 901,918 | 1,246,814 | ||||||
| Accounts receivable - Related Party, net of allowance $16,244 and $0 respectively | 25,000 | - | ||||||
| Prepaid expenses | 1,050,210 | 3,600 | ||||||
| Other current assets | 1,676 | 688 | ||||||
| Total Current Assets | 5,032,289 | 2,144,560 | ||||||
| Property and Equipment, net | 381,847 | 365,017 | ||||||
| Software, net | - | 258,933 | ||||||
| Other assets | 12,665 | 8,871 | ||||||
| Finance costs, net | 2,150 | 2,477 | ||||||
| Total Other Assets | 14,815 | 270,281 | ||||||
| Total Assets | $ | 5,428,951 | $ | 2,779,858 | ||||
| Liabilities and Stockholders' Equity (Deficit) | ||||||||
| Accounts payable | $ | 154,324 | $ | 207,741 | ||||
| Due to officers | - | 75,000 | ||||||
| Accrued expenses | 40,373 | 64,077 | ||||||
| Accrued payroll | 414,684 | 412,186 | ||||||
| Loan payable to factor | 542,530 | 827,075 | ||||||
| Accrued interest | 5,850 | 4,524 | ||||||
| Line of credit | 44,692 | 25,000 | ||||||
| Capital Leases, current portion | 32,768 | 16,923 | ||||||
| Notes payable, current portion, net of discount | 380,326 | 202,557 | ||||||
| Long term debt, current portion | 44,084 | 37,513 | ||||||
| Settlement Payable | 7,000 | 115,278 | ||||||
| Deferred Revenue | 209,033 | - | ||||||
| Other current liabilities | 43,379 | - | ||||||
| Warrant derivative fair value | 5,406,000 | - | ||||||
| Accrued preferred stock dividend payable | - | - | ||||||
| Total Current Liabilities | 7,325,043 | 1,987,874 | ||||||
| Capital Leases (net of current portion) | 26,108 | 23,974 | ||||||
| Line of credit (net of current portion) | - | 125,000 | ||||||
| Notes payable (net of current portion), net of discount | 31,694 | 273,751 | ||||||
| Long term debt (net of current portion) | 272,353 | 181,457 | ||||||
| Total Liabilities | 7,655,198 | 2,592,056 | ||||||
| Temporary Equity | ||||||||
| Series A 8% redeemable convertible preferred stock (13,500,000 and 0 shares issued and outstanding at December 31, 2013 and 2012, respectively –Redemption value of $5,460,000) | 1,928,000 | - | ||||||
| Commitments and Contingencies (See Note 10) | ||||||||
| Stockholders' Equity (Deficit): | ||||||||
| Common stock ($0.001 par value, 500,000,000 shares authorized, 54,752,294 and 39,054,867 shares issued and outstanding at December 31, 2013 and December 31, 2012, respectively) | 54,752 | 39,055 | ||||||
| Additional paid-in capital | 6,543,224 | 2,738,545 | ||||||
| Subscription receivable | - | (5,000 | ) | |||||
| Accumulated deficit | (10,752,223 | ) | (2,584,798 | ) | ||||
| Total Stockholders' Equity (Deficit) | (4,154,247 | ) | 187,802 | |||||
| Total Liabilities and Stockholders' Equity (Deficit) | $ | 5,428,951 | $ | 2,779,858 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
F-3
| CONSOLIDATED STATEMENTS OF OPERATIONS | ||||||||
| For the Year-Ended | ||||||||
| December 31, | December 31, | |||||||
| 2013 | 2012 | |||||||
| Revenue | $ | 7,099,514 | $ | 5,806,848 | ||||
| Revenue - Related Party | 211,239 | - | ||||||
| Total Revenue | 7,310,753 | 5,806,848 | ||||||
| Cost of Revenues | 4,061,644 | 2,830,008 | ||||||
| Gross Profit | 3,249,109 | 2,976,840 | ||||||
| Operating Expenses | ||||||||
| Selling and administrative expenses (includes stock compensation of $639,328 and $0 in 2013 and 2012, respectively) | 7,016,533 | 3,853,820 | ||||||
| Research and development | - | 64,386 | ||||||
| Asset Impairment | 946,931 | - | ||||||
| Depreciation and amortization | 83,900 | 50,765 | ||||||
| Total Operating Expenses | 8,047,364 | 3,968,971 | ||||||
| Operating Loss | (4,798,255 | ) | (992,131 | ) | ||||
| Other Income (Expense) | ||||||||
| Other income | 67 | 10 | ||||||
| Interest expense | (927,047 | ) | (465,349 | ) | ||||
| Gain on extinguishment of debt for put premium | 33,364 | - | ||||||
| Gain from change in fair value of warrant liability | 365,255 | - | ||||||
| Loss on extinguishment of debt | (146,624 | ) | - | |||||
| Total Other Income (Expense), net | (674,985 | ) | (465,339 | ) | ||||
| Net Loss | (5,473,240 | ) | (1,457,470 | ) | ||||
| Cumulative preferred stock dividend | (60,000 | ) | - | |||||
| Deemed dividend for beneficial conversion feature of preferred stock | (2,634,185 | ) | - | |||||
| Net Loss available to common stockholders | $ | (8,167,425 | ) | $ | (1,457,470 | ) | ||
| Net Loss Per Share | ||||||||
| basic and diluted | $ | (0.17 | ) | $ | (0.04 | ) | ||
| Weighted Average Number of Shares Outstanding | ||||||||
| basic and diluted | 48,385,115 | 32,730,809 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-4
| CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY (DEFICIT) |
| FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012 |
| Additional | Total | |||||||||||||||||||||||
| Common Stock | Paid-in | Subscription | Accumulated | Stockholders' | ||||||||||||||||||||
| Shares | Amount | Capital | Receivable | Deficit | Equity (Deficit) | |||||||||||||||||||
| Balance at December 31, 2011 | 16,499,021 | $ | 16,499 | $ | 751,010 | $ | - | $ | (1,127,328 | ) | $ | (359,819 | ) | |||||||||||
| Recapitalization | 13,499,206 | 13,499 | (13,499 | ) | - | - | - | |||||||||||||||||
| 2011 bridge note converted in 2012 related to reverse merger | 1,343,729 | 1,344 | 248,656 | - | - | 250,000 | ||||||||||||||||||
| Issuance of common stock for cash | 4,352,312 | 4,352 | 1,051,742 | - | - | 1,056,094 | ||||||||||||||||||
| Repayment of advances with shares | 1,265,381 | 1,266 | 312,642 | - | - | 313,908 | ||||||||||||||||||
| Value of Beneficial conversion feature in convertible debt | - | - | 300,000 | - | - | 300,000 | ||||||||||||||||||
| Repurchase of shares pursuant to settlement agreement | (3,299,802 | ) | (3,300 | ) | (229,200 | ) | - | - | (232,500 | ) | ||||||||||||||
| Conversion of convertible debt | 3,000,000 | 3,000 | 297,000 | - | - | 300,000 | ||||||||||||||||||
| Shares issued to lender as fees | 2,375,000 | 2,375 | 341,125 | - | - | 343,500 | ||||||||||||||||||
| Offering costs | - | - | (325,911 | ) | - | - | (325,911 | ) | ||||||||||||||||
| Subscription receivable | 20,000 | 20 | 4,980 | (5,000 | ) | - | - | |||||||||||||||||
| Fractional rounding | 26 | - | - | - | - | - | ||||||||||||||||||
| Net Loss 2012 | - | - | - | - | (1,457,470 | ) | (1,457,470 | ) | ||||||||||||||||
| Balance at December 31, 2012 | 39,054,867 | 39,055 | 2,738,545 | (5,000 | ) | (2,584,798 | ) | 187,802 | ||||||||||||||||
| Conversion of convertible debt | 1,608,333 | 1,608 | 513,059 | - | - | 514,667 | ||||||||||||||||||
| Issuance of common stock as compensation | 462,665 | 463 | 158,542 | - | - | 159,005 | ||||||||||||||||||
| Issuance of common stock for cash | 3,446,429 | 3,446 | 1,234,554 | - | - | 1,238,000 | ||||||||||||||||||
| Deemed dividend for series A preferred stock's beneficial conversion feature | - | - | - | - | (2,634,185 | ) | (2,634,185 | ) | ||||||||||||||||
| Dividends on series A preferred stock | - | - | - | - | (60,000 | ) | (60,000 | ) | ||||||||||||||||
| Public offering costs | - | - | (9,553 | ) | - | - | (9,553 | ) | ||||||||||||||||
| Reclassification of warrant liability | - | - | (101,418 | ) | - | - | (101,418 | ) | ||||||||||||||||
| Receipt of subscription receivable | - | - | - | 5,000 | - | 5,000 | ||||||||||||||||||
| Shares issued as loan fees | 5,575,000 | 5,575 | 673,778 | - | - | 679,353 | ||||||||||||||||||
| Shares issued for services | 4,605,000 | 4,605 | 1,320,895 | - | - | 1,325,500 | ||||||||||||||||||
| Stock option expense | - | - | 14,822 | - | - | 14,822 | ||||||||||||||||||
| Net Loss 2013 | - | - | - | - | (5,473,240 | ) | (5,473,240 | ) | ||||||||||||||||
| Balance at December 31, 2013 | 54,752,294 | $ | 54,752 | $ | 6,543,224 | $ | - | $ | (10,752,223 | ) | $ | (4,154,247 | ) | |||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-5
| CONSOLIDATED STATEMENTS OF CASH FLOWS | ||||||||
| For the Year-Ended | ||||||||
| December 31, | December 31, | |||||||
| 2013 | 2012 | |||||||
| Cash flows from Operating Activities: | ||||||||
| Net loss available to common stockholders | $ | (8,167,425 | ) | $ | (1,457,470 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Cumulative series A preferred stock dividend | 60,000 | - | ||||||
| Deemed dividend for beneficial conversion feature of series A preferred stock | 2,634,185 | - | ||||||
| Amortization of debt discount | 556,028 | 304,808 | ||||||
| Amortization of debt issue costs | 327 | - | ||||||
| Depreciation expense | 83,573 | 50,765 | ||||||
| Amortization of software | 64,137 | - | ||||||
| Software impairment | 946,931 | - | ||||||
| Accretion of premium on debt | 33,364 | - | ||||||
| Bad debt expense | 26,116 | - | ||||||
| Amortization of prepaid shares issued for services | 465,501 | - | ||||||
| Stock option expense | 14,822 | - | ||||||
| Shares issued for services | 159,005 | - | ||||||
| Loss on early extinguishment of debt | 146,624 | - | ||||||
| Gain from change in fair market value of warrant derivative liability | (365,255 | ) | - | |||||
| Change in operating assets and liabilities: | ||||||||
| Accounts receivable | (17,655 | ) | (1,103,257 | ) | ||||
| Other assets | (4,788 | ) | 5,146 | |||||
| Prepaid expenses | (129,038 | ) | 20,912 | |||||
| Accounts payable | (53,417 | ) | 53,783 | |||||
| Accounts payable related party | - | 75,000 | ||||||
| Settlement accrual | 7,000 | - | ||||||
| Accrued liabilities | (85,801 | ) | 383,835 | |||||
| Other accrued liabilities | 49,229 | - | ||||||
| Accrued payroll | 2,499 | - | ||||||
| Deferred revenue | 209,033 | (32,988 | ) | |||||
| Net Cash used in operating activities | (3,365,005 | ) | (1,699,466 | ) | ||||
| Cash flows from Investing Activities: | ||||||||
| Capitalization of internally developed software | (752,135 | ) | (258,933 | ) | ||||
| Purchases of property and equipment | (10,304 | ) | (20,985 | ) | ||||
| Net Cash used in investing activities | (762,439 | ) | (279,918 | ) | ||||
| Cash flows from Financing Activities: | ||||||||
| Proceeds from issuance of common stock | 1,243,000 | 730,183 | ||||||
| Proceeds from series A 8% redeemable convertible preferred stock issuance | 5,400,000 | - | ||||||
| Preferred and common stock offering costs | (505,901 | ) | - | |||||
| Stockholder loan repayment -related party | (115,000 | ) | - | |||||
| Stockholder loan - related party | 40,000 | - | ||||||
| Payment for repurchase of common stock | - | (94,165 | ) | |||||
| Loan proceeds | 1,595,000 | 1,193,908 | ||||||
| Loan proceeds from factor, net | 26,890 | 827,075 | ||||||
| Repayments of loans | (1,237,145 | ) | (33,087 | ) | ||||
| Repayment of capital lease | (18,015 | ) | (1,072 | ) | ||||
| Settlement payments | (115,278 | ) | - | |||||
| Borrowings (repayments) on line of credit, net | (26,080 | ) | 51,500 | |||||
| Net Cash provided by financing activities | 6,287,471 | 2,674,342 | ||||||
| Net increase in cash | 2,160,027 | 694,958 | ||||||
| Cash at beginning of year | 893,458 | 198,500 | ||||||
| Cash at ending of year | $ | 3,053,485 | $ | 893,458 | ||||
| Supplemental schedule of cash paid during the period for: | ||||||||
| Interest | $ | 376,539 | $ | 36,156 | ||||
| Income Taxes | $ | - | $ | - | ||||
| Supplemental schedule of non-cash investing and financing activities: | ||||||||
| Issuance of stock to repay debt | $ | 514,667 | $ | 563,908 | ||||
| Capital lease obligation incurred for use of equipment | $ | 90,099 | $ | 38,704 | ||||
| Beneficial conversion feature on convertible debt charged to additional paid in capital | $ | - | $ | 300,000 | ||||
| Conversion of $300,000 notes to common stock | $ | - | $ | 300,000 | ||||
| Shares issued as a loan fee | $ | 679,353 | $ | 343,500 | ||||
| Transfer of accounts payable to notes payable | $ | - | $ | 65,000 | ||||
| Insurance premium finance contract recorded as prepaid asset | $ | 57,573 | $ | - | ||||
| Shares issued for prepaid services | $ | 1,325,500 | $ | - | ||||
| Reclassification of line of credit to note payable | $ | 133,333 | $ | - | ||||
| Constructive dividend | $ | 2,634,185 | $ | - | ||||
| Reclassification of derivative to warrant liability | $ | 5,771,255 | $ | - | ||||
| Debt discount | $ | 37,500 | $ | - | ||||
The accompanying notes are an integral part of these consolidated financial statements.
F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013 and 2012
1 – NATURE OF BUSINESS AND GOING CONCERN
Overview
Health Revenue Assurance Holdings, Inc. (the “Company”) is a provider of revenue cycle services to a broad range of healthcare providers. We offer our customers integrated solutions designed around their specific business needs, including revenue cycle data analysis, contract and outsourced coding, billing, coding and compliance audits, coding education, coding consulting, physician coding services and ICD-10 education and transition services. With this approach, our customers benefit from integrated service offerings that we believe enhances their revenue integrity. As a result, we believe we help our customers achieve their business objectives and patient care objectives.
Dream Reachers, LLC, owns the Company’s offices and is the borrower on a mortgage loan related to such offices. Dream Reachers, LLC does not engage in real estate rental business. Its offices are occupied by Health Revenue Assurance Associates, Inc. (“HRAA”) at no cost and HRAA pays the related mortgage’s principal and interest, taxes and maintenance. The Company’s subsidiary HRAA is the sole member effective May 2011. Dream Reachers has been treated as a subsidiary for accounting purposes in the Company’s consolidated financial statements for all periods presented. (See Note 2)
On February 10, 2012, HRAA entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”) with Health Revenue Assurance Holdings, Inc. (formerly known as Anvex International, Inc., "HRAH"), a Nevada company, and its wholly-owned subsidiary Health Revenue Acquisition Corporation (“Acquisition Sub”), which was treated for accounting purposes as a reverse recapitalization with HRAA, considered the accounting acquirer. Each share of HRAA's common stock was exchanged for the right to receive approximately 1,271 shares of HRAH’s common stock. Before their entry into the Merger Agreement, no material relationship existed between HRAH and Acquisition Sub or HRAA. (See Note 12)
On April 13, 2012, the Company changed its name from Anvex International, Inc. to Health Revenue Assurance Holdings, Inc.
On April 13, 2012, the Company’s board of directors authorized a 12.98 for 1 split of its common stock to stockholders of record as of April 13, 2012. Shares resulting from the split were issued on April 26, 2012. In connection therewith, the Company transferred $32,747 from additional paid in capital to common stock, representing the par value of additional shares issued. As a result of the stock split, fractional shares were rounded up. All share and per share amounts for all periods presented have been retroactively adjusted to reflect the stock split. (See Note 12)
Going Concern
The Company’s future success is dependent upon its ability to achieve profitable operations and generate cash from operating activities, and upon additional financing, Management believes they can raise the appropriate funds needed to support their business plan and develop an operating company which is cash flow positive.
However, as of December 31, 2013, the Company has a working capital deficiency, stockholders’ deficit and accumulated deficit of $2,292,754, $4,154,247, and $10,752,223, respectively, for the year ended December 31, 2013, incurred net losses available to common stockholders of $8,167,425, and has used net cash in operations of $3,365,005. The Company has not been able to generate sufficient cash from operating activities to fund its on-going operations. There is no guarantee that the Company will be able to generate enough revenue and/or raise capital to support its operations. These factors raise substantial doubt about the Company’s ability to continue as a going concern.
The consolidated financial statements do not include any adjustments relating to the recoverability or classification of recorded assets and liabilities that might result should the Company be unable to continue as a going concern.
As of December 31, 2013, the Company has a cash balance of approximately $3,053,000. The Company is currently addressing the going concern and liquidity issues. The Company expects an increase in cash flow as the result of a growing customer demand for medical billing, consulting, training, and education.
On November 12, 2013, the Company entered into a Securities Purchase Agreement for the sale of $5.4 million in Series A 8% redeemable convertible preferred stock (the “Series A Preferred Stock”) and warrants to purchase shares of the Company’s common stock. The Series A Preferred Stock is convertible into common stock on a 2 for 1 basis and is redeemable by the Company, at the option of the investor, 48 months from November 12, 2013 at the stated value of $0.30 per share or a total of $5,400,000 plus accumulated but unpaid dividends, whether declared or not. The net proceeds to the Company after commissions and professional fees was $4,903,652 and after payment of stockholder loans is $4,322,000. The net raise is sufficient to fund on-going operations for the next several months. However, the funding is not sufficient to alleviate the going concern risk. (See Note 12)
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Health Revenue Assurance Associates, Inc. and Dream Reachers, LLC. All significant inter-company transactions and balances are eliminated in consolidation.
F-7
HEALTH REVENUE ASSURANCE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013 and 2012
Use of Estimates
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts in the consolidated financial statements. Actual results could differ from those estimates. Significant accounting estimates reflected in the Company’s consolidated financial statements include valuation of accounts receivable, valuation of property and equipment, valuation and amortization period of software, valuation of beneficial conversion features in convertible debt, valuation of derivatives, valuation of equity based instruments issued for other than cash, revenue recognition, and the valuation allowance on deferred tax assets.
Cash
For purposes of the statement of cash flows, the Company considers all highly liquid investments with maturity of three months or less when purchased to be cash equivalents. The Company’s cash balances are maintained at various banks that are insured by the Federal Deposit Insurance Corporation subject to certain limitations.
Accounts Receivable and Factoring
Accounts receivable are stated at the amounts management expects to collect. An allowance for doubtful accounts is recorded using a specific identification method based on a combination of historical experience, aging analysis and information on specific accounts. Account balances are written off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. Management has determined that an allowance in the amount of $16,244 is required as of December 31, 2013. The allowance arises from a website development project contracted with ResumeBear, a related party. The Company accounts for its factoring arrangements as either a sale or a secured financing based on the criteria in ASC 860 "Transfers and Servicing". Estimates of allowances for doubtful accounts are reflected as a recourse obligation, a liability, for factor arrangements treated as a sale with recourse or as a contra asset accounts receivable allowance account for arrangements accounted for as a secured financing.
Property and Equipment
Property and equipment is recorded at cost. Depreciation is computed using the straight-line method over estimated useful asset lives, which range from 5 to 39 years. Repairs and maintenance are expensed, while additions and betterments are capitalized. The cost and related accumulated depreciation of assets sold or retired are eliminated from the accounts and any gains or losses are reflected in earnings.
Leases
We perform a review of newly acquired leases to determine whether a lease should be treated as a capital or operating lease. Capital lease assets are capitalized and depreciated over the term of the initial lease. A liability equal to the present value of the aggregated lease payments is recorded utilizing the stated lease interest rate. If an interest rate is not stated, we will determine an estimated cost of capital and utilize that rate to calculate the present value. If the lease has an increasing rate over time, and (or) is an operating lease, all leasehold incentives, rent holidays, or other incentives will be considered in determining if a deferred rent liability is required. Leasehold incentives are capitalized and depreciated over the initial term of the lease.
Software
Costs incurred in connection with the development of software products are accounted for in accordance with the Financial Accounting Standards Board Accounting Standards Codification ("ASC") 985 Costs of Software to Be Sold, Leased or Marketed.” Costs incurred prior to the establishment of technological feasibility are charged to research and development expense. Software development costs are capitalized after a product is determined to be technologically feasible and is in the process of being developed for market and capitalization ceases after the general release of the software. Amortization of capitalized software development costs begins upon initial product shipment after general release. Capitalized software development costs are amortized over the estimated life of the related product (generally thirty-six months) using the straight-line method. The Company evaluates its software assets for impairment whenever events or change in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of software assets to be held and used is measured by a comparison of the carrying amount of the asset to the future net undiscounted cash flows expected to be generated by the asset. If such software assets are considered to be impaired, the impairment to be recognized is the excess of the carrying amount over the fair value of the software asset.
F-8
HEALTH REVENUE ASSURANCE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013 and 2012
Software maintenance costs are charged to expense as incurred. Expenditures for enhanced functionality are capitalized. The cost of the software and the related accumulated amortization are removed from the accounts upon retirement of the software with any resulting loss being recorded in operations. On July 15, 2013 the Company issued a general release for one of its products Visualizer. After the general release, the Company recorded approximately $64,000 in amortization expense in the accompanying consolidated financial statements for the year ended December 31, 2013. On September 30, 2013, the Company impaired the capitalized research and development costs for the Visualizer software suite of multiple offerings and the OMC Initiater after an evaluation based in part on the lack of cash flow and customer demand in ICD Visualizer after the general acceptance release date of July 15, 2013. In addition, the Company’s going concern opinion and cash liquidity concerns restrained the ability to make a capital investment in research and development to complete existing products in the pipeline as the available cash is needed to fund normal operating expenses. The resulting loss of $946,931 is presented as a line item entitled “asset impairment” on the consolidated statement of operations. The Company will continue to use the Visualizer suite of functionality as internally developed software to generate customized reports for revenue integrity auditing and compliance services but the Company no longer intends to market or sell internally developed software on a stand alone basis.
Long-Lived Assets
The Company reviews the carrying value of its long-lived assets whenever events or changes in circumstances indicate that the carrying values may no longer be appropriate. Recoverability of carrying values is assessed by estimating future net cash flows from the assets. Impairment assessment inherently involves judgment as to assumptions about expected future cash flows and the impact of market conditions on those assumptions. Future events and changing market conditions may impact management's assumptions as to sales prices, rental rates, costs, holding periods or other factors that may result in changes in the Company’s estimates of future cash flows. Although management believes the assumptions used in testing for impairment are reasonable, changes in any one of the assumptions could produce a significantly different result.
Fair Value Measurements and Fair Value of Financial Instruments
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. The Company classifies assets and liabilities recorded at fair value under the fair value hierarchy based upon the observability of inputs used in valuation techniques. Observable inputs (highest level) reflect market data obtained from independent sources, while unobservable inputs (lowest level) reflect internally developed market assumptions. The fair value measurements are classified under the following hierarchy:
| ● | Level 1—Observable inputs that reflect quoted market prices (unadjusted) for identical assets and liabilities in active markets; |
| ● | Level 2—Observable inputs, other than quoted market prices, that are either directly or indirectly observable in the marketplace for identical or similar assets and liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets and liabilities; and |
| ● | Level 3—Unobservable inputs that are supported by little or no market activity that is significant to the fair value of assets or liabilities. |
The estimated fair value of certain financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued expenses are carried at historical cost basis, which approximates their fair values because of the short-term nature of these instruments.
Accounting for Derivatives
The Company evaluates its convertible instruments, options, warrants or other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for under ASC Topic 815, “Derivatives and Hedging.” The result of this accounting treatment is that the fair value of the derivative is marked-to-market each balance sheet date and recorded as a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the statement of operations as other income (expense). Upon conversion or exercise of a derivative instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity. Equity instruments that are initially classified as equity that become subject to reclassification under ASC Topic 815 are reclassified to liabilities at the fair value of the instrument on the reclassification date.
Revenue Recognition
The Company recognizes medical coding audit services revenue based on the proportional performance method of recognizing revenue.
A portion of the Company’s revenue is generated from medical coding audit services. Auditing revenue is invoiced in accordance with the contract, generally at three benchmark time periods which coincide with when specific, obligatory field work services have been rendered and completed, the value of this portion of the contract price has been predetermined and agreed upon, and the client has received benefit or value in the form of the independent identification of system weaknesses and risk analysis. Further, collectability is reasonably assured due to the existence of a fixed fee contract and the size and financial health of the Company’s clients. Below is a description of the general benchmarks and work phases associated with the Company’s audit services:
| ● | Planning Phase - work commences prior to and as soon as the contract is signed and includes setting the audit scope, scheduling of the job, assignment of audit staff, understanding the client and their systems, determination of sample size and sampling methods to be employed, and other specific items as outlined in the contract. The planning phase includes the determination of deliverables as defined in the contract, generally consisting of a listing of errors, training and a final report. The Company generally invoices and recognizes 50% of the contract value at the completion of the Planning Phase. Although all of the contracts contain a clause making the first 50% of the engagement fee due and non-refundable at this point, the Company does not deem this initial fee to be recognized as deferred revenue under SAB 104 due to the extensive amount of work to be done prior to accepting the contract. |
| ● | Field Work Phase – is performed at the client location and generally lasts one week and encompasses actual testing of sample claims preselected in the Planning Phase. The auditor generally preloads the selected claims into the Company’s proprietary software and audits the claim records by reviewing actual medical records. The software assists the auditor in determining proper classifications and allows the auditor to compare the proper classification against what was filed in the submission made by the client to Medicare. Notes and comments are recorded and audit reports are generated. The Company generally invoices and recognizes 40% of the contract value at the completion of the Field Work Phase. |
| ● | Reporting Phase – includes a summary of audit findings, exit conference with clients, and any other specific deliverables as determined by the contract. The Company generally invoices and recognizes the remaining 10% of the contract value at the completion of the Reporting Phase. |
F-9
HEALTH REVENUE ASSURANCE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013 and 2012
A portion of the Company’s revenue is derived from consulting and coding services provided. Revenue from these revenue streams is recognized after services are performed based on the quoted and agreed upon fee contained in its contracts.
Arrangements with customers may involve multiple elements including software products, education products, training, software product maintenance, coding services, coding audit services and other consulting services. Training and maintenance on software products will generally occur after the software product sale. Other services may occur before or after the product sales and may not relate to the products. Revenue recognition for multiple element arrangements is as follows:
Each element is accounted for separately when each element has value to the customer on a standalone basis and there is Company specific objective evidence of selling price of each deliverable. For revenue arrangements with multiple deliverables, the Company allocates the total customer arrangement to the separate units of accounting based on their relative selling prices as determined by the price of the items when sold separately. Once the selling price is allocated, the revenue for each element is recognized using the general and specific criteria under GAAP as discussed above for elements sold in non-multiple element arrangements. A delivered item or items that do not qualify as a separate unit of accounting within the arrangement are combined with the other applicable undelivered items within the arrangement. The allocation of arrangement consideration and the recognition of revenue is then determined for those combined deliverables as a single unit of accounting. The Company has historically sold its services with established rates, which it believes is Company specific objective evidence of selling price. For the new software products, management has established selling prices, which qualifies as Company specific objective evidence of selling price.
For our education products sold we have determined to account for the course materials and training components as one unit of accounting. Accordingly, revenue is recognized for the single unit upon delivery of the training through our online webinars.
On July 15, 2013, the Company issued a general release for one of its products Visualizer. Software sales on a standalone basis will be recognized upon delivery of the software when evidence of the purchase arrangement exists and the price is determinable, and when collectability is reasonably assured. The Company will continue to use the Visualizer suite of functionality as internally developed software to generate customized reports for revenue integrity auditing and compliance services but the Company no longer intends to market or sell internally developed software on a stand alone basis.
Cost of Revenues
Cost of revenues includes labor costs for services and education development costs. There were no depreciation or amortizationAmortization costs in 2012 or 2011 that2013 of approximately $64,000 were allocableallocated to cost of sales. In future periods, amortization of capitalizedsales related to software costs will be included in costs of revenues.
amortization.The Company calculatesestimates the fair value of the awardstock-based compensation awards on the date of grant using the Black-ScholesBlack-Scholes-Merton (“BSM”) option pricing model. Determiningmodel, which was developed for use in estimating the fair value of stock-based awards attraded options that have no vesting restrictions and are freely transferable. In addition, option valuation models require the grant date under thisinput of highly subjective assumptions including the expected stock price volatility. The BSM option-pricing model requires judgment, including estimating volatility, employee stock option exercise behaviors and forfeiture rates. The assumptions used in calculatingconsiders, among other factors, the fair value of stock-based awards represent the Company's best estimates, but these estimates involve inherent uncertainties and the application of management judgment. For non-employee stock-based awards, the Company calculates the fair valueexpected term of the award and the expected volatility of the Company’s stock price. Expected terms are calculated using the Simplified Method, volatility is determined based on the date of grant in the same manner as employee awards, however, the awards are revalued at the end of each reporting periodCompany's historical stock price trends and the prorata compensation expensediscount rate is adjusted accordingly until such time the non-employee award is fully vested, at which time the total compensation recognizedbased upon treasury rates with instruments of similar expected terms. Warrants granted to date shall equal the fair value of the stock-based award as calculated onnon-employees are accounted for in accordance with the measurement date, which is the date at which the award recipient’s performance is complete. The estimationand recognition criteria of stock-based awards that will ultimately vest requires judgment, andASC Topic 505-50, Equity Based Payments to the extent actual results or updated estimates differ from original estimates, such amounts are recorded as a cumulative adjustment in the period estimates are revised.Non-Employees.
Research and Development Costs
In accordance with ASC 730-10, Researchresearch and development costs are expensed when incurred. Total research and development costs for the years ended December 31, 2013 and 2012 were $0 and 2011 were $64,386, and $93,489 respectively.
Advertising
The cost of advertising is expensed as incurred. Advertising and marketing expenses amounted to approximately $130,000$121,000 and $116,000$130,000 for the year ended December 31, 20122013 and 2011,2012, respectively and the total is included in selling and administrative expenses.
Income Taxes
The CompanyCompany’s subsidiary, HRAA, elected to convert from a Subchapter S corporation for Federal income tax purposes to a C corporation effective October 21, 2011. Upon ourHRAA’s C colorationcorporation election, weit began to use the asset and liability method to account for income taxes. Under this method, deferred income taxes are determined based on the differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements which will result in taxable or deductible amounts in future years and are measured using the currently enacted tax rates and laws. A valuation allowance is provided to reduce net deferred tax assets to the amount that, based on available evidence, is more likely than not to be realized.
F-10
HEALTH REVENUE ASSURANCE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013 and 2012
The Company follows the provisions of ASC 740-10, Accounting for Uncertain Income Tax Positions. When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. In accordance with the guidance of ASC 740-10, the benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above should be reflected as a liability for unrecognized tax benefits in the accompanying consolidated balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination.
Earnings Per Share
The Company computes and presents earnings or losses per share in accordance with FASB ASC Topic 260,Earnings per share. Basic earnings or losses per share are computed by dividing net income (loss) attributable to common stockholders by the weighted average number of common shares outstanding. Diluted earnings or loss per share is computed by dividing net income (loss) attributable to common stockholders by the weighted average number of common shares and common stock equivalents outstanding, calculated on the treasury stock method for options and warrants using the average market prices during the period.
As the Company incurred a net loss in all periods presented, all potentially dilutive securities were excluded from the computation of diluted loss per share since the effect of including them is anti-dilutive. There were no dilutiveDilutive securities outstanding at December 31, 20122013 were 1,000,000 stock options, 29,940,000 warrants, and 2011 respectively.Series A Preferred Stock convertible into 27,000,000 shares of common stock. No dilutive securities were outstanding in 2012.
Segment Reporting
Financial Accounting Standards Board (“FASB”) ASC Topic 280, Segment Reporting (“ASC 280”), establishes standards for the way public business enterprises report information about operating segments. ASC 280 also establishes standards for related disclosures about products and services, geographic areas and major customers. The Company has determined that based on these criteria it only operates one segment, consulting services, as all other services do not meet the minimum threshold for separate reporting of a segment.
Contingencies
We accrue for contingent obligations, including legal costs and restructuring costs, when the obligation is probable and the amount can be reasonably estimated. As facts concerning contingencies become known we reassess our position and make appropriate adjustments to the consolidated financial statements. Estimates that are particularly sensitive to future changes include those related to tax, legal, and other regulatory matters that are subject to change as events evolve and additional information becomes available. Total legal settlement accrued costs for the year ended December 31, 2013 was $7,000. (See Note 10)
Recent Accounting Pronouncements
We have implemented all new accounting standards that are in effect and that may impact our consolidated financial statements and do not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on our consolidated financial position or results of operations.
3 - ACCOUNTS RECEIVABLE
Accounts receivable at December 31, 20122013 and 2011December 31, 2012 was as follows:
| December 31, | December 31, | |||||||||||||||
| 2012 | 2011 | 2013 | 2012 | |||||||||||||
| Accounts receivable | $ | 1,246,814 | $ | 143,557 | $ | 901,918 | $ | 1,246,814 | ||||||||
| Accounts receivable –Related party | 41,244 | - | ||||||||||||||
| Allowance for doubtful accounts | - | - | (16,244 | ) | - | |||||||||||
| Total | $ | 1,246,814 | $ | 143,557 | $ | 926,918 | $ | 1,246,814 | ||||||||
Property and equipment consists of the following:
| December 31, | December 31, | |||||||||||||||
| 2012 | 2011 | 2013 | 2012 | |||||||||||||
| Building and improvements | $ | 227,603 | $ | 227,603 | $ | 227,603 | $ | 227,603 | ||||||||
| Furniture | 119,810 | 118,187 | 119,810 | 119,810 | ||||||||||||
| Computers and Equipment | 160,429 | 99,316 | 260,872 | 160,469 | ||||||||||||
| 507,882 | 445,106 | 608,285 | 507,882 | |||||||||||||
| Less - Accumulated depreciation | (142,865 | ) | (92,607 | ) | (226,438 | ) | (142,865 | ) | ||||||||
| Total | $ | 365,017 | $ | 352,499 | $ | 381,847 | $ | 365,017 | ||||||||
Depreciation expense for the years ended December 31, 20122013 and 20112012 was approximately $51,000$84,000 and $31,000,$51,000, respectively.
HEALTH REVENUE ASSURANCE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013 and 2012
5 – RESEARCH AND DEVELOPMENT AND SOFTWARE
At December 31, 2012,September 30, 2013, the Company had accumulated $258,933a total of $1,011,068 in capitalized costs related to the development of the Visualizer™Visualizer suite and the other functionality which iswas included as Softwaresoftware on the accompanying consolidated balance sheet. As of September 30, 2013, we had amortized $64,137 of the capitalized software after the general release on July 15, 2013 for the Visualizer project.
At the end of September 2013, the Company re-evaluated the capitalized research and development costs for the Visualizer software suite. The evaluation was based in part on the lack of cash flow and customer demand in ICD Visualizer after its general acceptance release date of July 15, 2013. In addition, the Company also considered its going concern risk and cash liquidity concerns that restrain the ability to make capital investments in research and development to complete existing products in the pipeline as the available cash is needed to fund normal operating expenses. As a result of this evaluation, the Company recorded a loss of $946,931 that is presented as a line item entitled “asset impairment” on the consolidated statement of operations. The Company will continue to use the Visualizer suite of functionality as internally developed software to generate customized reports for revenue integrity auditing and compliance services but the Company no longer intends to market or sell internally developed software on a stand alone basis.
Amortization expense for software, for the years ended December 31, 2013 and 2012 was $64,137 and 2011 was $0, respectively as there has not been a general release of the software for sale as of December 31, 2012.respectively. Software consisted of the following at December 31, 20122013 and 2011:
| December 31, 2012 | December 31, 2011 | |||||||
| Software | $ | 258,933 | $ | - | ||||
| Accumulated amortization | - | - | ||||||
| Software, net | $ | 258,933 | $ | - | ||||
| Estimated amortization expense of software is as follows: | ||||
| Year Ending December 31, | ||||
| 2013 | $ | 86,311 | ||
| 2014 | 86,311 | |||
| 2015 | 86,311 | |||
| Total | $ | 258,933 | ||
December 31, 2013 | December 31, 2012 | |||||||
| Software | $ | 1,011,068 | $ | 258,933 | ||||
| Accumulated amortization | (64,137 | ) | - | |||||
| Asset Impairment | (946,931 | ) | - | |||||
| Software, net | $ | - | $ | 258,933 | ||||
6 – LINELINES OF CREDIT
Bank
The Company has a $150,000 revolving line of credit with a bank (the “Line of Credit”), effective in December 2008, for its general working capital needs. The line contains certain restrictive covenants including restrictions on granting liens on the Company's assets. The line is also guaranteed by certain officers of credit is secured by all business assets, collateral, and personal guarantees.the Company. The line of credit matured on December 18, 2009 and was renewed and was due on December 18, 2012. The revolving line was modified on December 18, 2012 so that the loan no longer has an expiration date of December 18, 2012, but instead, a final maturity date of December 18, 2018. The interest rate per year is equal to the Bank’s Prime Ratebank’s prime rate plus 6.50 percent.6.50%. The Bank’sbank’s prime rate of interest at December 31, 2012 was 3.25%. The balance due at December 31, 2012 was $150,000 with $25,000 reflected as a current portion.
On September 19, 2013, the Company converted the Line of Credit to a term note. The firstCompany consolidated the Line of seventy-two payments, being $2,083Credit and an existing bank term loan into a consolidated term loan with a monthly payment in the amount of $3,209 with a new maturity date of September 19, 2017. At the time of the conversion the line of credit had an outstanding balance in the amount of $133,334. (See Note 7)
Dell
The Company maintains a Dell Business Credit line of up to $50,000. Interest rates vary under the line based on difference types of payment plans. The balance due under the line as of December 31, 2013 and 2012 was due January 18, 2013.$44,692 and $25,000, respectively, which is included in line of credit, current portion in the accompanying consolidated financial statements.
HEALTH REVENUE ASSURANCE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013 and 2012
7 – LONG TERM DEBT AND NOTES PAYABLE
Long Term debt:Debt:
Long Term debt consisted of the following at December 31, 2012:following:
| December 31, 2012 | December 31, 2011 | December 31, 2013 | December 31, 2012 | |||||||||||||
| Bank term loan | $ | 38,897 | $ | 66,245 | $ | 141,857 | $ | 38,897 | ||||||||
| Convertible Bridge Loan | - | 250,000 | ||||||||||||||
| Mortgage loan | 180,073 | 185,812 | 174,580 | 180,073 | ||||||||||||
| 218,970 | 502,057 | 316,437 | 218,970 | |||||||||||||
| Less current portion | (37,513 | ) | (283,640 | ) | (44,084 | ) | (37,513 | ) | ||||||||
| Total long term portion | $ | 181,457 | $ | 218,417 | $ | 272,353 | $ | 181,457 | ||||||||
On October 21, 2011, the Company entered into a second Bridge Loanbridge loan agreement (the “Bridge Loan”) in the amount of $250,000 with a third party lender. The primary purpose iswas to repay the Initial Bridge Loanan initial bridge loan and to pay for certain professional fees in connection with a reverse merger with a Public Company.the Merger. The Bridge Loan incursincurred interest at the rate of 12% per annum which will bewas due only in the event the contemplated equity transaction doesMerger did not materialize. Upon the closing of the transaction,Merger, all interest accrued but not paid shall bewas deemed cancelled and paid in full and the entire principal amount of the note shall bewas automatically converted into an aggregate of 1,343,749 shares of common stock at a conversion price of $0.19 per share which is equal to a discount of 25% of to the Purchase Price.purchase price. The loan was converted to stock in February 2012 (See Note 12).
On September 19, 2013, HRAA consolidated the above March 2009 Term Loan with the Line of Credit. (See Note 6) The outstanding balance for the Term Loan and the Line of Credit prior to consolidation was $20,697 and $133,334, respectively. The new consolidated term loan is personally guaranteed by Robert Rubinowitz and Andrea Clark and contains restrictive covenants, which among other things, prohibit the Company from granting any security interests or liens on the assets of the Company. Payments of principal and interest are approximately $3,200 per month. The new consolidated term loan matures on September 19, 2017 and incurs interest at a rate per year equal to the bank’s prime rate plus 3.5%. The balance due as of December 31, 2013 for the new consolidated term loan was approximately $142,000 and is included in the accompanying consolidated balance sheet.
The Company has a mortgage related to certain real estate, which houses the Company’s main offices in Plantation, Florida. The loan originated July 2010 in the amount of $192,500 and matures July 2020, when a balloon principal payment of approximately $129,000 becomes due. The loan is collateralized by the real estate and is personally guaranteed by theRobert Rubinowitz, a stockholder of the Company. Interest is fixed at 6.625% for the first five years of the loan, and converts to an adjustable rate for the second five years at the Federal Funds Rate plus 3.25%, as established by the United State Federal Reserve. The balance under this mortgage loan as of December 31, 2013 and 2012 was approximately $175,000 and $180,000, respectively and is allocated to the current and long term debt line items in the accompanying consolidated balance sheet. Monthly payments for principal and interest are approximately $1,500 until July 2015, when the total monthly payment may vary due to the adjustable interest rate provision in the note.
Although the Company is current in its payments on these loans, management believes the Company may be in default of certain non-financial covenants. The banks have not notified the Company of any default.
Notes payable:
In December 2012, the Company entered into loan agreements with various investors and issued promissory notes upon receipt of $815,000. The loan agreements have an interest rate of 12% per annum. Principal and interest is payable over 26 months. Additionally, in connection with the financing, the Company issued 2,375,000 shares of common stock to the lenders as loan fees (See note 12).fees. The fair value per share of $0.28 (based on recent cash sales prices) was used to compute the relative fair value of the shares in accordance with ASC 470-20 which totaled $343,500 which was recorded as a debt discount with a credit to additional paid-in-capital and such discount is being amortized over the term of the loans. The unamortized discount was $114,958 and $338,692 as of December 31, 2013 and 2012, respectively.
In January and February 2013, the Company entered into loan agreements and promissory notes with various investors upon receipt of $1,220,000. The loan agreements have an interest rate of 12% per annum. Principal and interest is payable over 26 months. Additionally, in connection with the financing, the Company issued 5,575,000 shares of common stock to the lenders as loan fees (See Note 12). The fair value per share of $0.28 (based on recent cash sales prices) was used to compute the relative fair value of the shares in accordance with ASC 470-20 which totaled approximately $679,500 which was recorded as a debt discount with a credit to additional paid-in-capital and such discount is being amortized over the term of the loans. The unamortized discount was $350,522 as of December 31, 2013 and the Company recorded $4,524$5,850 in accrued interest.
| December 31, 2012 | ||||
| Principal amount of notes payable | $ | 815,000 | ||
| Unamortized discount | (338,692 | ) | ||
| Notes payable, net of discount | 476,308 | |||
| Less current portion | (202,557 | ) | ||
| Total long term portion | $ | 273,751 | ||
HEALTH REVENUE ASSURANCE HOLDINGS, INC.
DECEMBER 31, 2013 and 2012
Notes payable consisted of the following:
December 31, 2013 | December 31, 2012 | |||||||
| Principal amount of notes payable | $ | 877,500 | $ | 815,000 | ||||
| Unamortized discount | (465,480 | ) | (338,692 | ) | ||||
| Notes payable, net of discount | 412,020 | 476,308 | ||||||
| Less current portion | (380,326 | ) | (202,557 | ) | ||||
| Total Long term portion | $ | 31,694 | $ | 273,751 | ||||
As of December 31, 20122013, principal payments required on long-term debt and notes payable over the next five years and thereafter are as follows:
| 2013 | $ | 375,564 | ||
| 2014 | 420,954 | |||
| 2015 | 74,321 | |||
| 2016 | 6,848 | |||
| 2017 | 7,322 | |||
| Thereafter | 148,961 | |||
| Total | $ | 1,033,970 |
| 2014 | $ | 786,584 | ||
| 2015 | 179,084 | |||
| 2016 | 44,084 | |||
| 2017 | 31,248 | |||
| 2018 | 5,576 | |||
| Thereafter | 147,361 | |||
| Total | $ | 1,193,937 |
| December 31, 2012 | ||||
| Equipment | 41,969 | |||
| Less accumulated depreciation | (5,926 | ) | ||
| Total | $ | 36,043 | ||
| Year Ending December 31: | ||||
| 2013 | $ | 16,923 | ||
| 2014 | 16,923 | |||
| 2015 | 11,282 | |||
| Total minimum lease payments | 45,128 | |||
| Less amount representing interest | (4,231 | ) | ||
| Present value of minimum lease payments | $ | 40,897 |
In June 2012, the Company entered into a one-year factoring agreement with a finance company. The agreement automatically renews annually unless terminated by either party. Under the terms of the agreement, the Company, at its discretion, assigns the collection rights of its receivables to the finance company in exchange for an advance rate of 85% of face value. The assignments are transacted with recourse only at the option of the finance company in the event of non-payment. The Company's obligations under the factorfactoring agreement are secured by substantially all assets of the Company. In accordance with ASC 860 "Transfers and Servicing" regarding transfers of receivables with recourse, this factoring arrangement is accounted for as a secured financing. DuringFor the year ended December 31, 2013 and 2012, the Company had factored approximately $3,850,000 $4,693,000 and $3,850,000, respectively, of receivables and had received cash advances of approximately $3,272,000.$4,708,000 and $3,272,000, respectively. Outstanding receivables purchased by the factor as of December 31, 2013 and 2012 were approximately $638,000 and $950,000, respectively, and are included in accounts receivable in the accompanying consolidated balance sheet, and the secured loan due to the lender was $827,075.approximately $543,000 and $827,000 at December 31, 2013 and 2012, respectively. Factor fees in 2012 were approximately $138,000 and $119,000 for the year ended December 2013 and 2012, respectively, and are included in interest expenses. (See Note 3)
9 – CONVERTIBLE PROMISSORY NOTES AND FAIR VALUE MEASUREMENTS
In December 2011, the Company received a deposit of $170,000. This deposit was an advance on three convertible promissory notes totaling approximately $314,000 signed on February 2, 2012, automatically convertible into future securities sold at 100% of the sale price and non-interest bearing. These loans qualify as stock settled debt under ASC 480 with a fixed monetary amount of $314,000. These loans were to mature in August 2012 but were converted into common stock in February 2012. (See Note 12)
In May 2012, the Company received $300,000 related to five convertible notes. The term of each note iswas 12 months. Interest iswas computed at 6% based on a 360 day year and is payable on the maturity date, and the conversion rate iswas $0.10 per share. Interest iswas due and payable only if the notes arewere repaid in cash. These notes were converted to common stock at their contractual conversion rate of $0.10 per share on July 15, 2012. (See Note 12)
At the note origination date, the Company recorded a debt discount for the beneficial conversion feature value related to the above referenced convertible note in the amount of $300,000, which is based on the intrinsic value between the fair market value of the Company’s stock and the conversion price. The discount is being amortized to interest expense over the term of the note. In accordance with ASC 470-20-40, upon conversion, the remaining unamortized portion of the beneficial conversion feature value was expensed.
On October 7, 2013, the Company entered into a one-year original issue discount (OID) convertible promissory note with warrants in the amount of $280,000 with Tonaquint, Inc., a Utah corporation (“Tonaquint”). The purchase price for this note and the warrants was $250,000. The Company had the option to repay this note at any time on or before the date that is sixty (60) days from October 7, 2013. The Company recorded a debt discount for the OID of $25,000 and expensed $5,000. The debt was treated as stock settled debt where a put premium of $120,000 was to be recorded over the six-month period to the first conversion date. Tonaquint had the right at any time after the date that is six (6) months from the effective date, at its election, to convert all or any part of the outstanding balance of the note into shares of fully paid and non-assessable common stock of the company based upon a formula that is seventy (70%) percent of the average of the two (2) lowest intra-day trade prices in the fifteen (15) trading days immediately preceding the conversion (the “Conversion Formula”). Tonaquint was granted the right to purchase at any time on or after October 7, 2013 until the date which is the last calendar day of the month in which the fifth anniversary of the “issue date” occurs, 350,000 fully paid and non-assessable shares of the Company’s common stock, par value $.001 per share, as such number may be the adjusted from time to time pursuant to the full ratchet price protection terms and conditions of the warrant. The initial “exercise price” is $0.40 per share of common stock. On November 12, 2013, the note was paid in full with financing received in connection with the sale and issuance of Series A Preferred Stock and warrants pursuant to the Securities Purchase Agreement, dated November 12, 2013, between the Company and the investors named therein. (See Note 12) As mentioned above, the Company issued 350,000 free standing and detachable warrants related to the note. The Company accounted for these warrants issued in accordance with the GAAP accounting guidance under ASC 815 applicable to derivative instruments, which requires every derivative instrument within its scope to be recorded on the balance sheet as either an asset or liability measured at its fair value, with changes in fair value recognized in earnings. Based on this guidance, the Company determined that the Company's warrants do not meet the criteria for classification as equity due to the price protection provisions. Accordingly, the Company classified the warrants as current liabilities. The warrants are subject to re-measurement at each balance sheet date, with any change in fair value recognized as a component of other income (expense), net in the statements of operations. We will estimate the fair value of these warrants at the respective balance sheet dates, based on the estimated market value of the underlying common stock at the valuation measurement date, the remaining contractual term of the warrant, risk-free interest rates and expected dividends on and expected volatility of the price of the underlying common stock. (See below for December 31, 2013 valuations). As a result of the November 12, 2013 financing and the full ratchet protection, the exercise price of the warrants was reduced to $0.20 per share and 350,000 additional warrants were issued to Tonaquint.
F-14
HEALTH REVENUE ASSURANCE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013 and 2012
On October 17, 2013, the Company entered into a one-year OID convertible promissory note in the amount of $142,500 with Tonaquint. The purchase price for this note and the warrant was $125,000. The Company had the option to repay this note at any time on or before the date that is sixty (60) days from October 17, 2013. The Company recorded a debt discount for the OID of $12,500 and expensed $5,000. The debt was treated as stock settled debt where a put premium of $61,071 was to be recorded over the six-month period to the first conversion date. Tonaquint had the right at any time after the date that is six (6) months from the effective date, at its election, to convert all or any part of the outstanding balance of the note into shares of fully paid and non-assessable common stock of the Company based upon the Conversion Formula. Tonaquint was granted the right to purchase at any time on or after October 17, 2013 until the date which is the last calendar day of the month in which the fifth anniversary of the “issue date” occurs, 175,000 fully paid and non-assessable shares of the Company’s common stock, as such number may be the adjusted from time to time pursuant to the full ratchet price protection terms and conditions of the warrant. The initial “exercise price” is $0.40 per share of common stock. On November 12, 2013, the note was paid in full with financing received in connection with the sale and issuance of Series A Preferred Stock and warrants pursuant to the Securities Purchase Agreement, dated November 12, 2013, between the Company and the investors named therein. (See Note 12) As mentioned above, the Company issued 175,000 free standing and detachable warrants related to the note. The Company accounted for these warrants issued in accordance with the US GAAP accounting guidance under ASC 815 applicable to derivative instruments, which requires every derivative instrument within its scope to be recorded on the balance sheet as either an asset or liability measured at its fair value, with changes in fair value recognized in earnings. Based on this guidance, the Company determined that the Company's warrants do not meet the criteria for classification as equity due to the price protection provisions. Accordingly, the Company classified the warrants as current liabilities. The warrants are subject to re-measurement at each balance sheet date, with any change in fair value recognized as a component of other income (expense), net in the statements of operations. We will estimate the fair value of these warrants at the respective balance sheet dates, based on the estimated market value of the underlying common stock at the valuation measurement date, the remaining contractual term of the warrant, risk-free interest rates and expected dividends on and expected volatility of the price of the underlying common stock. (See below for December 31, 2013 valuations) As a result of the November 12, 2013 financing and the full ratchet anti-dilution provision, the exercise price of the warrants was reduced to $0.20 per share and 175,000 additional warrants were issued to Tonaquint.
At the time the above two notes were paid off, the Company had accreted $33,364 of the put premium and according recognized a gain on extinguishment of $33,364 relating to this put premium. Further, as only $3,459 of the discount was amortized, the Company recorded a loss on early debt extinguishment of $34,041.
Fair Value Measurements – Derivative liability:
Assets and liabilities measured at fair value on a recurring and non-recurring basis consisted of the following at December 31, 2013:
Carrying Value at December 31, | Fair Value Measurements at December 31, 2013 | |||||||||||||||
| 2013 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
| Warrant derivative liability (29,940,000 warrants - See Note 12) | $ | 5,406,000 | $ | - | $ | - | $ | 5,406,000 | ||||||||
The following is a summary of activity of Level 3 liabilities for the period ended December 31, 2013:
| Balance at December 31, 2012 | $ | - | ||
| Reclassification of warrant liability | 5,771,255 | |||
| Change in fair value | (365,255 | ) | ||
| Balance December 31, 2013 | $ | 5,406,000 |
Changes in fair value of the warrant derivative liability is included in other income (expense) in the accompanying consolidated statements of operations.
The Company estimates the fair value of the warrant liability utilizing the Binomial Lattice model, which is dependent upon several variables such as the expected term (based on contractual term), expected volatility of our stock price over the expected term (based on historical volatility), expected risk-free interest rate over the expected term, and the expected dividend yield rate over the expected term. The Company also used the Black-Scholes pricing model as a comparison to the Binomial Lattice method and the results were similar. The Company believes this valuation methodology is appropriate for estimating the fair value of the warrant derivative liability. The following table summarizes the assumptions the Company utilized to estimate the fair value of the embedded conversion option at December 31, 2013:
| Assumptions | December 31, 2013 | |||
| Expected term | 1.0 | |||
| Expected Volatility | 116 | % | ||
| Risk free rate | 1.2 | % | ||
| 0.00 | % | |||
There were no changes in the valuation techniques during 2013.
F-15
HEALTH REVENUE ASSURANCE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013 and 2012
10 – COMMITMENTS AND CONTINGENCIES
Commitments
Leases:
Until August 2012, the Company leased certain office equipment under non-cancelable operating lease arrangements. Monthly payments under the lease agreements were approximately $600 per month. The lease expired in August 2012. In September 2012, the Company started a new non-cancelablenon-cancellable operating lease to replace thefor office equipment. The lease term is 5 years. Lease payments during the five years are approximately $500$560 per month.
On September 1, 2011, the Company entered into a commercial lease agreement for additional office space. The lease term is one year with five successive one yearone-year renewal options. Lease payments during the first year were approximately $2,500 for one month and $4,400 for the remaining eleven months. Starting September 1, 2012,2013, the lease has been renewed for one year with a fixed payment of approximately $5,008$5,800 per month. For each year thereafter of the initial year, the rent will be subject to an increment of 4%.
Future minimum lease payments under these leases are as follows:
Years Ending December 31:
| 2013 | $ | 51,432 | ||||||
| 2014 | 6,360 | $ | 53,246 | |||||
| 2015 | 6,360 | 6,720 | ||||||
| 2016 | 6,360 | 6,720 | ||||||
| 2017 | 5,040 | |||||||
| Thereafter | - | |||||||
| Total | $ | 70,512 | $ | 71,726 | ||||
Capital Leases:
HRAA leases its property and equipment from Dell Financial Services L.L.C. under several capital leases. The economic substance of the leases is that the Company is financing the acquisition of the assets through the lease and accordingly, it is recorded in the Company’s assets and liabilities.
The following is an analysis of the leased assets included in property and equipment:
December 31, 2013 | December 31, 2012 | |||||||
| Equipment | $ | 79,210 | $ | 41,969 | ||||
| Less accumulated depreciation | (33,607 | ) | (5,926 | ) | ||||
| Total | $ | 45,603 | $ | 36,043 | ||||
The lease agreements contain bargain purchase options at the end of the lease terms. The total amount due at December 31, 2013 is $58,876 of which $32,768 is included in short term liabilities.
The following is a schedule by years of future minimum payments required under the lease together with their present value as of December 31, 2013:
| Year Ending December 31: | ||||
| 2014 | $ | 32,768 | ||
| 2015 | 22,527 | |||
| 2016 | 3,581 | |||
| Total minimum lease payments | 58,876 | |||
| Less amount representing interest | (9,087 | ) | ||
| Present value of minimum lease payments | $ | 49,789 |
Amortization of assets held under capital leases is included with depreciation expense and is approximately $24,200 and $9,400 for the years ended as of December 31, 2013 and 2012, respectively.
Settlement Agreement:Agreements:
On May 8, 2012, the Company terminated the employment of ourits Chief Marketing Officer (CMO)(“CMO”) and subsequently amended its complaint to enforce certain non-competition clauses contained in the employment agreement. The Company sought a declaration of its obligations to pay severance under the terms of its then-existing employment agreement with the CMO.
On July 9, 2012, the Company and the former CMO entered into a Settlement Agreementsettlement agreement to resolve two pending lawsuits arising out of the termination of his employment agreement. The lawsuit was initiated by the Company against the former CMO in the United States District Court for the Southern District of Florida. In addition, the former CMO sued the Company in the United States District Court of the District of Colorado.
F-16
HEALTH REVENUE ASSURANCE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013 and 2012
Pursuant to the Settlement Agreement,settlement agreement, the former CMO agreed to abolish all claims and lawsuits against the Company and its CEO and COO and resigned any and all positions which he had or presently may have had with the Company. As part of the Settlement Agreement,settlement agreement, the Company agreed to make eleven (11) payments totaling $232,500 pursuant to the terms of his prior employment agreement. Additionally, the CMO agreed to transfer his 3,299,802 shares to an officer of the Company (see Note 12).in 2012. These payments commenced July 2012 and the outstanding balance asfinal payment in the amount of December 31, 2012$23,056 was $115,278.disbursed on July 29, 2013. In addition, the Company has agreed to abolish all claims and lawsuits against the former CMO. The Settlement Agreementsettlement agreement has a seven (7) day grace period for payments to the former CMO, after which time, he may seek court intervention to enforce the payments. The Company's Chief Executive OfficerRobert Rubinowitz, the former chief operating officer and Chief Operating Officer, respectively,Andrea Clark, the chief visionary officer, have personally guaranteed the payments of the Settlement Agreement.settlement agreement. As a result of the Settlement Agreement,settlement agreement, both parties are dismissingdismissed their respective filings and have agreed to not enter any more lawsuits concerning the scope of this matter.
On March 14, 2013, the Company and its former regional sales manager entered into a settlement agreement to resolve one pending lawsuits arising out of the termination of his employment. The lawsuit was initiated by the former regional sales manager against the Company in the United States District Court for the city of Denver, Colorado. Pursuant to the settlement agreement, the former regional sales manager agreed to abolish all claims and lawsuits against the Company. As part of the settlement agreement, the Company agreed to make a payment totaling $11,000 pursuant to the terms of the settlement agreement and general release of all claims executed by both parties. As of December 31, 2013 the Company had accrued $7,000 for settlement payable.
Employment Agreements:
Contingencies
From time to time, the Company is involved in litigation matters relating to claims arising from the ordinary course of business. While the results of such claims and legal actions cannot be predicted with certainty, the Company’s management does not believe that there are claims or actions, pending or threatened against the Company, the ultimate disposition of which would have a material adverse effect on our business, results of operations, financial condition or cash flows.
On March 26, 2014, the Company notified Dean Boyer, its chief technology officer, that the Company was terminating his employment with the Company as well as that certain employment agreement with the Company dated October 1, 2013, as amended on November 13, 2013, effective March 31, 2014. On March 28, 2014, the Company received a letter from Mr. Boyer’s counsel demanding payment of $421,062.53 as severance in connection with the termination of Mr. Boyer’s employment agreement. On April 7, 2014, the Company received an additional letter from Mr. Boyer’s counsel demanding an additional $13,370.21 for accrued but unused vacation pay. The Company intends to dispute the amounts claimed to be owed to Mr. Boyer.
11 – STOCK OPTIONS AND WARRANTS
Share Based Compensation
The Company is in the process of establishing a non-qualified stock option plan. In advance of the actual establishment of the plan the Company has granted a total of one million (1,000,000) stock options to an officer. The grant date is that which an employer and its employee reach a mutual understanding of the key terms and conditions of a share-based payment arrangement. This is the date on which the employer becomes contingently obligated to issue equity instruments or transfer assets to the employee who renders the requisite service. The Company is obligated for this grant as adoption of a stock option plan and board approval is considered a mere formality.
Stock Options
During the year ended December 31, 2013, the Company recorded pre-tax compensation expense of $14,822 related to the Company’s 1,000,000 options as discussed above. As of December 31, 2013, there was approximately $206,300 of unrecognized compensation expense related to stock options, which will be recognized over the weighted-average remaining requisite service period of 1.9 years. There were no exercises of stock options for the year ended December 31, 2013.
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The 1,000,000 options were valued at $221,121. The estimated value of stock options granted during the year ended December 31, 2013 was $0.22 per share, using the following assumptions:
| 2013 | ||||
| Dividend yield (1) | 0.0 | % | ||
| Expected volatility (2) | 116 | % | ||
| 5 Year Bond interest rate (3) | 1.20 | % | ||
| Expected life (4) | 6.0 | |||
(1) Represents cash dividends paid as a percentage of the share price on the date of grant.
(2) Based on historical volatility of the Company’s common stock over the expected life of the options.
(3) Represents the U.S. Treasury rates over maturity periods matching the expected term of the options at the time of grant.
(4) The period of time that options granted is expected to be outstanding based upon the simplified method.
F-17
HEALTH REVENUE ASSURANCE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013 and 2012
The following table summarizes stock option activity for the year ended December 31, 2013:
| Options | Shares | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Term | Aggregate Intrinsic Value ($000) | |||||||||
| Outstanding at January 1, 2013 | - | - | |||||||||||
| Granted | 1,000,000 | 0.26 | * | $ | - | ||||||||
| Exercised | - | - | |||||||||||
| Forfeited or expired | - | - | |||||||||||
| Outstanding at December 31, 2013 | 1,000,000 | $ | 0.26 | * | $ | - | |||||||
| Exercisable at December 31, 2013 | - | - | - | - | |||||||||
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on the last trading day of the fourth quarter of 2013 and the exercise price, multiplied by the number of in-the-money options).
* These 1,000,000 options were granted without a specified expiration term.
Warrants
2013
In connection with the promissory notes issued to Tonaquint on October 7, 2013 and October 17, 2013, the Company issued 350,000 and 175,000 warrants, respectively. (See Note 9) As a result of the Series A Preferred Stock and warrant sale on November 12, 2013, the exercise price of both the 350,000 warrants and 175,000 warrants was reduced to $0.20 per share and an additional 525,000 warrants were issued to Tonaquint pursuant to full ratchet anti-dilution provisions.
On November 12, 2013 and in connection with the Series A Preferred Stock offering, the Company issued 27,000,000 warrants to investors and 1,890,000 warrants were issued as a fee to the placement agent all at an exercise price of $0.30 per share. (See Note 12)
Warrant activity for the year ended December 31, 2013 is as follows:
Number of Warrants | Weighted Average Exercise Price | |||||||
| Outstanding at December 31, 2012 | - | $ | - | |||||
| Granted | 29,415,000 | 0.30 | ||||||
| Anti-dilution issuance | 525,000 | 0.20 | ||||||
| Exercised | - | - | ||||||
| Forfeited | - | - | ||||||
| Expired | - | - | ||||||
| Outstanding at December 31, 2013 | 29,940,000 | $ | 0.30 | |||||
| Exercisable at December 31, 2013 | 29,940,000 | $ | 0.30 | |||||
| Aggregate intrinsic value | $ | 52,500 | ||||||
All warrants were issued with an exercise term of 5 years.
Warrants outstanding have a weighted average remaining contractual life of 4.87 years as of December 31, 2013.
12 – STOCKHOLDERS'STOCKHOLDER’S EQUITY (DEFICIT)
Recapitalization and Deemed Common Stock Issuance
On February 10, 2012, HRAAthe Company entered into athe Merger agreementAgreement with Health Revenue Assurance Holdings, Inc. "HRAH" (a Nevada incorporated publicly-held company)HRAA and its subsidiary Health Revenue Acquisition Corporation (Acquisition Subsidiary)Sub which was treated for accounting purposes as a reverse recapitalization with HRAA considered the accounting acquirer since the shareholdersstockholders of HRAA obtained voting and management control of HRAH.the Company. Each share of HRAA's common stock was exchanged for the right to receive approximately 1,271 shares of HRAH’s common stock. Before their entry into the Merger Agreement, no material relationship existed between HRAH or Acquisition Sub and HRAA. As part of the recapitalization, the Company is deemed to have issued 13,499,226 shares of common stock, which represents the shares of common sharesstock outstanding in HRAH just prior to the merger.Merger. There were no recorded assets or liabilities in HRAHthe Company just prior to the merger.Merger. All share and per share amounts for all periods presented have been retroactively adjusted to reflect the recapitalization.
Forward Stock Split
On April 13, 2012, the Company’s Boardboard of Directorsdirectors authorized a 12.98 for 1 split of its common stock to stockholders of record as of April 13, 2012. Shares resulting from the split were issued on April 26, 2012. In connection therewith, the Company transferred $32,747 from additional paid in capital to common stock, representing the par value of additional shares issued. As a result of the stock split, fractional shares were rounded up. All share and per share amounts for all periods presented have been retroactively adjusted to reflect the stock split.
F-18
HEALTH REVENUE ASSURANCE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013 and 2012
Capitalization Changes
On October 8, 2013, the Company amended its articles of incorporation with the Nevada Secretary of State by increasing the number of authorized shares of common stock from 75,000,000 to 500,000,000. This amendment has been retroactively disclosed on the balance sheet.
Common Stock Compensation. At the time of the transaction the Company valued the stock based on current knowledge of the board and during the third quarter of 2011, the board estimated the fair value at approximately $256,000. Subsequently the Company was able to raise capital at a higher valuation. As a result of the Private Placement completed in February 2012, and since the grant of stock was within six months of this transaction the Board determined to revalue the stock at the price per share of the private placement and record additional compensation during the fourth quarter of 2011 of approximately $563,000 for total compensation of approximately $819,000.
2012:
On February 10, 2012, upon closing of the reverse merger,Merger Agreement, a $250,000 convertible bridge loan was automatically converted into an aggregate of 1,343,749 shares of common stock at the contractual conversion price of $0.19 per share.
On February 10, 2012, concurrently with the closing of the reverse merger, the Company sold 1,410,874 shares of the Company’s common stock for gross proceeds of $350,000 at a purchase price of $0.25 per share in a private placement offering.
On February 10, 2012 concurrently with the closing of the reverse merger, convertible promissory notes totaling $313,908 obtained on February 2, 2012 were converted into 1,265,381 shares of common stock or $0.25 per share based on the contractual conversion rate.
In April 2012, the Company sold 1,394,909 shares of common sharesstock for approximately $349,000 or $0.25at a price per share.share of $0.25.
In May 2012, the Company recorded $300,000 to additional paid-in capital for the beneficial conversion value of convertible debt (see(See Note 10)9).
In July 2012, pursuant to a settlement agreement (see(See Note 11)10), the Company agreed to pay $232,500 and 3,299,802 common shares were returned to the Company. The Company charged equity for the $232,500 in accordance with the settlement provisions of ASC 718 “Stock Compensation”.
In July 2012, in connection with the settlement agreement discussed in Note 11,10, upon return of the 3,299,802 shares to the transfer agent, the shares were simultaneously reissued to delegees of the CEO,Andrea Clark, however, such shares were unvested and subsequently cancelled as a null and void issuance.
On July 15, 2012, the holders of the five convertible notes issued by the Company in May 2012 exercised their rights under the agreement and converted $300,000 into 3,000,000 shares of common stock at the contractual conversion rate of $0.10 per share.
In August 2012, the company raised approximately $22,000 with the sale ofCompany sold 77,743 shares of common stock for $22,000 at $0.28a price per share.share of $0.28.
During the period from October 2012 through December 2012, the Company sold 1,468,786 shares of common sharesstock for $335,600 at prices per share between $0.20 and $0.28.
In December 2012, the Company issued 2,375,000 shares of common stock in connection with a financing transaction as more fully described in note 7.Note 6.
During 2012, the companyCompany incurred approximately $326,000 in offering costs that were charged to additional paid-in capital.
On January 15, 2013, the Company sold 46,429 shares of common stock for $13,000 at a price per share of $0.28.
On January 31, 2013, the Company issued 50,266 shares of common stock as compensation to an employee for services rendered through March 31, 2013. The shares were valued at $0.49 per share based on the quoted trading price per share or $24,630, which was expensed.
In February 2013, the Company issued 5,575,000 shares of common stock in connection with a financing transaction as more fully described in Note 7.
In March 2013, the Company entered into a one-year agreement with a consultant for 230,000 vested shares and cash consideration. The shares were valued on the agreement date, which was the measurement date at $0.35, based on the quoted trading price, and the $80,500 was recorded as a prepaid asset and is being expensed over the term of the contract. The shares were issued on April 1, 2013 to the consultant.
On April 1, 2013, the Company issued an aggregate of 54,847 shares of common stock as compensation to two employees for services rendered through March 31, 2013. The shares were valued at $0.40 per share based on recent cash sales by the Company or $21,939, which was expensed.
On May 19, 2013, the Company sold 625,000 shares of common stock for $250,000 at a price per share of $0.40.
On May 24, 2013, the Company sold 125,000 shares of common stock for $50,000 at a price of $0.40 per share.
HEALTH REVENUE ASSURANCE HOLDINGS, INC.
DECEMBER 31, 2013 and 2012
On June 21, 2013, the Company sold 750,000 shares of common stock for $300,000 at a price per share of $0.40.
On June 27, 2013, the Company entered into a financial advisor and agent placement agreement whereby the Company had the option to pay in cash or issue 100,000 shares of common stock. The shares were valued on the agreement date, which was the measurement date at $0.51 per share based on the quoted trading price, and the $51,000 is being expensed over the term of the contract. The Company issued the shares in September 2013.
On July 8, 2013, the Company sold 500,000 shares of common stock for $200,000 at a price per share $0.40.
On August 7, 2013, the Company sold 500,000 shares of common stock for $200,000 at a price per share $0.40.
On August 21, 2013, the Company sold 100,000 shares of common stock for $25,000 at a price per share of $0.25.
On August 27, 2013, the Company issued 400,000 shares of common stock for $100,000 at a price per share of $0.25.
On August 30, 2013, the Company issued 400,000 shares of common stock for $100,000 at a price per share of $0.25 per share.
On August 22, 2013 and August 28, 2013, the Company converted $402,083 in unsecured promissory notes for five (5) individuals into one million six hundred eight thousand three hundred and thirty three (1,608,333) shares of common stock at a conversion price of $0.25 per share. The shares of common stock were valued at $514,666 based on the quoted trading price of $0.32 and accordingly, the Company recorded a loss on conversion of $112,583.
In September 2013, the Company issued 95,052 shares of common stock as compensation to three employees for services rendered through June 30, 2013. The shares were valued at $0.48 per share based on the quoted trading price per share or $45,625, which was expensed.
On September 6, 2013, the Company entered into a three-year agreement with a company to provide consulting and recruiting services. Upon execution of the agreement, the Company issued 50,000 shares of common stock valued at $0.30 per share based on the quoted trading price, in consideration of their services to be rendered for the first year of the agreement. The $15,000 is being expensed over 12 months.
On September 9, 2013, the Company entered into a one year consulting agreement with a stockholder, Mr. Michael Ciprianni, to provide certain consulting services related to the Company’s business in exchange for four million one hundred twenty five thousand (4,125,000) shares of common stock in consideration of the services to be rendered. The shares were valued on the agreement date, which was the measurement date at $0.28 per share based on the quoted trading price, and the $1,155,000 is being expensed over the term of the contract.
On September 30, 2013, the Company issued 187,500 shares of common stock as compensation to two employees for services rendered through September 30, 2013. The shares were valued at $0.23 per share based on the quoted trading price per share or $43,125, which was expensed.
On October 9, 2013, the Company issued 100,000 shares of common stock as compensation to a consultant to provide services. The shares were valued at $0.24 per share based on the quoted trading price per share or $24,000, which was recorded as prepaid and is being expensed over the term of the agreement, which is six (6) months.
On December 31, 2013, in accordance with a 2012 employment agreement, the Company issued 75,000 shares of common stock as compensation to an employee for services rendered through December 31, 2013. The shares were valued at $0.25 per share based on the quoted trading price per share or $18,750, which was expensed.
Temporary Equity - INCOME TAXESPreferred Stock
On November 12, 2013, the Company entered into a Securities Purchase Agreement for the sale of Series A 8% Redeemable Convertible Preferred Stock (“Series A stock”) and warrants to purchase shares of the Company’s common stock. The Company sold 13,500,000 of Series A stock and warrants to purchase 27,000,000 shares of the Company’s common stock for gross proceeds of $5,400,000. The net proceeds to the Company after offering costs is $4,903,652. The Series A stock is convertible into common stock on a 2 for 1 basis and is redeemable by the Company, at the option of the investor, 48 months from November 12, 2013 at the stated value of $0.40 per share or a total of $5,400,000 plus accumulated but unpaid dividends, whether declared or not. Due to the redemption feature the Series A Stock is reflected as temporary equity at December 31, 2013 as follows:
| Series A sale price | $ | 5,400,000 | ||
| Less: Reclassification of warrant fair value to liability | (5,669,837 | ) | ||
| Offering costs | (496,348 | ) | ||
| Plus: Deemed dividend | 2,634,185 | |||
| Series A dividends | 60,000 | |||
| $ | 1,928,000 |
The Company hasalso issued warrants to purchase 1,890,000 shares of common stock to a placement agent. (See Note 11).
The Company recorded a beneficial conversion value for the preferred stock of approximately $2.6 million as an immediate charge to accumulated deficit as it is considered a constructive dividend to Series A preferred stockholders. As part of this equity financing transaction, the Company issued 27,000,000 five-year warrants (See Note 11) with immediate vesting rights to convert into common shares at an initial exercise price of $0.30 per share under price protection provisions. The warrants also contain cashless exercise provisions. Due to price protection provisions in the warrants, the Company will account for these warrants issued in accordance with the US GAAP accounting guidance under ASC 815 applicable to derivative instruments, which requires every derivative instrument within its scope to be recorded on the balance sheet as either an asset or liability measured at its fair value, with changes in fair value recognized in earnings. (See Notes 9 and 11)
In connection with the Securities Purchase Agreement, the Company entered into a registration rights agreement with the Purchasers, pursuant to which the Company agreed to register all of the shares of common stock underlying the Series A Preferred Stock and the shares of common stock underlying the Warrants on a registration statement on Form S-1 (the “Registration Statement”) to be filed with the SEC within 30 calendar days following the Closing Date (the “Filing Deadline”) and to use its best efforts to cause the Registration Statement to be declared effective under the Securities Act within 90 calendar days following the Filing Deadline. The Registration Statement was filed on December 11, 2013, as amended December 20, 2013 and declared effective on December 24, 2013.
F-20
HEALTH REVENUE ASSURANCE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013 and 2012
13 – CONCENTRATIONS
Sales to four (4) hospital customers represented approximately 60% of our revenues for the year ended December 31, 2013. We have direct relationships with the individual hospitals and the health systems.
| Hospital Customer A | 42.0 | % | ||
| Hospital Customer B | 6.0 | % | ||
| Hospital Customer C | 6.0 | % | ||
| Hospital Customer D | 6.0 | % | ||
| Total | 60.0 | % |
Sales to thirteen (13) hospitals were approximately 89% of our revenues for the year ended December 31, 2012.
Five and four vendors represented approximately 56% and 67% of our outstanding accounts payable balance as of December 31, 2013 and December 31, 2012, respectively.
Four and one customers represented approximately 64% and 62% of our accounts receivable as of December 31, 2013 and December 31, 2012, respectively.
14 – INCOME TAXES
The Company’s subsidiary, HRAA, elected to convert from a Subchapter S corporation for Federal income tax purposes to a C corporation effective October 21, 2011. Accordingly, the Company'sHRAA’s income or losses are passed through to the shareholdersstockholders of HRAA for the period January 1 to October 21, 2011. The Company will absorb the tax effects of any income or losses subsequent to the date of conversion to a C Corporationcorporation and in future years.
The Company has incurred aggregate cumulative net operating losses of approximately $1,558,862$4,209,000 for C corporation income tax purposes through December 31, 2012.2013. The net operating loss carries forward for income taxes, purposes and may be available to reduce future years’ taxable income. These carry forwards will expire, if not utilized, starting in 2031 through 2032.2033. Management believes that the realization of the benefits from these losses appears not more likely than not due to the Company’s limited operating history and continuing losses for income tax purposes. Accordingly, the Company has provided a 100% valuation allowance on the deferred tax asset to reduce the asset to zero. Management will review this valuation allowance periodically and make adjustments as warranted.
The Company’s income tax expense (benefit) differs from the “expected” tax expense for Federal income tax purposes computed by applying a Federal corporate tax rate of 34% to loss before income taxes as follows:
| Year ended December 31, 2012 | Year ended December 31, 2011 | |||||||
| U.S. Federal “expected” income tax | $ | (495,540 | ) | $ | (398,453 | ) | ||
| State income tax | (52,906 | ) | (58,596 | ) | ||||
| Non-deductible beneficial conversion interest | 102,000 | - | ||||||
| Non-deductible items | 24,769 | - | ||||||
| Stock compensation | - | 319,252 | ||||||
| S Corp non-deductible/taxable items | - | (31,703 | ) | |||||
| Change in valuation allowance | 421,677 | 169,500 | ||||||
| Total provision for income taxes | $ | - | $ | - | ||||
| Year ended | Year ended | |||||||
December 31, 2013 | December 31, 2012 | |||||||
| U.S. Federal "expected" income tax | $ | (1,860,902 | ) | $ | (495,540 | ) | ||
| State income tax | (198,679 | ) | (52,906 | ) | ||||
| Non-deductible beneficial conversion interest | - | 102,000 | ||||||
| Stock compensation | 252,366 | 24,769 | ||||||
| Change in fair value of warrant liability | (124,187 | ) | - | |||||
| Loss on extinguishment of debt | 49,852 | - | ||||||
| Other | 23,585 | - | ||||||
| Change in valuation allowance | 1,857,964 | 421,677 | ||||||
| Total provision for income taxes | $ | - | $ | - | ||||
The tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities at December 31, 20122013 and 20112012 are as follows:
| 2012 | 2011 | 2013 | 2012 | |||||||||||||
| Deferred tax assets: | ||||||||||||||||
| Net operating loss carry forward | $ | 586,600 | $ | 169,500 | $ | 1,593,719 | $ | 586,600 | ||||||||
| Stock options | 5,578 | - | ||||||||||||||
| Accrued salary and other | 35,821 | - | - | 35,821 | ||||||||||||
| Accrual to cash timing difference | 859,735 | - | ||||||||||||||
| Total gross deferred tax assets | 622,421 | 169,500 | 2,459,032 | 622,421 | ||||||||||||
| Deferred tax liabilities: | ||||||||||||||||
| Depreciation | (31,244 | ) | - | (9,890 | ) | (31,244 | ) | |||||||||
| Total gross deferred tax liabilities | (31,244 | ) | 169,500 | (9,890 | ) | (31,244 | ) | |||||||||
| Less valuation allowance | (591,177 | ) | (169,500 | ) | (2,449,142 | ) | (591,177 | ) | ||||||||
| Net deferred tax assets | $ | - | $ | - | $ | - | $ | - | ||||||||
A deferred tax asset of approximately $169,500 results from the C Corporationcorporation taxable losses totaling $434,509 from the period October 22, 2011 through December 31, 2011. The valuation allowance at December 31, 20112012 was $169,500.$591,177. The increase during 20122013 was $421,677.$1,857,964.
F-21
HEALTH REVENUE ASSURANCE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013 and 2012
The Company believes its tax positions are all highly certain of being upheld upon examination. As such, the Company has not recorded a liability for unrecognized tax benefits. As of December 31, 2012,2013, tax years 2013, 2012 and 2011 remain open for IRSInternal Revenue Service audit. The Company has received no notice of audit from the Internal Revenue Service for any of the open tax years.
The Company follows the provisions of ASC 740-10, Accounting for Uncertain Income Tax Positions. When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. In accordance with the guidance of ASC 740-10, the benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above should be reflected as a liability for unrecognized tax benefits in the accompanying consolidated balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination.
15 – RELATED PARTY TRANSACTIONS
The Company owed Andrea Clark $75,000. The balance due to Ms. Clark was formalized in a promissory note dated November 1, 2013. The Company also owed Robert Rubinowitz $40,000 pursuant to a promissory note dated November 1, 2013 for funds advanced in September 2013. On November 12, 2013 the promissory notes to Ms. Clark and Mr. Rubinowitz were paid in full from the net proceeds of the Securities Purchase Agreement, dated November 12, 2013, among the Company and the investors named therein.
In March 2013, the Company entered into a contract with ResumeBear, Inc. (“ResumeBear”), a related party, to provide website development services in the amount of $302,764. Mr. Peter Russo, a member of the Company’s board of directors, is the chief executive officer and a director of ResumeBear. Mr. Michael Brainard, a member of the Company’s board of directors, is also a director of ResumeBear. Revenues recorded from ResumeBear were $211,239 for the year ended December 31, 2013. In January 2014, the Company wrote-off approximately $108,000 of the account receivable with ResumeBear which is reflected in the December 31, 2013 consolidated financial statements as an allowance of $16,244 and a reduction of revenue of approximately $92,000. Due to cost overruns and product delivery issues relating primarly to a third party subcontractor, the Company estimates the total loss on this contract is approximately $108,000 through December 31, 2013 and another $88,000 through the date of this report.
16 – SUBSEQUENT EVENTS
Separation Agreement with Robert Rubinowitz
On April 14, 2014, the Company entered into a separation agreement (the “Separation Agreement”) with Robert Rubinowitz, its President, Chief Operating Officer, Secretary, Treasurer and director, which provides for the termination of Mr. Rubinowitz's employment and his resignation as an officer and director of the Company, and the termination of that certain Employment Agreement dated October 1, 2013, as amended on November 12, 2013, between the Company and Mr. Rubinowitz (the “Employment Agreement”). The Separation Agreement provides that Mr. Rubinowitz will receive (i) $175,000 to be paid in equal increments of $3,365.39 on each of May 2, 2014, May 16, 2014, May 30, 2014, June 14, 2014 and June 27, 2014 and thereafter equal increments of $7,532.05 with the last payment date being April 17, 2015, (ii) $23,557.70 in accrued and unpaid base salary, bonus and vacation earned through April 11, 2014 payable in equal installments of $1,121.80 beginning on July 11, 2014, and (iii) $6,730.77 in accrued salary, in each case, less all applicable deductions and withholdings, from the Company in full and final satisfaction of the amounts due to Mr. Rubinowitz pursuant to the terms of the Employment Agreement.
The Separation Agreement also requires the Company to use commercially reasonable efforts to have Mr. Rubinowitz and Andrea Clark removed as a guarantors under certain of the Company's debt obligations. The Company also agreed to pay an early termination fee for the early return of Mr. Rubinowitz's leased vehicle. The Company further agreed to file a Registration Statement with the SEC to register the resale of Mr. Rubinowitz's outstanding common stock as of the date of Separation Agreement.
The foregoing description of the Separation Agreement does not purport to be complete and is qualified in its entirety by reference to the complete text of the Separation Agreement, a copy of which is attached as Exhibit 10.22 to this Annual Report on Form 10-K.
Termination of Named Executive Officers
On March 26, 2014, the Company notified Dean Boyer, its chief technology officer, that the Company was terminating his employment with the Company as well as that certain employment agreement with the Company dated October 1, 2013, as amended on November 13, 2013, effective March 31, 2014. On March 28, 2014, the Company received a letter from Mr. Boyer’s counsel demanding payment of $421,062.53 as severance in connection with the termination of Mr. Boyer’s employment agreement. On April 7, 2014, the Company received an additional letter from Mr. Boyer’s counsel demanding an additional $13,370.21 for accrued but unused vacation pay.
On April 15, 2014, the Company notified Joseph Brophy, its senior vice president of operations, that the Company was terminating his employment with the Company as well as that certain letter agreement, dated December 5, 2012, both effective April 25, 2014.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
We lack internal controls and procedures due in part to the information relating to us and our consolidated subsidiaries required to be disclosed in our Exchange Act reports (i) is recorded, processed, summarized and reported within the time periods specifiedCompany’s lack of sufficient personnel with expertise in the SEC’s rulesarea of SEC reporting, generally accepted accounting principles (GAAP) and forms,tax accounting procedures, as well as our lack of sufficient financial resources to implement the policies and (ii) is accumulatedcontrols required pursuant to the Exchange act. At this time, we also have insufficient segregation of duties among our accounting personnel. We began to take steps to address these matters and communicatedhave hired an internal control specialist to our management, including our principal executive officerassist in the design, implementation, and principal financial officer, as appropriate to allow timely decisions regarding required disclosure astest of December 31, 2012.adequate controls.
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) includes those policies and procedures that: (a) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (b) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles in the United States of America, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (c) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the consolidated financial statements.
Internal control over reporting, because of its inherent limitations, may not prevent or detect misstatements. Projections of any evaluation of effectiveness for future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As of December 31, 2012, we2013, management carried out an assessment of the effectiveness of our internal control over financial reporting based on the framework in “Internal Control-Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on ourits evaluation, our management concluded that our internal control over financial reporting was not effective as of December 31, 2012.2013.
As of December 31, 2012 we had2013, management identified certain matters that constituted a material weakness in our internal controls over financial reporting. Specifically, we lack internal controls and procedures due in part to the Company’s lack of sufficient personnel with expertise in the area of SEC, generally accepted accounting principles (GAAP) and tax accounting procedures. We realize that we needbegan to take steps to address this matter, including hiring a Chief Financial Officer. these matters as we have hired an internal control consultant to assist in the design, implementation, and test of adequate controls.
We believe that hiring a Chief Financial Officer will make significanthave made pivotal progress towards remediating this weakness;to mitigate internal control weaknesses; however, we must still complete the process of design-specific control procedures and testing them fortest their effectiveness, and maintaining sufficient personnel to implement these tasks before we can report that this weakness has been fully remediated. As of March 31, 2013 we have hired a Controller and begun the interview process of hiring a Chief Financial Officer with expertise in the area of SEC, generally accepted accounting principles (GAAP) and tax accounting procedures.
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange CommissionSEC that permit the Company to provide only management’s report in this annual report.
Changes in Internal Control over Financial Reporting
26
On March 19, 2014, the Company received a notice from one of its significant customers, Baptist Memorial Health Care Corporation, that it does not intend to renew its services agreement with the Company. As such, the services agreement will terminate on September 30, 2014. The customer and the Company are in discussions to realign the customer's current contract obligations of ICD-10 staffing commitments to other services under new terms and pricing structures.
Resignation of Directors
On April 2, 2014, Mitchell D. Kaye, a member of our board of directors, resigned. On April 4, 2014, David Kroin, a member of our board of directors, resigned.
Separation Agreement with Robert Rubinowitz
On April 14, 2014, the Company entered into a separation agreement (the “Separation Agreement”) with Robert Rubinowitz, its President, Chief Operating Officer, Secretary, Treasurer and director, which provides for the termination of Mr. Rubinowitz's employment and his resignation as an officer and director of the Company, and the termination of that certain Employment Agreement dated October 1, 2013, as amended on November 12, 2013, between the Company and Mr. Rubinowitz (the “Employment Agreement”). The Separation Agreement provides that Mr. Rubinowitz will receive (i) $175,000 to be paid in equal increments of $3,365.39 on each of May 2, 2014, May 16, 2014, May 30, 2014, June 14, 2014 and June 27, 2014 and thereafter equal increments of $7,532.05 with the last payment date being April 17, 2015, (ii) $23,557.70 in accrued and unpaid base salary, bonus and vacation earned through April 11, 2014 payable in equal installments of $1,121.80 beginning on July 11, 2014, and (iii) $6,730.77 in accrued salary, in each case, less all applicable deductions and withholdings, from the Company in full and final satisfaction of the amounts due to Mr. Rubinowitz pursuant to the terms of the Employment Agreement.
The Separation Agreement also requires the Company to use commercially reasonable efforts to have Mr. Rubinowitz and Andrea Clark removed as a guarantors under certain of the Company's debt obligations. The Company also agreed to pay an early termination fee for the early return of Mr. Rubinowitz's leased vehicle. The Company further agreed to file a Registration Statement with the SEC to register the resale of Mr. Rubinowitz's outstanding common stock as of the date of Separation Agreement.
The foregoing description of the Separation Agreement does not purport to be complete and is qualified in its entirety by reference to the complete text of the Separation Agreement, a copy of which is attached as Exhibit 10.22 to this Annual Report on Form 10-K.
Dean Boyer Termination
On March 26, 2014, the Company notified Dean Boyer, its chief technology officer, that the Company was terminating his employment with the Company as well as that certain employment agreement with the Company dated October 1, 2013, as amended on November 13, 2013, effective March 31, 2014. On March 28, 2014, the Company received a letter from Mr. Boyer’s counsel demanding payment of $421,062.53 as severance in connection with the termination of Mr. Boyer’s employment agreement. On April 7, 2014, the Company received an additional letter from Mr. Boyer’s counsel demanding an additional $13,370.21 for accrued but unused vacation pay. The Company intends to dispute the amount claimed to be owed to Mr. Boyer.
Appointment of Tim Lankes as Director
On April 12, 2014, the board of directors appointed Tim Lankes, the Company's chief executive officer, as a director. Certain biographical information is provided about Mr. Lankes in Item 10 below, and his employment agreement is summarized under "Employment Agreements" in Item 11 below.
Amendment to Bylaws
On and effective April 14, 2014, the Company's board of directors amended and restated the Company’s Bylaws. The following is a summary of changes effected by adoption of the Second Amended and Restated Bylaws. The following description of the Second Amended and Restated Bylaws does not purport to be complete and is qualified in its entirety by reference to the Second Amended and Restated Bylaws filed as Exhibit 3.2 to this Annual Report on Form 10-K.
Joseph Brophy Termination
On April 15, 2014, the Company notified Joseph Brophy, its senior vice president of operations, that the Company was terminating his employment with the Company as well as that certain letter agreement, dated December 5, 2012, both effective April 25, 2014.
27
GENERAL
In addition to the amendments described below, the Second Amended and Restated Bylaws include certain changes to (1) clarify language, (2) comply with or confirm to Nevada law and (3) make various technical corrections and non-substantive changes. The Second Amended and Restated Bylaws are referred to herein as the amended Bylaws.
ARTICLE I. STOCKHOLDERS.
Annual Meetings of Stockholders. The amended Bylaws provide that the annual meeting of stockholders will be held at the date and time set by the Board of Directors. Nevada law provides, however, that if an annual meeting is not held (or directors are not elected by written consent) within eighteen months after the last annual meeting of the stockholders (or election of directors by written consent), a stockholder may petition a Nevada court to require such a meeting.
Matters that May be Brought Before a Meeting of Stockholders. The amended Bylaws limit the matters that may be brought before a special meeting to those specified in the notice of the meeting and, with respect to annual meetings of stockholders, to those that are: (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors (or any duly authorized committee thereof), (b) otherwise properly brought before the annual meeting by or at the direction of the Board of Directors (or any duly authorized committee thereof), or (c) otherwise properly brought before the annual meeting by any stockholder of the Company (i) who is a stockholder of record on the date of the giving of the notice and on the record date for the determination of stockholders entitled to notice of and to vote at such annual meeting and who complies with certain notice procedures set forth in the amended Bylaws. The notice procedures are detailed and require, among other things, disclosure by the stockholder of any interest in the matter being presented and the stockholder's direct, indirect or potential interest in the Company by way of stock ownership, right to acquire stock or through derivatives, such as swap, option or short interests.
Nomination of Directors. The amended Bylaws provide that directors may be nominated either by the Board or by a stockholder. To nominate a director, a stockholder must meet certain requirements substantially similar to those required to bring a matter before a meeting of the stockholders, including record date requirements and advance, written notice requirements.
Action by Stockholders. The amended Bylaws continue to provide that action by the stockholders may be either taken at a meeting of the stockholders at which a quorum is present or by the written consent of stockholders holding a majority of the voting power of the Company's issued and outstanding capital stock.
ARTICLE II. BOARD OF DIRECTORS
Committees. The amended Bylaws continue to provide that the Board of Directors may delegate authority to committees of the Board, but the authority of such a committee may not extend to: (i) adopting an agreement of merger or consolidation under Sections 92A.005 to 92A.270, inclusive, of the Nevada Revised Statutes, (ii) approving the sale, lease or exchange of all of the Company's property and assets under Section 78.565 of the Nevada Revised Statutes, (iii) amending the Articles of Incorporation of the Corporation, (iv) recommending to the stockholders a dissolution of the Corporation or a revocation of a dissolution, or (v) declaring a dividend.
Removal of Directors. The amended Bylaws provide that it requires a 2/3 majority of the shares of the Company's stock entitled to vote to remove a member of the Board of Directors, with or without cause. By contrast, the prior bylaws required only a majority of such shares to remove a director. The prior provision was, however, inconsistent with Nevada law, which requires the 2/3 majority included in the amended Bylaws.
Changes in Capital Structure. The prior Bylaws included a provision indicating that the Board of Directors had the authority to change the Company's capital structure. This provision has been eliminated in the amended Bylaws.
ARTICLE VI. AMENDMENTS
Authority to Amend the Bylaws. The amended Bylaws grant exclusive authority to the Board of Directors to amend the Bylaws.
29
Directors and Executive Officers
Set forth below are the names, ages and other biographical information of our directors and executive officers as of March 31, 2013:
April 15, 2014:| Name | Age | Position | ||
| Tim Lankes | 54 | Chief Executive Officer and Director | ||
| Andrea Clark | Chief Visionary Officer and Chairman of the Board | |||
| Evan McKeown | 55 | Chief Financial Officer and Chief | ||
| Michael Brainard | 44 | Director | ||
| Joseph Brophy | 61 | Senior Vice President |
The following is a description of the business experience of each of our executive officers:officers and directors:
Tim Lankes, 54, Chief Executive Officer and Director
Mr. Lankes has served as our chief executive officer since February 2014 and as our director since April 2014. From May 2011 until December 2013, Mr. Lankes served as vice president and chief operating officer for Parallon Technology Solutions, an IT outsourcing and consulting subsidiary of Hospital Corporation of America. He previously served as chief operating officer of Christ Presbyterian Church and Academy from July 2009 until August 2011. Prior to that Mr. Lankes held several senior leadership positions at Perot Systems Corporation, over a 15 year tenure, including managing Perot's International Healthcare Division and culminated in his leading their Ambulatory IT and Revenue Cycle Services Division. Mr. Lankes has over 30 years of military and business leadership experience including successful transformations, startup operations and creating sustained growth in healthcare services and consulting. Mr. Lankes holds a B.A. degree in Management from Abilene Christian University and a Master’s of Business Administration from the University of Tennessee. He has served our country with honor as a First Lieutenant in the U.S. Army's Field Artillery and as a Field Artillery Captain in the Tennessee and Minnesota Army National Guard. Mr. Lankes was nominated to the board of directors because of his leadership and consulting experience with profit and non-profit organizations including strategic planning, business development and start-up operations.
Andrea Clark, 52,53, Chairman of the Board of Directors and Chief ExecutiveVisionary Officer
Ms. Clark was nominated to the board of directors because of Robert Rubinowitz, 47, Chief Operating Officer, President, Secretaryher experience as a healthcare industry luminary, author and Director
Evan McKeown, 55, Chief Financial Officer and Chief Administrative Officer
Mr. McKeown has served as our chief financial officer since April 2013 and as our chief administrative officer since February 28, 2014. Prior to joining the Company, Mr. McKeown served as chief financial officer Perry Baromedical, a regulated medical device manufacturer and world leader in the manufacture, installation and service of FDA approved Hyperbaric Oxygen Chambers, from December 2011 until May 2012. From March 2009 to December 2011, Mr. Keown was an independent consultant providing tax, consulting and business advisory services. Mr. McKeown also served as chief financial officer and controller of National Healing Corporation, a leader in providing comprehensive outpatient wound care centers and wound and disease management solutions for hospitals, from November 2007 to February 2009. During his tenure at National Healing Corporation, Mr. McKeown gained relevant experience with healthcare coding and hospital contract negotiations. Prior to that, Mr. McKeown was the senior vice president, chief financial officer and chief accounting officer for Applied Digital Solutions, a former publicly traded company that provided radio frequency identification and security technology for various consumer and commercial applications. Mr. McKeown also served as a Tax Manager for Ernst & Young and was a senior accountant with Coopers & Lybrand. Mr. McKeown received his B.S. in Business Administration from the University of Maine and is licensed as a Certified Public Accountant in the State of Maine.
Peter Russo, 57, Director
Mr. Russo has served as our director since August 2013. Mr. Russo currently serves as chief executive officer and director of Resume Bear Holdings Corp. a startup online job search technology company, since January 2014 and August 2013, respectively. Previous to that Mr. Russo served as chief financial officer and treasurer of magicJack VocalTec Ltd., a publicly traded company listed on the NASDAQ under the symbol “CALL,” from July 2010 to May 2013 and also served as its principal accounting officer. Prior to his appointment as chief financial officer of magicJack VocalTec Ltd., Mr. Russo served as chief financial officer of YMax Corp from May 2005 to July 2010. Prior to joining YMax, from 1996-1999, Mr. Russo was a consultant and served as chief financial officer of Group Long Distance, Inc. (“GLD”), a publicly traded reseller of local and long distance services, that was previously listed on the NASDAQ under the symbol “GLDI.” Prior to joining GLD, Mr. Russo was the Executive Vice President of the State Bank of South Australia. Mr. Russo currently serves on the Advisory Board of Ocho Gaming, LLC. Ocho Gaming is a premiere operator and provider of online gaming in the Latin American market. Mr. Russo, along with his wife, is co-founder of FriendlyBands LLC a maker of craft and bracelet products. Mr. Russo holds a B.B.A. degree from Pace University in New York. Mr. Russo was nominated to the board of directors because of his past experience as chief financial officer of other publicly traded companies and his knowledge to effectively participate as a board member.
Michael Brainard, 44, Director
Mr. Brainard has served as our director since September 2013. Mr. Brainard is currently chief executive officer of Brainard Strategy Inc. since 2005. Mr Brainard has served as a director of ResumeBear Holdings Corp. since August 2013 and previously served as its chief executive officer from August 2013 until January 2014. Mr Brainard is also the chief executive officer and a director of ResumeBear, Inc. since July 2012. Mr. Brainard brings over 20 years of experience to the board of directors as a management consultant, senior executive, executive coach, manager, entrepreneur, and researcher. As a management consultant, Mr. Brainard has designed and conducted process re-engineering and re-structuring, organizational assessments, leadership development initiatives, performance management systems, change management processes, and a variety of strategic planning initiatives. Additionally Mr. Brainard has worked as a post-acquisition internal and external integration leader. Mr. Brainard has provided strategy and consulting services to companies such as Scripps, AMN Healthcare, AccentCare, Memorialcare, and Patient Safe Solutions. He holds a B.A. in Psychology from the University of Delaware, a M.S. in Industrial Psychology from Alliant International University and a Ph.D. in Industrial Psychology from Alliant International University. Mr. Brainard was nominated to the board of directors due to his 20 years of strategy consulting experience, much of which is in the healthcare space.
Joseph Brophy, 61, Senior Vice President of Operations
Mr. Brophy has served as our senior vice president of operations since January 2013. As Senior Vice President of Operations, Mr. Brophy is responsible for overseeing all day-to-day operations of HRAA’s products and services, including technology and analytics solutions, coding, education, auditing, consulting and ICD-10 transition solutions, to ensure the very best customer experience. Previous to that Mr. Brophy served as the Director of Healthcare Sales-East Coast for Axway Inc. from June 2006 until January 2013. Mr. Brophy is a seasoned executive in the healthcare technology sector and understands the necessities of HRAA’s core customer segment. Mr. Brophy is a vital component of our team as we continue to deliver products and services that safeguard our customers and partners. Mr. Brophy brings over 25 years of healthcare operations, technology, consulting, business and sales expertise to HRAA. He has held roles as a hospital COO, Consultant, Director of Business Development and Regional Sales Executive. Mr. Brophy holds a Master of Arts, Administration from Rider University and a Bachelor of Arts from Saint Francis University.
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Section 16(a) Beneficial Ownership Compliance
As of the date of this report, we are not subject to Section 16(a) of the Securities Exchange Act of 1934.
Corporate Governance
The Boardboard of directors has not adopted Corporate Governance Principles.corporate governance principles. Currently, the Company’s Chief ExecutiveVisionary Officer also holds the position of Chairman of the Boardboard of Directors.directors. In the future, however, the Boardboard of directors may reconsider whether its Chief ExecutiveVisionary Officer should also serve as Boardthe board of directors Chairman.
Audit Committee and Financial Expert
We do not have a standing audit committee of the Boardboard of Directors.directors. Management has determined not to establish an audit committee at present because of our limited resources and limited operating activities do not warrant the formation of an audit committee or the expense of doing so. We do not have a financial expert serving on the Boardboard of Directors.directors.
Compensation Committee and Nominating Committee
We currently do not have a compensation committee or a nominating committee. Determining compensation for our officers and directors is done by our board of directors. Nominations for election to our
Code of Conduct and Corporate Ethics Policy
Our board of directors may be made by thehas approved, and we have adopted, a Code of Conduct and Corporate Ethics Policy (the "Code of Conduct"), which applies to all of our directors, officers and employees. Our board of directors or by any stockholder entitled to vote for the election of directors in accordance with our bylawshas also approved, and Nevada law.
Indemnification Agreements
In November 2013, in connection with the appointments of David Kroin and Mitchell Kaye as directors, the Company entered into indemnification agreements with certain of its officers and directors, which indemnify such officers and directors from proceedings related to the fact that he or she was/is a director or officer or arising while he or she was/is serving as a director or officer.
The following table presents information concerning compensation for each of our named executive officers for services in all capacities during the years indicated:our fiscal 2013 and 2012 years:
| Name and Principal Position | Year | Salary ($) | Bonus ($) | Stock Awards ($) | Option Awards ($) | Non-equity Incentive Plan Compensation ($) | All Other Compensation ($) | Total ($) | |||||||||||||||||
| Andrea Clark | 2013 | $ | 178,365 | – | – | – | – | $ | 10,312 | (2) | $ | 188,677 | |||||||||||||
| Chief Executive Officer (1) | 2012 | $ | 175,000 | – | – | – | – | $ | 12,000 | (3) | $ | 187,000 | |||||||||||||
| Robert Rubinowitz | 2013 | $ | 178,365 | $ | 12,187 | (5) | 190,552 | ||||||||||||||||||
| President, Chief Operating Officer and Chief Financial Officer(4) | 2012 | $ | 175,000 | $ | 12,000 | (3) | $ | 187,000 | |||||||||||||||||
| Evan McKeown, | 2013 | $ | 106,154 | – | – | 221,121 | (7) | – | – | $ | 327,275 | ||||||||||||||
| Chief Financial Officer and Chief Administrative Officer (6) | 2012 | – | – | – | – | – | – | – | |||||||||||||||||
| Dean Boyer | 2013 | $ | 203,846 | – | – | – | – | – | $ | 203,846 | |||||||||||||||
| Chief Technical Officer (8) | 2012 | $ | 135,115 | – | – | – | – | – | $ | 135,115 | |||||||||||||||
| Joseph Brophy | 2013 | $ | 164,904 | – | 62,130 | (10)(11) | – | – | -- | $ | 227,034 | ||||||||||||||
| SVP of Operations (9) | 2012 | – | – | – | – | – | – | – | |||||||||||||||||
| Michael Gallagher | 2013 | $ | 150,000 | – | 73,125 | (13)(14) | – | – | -- | $ | 223,225 | ||||||||||||||
| Chief Medical Information Officer (12) | 2012 | – | – | – | – | – | – | – | |||||||||||||||||
| Non-equity | ||||||||||||||||||||||||||||||
| Name and | Stock | Option | Incentive Plan | All Other | ||||||||||||||||||||||||||
| Principal | Salary | Bonus | Awards | Awards | Compensation | Compensation | Total | |||||||||||||||||||||||
| Position | Year | ($) | ($) | ($) | ($) | ($) | ($) | ($) | ||||||||||||||||||||||
| Andrea Clark –Chief | 2012 | 175,000 | – | – | – | – | 19,000 | (1) | 194,000 | |||||||||||||||||||||
| Executive Officer | 2011 | 175,000 | – | – | – | – | – | 175,000 | ||||||||||||||||||||||
| Robert Rubinowitz – Chief | 2012 | 175,000 | – | – | – | – | 19,000 | (1) | 194,000 | |||||||||||||||||||||
| Operating Officer, President and Secretary | 2011 | 175,000 | – | – | – | – | – | 175,000 | ||||||||||||||||||||||
| (1) | On February 26, 2014, Ms. Clark resigned as chief executive officer and was appointed chief visionary officer. On February 26, 2014, Mr. Tim Lankes was appointed chief executive officer of the Company. |
| (2) | This amount includes $10,312 for a car allowance. |
This amount includes $12,000 for a car |
| (4) | Mr. Rubinowitz served as chief financial officer through April 22, 2013. Mr. Rubinowitz resigned as president on April 14, 2014. |
| (5) | This amount includes $12,187 for a car allowance. |
| (6) | Mr. Evan McKeown was appointed as chief financial officer of the Company on April 22, 2013 and as Chief Administrative Officer on February 28, 2014. |
| (7) | Represents the aggregate grant date fair value, computed in accordance with FASB ASC Topic 718, of 1,000,000 shares of our common stock. |
| (8) | Mr. Boyer’s employment with the Company was terminated effective March 31, 2014. |
| (9) | Mr. Brophy's employment was terminated on April 15, 2014, effective April 25, 2014. |
| (10) | Represents the aggregate grant date fair value, computed in accordance with FASB ASC Topic 718, of 245,851 shares of our common stock. |
| (11) | This amount includes $62,130 for restricted stock grants. |
| (12) | Mr. Gallagher resigned as chief medical information officer and chief medical officer in February 2014. |
| (13) | Represents the aggregate grant date fair value, computed in accordance with FASB ASC Topic 718, of 206,504 shares of our common stock. |
| (14) | This amount includes $73,125 for restricted stock grants. |
Narrative Disclosure to Summary Compensation Table and Additional Narrative Disclosure
Employment Agreements
We have entered into employment agreements with our officers.
Employment Agreement with Tim Lankes
On February 26, 2014, the Company entered into an employment agreement with Tim Lankes (the “Lankes Agreement”), pursuant to his appointment as the Company’s Chief Executive Officer. Pursuant to the Lankes Agreement, Mr. Lankes will receive an annual base compensation of $240,000 (the “Base Salary”). In addition to his Base Salary, Mr. Lankes is eligible to receive a performance bonus for each completed fiscal year equal to 50% of his base salary (the “Target Bonus”), which may be greater or less than the Target Bonus, as determined by the board of directors. Additionally, Mr. Lankes shall be granted options (the “Options”) to acquire a number of shares of the Company’s common stock equal to 2.5% of the total number of shares of the Company’s common stock outstanding as of the date of the appointment on a fully diluted basis, to vest in annual equal installments over four years. The Options shall vest immediately upon a change of control of the Company, as defined in the Lankes Agreement. Mr. Lankes shall also receive a restricted stock unit grant (the “Performance Vesting Grant”) of the Company’s common stock equal to 2.5% of the total number of shares of the Company’s common stock outstanding, to vest based on attaining certain enterprise values detailed in the Lankes Agreement. The Lankes Agreement also provides for incentive awards, as well as a benefit package, including medical, disability, insurance, 401(k) and other equity programs. The Lankes Agreement will end on the earlier of (i) Mr. Lankes' death or mental or physical disability or incapacity, (ii) Mr. Lankes' resignation, or (iii) termination by the Company at any time with or without cause. The Lankes Agreement may be terminated by the Company for cause. Should the Company terminate the agreement without cause, Mr. Lankes is entitled to receive one times his Base Salary at the time of termination. Should the Lankes Agreement be terminated by the Company for cause or if Mr. Lankes resigns for any reason other than good reason, as defined in the Lankes Agreement, Mr. Lankes is entitled to receive his Base Salary through the date of termination and payment for any accrued but unused vacation time, and shall not be entitled to any other salary, bonus, compensation, or benefits.
Employment Agreement with Andrea Clark
On October 2, 2013, the Company entered into an employment agreement with Andrea Clark and amended such agreement on November 12, 2013 (the “Clark Agreement”). Pursuant to the Clark Agreement, Ms. Clark will receive annual base compensation of $175,000, which may be increased but not decreased from time to time as determined by the board of directors of the Company. The Clark Agreement also provides for incentive awards, as well as a benefit package, including medical, disability, insurance, 401(k) and other equity programs. The term of the Clark Agreement is three (3) years and shall automatically be renewed for successive three (3) year terms thereafter, unless otherwise notified in writing ninety (90) days prior to the termination of the agreement. The Clark Agreement may be terminated by the Company for cause. Should the Company terminate the agreement without cause, Ms. Clark is entitled to receive two times her base salary at the time of termination; a pro-rata bonus payment on any bonus or incentive plan; any earned but unpaid base salary, and accrued but unpaid vacation time. Should the Clark Agreement be terminated by Ms. Clark two years after the effective date, Ms. Clark shall be entitled to receive: any earned but unpaid base salary and bonus compensation; any earned but unpaid vacation time; a pro-rata bonus or incentive plan award; and, at Ms. Clark’s election, either (i) registered shares of the Company’s common stock equal to 100% of her base salary at the time of resignation, or (ii) fully vested and cashless exercisable discounted stock options. In the event there is: (1) a change of control of the Company; and (2) Ms. Clark is terminated within six months following such change of control, Ms. Clark shall be entitled to receive any earned but unpaid base salary, any earned but unpaid bonus compensation, two times her base salary as of the date of the change of control, two times the average bonus paid to Ms. Clark over the three previous calendar years, and accrued but unpaid vacation time. Should the Clark Agreement be terminated in the event of death or disability of Ms. Clark, Ms. Clark or her estate, shall be entitled to receive two times her base salary immediately prior to termination, a pro-rata bonus payment on any bonus or incentive plan; earned but unpaid base salary and earned but unpaid bonus compensation, and accrued but unpaid vacation time.
33
Employment Agreement with Evan McKeown
On October 2, 2013, the Company entered into employment agreement with Evan McKeown and amended such agreement on November 12, 2013 (the “McKeown Agreement”).
Pursuant to the McKeown Agreement, Mr. McKeown will receive annual base compensation of $180,000, which may be increased but not decreased from time to time as determined by the board of directors of the Company. The McKeown Agreement also provides for incentive awards, as well as a benefit package, including medical, disability, insurance, 401(k) and other equity programs. The term of the McKeown Agreement is two (2) years and shall automatically be renewed for successive two (2) year terms thereafter, unless otherwise notified in writing ninety (90) days prior to the termination of the agreement. The McKeown Agreement may be terminated by the Company for cause. Should the Company terminate the agreement without cause, Mr. McKeown is entitled to receive: (1) two times his base salary at the time of termination if terminated within six months of execution of the McKeown Addendum, and one time base salary if terminated after six months of execution of the McKeown Addendum; (2) a pro-rata bonus payment on any bonus or incentive plan; and (3) any earned but unpaid base salary, and accrued but unpaid vacation time. In the event there is: (1) a change of control of the Company; and (2) Mr. McKeown is terminated within six months following such change of control, Mr. McKeown shall be entitled to receive any earned but unpaid base salary, any earned but unpaid bonus compensation, two times his base salary as of the date of the change of control, two times the average bonus paid to Mr. McKeown over the three previous calendar years, and accrued but unpaid vacation time. Should the McKeown Agreement be terminated in the event of death or disability of Mr. McKeown, Mr. McKeown or his estate, shall be entitled to receive the greater of the base salary owed immediately prior to termination or one year’s base salary, a pro-rata bonus payment on any bonus or incentive plan; earned but unpaid base salary and earned but unpaid bonus compensation, and accrued but unpaid vacation time.
Additionally, Mr. McKeown was granted options to purchase 1,000,000 shares of the Company’s common stock (the “ Options ”) at a per share exercise price of the fair market value per share of the Company’s common stock at the time of execution. The Options shall vest after two years or upon termination of Mr. McKeown for any reason, whichever happens sooner.
Employment Agreement with Robert Rubinowitz
On October 2, 2013, the Company entered into an employment agreement with Robert Rubinowitz and amended such agreement on November 12, 2013 (the “Rubinowitz Agreement”). On April 14, 2014, the Company entered in a separation agreement with Mr. Rubinowitz which is described elsewhere in this Annual Report on Form 10-K.
Pursuant to the Rubinowitz Agreement, Mr. Rubinowitz will receive annual base compensation of $175,000, which may be increased but not decreased from time to time as determined by the Board of Directors of the Company. The Rubinowitz Agreement also provides for incentive awards, as well as a benefit package, including medical, disability, insurance, 401(k) and other equity programs. The term of the Rubinowitz Agreement is three (3) years and shall automatically be renewed for successive three (3) year terms thereafter, unless otherwise notified in writing ninety (90) days prior to the termination of the agreement. The Rubinowitz Agreement may be terminated by the Company for cause. Should the Company terminate the agreement without cause, Mr. Rubinowitz is entitled to receive two times his base salary at the time of termination; a pro-rata bonus payment on any bonus or incentive plan; any earned but unpaid base salary, and accrued but unpaid vacation time. Should the Rubinowitz Agreement be terminated by Mr. Rubinowitz two years after the effective date, Mr. Rubinowitz shall be entitled to receive: any earned but unpaid base salary and bonus compensation; any earned but unpaid vacation time; a pro-rata bonus or incentive plan award; and, at Mr. Rubinowitz ’s election, either (i) registered shares of the Company’s common stock equal to 100% of his base salary at the time of resignation, or (ii) fully vested and cashless exercisable discounted stock options. In the event there is: (1) a change of control of the Company; and (2) Mr. Rubinowitz is terminated within six months following such change of control, Mr. Rubinowitz shall be entitled to receive any earned but unpaid base salary, any earned but unpaid bonus compensation, two times his base salary as of the date of the change of control, two times the average bonus paid to Mr. Rubinowitz over the three previous calendar years, and accrued but unpaid vacation time. Should the Rubinowitz Agreement be terminated in the event of death or disability of Mr. Rubinowitz, Mr. Rubinowitz or his estate, shall be entitled to receive two times his base salary immediately prior to termination, a pro-rata bonus payment on any bonus or incentive plan; earned but unpaid base salary and earned but unpaid bonus compensation, and accrued but unpaid vacation time.
Employment Agreement with Dean Boyer
On October 2, 2013, the Company entered into employment agreement with Dean Boyer and amended such agreement on November 12, 2013 (the “Boyer Agreement”). On March 26, 2014, the Company notified Dean Boyer, its chief technology officer, that the Company was terminating his employment with the Company as well as that certain employment agreement with the Company dated October 1, 2013, as amended on November 13, 2013, effective March 31, 2014.
Pursuant to the Boyer Agreement, Mr. Boyer will receive annual base compensation of $200,000, which may be increased but not decreased from time to time as determined by the board of directors of the Company. The Boyer Agreement also provides for incentive awards, as well as a benefit package, including medical, disability, insurance, 401(k) and other equity programs. The term of the Boyer Agreement is two (2) years and shall automatically be renewed for successive two (2) year terms thereafter, unless otherwise notified in writing ninety (90) days prior to the termination of the agreement. The Boyer Agreement may be terminated by the Company for cause. Should the Company terminate the agreement without cause, Mr. Boyer is entitled to receive one times his base salary at the time of termination; a pro-rata bonus payment on any bonus or incentive plan; any earned but unpaid base salary, and accrued but unpaid vacation time. In the event there is: (1) a change of control of the Company; and (2) Mr. Boyer is terminated within six months following such change of control, Mr. Boyer shall be entitled to receive any earned but unpaid base salary, any earned but unpaid bonus compensation, two times his base salary as of the date of the change of control, two times the average bonus paid to Mr. Boyer over the two previous calendar years, and accrued but unpaid vacation time. Should the Boyer Agreement be terminated in the event of death or disability of Mr. Boyer, Mr. Boyer or his estate, shall be entitled to receive the greater of the base salary owed immediately prior to termination or one year’s base salary, a pro-rata bonus payment on any bonus or incentive plan; earned but unpaid base salary and earned but unpaid bonus compensation, and accrued but unpaid vacation time.
Letter Agreement with Joseph Brophy
On December 17, 2012, HRAA entered into a letter agreement with Mr. Joseph Brophy to serve as senior vice president (the “Brophy Letter Agreement”). Pursuant to the Brophy Letter Agreement, Mr. Brophy will receive a base salary of $175,000. Mr. Brophy is entitled to receive a quarterly disbursement of stock based on the following formula: (i) $18,750 divided by (ii) the market value of the Company’s common stock at the time of the disbursement. In addition, Mr. Brophy is entitled to 5,000 stock options each time HRAA’s margin performance is improved by a minimum of 1% over the previous quarter. The options vest over a four year period. Mr. Brophy is also entitled to receive a cash bonus of $5,000 each time HRAA’s revenues cross a $2,000,000 threshold while maintaining or improving profit margin. Mr. Brophy's employment was terminated on April 15, 2014, effective April 25, 2014.
Letter Agreement with Dr. Michael Gallagher
On December 5, 2012, HRAA entered into a letter agreement with Dr. Michael Gallagher to serve as chief medical information officer (the “Gallagher Letter Agreement”). Pursuant to the Gallagher Letter Agreement, Dr. Gallagher received a base salary of $200,000. Dr. Gallagher was entitled to receive a quarterly disbursement of stock based on the following formula: (i) $24,375 divided by (ii) the market value of the Company’s stock at the time of the disbursement. Dr. Gallagher was also entitled to 10,000 stock options each time a new Company product was announced. In addition, Dr. Gallagher was entitled to a cash bonus of $5,000 each time a product crossed a threshold of $2,000,000. Dr. Gallagher resigned as chief medical information officer in February 2014.
34
Outstanding Equity Awards At Fiscal Year-End
As of March 31, 2014, Mr. McKeown was granted options to purchase 1,000,000 shares of the Company’s common stock at a per share exercise price of the fair market value per share of the Company’s common stock at the time of execution of the amended employment agreement.
The following table provides information as of December 31, 2012.2013 regarding unexercised stock options and restricted stock outstanding held by:
| Outstanding Equity Awards as Of December 31, 2013 | ||||||||||||||||||||||||
| Option Awards | Stock Awards | |||||||||||||||||||||||
| Name | Number of Securities Underlying Unexercised Options (#) Exercisable | Number of Securities Underlying Unexercised Options(#) Unexercisable | Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#) | Option Exercise Price ($) | Option Expiration Date | Number of Shares or Units of Stock That Have Not Vested (#) | Market Value of Shares or Units of Stock That Have Not Vested ($) | Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#) | Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested ($) | |||||||||||||||
| Evan McKeown | — | 1,000,000 | (1) | — | 0.26 | (2) | — | — | — | — | ||||||||||||||
| Joseph Brophy | — | — | — | — | — | — | — | — | ||||||||||||||||
| Michael Gallagher | — | — | — | — | — | — | — | — | ||||||||||||||||
(1) The options fully vest on November 12, 2015.
(2) There is no expiration date with respect to the options.
Board of Directors
The number of directors of the Company is such number as determined by the board of directors. All directors hold office until the next annual meeting of shareholdersstockholders and until their successors have been duly elected and qualified, or until their earlier death, resignation or removal. Officers are elected by and serve at the discretiona majority of the board.our board of directors.
Our directors are reimbursed for expenses incurred by them in connection with attending board meetings, but they do not receive any other compensation for serving on the Board.board.
There are no securities authorized for issuance under an Equity Compensation Plan.equity compensation arrangement, other than 1,000,000 of stock options to an officer.
The following table presents information regarding options and rights outstanding under our compensation arrangements as of December 31, 2013:
| Plan Category(1) | (a) Number of securities to be issued upon exercise of outstanding options, warrants and rights | (b) Weighted- average exercise price per share of outstanding options, warrants and rights | (c) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | |||||||||
| Equity compensation plans approved by security holders | ||||||||||||
| Equity compensation plans not approved by security holders | 1,000,000 | $ | 0.26 | 0 | ||||||||
| Total | 1,000,000 | $ | 0.26 | 0 | ||||||||
Security Ownership Of Certain Beneficial Owners And Management
The following table sets forth information regarding the beneficial ownership of shares of our capitalcommon stock as of March 31, 2013April 11, 2014 by:
| ● | Each of our directors; | |
| ● | Each of our named executive officers; | |
| ● | All of our directors and executive officers as a group; and | |
| ● | Each person known by us to beneficially own more than 5% of our outstanding common stock. |
| Name and Address of Beneficial Owner | Amount and Nature of Beneficial Ownership | Percentage of Common Stock Outstanding | ||||||
| Tim Lankes | 0 | 0 | % | |||||
| Andrea Clark**† | 6,599,604 | 12.05 | % | |||||
| Evan McKeown | 0 | 0 | % | |||||
| Peter Russo(1) | 0 | 0 | % | |||||
| Michael Brainard | 11,000 | * | % | |||||
| Robert Rubinowitz**† | 6,599,617 | 12.05 | % | |||||
| Joseph Brophy | 245,851 | * | % | |||||
| Directors and executive officers as a group (7 people) | 13,456,072 | 24.58 | % | |||||
| 5% Stockholders | ||||||||
| Andrea Clark** | 6,599,604 | 12.05 | % | |||||
| Robert Rubinowitz**† | 6,599,617 | 12.05 | % | |||||
| Great Point Partners, LLC (2) | 5,467,017 | 9.985 | % | |||||
| Title of Class | Name Beneficial Owner | Amount and Nature of Beneficial Ownership (1) | Percentage of Class (2) | |||||||
| Common Stock | Andrea Clark* | 6,599,604 | (3) | 16.57% | ||||||
| Common Stock | Robert Rubinowitz* | 6,599,617 | (4) | 14.44% | ||||||
| Common Stock | Directors and executive officers as a group (2 people) | 14,174,073 | 31.01% | |||||||
* Less than 1%
** Andrea Clark and Robert Rubinowitz are husband and wife.
† On November 12, 2013, Andrea Clark, Robert Rubinowitz and Dean Boyer each executed a voting agreement in connection with the Securities Purchase Agreement, dated November 12, 2013, among the Company and the investors named therein whereby the individuals agreed to vote their shares in favor of the investor's two nominees to the Company's board of directors.
***To the Company’s knowledge, based on the combined total of the transfer agent stock report dated March 28, 2014 and Non Objective Beneficial Ownership report dated January 6, 2014.
| (1) | |
| (2) | Great Point Partners, LLC (“Great Point”) is the investment manager of each of Biomedical Value Fund, L.P. (“BVF”), Biomedical Offshore Value Fund, Ltd. (“BOVF”), Biomedical Institutional Value Fund, L.P. (“BIVF”), Class D Series of GEF-PS, L.P. (“GEF-PS”), WS Investments II, LLC (“WS”) and |
The Great Point Stockholders are prohibited form engaging or participating in any actions or plans that relate to or would result in, among other things, acquiring additional securities of us, alone or together with any other person, which |
37
Item 13. Certain Relationships and Related Transactions, and Director Independence
Certain Related Party Transactions
On January 7, 2013, the Company entered into a one year consulting agreement with Mrs. Vanessa Ciprianni to provide certain consulting services to the Company’s business in exchange for $10,000 per month. Mrs. Ciprianni is the wife of Mr. Michael Ciprianni, a beneficial owner of more than 5% of the Company’s common stock. On January 1, 2014, the consulting agreement was terminated. As of a transfer agent stock report dated March 8, 2014, Mr. Ciprianni ceased to be the beneficial owner of 5% of the Company's common stock.
On September 9, 2013, the Company entered into a one year consulting agreement with Mr. Michael Ciprianni, a beneficial owner of more than 5% of the Company’s common stock, to provide certain consulting services related to the Company’s business in exchange for four million one hundred twenty five thousand (4,125,000) shares of common stock equal to a fair market value of $1,155,000 in consideration of the services to be rendered. As of a transfer agent stock report dated March 8, 2014, Mr. Ciprianni ceased to be the beneficial owner of 5% of the Company's common stock.
The Company owed Andrea Clark $75,000. The balance due to Ms. Clark was formalized in a promissory note dated November 1, 2013. The Company also owed its Robert Rubinowitz $40,000 pursuant to a promissory note dated November 1, 2013 for funds advanced in September 2013. On November 12, 2013, the promissory notes to Ms. Clark and Mr. Rubinowitz were paid in full from the net proceeds of the Securities Purchase Agreement, dated November 12, 2013, between the Company and certain investors named therein.
Other than those listed above, there have been no material transactions, series of similar transactions or currently proposed transactions during 2012 in which we or our subsidiaries was or is to be a party, in which the amount involved exceeded the lesser of $120,000 or 1% of the average of our total assets at year end for the last two completed fiscal years and in which any director or executive officer or any security holder who is known to us to own of record or beneficially more than 5% of our common stock, or any member of the immediate family or sharing the household (other than a tenant or employee) of any of the foregoing persons, had a direct or indirect material interest.
Independence Of The Board Of Directors
Our board of directors consists of four (4) members. Because our common stock is not currently listed on a national securities exchange, we have used the definition of “independence” of The NASDAQ Stock Market to make this determination. NASDAQ Listing Rule 5605(a)(2) provides that an “independent director” is a person other than an officer or employee of the company or any other individual having a relationship which, in the opinion of the Company’s board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.
Our common stock is listed on the OTC Bulletin Board. For a director to be “independent” under these standards, the Boardboard of directors must affirmatively determine that the director has no material relationship with us, either directly or as a partner, shareholder,stockholder, or officer of an organization that has a relationship with us. Applying corporate governance standards, and all other applicable laws, rules and regulations, the Boardboard of Directorsdirectors has determined that none of our directors are independent. This does not constitute an independent board of directors.
During the year ended December 31, 2012,2013, we were billed or expect to be billed by our independent registered public accounting firm the following fees:
| 2012-Salberg | 2012-Friedman | 2011-Friedman | 2013 | 2012 | ||||||||||||||||
| Audit Fees (1) | $ | 32,500 | $ | 42,000 | $ | 75,000 | $ | 75,200 | $ | 32,500 | ||||||||||
| Audit-Related Fees (2) | - | - | 21,200 | - | ||||||||||||||||
| Tax Fees (3) | - | - | - | - | ||||||||||||||||
| All Other Fees (4) | - | - | - | - | ||||||||||||||||
| Total | $ | 32,500 | $ | 42,000 | $ | 75,000 | $ | 96,400 | $ | 32,500 | ||||||||||
| (1) | Audit fees principally include those for services related to the annual audit and interim reviews of the consolidated financial statements. |
| (2) | Audit-related fees principally include assurance and related services that were reasonably related to the performance of our independent registered public accounting firm’s assurance and review of the financial statements and not reported under the caption “Audit Fees.” |
| (3) | Tax fees principally include services for federal, state and international tax compliance, tax planning and tax consultation, but excluding tax services rendered in connection with the audit. |
| (4) | Our independent registered public accounting firm did not perform any services for us other than those described above. |
Audit Committee’s Pre-Approval Policies and Procedures
Item 15. Exhibits, Financial Statement Schedules
The exhibits required to be filed as part of this Annual Report on Form 10-K are listed in the Exhibit Index attached hereto and are incorporated herein by reference.
EXHIBIT NUMBER | ||
| 2.1 | Agreement and Plan of Merger and Reorganization, dated February 10, 2012, | |
| Articles of Merger filed with the State of Nevada on February 10, | ||
| Articles of Merger filed with the State of Maryland on February 10, | ||
| Amended and Restated Articles of Incorporation* | ||
| 3.2 | Second Amended and Restated Bylaws* |
| 4.1 | Form of | |||
| Form of | ||||
| Split-Off Agreement, dated February 10, 2012, among Health Revenue Assurance Holdings, Inc., f/k/a Anvex International, Inc., Anvex Split Corp. and Anna Vechera (1) | ||||
| General Release Agreement, dated February 10, 2012, among Health Revenue Assurance Holdings, Inc., f/k/a Anvex International, Inc., Anvex Split Corp. and Anna Vechera (1) | ||||
| Employment Agreement between the Company and Andrea Clark, effective October 2, 2013 (5) | ||||
| 10.9† | Addendum to Employment Agreement between the Company and Andrea Clark, effective November 12, 2013 (6) | |||
| 10.10† | Employment Agreement between the Company and Robert Rubinowitz, effective October 2, 2013 (5) | |||
| 10.11† | Addendum to Employment Agreement between the Company and Robert Rubinowitz, effective November 12, 2013 (6) | |||
| 10.12† | Employment Agreement between the Company and Evan McKeown, effective October 2, 2013 (5) | |||
| 10.13† | Addendum to Employment Agreement between the Company and Evan McKeown, effective November 12, 2013 (6) | |||
| 10.14 | Employment Agreement between the Company and Dean Boyer, effective October 2, 2013 (5) | |||
| 10.15† | Addendum to Employment Agreement between the Company and Dean Boyer, effective November 12, 2013 (6) | |||
| 10.16 | Securities Purchase Agreement, dated November 12, 2013, among the Company and the investors named therein (6) | |||
| 10.17 | Form of Registration Rights Agreement (6) | |||
| 10.18† | Form of Indemnification Agreement (6) | |||
| 10.19 | Form of Voting Agreement* | |||
| 10.20† | Employment Agreement, dated February 26, 2014, between the Company and Tim Lankes(7) | |||
| 10.21 | Agreement for Purchase of Accounts, dated June 7, 2012, between Health Revenue Assurance Associates, Inc. and Aerofund Financial, Inc.* | |||
| 10.22 | Letter | |||
| 10.23† | Letter Agreement, dated December 5, 2012, between Health Revenue Assurance Associates, Inc. and Dr. Michael Gallagher* | |||
| 10.24† | Letter Agreement, dated December 17, 2012, between Health Revenue Assurance Associates, Inc. and Joseph Brophy* | |||
| 10.25 | Form of Promissory Note issued to Tonaquint* | |||
| 10.26 | ResumeBear Website Development Project Plan, dated March | |||
| 21.1 | List of Subsidiaries.* | |||
| 31.1 | Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the | |||
| 31.2 | Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the | |||
| 32.1 | Certification of | |||
| 101.INS | XBRL Instance | |
| 101.SCH | XBRL Taxonomy Extension Schema | |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase | |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document** | |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase | |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase | |
| (3) | Filed as an exhibit to |
| (4) | Filed as an exhibit to our Current Report on Form 8-K filed with the SEC on September 12, 2013. |
| (5) | Filed as an exhibit to our Current Report on Form 8-K filed with the SEC on October 8, 2013. |
| (6) | Filed as an exhibit to our Current Report on Form 8-K filed with the SEC on November 18, |
| (7) | Filed as an exhibit to our Current Report on Form 8-K filed with the |
† Management contract or compensatory plan.
* Filed herewith.
** Furnished herewith. XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Health Revenue Assurance Holdings, | Inc. | ||
| By: | /s/ | Tim Lankes | |
| Chief Executive Officer | |||
| Date: April | 15, 2014 | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| SIGNATURE | TITLE | DATE | ||
| /s/ | Chief Executive Officer | April | ||
| (Duly Authorized and Principal Executive Officer) and Director | ||||
| /s/ | Chief Financial Officer | April | ||
| (Duly Authorized, Principal Financial Officer and Principal Accounting Officer) |
| /s/ Andrea Clark | Director | April 15, 2014 | ||
| Andrea Clark | ||||
| /s/ Peter Russo | Director | April 15, 2014 | ||
| Peter Russo | ||||
| /s/ Michael Brainard | Director | April 15, 2014 | ||
| Michael Brainard |
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