NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014 (UNAUDITED)
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.
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 March 31, 2014, the Company has a working capital deficiency, stockholders’ deficit and accumulated deficit of approximately $2,461,400, $4,724,900, and $11,327,000, respectively, for the three months ended March 31, 2014, incurred net losses available to common stockholders of approximately $574,600, and has used net cash in operations of approximately $856,700. 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 March 31, 2014, the Company has a cash balance of approximately $1,967,100. 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, and a reduction of operating expenses.
HEALTH REVENUE ASSURANCE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014 (UNAUDITED)
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 were $4,903,652 and after payment of stockholder loans was $4,322,000. The net raise was sufficient to fund on-going operations for the next several months. However, the funding is not sufficient to alleviate the going concern risk.
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (all of which are of a normal recurring nature) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2014 are not indicative of the results that may be expected for the year ending December 31, 2014 or for any other future period. These unaudited consolidated financial statements and the unaudited notes thereto should be read in conjunction with the audited financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2013 filed with the Securities and Exchange Commission (the “SEC”) on April 15, 2014 (our “10-K”).
Principles of Consolidation
The unaudited 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.
Certain prior period amounts in the unaudited consolidated financial statements have been reclassified from research and development to selling and administrative expenses to conform to the current period’s presentation.
Use of Estimates
The preparation of the unaudited 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.
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.
HEALTH REVENUE ASSURANCE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014 (UNAUDITED)
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. Dilutive securities outstanding at March 31, 2014 include 29,940,000 warrants and Series A Preferred stock convertible into 27,000,000 shares of common stock. There were no dilutive securities outstanding at March 31, 2013 respectively.
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.
Recent Accounting Pronouncements
We have implemented all new accounting standards that are in effect and that may impact our unaudited 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 was as follows at:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2014
|
|
|
2013
|
|
Accounts receivable
|
|
$
|
844,699
|
|
|
$
|
901,918
|
|
Accounts receivable –Related party
|
|
|
-
|
|
|
|
41,244
|
|
Allowance for doubtful accounts
|
|
|
-
|
|
|
|
(16,244
|
)
|
Total
|
|
$
|
844,699
|
|
|
$
|
926,918
|
|
We had $0 and $6,450 in bad debt expense on trade accounts receivable for three months ended March 31, 2014 and 2013, respectively.
HEALTH REVENUE ASSURANCE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014 (UNAUDITED)
4 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
|
|
March 31,
2014
|
|
|
December 31,
2013
|
|
Building and improvements
|
|
$
|
227,603
|
|
|
$
|
227,603
|
|
Furniture
|
|
|
119,810
|
|
|
|
119,810
|
|
Computers and Equipment
|
|
|
264,957
|
|
|
|
260,872
|
|
|
|
|
612,370
|
|
|
|
608,285
|
|
Less - Accumulated depreciation
|
|
|
(246,178
|
)
|
|
|
(226,438
|
)
|
Total
|
|
$
|
366,192
|
|
|
$
|
381,847
|
|
Depreciation expense for the three months ended March 31, 2014 and 2013 was approximately $19,700 and $25,300, respectively.
5 – RESEARCH AND DEVELOPMENT AND SOFTWARE
In early 2012, the Company started developing the
Visualizer
suite. This business intelligence product is designed to meet the emerging need for healthcare analytics. Customer data is infused into the suite, and the Company uses this data in its consulting services to develop pre-defined analytics targeted to address healthcare’s emerging concerns and needs.
The Company’s
Visualizer
suite offers our consultants a range of functionality.
Visualizer
also assists healthcare leaders with their need to understand the impacts of the transition to ICD-10 including work flow, productivity, process changes and documentation and reimbursement risks. The application helps to visualize the reimbursement and operational effects of transitioning organizations to ICD-10 and identify where to focus education and documentation issues. It enables clients to develop a custom work plan to mitigate risks from the highest areas of exposure to the least.
At September 30, 2013, the Company had accumulated a total of $1,011,068 in capitalized costs related to the development of the
Visualizer
suite and the other functionality which was included as software 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 for the year ended December 31, 2013 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.
There was no amortization expense for software for the three months ended March 31, 2014 and 2013, respectively.
HEALTH REVENUE ASSURANCE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014 (UNAUDITED)
Software consisted of the following at:
|
|
March 31,
2014
|
|
|
December 31,
2013
|
|
Software
|
|
$
|
-
|
|
|
$
|
1,011,068
|
|
Accumulated amortization
|
|
|
-
|
|
|
|
(64,137
|
)
|
Asset Impairment
|
|
|
-
|
|
|
|
(946,931
|
)
|
Software, net
|
|
$
|
-
|
|
|
$
|
-
|
|
6 – LINES 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 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 rate plus 6.50%. The bank’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 Company consolidated the Line of Credit 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 March 31, 2014 and December 31, 2013 was $43,469, and $44,692, respectively, which is included in line of credit, current portion in the accompanying unaudited consolidated financial statements.
7 – LONG TERM DEBT AND NOTES PAYABLE
Long Term debt
:
Long Term debt consisted of the following at:
|
|
March 31,
2014
|
|
|
December 31,
2013
|
|
Bank term loan
|
|
$
|
132,229
|
|
|
$
|
141,857
|
|
Mortgage loan
|
|
|
173,082
|
|
|
|
174,580
|
|
|
|
|
305,311
|
|
|
|
316,437
|
|
Less current portion
|
|
|
(45,298
|
)
|
|
|
(44,084
|
)
|
Total long term portion
|
|
$
|
260,013
|
|
|
$
|
272,353
|
|
In March 2009, HRAA entered into a term loan with Bank of America which proceeds were used for general working capital needs (the “Term Loan”). The Term Loan was established as a result of a conversion of a revolving line of credit. The Term Loan is personally guaranteed by Robert Rubinowitz and Andrea Clark and contains certain restrictive covenants including restrictions on granting liens on the Company's assets. The Term Loan matured in five years and incurred interest at the rate of 6.75% per annum.
HEALTH REVENUE ASSURANCE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014 (UNAUDITED)
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, and prohibits the Company from granting any security interests or liens on the assets of the Company. Payments of principal and interest are approximately $4,000 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 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 Robert 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. 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:
The Company has eighteen notes payable, (i) thirteen of the loans are secured by contract accounts receivable of a Company customer which security interest is subordinate to the lender under the factoring agreement, and (ii) one of the loans is secured by the stock of HRAA.
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. 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 $88,428 and $114,958 as of March 31, 2014 and December 31, 2013, respectively.
In January and February 2013, the Company entered into loan agreements with various investors and issued promissory notes 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 11) 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 $275,410 and $350,522 as of March 31, 2014 and December 31, 2013, respectively.
The Company began paying principal and interest on the above mentioned notes in early 2013 in accordance with the payment terms. On August 2013, the Company converted $402,083 in unsecured investor promissory notes for five (5) individuals into one million six hundred eight thousand three hundred and thirty three (1,608,333) common shares at a conversion price of $0.25 per share. As a result of the conversion the Company expensed $128,452 of the unamortized discount as interest expense for the year ended December 31, 2013. Additionally, the Company recorded a loss on conversion of $112,584 as a result of issuing stock at a discount from fair market value in 2013
.
HEALTH REVENUE ASSURANCE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014 (UNAUDITED)
Notes payable consisted of the following at:
|
|
March 31,
2014
|
|
|
December 31,
2013
|
|
Principal amount of notes payable
|
|
$
|
674,527
|
|
|
|
877,500
|
|
Unamortized discount
|
|
|
(363,838
|
)
|
|
|
(465,480
|
)
|
Notes payable, net of discount
|
|
|
310,689
|
|
|
|
412,020
|
|
Less current portion
|
|
|
(310,689
|
)
|
|
|
(380,326
|
)
|
Total Long term portion
|
|
$
|
-
|
|
|
|
31,694
|
|
8 – FACTORING AGREEMENT
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 factor 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. For the three months ended March 31, 2014, the Company had factored approximately $1,136,000 of receivables and had received cash advances of approximately $1,154,300. Outstanding receivables purchased by the factor as of March 31, 2014 were approximately $521,700 and are included in accounts receivable in the accompanying unaudited consolidated balance sheet, and the secured loan due to the lender was approximately $424,000. Factor fees for the three months ending March 31, 2014 and 2013 were approximately $40,600 and $37,800, respectively and are included in interest expenses. (See Note 3)
Although the Company is current in its financial obligations under this factoring agreement, management believes the Company may be in default under the solvency provision and certain non-financial default provisions. The Company has not been notified of any default by the factor company.
9 – CONVERTIBLE PROMISSORY NOTES
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 11) 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 Note 12) 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.
HEALTH REVENUE ASSURANCE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014 (UNAUDITED)
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 11) 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 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 Note 12) 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 in 2013
.
10 – COMMITMENTS AND CONTINGENCIES
Commitments:
Leases:
In September 2012, the Company started a non-cancellable operating lease for office equipment. The lease term is 5 years. Lease payments during the five years are approximately $560 per month.
HEALTH REVENUE ASSURANCE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014 (UNAUDITED)
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 year renewal options. Starting September 1, 2013, the lease has been renewed for one year with a fixed payment of approximately $5,800 per month.
Capital Leases:
The Company leases its equipment from Dell Financial Services L.L.C. under various capital leases. The economic substance of the lease 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:
|
|
March 31,
2014
|
|
|
December 31,
2013
|
|
Equipment
|
|
$
|
79,210
|
|
|
$
|
79,210
|
|
Less accumulated depreciation
|
|
|
(27,006
|
)
|
|
|
(33,607
|
)
|
Total
|
|
$
|
52,204
|
|
|
$
|
45,603
|
|
The lease agreement contains a bargain purchase option at the end of the lease term. The total amount due at March 31, 2014 is $50,684 of which $32,768 is included in short term liabilities. Amortization of assets held under capital leases is included with depreciation expense and is approximately $6,600 as of March 31, 2014.
Settlement Agreement
:
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. The settlement payments were paid in full as of March 31, 2014.
Employment Agreements
:
On October 2, 2013 the Company entered into employment agreements with four (4) of our officers and directors. The Employment agreements provide for severance benefits, change in control provisions, accrued but unpaid wages and bonuses, accrued but unpaid vacation time, incentive awards, equity and stock options, and other benefits. These four (4) employment agreements were amended on November 12, 2013. (See Note 15 for change in officers) As of March 31, 2014, no performance bonuses have been earned. 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.
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. (See Note 15)
HEALTH REVENUE ASSURANCE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014 (UNAUDITED)
11 – STOCKHOLDERS' DEFICIT
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 in 2013, 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. The Company may cancel option grants and the unvested stock options are forfeited for an employee at resignation and termination.
Stock Options
During the three months ended March 31, 2014, the Company recorded pre-tax recovery of compensation expense of $14,822 related the cancellation of 1,000,000 stock options as result of an officer’s resignation. There was no unrecognized compensation expense related to stock options at March 31, 2014. There were no exercises of stock options for the three months ended March 31, 2014.
The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model. The 1,000,000 options were valued at $221,121. Unvested stock options of 1,000,000 were forfeited and the related option grant was cancelled as result of an officer’s resignation.
The following table summarizes stock option activity for the three months ended March 31, 2014:
Options
|
|
Shares
|
|
|
Weighted-Average Exercise Price
|
|
|
Weighted-Average
Remaining
Contractual Term
|
|
|
Aggregate
Intrinsic Value
($000)
|
|
Outstanding at January 1, 2014
|
|
|
1,000,000
|
|
|
$
|
0.26
|
|
|
|
-
|
|
|
|
-
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited or expired
|
|
|
(1,000,000
|
)
|
|
|
0.26
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding at March 31, 2014
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Common Stock
2013:
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.
HEALTH REVENUE ASSURANCE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014 (UNAUDITED)
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.
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 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.
HEALTH REVENUE ASSURANCE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014 (UNAUDITED)
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.
2014:
On March 31, 2014, in accordance with a 2012 employment agreement, the Company issued 93,750 shares of common stock as compensation to an employee for services rendered through March 31, 2014. The shares were valued at $0.20 per share based on the quoted trading price per share or $18,750, which was expensed.
Temporary Equity – Redeemable Convertible Preferred 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 were $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. The Company accounts for these preferred stock in accordance with the US GAAP accounting guidance under ASC 480 applicable to redeemable instruments, which requires the differential between the issuance and redemption value to be accreted over the period that begins on the issuance date and ends on the redemption date. The accretion increases retained deficits and net loss available to common stockholders in calculating net loss per share.
Due to the redemption feature the Series A Stock is reflected as temporary equity 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
|
|
Series A at December 31, 2013
|
|
$
|
1,928,000
|
|
Plus: Accretion of Series A value differential
|
|
|
330,553
|
|
Series A dividends
|
|
|
107,976
|
|
Series A at March 31, 2014
|
|
$
|
2,366,529
|
|
The Company also issued warrants to purchase 1,890,000 shares of common stock to a placement agent. (See Note 12)
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 12) 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.
HEALTH REVENUE ASSURANCE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014 (UNAUDITED)
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 declared effective prior to the Filing Deadline.
12 – WARRANTS AND FAIR VALUE MEASUREMENTS
Warrants
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. 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.
Warrant activity is as follows:
|
|
Number of
Warrants
|
|
|
Weighted
Average
Exercise Price
|
|
Outstanding at December 31, 2013
|
|
|
29,940,000
|
|
|
$
|
0.30
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Anti-dilution issuance
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
Outstanding at March 31, 2014
|
|
|
29,940,000
|
|
|
$
|
0.30
|
|
Exercisable at March 31, 2014
|
|
|
29,940,000
|
|
|
$
|
0.30
|
|
Aggregate intrinsic value
|
|
|
|
|
|
$
|
-
|
|
All warrants were issued with an exercise term of 5 years.
Warrants outstanding have a weighted average remaining contractual life of 4.62 years as of March 31, 2014
.
Fair Value Measurements – Derivative liability
:
The accounting guidance for fair value measurements provides a framework for measuring fair value and requires expanded disclosures regarding fair value measurements. Fair value is defined as the price that would be received for an asset or the exit price that would be paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. The accounting guidance established a fair value hierarchy which requires an entity to maximize the use of observable inputs, where available. This hierarchy prioritizes the inputs into three broad levels as follows. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on the Company’s own assumptions used to measure assets and liabilities at fair value. An asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
HEALTH REVENUE ASSURANCE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014 (UNAUDITED)
Assets and liabilities measured at fair value on a recurring and non-recurring basis consisted of the following at:
|
|
Carrying
Value at
March 31,
|
|
|
Fair Value Measurements at March 31, 2014
|
|
|
|
2014
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant derivative liability (29,940,000 warrants)
|
|
$
|
4,104,138
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
4,104,138
|
|
The following is a summary of activity of Level 3 liabilities:
Balance at December 31, 2013
|
|
$
|
5,406,000
|
|
|
|
|
|
|
Change in fair value
|
|
|
(1,301,862
|
)
|
Balance March 31, 2014
|
|
$
|
4,104,138
|
|
Changes in fair value of the warrant derivative liability are included in other income (expense) in the accompanying unaudited 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:
Assumptions
|
|
March 31,
2014
|
|
Expected term
|
|
|
0.925
|
|
Expected Volatility
|
|
|
110
|
%
|
Risk free rate
|
|
|
1.2
|
%
|
|
|
|
0.00
|
%
|
There were no changes in the valuation techniques during 2014
.
13 – CONCENTRATIONS
Sales to six hospitals represented approximately 54% of net sales for the three months ended March 31, 2014.
Hospital Customer A
|
|
|
17.0
|
%
|
Hospital Customer B
|
|
|
7.4
|
%
|
Hospital Customer C
|
|
|
7.2
|
%
|
Hospital Customer D
|
|
|
1.9
|
%
|
Hospital Customer E
|
|
|
11.1
|
%
|
Hospital Customer F
|
|
|
9.4
|
%
|
Total
|
|
|
54.0
|
%
|
Four and three customers represented approximately 73% and 64% of the accounts receivable as of March 31, 2014 and December 31, 2013 respectively.
HEALTH REVENUE ASSURANCE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014 (UNAUDITED)
14 – RELATED PARTY TRANSACTIONS
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. No revenues were recorded from ResumeBear for the three months ended March 31, 2014 and 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 primarily to a third party subcontractor, the Company estimates the cumulative total loss on this contract is approximately $220,200 through March 31, 2014, and $112,200 incurred for the three months ended March 31, 2014
.
15 – 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 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 the Company’s 2013 Annual Report on Form 10-K filed April 15, 2014
.
Change in Officers and Directors:
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. Mr. Boyer’s vacation pay was paid in full on April 18, 2014. On May 15, 2014, a consulting agreement and a termination and release agreement were executed with Mr. Boyer. The agreements provides that Mr. Boyer will receive $200,000 to be paid $50,000 on May 16, 2014, and thereafter equal increments of $12,000 with the Company’s scheduled payrolls, with the last payment of $6,000 date being November 14, 2014; in each case, payments will be less all applicable deductions and withholdings
.
On April 2, 2014 and April 4, 2014, respectively, directors Mitchell D. Kaye and David Kroin resigned from the board of directors.
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.
On April 16, 2014, Tim Lankes resigned as the Chief Executive Officer and as a member of the board of directors.
Mr. Lankes did not serve on any committees or hold any other positions in the Company.
On April 18, 2014, Mr. Evan McKeown resigned as Chief Financial and Accounting Officer of the Company.
On April 22, 2014, the board of directors of Health Revenue Assurance Holdings, Inc. appointed Mr. Todd Willis as its interim Chief Executive Officer. Since October 2013, Mr. Willis has served as the Senior Vice President of the Company’s Coding Business Unit.
On April 29, 2014, the
board of directors of Health Revenue Assurance Holdings, Inc
.
appointed Gina Hicks as its interim
Chief Financial Officer.
On May 19, 2014, the Company granted Mr. Michael Brainard and Mr. Peter Russo, directors of the Company, 500,000 and 750,000
shares of
restricted common stock, respectively, which
vest
one year from the date of grant.
The shares were valued at $0.05 per share or $62,500 which will be expensed over the one year term.
HEALTH REVENUE ASSURANCE HOLDINGS, INC.