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, 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).
On February 10, 2012, we entered into an Agreement 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”), pursuant to which Acquisition Sub was merged with and into HRAA, and HRAA, as the surviving corporation, became our wholly-owned subsidiary (the “Merger”).
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/PS will require significant business and systems changes throughout the health care industry and will impact all processes and people from finance to compliance to doctors.
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 have the ability to comment during a period ending 30 days after the date of the announcement. HHS then has a 60 day period to review and issue its final decision regarding the final implementation date.
The Company anticipates implementation of ICD-10-CM/PCS to be completed by the newly proposed effective date of October 1, 2014.
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The following table presents a summary of operating information for the year ended December 31, 2012 and 2011:
Revenue increased by approximately $4,374,000 or approximately 305%, from approximately $1,433,000 for the year ended December 31, 2011 to $5,807,000 for the year ended December 31, 2012. The increase was due primarily to increased revenue generated as a result of an increase in business development and marketing efforts put forth by HRAA.
Cost of revenues increased by approximately $2,356,000 or approximately 497%, from approximately $474,000 for the year ended December 31, 2011 to approximately $2,830,000 for the year ended December 31, 2012. The increase was due primarily to greater personnel and related training costs associated with the buildup 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.
Travel/Business Development has increased by approximately $294,000 or approximately 219%, from approximately $134,000 for the year ended December 31, 2011 to approximately $429,000 for the year ended December 31, 2012. The increase was due primarily to sales team efforts to develop new business growth.
Professional fees have increased from approximately $82,000 for the year ended December 31, 2011 to approximately $395,000 for the year ended December 31, 2012, an increase of approximately $313,000, or 385%. This increase is attributable to legal and accounting services provided in connection with the merger and two subsequent capital rises, and expenses associated with audit and review services.
We believe that both management and shareholders 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 making and as a means to evaluate period-to-period comparison. Our management uses and relies on the following non-GAAP financial measure:
Our management believes Adjusted 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.
As of December 31, 2012, the Company had cash balances of approximately $894,000 as compared to approximately $199,000 as of December 31, 2011, an increase of approximately $695,000.
Net cash provided by financing activities amounted to approximately $2,674,000 for the year ended December 31, 2012, compared to net cash provided in the year ended December 31, 2011 of approximately $256,000, representing an increase in net cash flow from financing activities of approximately $2,418,000. This was due to the receipt of net proceeds from the Company’s issuance of stock, advances on convertible promissory notes, and net borrowings from new and existing debt obligations offset by various debt repayments.
The revolving line of credit for $150,000 with Bank of America for working capital needs was modified on December 18, 2012. 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 6.5 percentage points. The Bank’s prime rate of interest at December 31, 2012 was 3.25%. First payment of $2,083 was due January 18, 2013.
A term loan with Bank of America whose proceeds were used for general working capital. The loan is personally guaranteed by one of the Company’s stockholders and is collateralized by the assets of HRAA. Payments of principal and interest are approximately $2,700 per month. The loan matures in five years from September 2009, and incurs interest at the rate of 6.75% per annum. The balance due as of December, 2012 was approximately $39,000.
A mortgage made to HRAA’s subsidiary related to certain real estate which houses HRAA’s main offices in Plantation, Florida. The loan originated in 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. 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, 2012 was approximately $180,000. 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.
The Company leases certain office equipment under non-cancelable operating lease arrangements. Monthly payments under the lease agreements are approximately $500 as of December 31, 2012.
On May 14, 2012, the Company entered into a round of Convertible Promissory notes totaling $300,000. These loans were to mature on May 14, 2013. The loans converted to common stock on July 15, 2012.
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 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) implement a technology based software analytic solution which would assist clients to identify financial opportunities relating to the transition to ICD-10-CM/PCS.
The delay in implementation of ICD-10-CM/PCS 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.
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, 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 other services may occur before or after the software product sale and may not relate to the software product. Revenue recognition for multiple element arrangement is as follows:
We conducted our audit 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 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 audit 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, 2012, and the consolidated results of its operations and its cash flows for the year then ended 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 and net cash used in operating activities in 2012 of $1,457,470 and $1,699,466, respectively, and has an accumulated deficit of $2,584,798 at December 31, 2012. 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.
2295 NW Corporate Blvd., Suite 240 ● Boca Raton, FL 33431-7328
Phone: (561) 995-8270 ● Toll Free: (866) CPA-8500 ● Fax: (561) 995-1920
Member National Association of Certified Valuation Analysts ● Registered with the PCAOB
We have audited the accompanying consolidated balance sheet of Health Revenue Assurance Holdings, Inc. and Subsidiaries (f/k/a Anvex International, Inc.) (the “Company”) as of December 31, 2011, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the year then ended. 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 audit.
We conducted our audit 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 also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
On April 13, 2012, the Company’s Board of Directors unanimously approved a change in the Company’s 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)
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, 2012, the Company has a stockholders' deficit and for the year-ended ended December 31, 2012, incurred substantial net losses, and has used net cash in operations. The Company has not been able to generate sufficient cash from operating activities to fund its ongoing 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.
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. Dream Reachers became a wholly owned subsidiary in May 2011 but previously was treated as a VIE. The carrying amount and classification of the assets and liabilities of Dream Reachers, LLC included in the Consolidated Balance Sheets are approximately:
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.
Level 1-Observable inputs that reflect quoted market prices (unadjusted) for identical assets and liabilities in active markets;
Level 3-Unobservable inputs that are supported by little or no market activity that are significant to the fair value of assets or liabilities.
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 account for revenue recognition purposes.
In accordance with ASC 730-10, Research and development costs are expensed when incurred. Total research and development costs for the years ended December 31, 2012 and 2011 were $64,386 and $93,489 respectively.
The cost of advertising is expensed as incurred. Advertising and marketing expenses amounted to approximately $130,000 and $116,000 for the year ended December 31, 2012 and 2011, respectively and is included in selling and administrative expenses.
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 dilutive securities outstanding at December 31, 2012 and 2011 respectively.
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.
Bad debt expense on trade accounts receivable for 2012 and 2011 was $0, respectively. (See Note 9)
Depreciation expense for the years ended December 31, 2012 and 2011 was approximately $51,000 and $31,000, respectively.
HRAA’s Visualizer™ suite will encompass multiple offerings. The first project currently under development is ICD Visualizer™, which assists healthcare leaders with their need to understand the exponential impact 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.
Amortization expense for software, for the years ended December 31, 2012 and 2011 was $0, respectively as there has not been a general release of the software for sale as of December 31, 2012. Software consisted of the following at December 31, 2012 and 2011:
The following is a schedule of estimated future amortization expense of software at December 31, 2012 (assumes amortization begins January 1, 2013):
Long Term debt consisted of the following at December 31, 2012:
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, 2012 was approximately $39,000 and is allocated to the current and long term debt line items 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 the 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, 2012 was approximately $180,000 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.
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). 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 $338,692 as of December 31, 2012 and the Company recorded $4,524 in accrued interest.
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. During 2012, the Company had factored approximately $3,850,000 of receivables and had received cash advances of approximately $3,272,000. Outstanding receivables purchased by the factor as of December 31, 2012 were approximately $950,000 and included in accounts receivable in the accompanying consolidated balance sheet, and the secured loan due to the lender was $827,075. Factor fees in 2012 were approximately $119,000, and are included in interest expenses. (See Note 3)
On July 9, 2012, the Company and the former CMO entered into a Settlement 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.
On February 10, 2012, HRAA entered into a Merger agreement with Health Revenue Assurance Holdings, Inc. "HRAH" (a Nevada incorporated publicly-held company) and its subsidiary Health Revenue Acquisition Corporation (Acquisition Subsidiary) which was treated for accounting purposes as a reverse recapitalization with HRAA considered the accounting acquirer since the shareholders of HRAA obtained voting and management control of HRAH. 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 common shares outstanding in HRAH just prior to the merger. There were no recorded assets or liabilities in HRAH just prior to the merger. All share and per share amounts for all periods presented have been retroactively adjusted to reflect the recapitalization.
The Company hired a Chief Marketing Officer and granted 3,299,815 unrestricted shares of Common Stock for his future services. Accordingly, the Company treated the issuance of the shares to its Chief Marketing Officer as 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.
In April 2012, the Company sold 1,394,909 common shares for approximately $349,000 or $0.25 per share.
In July 2012, pursuant to a settlement agreement (see Note 11), 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, upon return of the 3,299,802 shares to the transfer agent, the shares were simultaneously reissued to delegees of the CEO, however, such shares were unvested and subsequently cancelled as a null and void issuance.
During the period from October 2012 through December 2012, the Company sold 1,468,786 common shares for $335,600 at prices per share between $0.20 and $0.28.
Three vendors represented approximately 68% of the outstanding accounts payable balance as of December 31, 2011.
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 to 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.
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:
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, tax years 2012 and 2011 remain open for IRS audit. The Company has received no notice of audit from the Internal Revenue Service for any of the open tax years.