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HRAA > SEC Filings for HRAA > Form 10-K on 15-Apr-2014All Recent SEC Filings

Show all filings for HEALTH REVENUE ASSURANCE HOLDINGS, INC.

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


15-Apr-2014

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 the Company for the fiscal years ended December 31, 2013 and 2012 should be read in conjunction with the Company's financial statements, and the notes to those financial statements that are included elsewhere in this Annual Report.

Overview

The Company is a provider of revenue cycle services to a broad range of healthcare providers. We offer our customers integrated solutions designed around their specific business needs, including revenue cycle data analysis, contract and outsourced codings, billing, coding and compliance audits, coding education, coding consulting, physician coding services and ICD-10 education and transition services. With this approach, our customers benefit from integrated service offerings that we believe enhances their revenue integrity. As a result, we believe we help our customers achieve their business objectives and patient care objectives.

On February 10, 2012, the Company entered into the Merger Agreement with Acquisition Sub and HRAA, pursuant to which Acquisition Sub was merged with and into HRAA, and HRAA, as the surviving corporation, became a wholly-owned subsidiary of the Company. Before the entry into the Merger Agreement, no material relationship existed between the Company and the Acquisition Sub or HRAA.

Prior to the closing of the Merger, the Company transferred all of its operating assets and liabilities to the Split-Off Subsidiary, and contemporaneously with the closing of the Merger, the Company sold all of the outstanding capital stock of the Split-Off Subsidiary to the Split-Off Buyer. In connection with the sale, an aggregate of 3,500,000 shares of the Company's common stock held by the Split-Off Buyer were surrendered and cancelled without further consideration.

Pursuant to the terms and conditions of the Merger Agreement, and upon the consummation of the Merger:

? Each share of HRAA's common stock issued and outstanding immediately prior to the closing of the Merger was converted into the right to receive 1,271.111 shares of the Company's common stock. An aggregate of 1,271,111 shares of the Company's common stock were issued to the holders of HRAA's common stock. Immediately prior to the Merger, HRAA had no outstanding securities other than shares of its common stock.

? Anna Vechera resigned as the Company's sole officer and director, and simultaneously with the Merger, a new board of directors and new officers were appointed. The Company's new board of directors consisted of Robert Rubinowitz, Andrea Clark and Keith Siddel, previously the directors of HRAA. In addition, immediately following the Merger, Andrea Clark was appointed as the Company's President and Chief Executive Officer, Robert Rubinowitz was appointed as the Company's Chief Operating Officer, Secretary and Treasurer and Keith Siddel was appointed as the Company's Chief Marketing Officer. Andrea Clark, Robert Rubinowitz and Keith Siddel no longer hold these positions.

On April 13, 2012, the Company changed its name from Anvex International, Inc. to Health Revenue Assurance Holdings, Inc.

On April 13, 2012, the board of directors authorized the Stock Split. The shares resulting from the Stock Split were issued on April 26, 2012. All share and per share amounts for all periods presented have been retroactively adjusted to reflect the Stock Split.


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 Transition

In the short term, the main focus of our business will be with respect to the ICD-10 coding transition. In that regard, our potential clients are all hospitals and medical providers, which currently maintain coding personnel in some form that are primarily responsible for seeking reimbursement for patients' procedures. The current system in place that drives the appropriate medical codes from hospitals/medical facilities to insurance companies is called ICD-9, which was implemented over 30 years ago.

In January 2009, the United States Department of Health and Human Services ("HHS") published a final rule which mandated a change in medical coding in United States health care settings from the current system, International Classification of Diseases, 9th Edition, Clinical Modification ("ICD-9-CM"), to the International Classification of Diseases, 10th Edition, Clinical Modification/Procedure Coding System ("ICD-10-CM/PCS"). Compliance with this ruling was to be achieved by October 1, 2013. The new, mandated version expands the number of codes from 24,000 to 155,000, making it more precise and descriptive and more accurately describing the diagnoses and inpatient procedures of care delivered. The transition to ICD-10-CM/PCS requires significant business and systems changes throughout the health care industry and impacts both business and clinical processes.

On April 9, 2012, as published in the Federal Register, citing concerns about the ability of provider groups to meet the looming compliance deadline to adopt ICD-10-CM/PCS, HHS announced a proposed rule, which would delay the implementation date to October 1, 2014. Interested parties had the ability to comment during a period ending 30 days after the date of the announcement. On August 27, 2012 HHS Secretary Kathleen Sebelius announced the release of a rule that made final a one-year proposed delay-from October 1, 2013 to October 1, 2014 - in the compliance date for the industry's transition to ICD-10 codes. On April 1, 2014, the President signed into law legislation delaying the implementation date of ICD-10-CM/PCS until at least October 1, 2015.

We believe the impacts to the ICD-10 delay will have minimal impacts on our near term coding staffing and consulting services and do not affect our ability to acquire long term coding outsourcing service contracts.

Securities Purchase Agreement

On November 12, 2013, the Company entered into a Securities Purchase Agreement (the "Securities Purchase Agreement") with certain investors named therein (each a "Purchaser" and, collectively, the "Purchasers") for an aggregate of $5,400,000. Pursuant to the Securities Purchase Agreement, the Company issued the following to the Purchasers: (i) 13,500,000 shares of its Series A 8% Redeemable Convertible Preferred Stock (the "Series A Preferred Stock") and (ii) 5-year warrants (the "Warrants") to purchase an aggregate of 27,000,000 shares of common stock for an exercise price of $0.30 per share. The Series A Preferred Stock is convertible into common stock on a 2 for 1 basis and is redeemable by the Company, at the option of the investor, 48 months from November 12, 2013 at the stated value of $0.30 per share or a total of $5,400,000 plus accumulated but unpaid dividends, whether declared or not. The Company also issued 1,890,000 warrants as a fee to the placement agent at an exercise price of $0.30 per share.

In connection with the Securities Purchase Agreement, the Company entered into a registration rights agreement with the Purchasers, pursuant to which the Company agreed to register all of the shares of common stock underlying the Series A Preferred Stock and the shares of common stock underlying the Warrants on a registration statement on Form S-1 (the "Registration Statement") to be filed with the SEC within 30 calendar days following the Closing Date (the "Filing Deadline") and to use its best efforts to cause the Registration Statement to be declared effective under the Securities Act within 90 calendar days following the Filing Deadline. The Registration Statement was filed on December 11, 2013, as amended December 20, 2013 and declared effective on December 24, 2013.

Separation Agreement with Robert Rubinowitz

On April 14, 2014, the Company entered into a 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. See Part II, "Item 9B, Other Information," included elsewhere in this Form 10-K.

Resignation of Directors

Directors Mitchell D. Kaye and David Kroin resigned from the board of directors on April 2, 2014 and April 4, 2014, respectively. See Part II, "Item 9B, Other Information," included elsewhere in this Form 10-K.

Appointment of Tim Lankes as Director

On April 12, 2014, Tim Lankes, the Company's chief executive officer was appointed to the board of directors of the Company. See Part II, "Item 9B, Other Information," included elsewhere in this Form 10-K.


Year ended December 31, 2013 compared to the year ended December 31, 2012

Results of Operations

The following table presents a summary of operating information for the year ended December 31, 2013 and 2012:

                                                 For the years ended
                                           December 31,       December 31,         Increase/          Increase/
                                               2013               2012           (Decrease) $        (Decrease) %
Revenue                                    $   7,099,514      $   5,806,848      $   1,292,666               22.26 %
Revenue - Related Party                          211,239                  -            211,239              100.00 %
Total Revenue                                  7,310,753          5,806,848          1,503,905               25.90 %
Costs of Revenues                              4,061,644          2,830,008          1,231,636               43.52 %
Gross profit                                   3,249,109          2,976,840            272,269                9.15 %

Selling and administrative expenses            7,016,533          3,853,820          3,162,713               82.07 %
Research and development expenses                      -             64,386            (64,386 )           (100.00 )%
Asset impairment                                 946,931                  -            946,931              100.00 %
Depreciation and amortization                     83,900             50,765             33,135               65.27 %
Total operating expenses                       8,047,364          3,968,971          4,078,393              102.76 %
Operating income (loss)                       (4,798,255 )         (992,131 )       (3,806,124 )            383.63 %
Other expense, net                              (674,985 )         (465,339 )         (209,646 )             45.05 %
Net Income (loss)                          $  (5,473,240 )    $  (1,457,470 )    $  (4,015,770 )            275.53 %
Cumulative preferred stock dividend              (60,000 )                -            (60,000 )               100 %
Deemed dividend for beneficial
conversion feature of preferred stock         (2,634,185 )                -         (2,634,185 )               100 %
Net Income (loss) available to common
stockholders                                  (8,167,425 )       (1,457,470 )       (6,709,955 )               460 %

Revenue:

Revenue increased by $1,503,905 or approximately 26%, from $5,806,848 for the year ended December 31, 2012 to $7,310,753 for the year ended December 31, 2013. The increase was due primarily to increased revenue generated as a result of the growing business development and marketing efforts by the Company.

Cost of Revenues:

Cost of revenues increased by $1,231,636 or approximately 44%, from $2,830,008 for the year ended December 31, 2012 to $4,061,644 for the year ended December 31, 2013. The increase was due primarily to additional personnel and related training costs associated with the build-up of the Company's audit and coding service provider personnel required to service the anticipated increase in service contracts in future periods.

Gross profit:

Gross profit increased by $272,269, or approximately 9%, from $2,976,840 for the year ended December 31, 2012 to $3,249,109 for the year ended December 31, 2013. The increase in gross profit was primarily attributable to increase in business experienced during the year.

Selling and Administrative Expenses:

Selling and administrative expenses were $7,016,533 for the year ended December 31, 2013, an increase of $3,162,713 or approximately 82%, from $3,853,820 for the year ended December 31, 2012. The change in the 2013 period compared to the 2012 period was primarily due to:

? Personnel costs have increased by approximately $1,895,000 or 91%, from approximately $2,075,000 for the year ended December 31, 2012 to approximately $3,970,000 for the year ended December 31, 2013. The increase is due primarily to increased compensation and related expenses associated with the build-up of the Company's management, sales and administrative staff in anticipation of growth in business volume.

? Travel/business development has decreased by approximately $97,000 or approximately 23%, from approximately $429,000 for the year ended December 31, 2012 to approximately $332,000 for the year ended December 31, 2013.

? Professional fees have increased from approximately $395,000 for the year ended December 31, 2012 to approximately $1,218,000 for the year ended December 31, 2013, an increase of $823,000, or approximately 208%. This increase is attributable to legal, audit, consulting, investor and public relations, and accounting services provided in connection with expenses associated with financial reporting matters.

? The remainder of the increase in selling and administrative expenses is related to costs associated to the Company's business development such as marketing, communications, trade shows and seminars.


Research and Development Expenses:

We had no research and development expenses for the year ended December 31, 2013, a decrease of $64,386 or 100%, for the year ended December 31, 2012. The decrease is due to a significant reduction in the technology department personnel and information technology research projects. The Company lacked the available financial resources to invest in research and development.

Asset Impairment:

At the end of September 2013, the Company re-evaluated the capitalized research and development costs associated with the Visualizer software suite of multiple offerings and the OMC (Outsourced Medical Coding) Initiater after an evaluation based in part on the lack of cash flow and customer demand in ICD Visualizer after the general acceptance release date of July 15, 2013. In addition, the Company also considered its going concern risk and cash liquidity concerns that restrain the ability to make capital investments in research and development to complete existing products in the 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 that is presented as a line item entitled "asset impairment" on the consolidated statement of operations. The Company will continue to use the Visualizer suite of functionality as internally developed software to generate customized reports for revenue integrity auditing and compliance services but the Company no longer intends to market or sell internally developed software on a stand alone basis.

Depreciation and Amortization Expenses:

Depreciation and amortization expenses were approximately $84,000 for the year ended December 31, 2013, an increase of approximately $33,000, or 65%, from approximately $51,000 for the year ended December 31, 2012. The increase was primarily due to depreciation costs associated with the Company's purchases for office furniture and computers necessary to support the increase in personnel.

Other Expenses, net:

Total other expenses, net of other income and gains were $674,985 and $465,339 for the years ended December 31, 2013 and December 31, 2012, respectively. The 2013 amount includes a gain of $365,255 from the change in fair value of warrant liability, $33,364 from the gain on extinguishment of debt relating to a put premium, $146,624 loss on extinguishment of debt, other income of $67 and interest expense of $927,047 while the 2012 amount is primarily interest expense.

Interest expense increased approximately $462,000, from approximately $465,000 for the year ended December 31, 2012. The increase is due to the factoring fees experienced during the year along with interest on finance charges, outstanding debt obligations and amortization of debt discounts.

Net Income (loss) and net income (loss) available to common stockholders:

As a result of the above factors, a net loss of approximately $5,473,240 was recognized for the year ended December 31, 2013 as compared to net loss of approximately $1,457,470 for the year ended December 31, 2012, an increase of approximately $4,015,770 or approximately 276%. The increase in net loss is outlined above. However, the net loss available to common stockholders was $8,167,425 as a result of $60,000 in undeclared Series A preferred stock dividends and a $2,634,185 deemed dividend relating to the value of the beneficial conversion feature on the Series A preferred stock.

Non-GAAP - Financial Measures

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

We believe that both management and stockholders 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 earnings before interest tax depreciation and amortization (EBITDA) from continuing operations is an important measure of our operating performance because it allows management, investors and analysts to evaluate and assess our core operating results from period to period after removing the impact of items of a non-operational nature that affect comparability. Our management recognizes that Adjusted EBITDA from continuing operations, like EBITDA from continuing operations, has inherent limitations because of the excluded items.

We have included a reconciliation of our non-GAAP financial measures to the most comparable financial measure calculated in accordance with GAAP. We believe that providing the non-GAAP financial measure, together with the reconciliation to GAAP, helps investors make comparisons between the Company and other companies. In making any comparisons to other companies, investors need to be aware that companies use different non-GAAP measure to evaluate their financial performance. Investors should pay close attention to the specific definition being used and to the reconciliation between such measure and the corresponding GAAP measure provided by each company under applicable SEC rules.


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

                                                   For the year ended
                                             December 31,      December 31,
                                                 2013              2012
Net loss                                     $  (5,473,240 )   $  (1,457,470 )
Interest expense                                   927,047           465,349
Asset Impairment                                   946,931                 -
Loss on early extinguishment of debt               146,624                 -
Depreciation and amortization                      148,037            50,765
Share based compensation expense                   639,328                 -
Gain on put premium extinguishment of debt         (33,364 )               -
Change in fair value of warrant liability         (365,255 )               -
Adjusted EBITDA (loss) from operations       $  (3,063,892 )   $    (941,356 )

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, 2013, the Company generated a net $6,287,000 from its financing activities primarily associated with the debt and equity financing. Such proceeds, coupled with its beginning cash balances, were utilized by the Company to fund its negative cash flow from operating activities in the amount of $3,365,005 and investment in capitalized software, property and equipment of approximately $762,439.

As of December 31, 2013, the Company had cash balances of approximately $3,053,485 as compared to approximately $893,458 as of December 31, 2012, an increase of approximately $2,160,027 or 242%.

Net cash used in operating activities was $3,365,005 for the year ended December 31, 2013. This compared to net cash used by operating activities of $1,699,466 for the year ended December 31, 2012. The increase of $1,665,539 was used to fund a net loss of $8,167,425 reduced by non-cash depreciation and amortization of $148,037, software impairment of $946,931, loss on early extinguishment of debt of $146,624 stock based compensation expense of $173,827, amortization of prepaid shares issued for services of $465,501, accretion of premium on debt $33,364, amortization of debt discount of $556,028, cumulative preferred stock dividend of $60,000, deemed dividend for beneficial conversion feature of preferred stock of $2,634,185, bad debt of $26,116, gain from change in fair market value of warrant of $365,255 and changes in operating assets and liabilities totaling ($22,938).

Net cash used in investing activities for the year ended December 31, 2013 was $762,439 compared to $279,918 for the year ended December 31, 2012. The increase is primarily attributable to the development of software.

Net cash provided by financing activities amounted to $6,287,471 for the year ended December 31, 2013, compared to net cash provided in the year ended December 31, 2012 of $2,674,342, representing an increase in net cash flow from financing activities of $3,613,129. This was due to the receipt of net proceeds from the Company's issuance of stock, equity capital raises, net borrowings from new and existing debt obligations, offset by various debt repayments.

Financing:

The Company and HRAA have the following financing arrangements:

1. The Company entered into a revolving line of credit for $150,000 with Bank of America in December 2008, for its general working capital needs. The line of credit 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, Robert Rubinowitz and Andrea Clark, and was modified on September 19, 2013. The line of credit had a maturity date of December 18, 2009 and was renewed until December 18, 2012. The line of credit was modified on December 18, 2012 so that the loan no longer had an expiration date of December 18, 2012, but instead, a final maturity date of December 18, 2018. The interest rate per year was equal to the bank's prime rate plus 6.50%. The bank's prime rate of interest at December 31, 2012 was 3.25%. First payment of approximately $3,200 was paid October 19, 2013.

2. The Company entered into a term loan in March 2009 with Bank of America whose proceeds were used for general working capital. The term loan was personally guaranteed by Robert Rubinowitz and Andrea Clark and contain 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. The term loan has been consolidated with an existing line of credit. The balance due as of September 19, 2013, the date of the consolidation was approximately $20,697.

3. On September 19, 2013, The Company consolidated the term loan with the line of credit. The outstanding balance for the term loan and the line of credit prior to consolidation was $20,697 and $133,334, respectively. The new consolidated term loan is personally guaranteed by Robert Rubinowitz and Andrea Clark and contains restrictive covenants, which among other things, prohibit the Company from granting any security interests or liens on the assets of the Company. Payments of principal and interest are approximately $3,200 per month. The new consolidated term loan matures on September 19, 2017 and incurs interest at a rate per year equal to the bank's prime rate plus 3.5%. The balance due as of December 31, 2013 for the new consolidated term loan was approximately $142,000. Although the Company is current in its payments on this loan, management believes the Company may be in default of certain non-financial covenants. The bank has not notified the Company of any default.

4. A mortgage made to Dream Reachers related to certain real estate, which houses the Company's main office 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 Robert Rubinowitz. Interest is fixed at 6.625% for the first five years of the loan, and converts to an adjustable rate for the second five years at the Federal funds rate plus 3.25%, as established by the United State Federal Reserve. The balance under this mortgage loan as of December 31, 2013 was approximately $174,600. Monthly payments of 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.


5. In June 2012, HRAA 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, HRAA, at its . . .

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