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HRAA > SEC Filings for HRAA > Form 10-K on 1-Apr-2013All Recent SEC Filings

Show all filings for HEALTH REVENUE ASSURANCE HOLDINGS, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-K for HEALTH REVENUE ASSURANCE HOLDINGS, INC.


1-Apr-2013

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of the results of operations and financial condition of Health Revenue Assurance Holdings, Inc. for the fiscal years ended December 31, 2012 and 2011, should be read in conjunction with the Selected Consolidated Financial Data, Health Revenue Assurance Holdings' 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 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.

Overview

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").

HRAA improves the healthcare delivery experience for doctors, nurses and patients while assuring the existence of healthcare organizations. Since 2001, we have been providing Revenue Integrity programs for healthcare organizations across the country and are committed to providing the most intuitive and effective solutions in the industry. HRAA's products and services include business intelligence technology solutions, contract coding, billing, coding and compliance audits, education, revenue cycle consulting, physician services and ICD-10 transition services. Our collaborative approach provides the right solutions for our clients' needs with the highest regard for ethical standards and responsibility.

On April 13, 2012, the Board unanimously approved a change in the Company's name from Anvex International, Inc. to Health Revenue Assurance Holdings, Inc. ("HRAH") to be consistent with our current business following the Merger.

We are subject to risks common to service providers and consulting companies, including competition and the ability to recruit, train, and put in place a sufficient quantity of proficient consultants and medical coders familiar with the requirements of IDC-10-CM/PCS, the uncertainty of future regulatory approvals and laws, the need for future capital and the retention of key employees. We cannot provide assurance that we will generate revenues or achieve and sustain profitability in the future.

Recent Developments

Certain significant items or events must be considered to better understand differences in our results of operations from period to period. We believe that the following items have had a material impact on our results of operations for the periods discussed below or may have a material impact on our results of operations in future periods.

ICD-10-CM/PCS

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.

HRAA Chairman, CEO and Founder Andrea Clark, RHIA, CCS, CPC-H, continues to build the company to meet the changing needs of the healthcare community and her accomplishments continue to be acknowledged. A few recent awards include:

· "Female Executive of the Year" Gold Award Winner - Stevie Awards for Women in Business - December, 2012

· "Maverick of the Year" Bronze Award Winner - Stevie Awards for Women in Business - December, 2012

· "Mentor of the Year" - 2012 AHIMA Triumph Awards - June, 2012

· "10 HIM Heroes, Professionals Who Have Made a Difference" - For The Record Magazine - October, 2011

· HRAA has also been recognized for tremendous growth and industry leadership. Recent acknowledgments include:

· "Fastest Growing Company of the Year" Bronze Award Winner- Stevie Awards for Women in Business - December, 2012

· "Top Ten Best Places To Work" - South Florida Business Journal - 2011


Year ended December 31, 2012 compared to the year ended December 31, 2011

Results of Operation

The following table presents a summary of operating information for the year ended December 31, 2012 and 2011:

                                            Year-ended        Year-ended        Increase/       Increase/
                                           December 31,      December 31,      (Decrease)      (Decrease)
                                               2012              2011              ($)             (%)

Revenues                                   $   5,806,848     $   1,432,773     $ 4,374,075           305.3 %
Cost of Revenues                               2,830,008           473,719       2,356,289           497.4 %
Gross profit                                   2,976,840           959,054       2,017,786           210.4 %

Selling and administrative expenses            3,853,820         1,976,655       1,877,165            95.0 %
Research and development expenses                 64,386            93,489         (29,103 )         -31.1 %
Depreciation and amortization                     50,765            31,362          19,403            61.9 %
Other expenses, net                              465,339            29,468         435,871          1479.1 %
Net income (loss)                          $  (1,457,470 )   $  (1,171,921 )   $  (285,549 )          24.4 %

Revenue:

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:

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.

Gross profit:

Gross profit increased by approximately $2,018,000, or approximately 210%, from approximately $959,000 for the year ended December 31, 2011 to approximately $2,977,000 for the year ended December 31, 2012. The increase in gross profit was due to the increase in business experienced in the year.

Selling and Administrative Expenses:

Selling and administrative expenses were approximately $3,854,000 for the year ended December 31, 2012, an increase of approximately $1,877,000 or 95%, from approximately $1,977,000 for year ended December 31, 2011. The change in the 2012 period compared to the 2011 period was primarily due to:

? Personnel costs have increased by approximately $1,734,000 or approximately 510%, from approximately $340,000 for the year ended December 31, 2011 to approximately $2,075,000 for the year ended December 31, 2012. The increase is due primarily to increased compensation and related expenses associated with the buildup of the Company's management, sales and administrative staff in anticipation of growth in business volume.


? 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.

? The remainder of the increase in Selling and administrative expenses is related to costs associated to the company's business development such as marketing, trade shows and seminars. The increases were partially offset by decreased expenses of approximately $464,000.

Research and Development Expenses:

Research and development expenses were approximately $64,000 for the year ended December 31, 2012, a decrease of approximately $29,000, or 31%, from approximately $93,000 for the year ended December 31, 2011. The decrease is due to the capitalization of expenses related to the development of the Visualizer™ suite.

Depreciation and Amortization Expenses:

Depreciation and amortization expenses were approximately $51,000 for the year ended December 31, 2012, an increase of approximately $19,000, or 62%, from approximately $31,000 for the year ended December 30, 2011. The increase was primarily due to depreciation costs associated with the Company's purchases for office furniture and computer necessary to support the increase in personnel.

Interest Expense (included in other expenses, net):

Interest Expense was approximately $465,000 for the year ended December 31, 2012, an increase of approximately $436,000, from approximately $29,000 for the year ended December 31, 2011. The increase is primarily due to the factoring fees in 2012 along with interest on outstanding debt obligations and a $300,000 non-cash expense related to the amortization of a $300,000 beneficial conversion feature which was expensed during the year ended December 31, 2012. Additionally, de minimus other income offset interest expense in the above captioned account "Other expense, net".

Net Income (loss):

As a result of the above factors, a net loss of approximately $1,457,000 was recognized for year ended December 31, 2012 as compared to net loss of approximately $1,172,000 for the year ended December 31, 2011, a decrease in income of approximately $286,000 or approximately 24%. The increase in net loss is outlined above.

Non-GAAP - Financial Measures

The following discussion and analysis includes both financial measures in accordance with GAAP, as well as a non-GAAP financial measure. Generally, a non-GAAP financial measure is a numerical measure of a company's performance, financial position or cash flows that either excludes or includes amounts that are not normally included or excluded in the most directly comparable measure calculated and presented in accordance with GAAP. Non-GAAP financial measures should be viewed as supplemental to, and should not be considered as alternatives to net income, operating income, and cash flow from operating activities, liquidity or any other financial measures. They may not be indicative of the historical operating results of the Company nor is it intended to be predictive of potential future results. Investors should not consider non-GAAP financial measures in isolation or as substitutes for performance measures calculated in accordance with GAAP.


We believe that both management and 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:

Adjusted EBITDA from continuing operations

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.

The Company defines Adjusted EBITDA from continuing operations as earnings (or loss) before interest expense, income taxes, depreciation and amortization, and non-cash stock-based compensation. The Company excludes stock-based compensation because it is non-cash in nature. The following table presents a reconciliation of Adjusted EBITDA from continuing operations to Net Income (loss) from continuing operations allocable to common shareholders, a GAAP financial measure:

                                                                      For the year ended
                                                               December 31,       December 31,
                                                                   2012               2011
Net loss                                                       $  (1,457,470 )    $  (1,171,921 )
 Interest expense                                                    465,349             29,468
 Depreciation and amortization                                        50,765             31,362
 Stock based compensation expense                                          -            818,595
Adjusted EBITDA (loss) from operations                         $    (941,356 )    $    (292,496 )

Liquidity and Capital Resources

The Company's principal sources of liquidity include proceeds from long term debt and private placement of its shares. Overall, for the year ended December 31, 2012, the Company generated approximately $2,803,000 from its financing activities primarily associated with the debt and equity financing. Such proceeds, coupled with its beginning cash balances, were utilized by the Company to fund its negative cash flow from operating activities in the amount of approximately $1,699,000 and investment in property and equipment of approximately $280,000.

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 used in operating activities was approximately $1,699,000 for the year ended December 31, 2012. This compared to net cash used by operating activities of approximately $66,000 for the year ended December 31, 2011. The decrease of $1,633,000 was primarily due to higher personnel costs, greater travel and business development costs, and professional fees connected to the Company's merger with HRAA which occurred in February 2012 along with non-cash charges of $355,573.

Net cash used in investing activities for the year ended December 31, 2012 was approximately $280,000 compared to approximately $47,000 for the year ended December 31, 2011. The increase is primarily attributable to the development of software.


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.

Financing:

The Company has the following financing arrangements:

1. 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.

2. 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.

3. 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.

4. A factoring facility with a finance company whereby, 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 in the event of non-payment. During 2012, the Company had factored approximately $3,850,000 of accounts receivable and had received cash advances of approximately $3,272,000 with a balance due to factor of approximately $827,000 at December 31, 2012.

5. 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.

6. 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.

7. During December 2012 and January 2013, the Company entered into a round of Loan Agreement and Promissory notes totaling $2,035,000. As of December 31, 2012, the Company had received $815,000.

The Company's recent merger yielded cash from the sale of common stock that was approximately $600,000 short of the expected amount to be raised in order in order to execute its growth plan for the near future. Since the time of the Merger, the Company has transacted equity capital raises totaling approximately $1,060,000 of additional capital infusion. The Company has continued its buildup of the personnel and business development efforts and has incurred operating losses. As a result, the Company possesses a working capital of approximately $157,000 at December 31, 2012 and continues to hold discussions with interested parties regarding additional investment in the Company's common stock in amounts which approximate its current estimated working capital shortfall. Should efforts to raise additional capital prove to be unsuccessful; the Company will reduce its growth plans accordingly.


2013 Outlook

Our future plans target capitalizing on opportunities made available from the mandated implementation of ICD-10-CM/PCS, currently required to be implemented by hospitals and health care providers throughout the country by October 1, 2013. As previously described, on April 9, 2012, HHS announced a proposed rule which would delay the implementation date to October 1, 2014. On August 27, 2012, Health and Human Services Secretary Kathleen Sebelius announced the release of a rule that makes final a one-year proposed delay-from October 1, 2013, to October 1, 2014 - in the compliance date for the industry's transition to ICD-10 codes.

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.


Off-Balance Sheet Arrangements

None.

Critical Accounting Policies

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires our management to make assumptions, estimates, and judgments that affect the amounts reported, including the notes thereto, and related disclosures of commitments and contingencies, if any. We have identified certain accounting policies that are significant to the preparation of our consolidated financial statements. These accounting policies are important for an understanding of our financial condition and results of operations. Critical accounting policies are those that are most important to the portrayal of our financial condition and results of operations and require management's difficult, subjective, or complex judgment, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Certain accounting estimates are particularly sensitive because of their significance to financial statements and because of the possibility that future events affecting the estimate may differ significantly from management's current judgments. We believe the following critical accounting policies involve the most significant estimates and judgments used in the preparation of our consolidated financial statements.

The Company is an emerging growth company; therefore we have elected to use the extended transition period for complying with new or revised accounting standards under Section 102(b)(2)(B) of the Jumpstart Our Business Startups Act. As a result of this election, our consolidated financial statements may not be comparable to companies that comply with public company effective dates.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Health Revenue Assurance Associates, Inc. and Dream Reachers, LLC. All significant inter-company transactions and balances are eliminated in consolidation.

Use of Estimates

Management uses estimates and assumptions in preparing financial statements. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could differ from those estimates. Significant accounting estimates reflected in the Company's consolidated financial statements include valuation of accounts receivable, valuation of property and equipment, valuation and amortization period of software, valuation of beneficial conversion features in convertible debt, valuation of equity based instruments issued for other than cash, revenue recognition, and the valuation allowance on deferred tax assets.

Stock-Based Compensation

Stock-based compensation expense is measured at the grant date fair value of the award and is expensed over the requisite service period. For employee stock-based awards, the Company calculates the fair value of the award on the date of grant using the Black-Scholes option pricing model. Determining the fair value of stock-based awards at the grant date under this model requires judgment, including estimating volatility, employee stock option exercise behaviors and forfeiture rates. The assumptions used in calculating the fair value of stock-based awards represent the Company's best estimates, but these estimates involve inherent uncertainties and the application of management . . .

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