The Company’s corporate headquarters is located in Plantation, Florida. The Company currently leases space located at 8551 W. Sunrise Boulevard, Unit 305, Plantation, Florida 33322. The lease is for a term of one-year beginning on September 1, 2011 and ending August 30, 2012. We have an option to renew the lease for 5 successive one-year terms. Our lease payments are a total of $55,767 for the entire term (or, $4,230 per month).
The following discussion and analysis of the results of operations and financial condition of Anvex International, Inc. (“Anvex”) for the fiscal years ended December 31, 2011 and 2010, should be read in conjunction with the Selected Consolidated Financial Data, Anvex’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 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 as a result of a number of factors, including those set forth under the Risk Factors, Cautionary Notice Regarding Forward-Looking Statements 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.
HRAA provides medical coding consulting services designed to support the performance of revenue integrity for integrated health systems, hospitals, ambulatory surgical centers and physician practices throughout the United States. The services provided include general consulting, education, training, medical coding auditing, actual medical coding input services, and software sales.
HRAA has one variable interest entity that it treats as a subsidiary, Dream Reachers, LLC, engaged in the rental of real estate.
The following table presents a summary of operating information for the year ended December 31, 2011and 2010:
Cost of revenues increased by approximately $180,000 or approximately 61%, from approximately $294,000 for the year ended December 31, 2010 to approximately $474,000 for the year ended December 31, 2011. The increase was due primarily to greater personnel costs associated with the increase in medical coding audit service revenue. The Company increased staff from 7 employees to 27 employees during the year. These employees were added primarily in the third and fourth quarter.
Gross profit increased by approximately $117,000, or approximately 14%, from approximately $842,000 for the year ended December 31, 2010 to approximately $959,000 for the year ended December 31, 2011. The increase was due to the increased revenue generated by medical coding audit services offset by the additional cost of hiring and training new employees to provide such services.
Selling and administrative expenses were approximately $1.977 million for the year ended December 31, 2011, an increase of approximately $1,381,000, or 232%, from approximately $595,000 for the year ended December 31, 2010. The increase was primarily due to approximately $819,000 of compensation expense recognized in connection with the issuance of stock as part of the merger with HRM, higher personnel costs, advertising costs, and professional fees in the 2011 period connected to Anvex’s merger with HRAA which occurred in February 2012.
Research and development expenses were approximately $93,000 for the year ended December 31, 2011, an increase of approximately $20,000, or 27%, from approximately $74,000 for the year ended December 31, 2010. The increase was primarily due to expenses associated with the development of the Company’s proprietary software.
Depreciation and amortization expenses were $31,000 for the year ended December 31, 2011, an increase of approximately $15,000, or 89%, from approximately $17,000 for the year ended December 31, 2010. The increase was primarily due to a full year of depreciation related to the purchase and related improvements of the Anvex’s office facilities, purchased in July 2010.
Net cash provided by financing activities amounted to approximately $256,000 in the year ended December 31, 2011 period, compared to net cash provided in 2010 of approximately $123,000, representing an increase in net cash flow from financing activities of approximately $133,000. This was due to the receipt of the previously mentioned bridge loan in the amount of $250,000 and proceeds from a stock subscription in anticipation of the Company’s merger in the amount of approximately $170,000. This compares to the mortgage borrowed in connection with Dream Reachers acquisition of HRAA's office facilities in July 2010 in the year ended December 31, 2010.
The shares of common stock issued to the former stockholders of HRAA in connection with the Merger were not registered under 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 Act 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. We have not committed to registering these shares for resale. Certificates representing these shares contain a legend stating the restrictions applicable to such shares.
A revolving line of credit for $150,000 with Bank of America for working capital needs. The line of credit is secured by all business assets, collateral, and personal guarantees. The line of credit has an open ended maturity date, is automatically renewed unless cancelled, and incurs interest at the Bank’s prime rate plus 3%. The Bank’s prime rate of interest at December 31, 2011 was 3.25%. The balance of the revolving line of credit as of December 31, 2011 was $98,500.
A mortgage made to Dream Reachers, LLC related to certain real estate which houses HRAA’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 a stockholder of HRAA and all members of the affiliate. 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, 2011 was approximately $186,000. 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.
In the coming 12 months, HRAA has approximately $284,000 in bridge, bank and other loans that will become due.
We believe that our currently available working capital, credit facilities referred to above and the additional capitalization related to our acquisition should be adequate to sustain our operations at the current level for the next twelve months. Proceeds raised in the Offering will be used in accordance with the Use of Proceeds section discussed herein.
Regardless of the final implementation date, the Company’s plan to capitalize on the mandated implementation is based upon on the expectation that we will a) increase the level of coding service revenues from clients that seek contract coding based on the requirements of the current ICD-9-CM and the new ICD-10-CM/PCS b) increase audit service revenues from clients that seek to validate the accuracy of their billing performed by internal departments and c) increase revenues through the implementation of technology based software analytics solutions which would assist clients in identifying financial opportunities relating to their revenue cycle and the transition to ICD-10-CM/PCS.
A substantial 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 when the work is performed. 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.
· 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 Report Phase.
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 HRAA at no cost and HRAA pays the related mortgage's principal and interest, taxes and maintenance. Dream Reachers has been treated as a Variable Interest Entity for accounting purposes in the Company's consolidated financial statements.
The Company accounts for stock-based compensation under the provisions of ASC Topic 718, Compensation-Stock Compensation (“ASC 718”), which requires the measurement and recognition of compensation expense for all stock-based awards made to employees and directors based on estimated fair value on the grant date. Services performed and other transactions settled in the Company’s common stock are recorded at the estimated fair value of the stock issued, if that value is more readily determinable than the fair value of the consideration received.
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 audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
The accompanying consolidated financial statements of the Company are prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”).
The consolidated financial statements include the accounts of Anvex International, Inc and its wholly-owned subsidiary, Health Revenue Assurance Associates and the accounts of its Variable Interest Entity (“VIE”), Dream Reachers, LLC. All significant inter-company transactions and balances are eliminated in consolidation.
Effective January 1, 2010, the Company adopted new provisions of the consolidation guidance included in Accounting Standards Codification 810, Consolidations, that amended the consolidation guidance applicable to VIEs and the definition of a VIE, and requires enhanced disclosures to provide more information about an enterprise's involvement in a VIE. Under the consolidation guidance, the Company must make an evaluation of these entities to determine if they meet the definition of a VIE. Generally, a VIE is an entity with one or more of the following characteristics: (a) the total equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support; (b) as a group, the holders of the equity investment at risk lack (i) the ability to make decisions about an entity's activities through voting or similar rights, (ii) the obligation to absorb the expected losses of the entity, or (iii) the right to receive the expected residual returns of the entity; or (c) the equity investors have voting rights that are not proportional to their economic interests and substantially all of the entity's activities either involve, or are conducted on behalf of, an investor that has disproportionately few voting rights. The carrying amount and classification of the assets and liabilities of the Company’s VIE, Dream Reachers, LLC included in the Consolidated Balance Sheets are as follows:
A substantial 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 the work is performed. 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.
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 HRAA at no cost and HRAA pays the related mortgage’s principal and interest, taxes and maintenance. Dream Reachers has been treated as a Subsidiary for accounting purposes in the Company’s consolidated financial statements.
Level 1 Inputs- Quoted prices for identical instruments in active markets.
The cost of advertising is expensed as incurred. Advertising and marketing expenses amounted to approximately $116,000 and $42,000 for the years ended December 31, 2011 and 2010, respectively.
Services performed and other transactions settled in the Company’s common stock are recorded at the estimated fair value of the stock issued, if that value is more readily determinable than the fair value of the consideration received.
The Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 260-10 requires the presentation of basic earnings per share and diluted earnings per share.
In June 2009, the FASB issued guidance for determining the primary beneficiary of a variable interest entity (“VIE”). In December 2009, the FASB issued ASU 2009-17, “Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities” (“ASU 2009-17”). ASU 2009-17 provides amendments to ASC 810 to reflect the revised guidance. The amendments in ASU 2009-17 replace the quantitative-based risks and rewards calculation for determining which reporting entity, if any, has a controlling financial interest in a VIE with an approach focused on identifying which reporting entity has the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and (i) the obligation to absorb losses of the entity or (ii) the right to receive benefits from the entity. The amendments in ASU 2009-17 also require additional disclosures about a reporting entity’s involvement with VIEs. ASU 2009-17 is effective for annual reporting periods beginning after November 15, 2009. We do not anticipate that the adoption of this guidance will have a material impact on our financial position and results of operations.
Depreciation expense for the years ended December 31, 2011 and 2010 was approximately $31,000 and $16,000, respectively.
The Company has a term loan with a bank whose proceeds were used for general working capital needs (the “Term Loan”). The Term Loan was established in March 2009 as a result of a conversion of a revolving line of credit. The Term Loan is personally guaranteed by one of the Company’s stockholders and is collateralized by the assets of the Company. Payments of principal and interest are approximately $2,700 per month. The Term Loan matures in five years and incurs interest at the rate of 6.75% per annum. Balances due as of December 31, 2011 and 2010 were $67,000 and $93,000, respectively.
Dream Reachers, LLC 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 a stockholder of the Company and all members of the affiliate. 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, 2011 and 2010 was approximately $186,000 and 190,000, respectively. 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.
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. These loans mature in August 2012 and subsequent to year end when the Company entered into the Merger Agreement with Anvex International, Inc., these loans were converted into stock.
The Company leases certain office equipment under non cancelable operating lease arrangements. Monthly payments under the lease agreements are approximately $600 as of December 31, 2011.
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. Lease payments during the first year are approximately $2,500 for one month and $4,400 for the remaining eleven months. The lease payment amount for any future renewal terms is to be mutually agreed to by the Company and the lessor.
We have entered into employment agreements with our officers and directors.
On July 15, 2011, HRAA entered into an employment agreement with our president and chief executive officer, Andrea Clark. The terms of Ms. Clark’s employment agreement is three(3) years, and provides for compensation that includes a base salary of $175,000, incentive awards, as well as a benefit package, including (a) medical, dental, vision, disability and life insurance; (b) profit sharing, stock options and pension plans; (c) education or tuition assistance; (d) air, auto and all related travel expense reimbursement; (e) expense allowance; and (f) relocation, moving, home office expense reimbursement.
On August 15, 2011, HRAA entered into an employment agreement with our chief administrative officer, Keith Siddel The terms of Mr. Siddel’s employment agreement is three(3) years, and provides for compensation that includes a base salary of $175,000, incentive awards, as well as a benefit package, including (a) medical, dental, vision, disability and life insurance; (b) profit sharing, stock options and pension plans; (c) education or tuition assistance; (d) air, auto and all related ravel expense reimbursement; (e) expense allowance; and (f) relocation, moving, home office expense reimbursement.
Three vendors represented more than 68% of the outstanding Accounts Payable balance at the end of 2011. Two vendors represented more than 10% of the outstanding Accounts Payable balance at the end of 2010.
The Company has elected to convert from a Subchapter S corporation for Federal income tax purposes to a C corporation effective October 21, 2011. Accordingly, the Company's income or losses are passed through the shareholders 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 Corporation and in future years. Federal income tax returns for years prior to 2009 are no longer subject to examination by tax authorities.
A deferred tax asset of approximately $169,500 would result from the C Corporation losses totaling $434,509 from the period October 22 through December 31, 2011. Those losses expire in December 31, 2032. A valuation allowance for its net operating losses has been applied because the Company is unsure when they will be able to use these losses.
We evaluated our material tax positions and determined that we did not have any uncertain tax positions requiring recognition of a liability. Our policy is to recognize interest and penalties accrued on uncertain tax positions as part of income tax expense. For the years ended December 31, 2011 and 2010, no estimated interest or penalties were recognized for the uncertainty of certain tax positions.
On February 2, 2012, the Company entered into three Convertible Promissory notes totaling $313,902. These loans mature on August 1, 2012 and automatically convert into shares of the Company’s stock if the Company affected a qualified financing. In February 2012, in connection with the Merger, these shares were converted.
On February 10, 2012, the Company entered into a Merger agreement with Anvex International, Inc. (a public company) which was treated for accounting purposes as a reverse Merger with the Company considered the accounting acquirer. Each share of the Company’s common stock was exchanged for the right to receive approximately 1,271 shares of Anvex’s common stock. Before their entry into the Merger Agreement, no material relationship existed between Anvex or Acquisition Sub and 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 approximately 1,271 shares of Anvex’s common stock. An aggregate of 1,271,111shares of Anvex’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.
As a result of the Offering, after payment of offering expenses including related legal and accounting expenses the Company received net proceeds of $406,407.