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HRAA > SEC Filings for HRAA > Form 10-Q on 20-May-2014All Recent SEC Filings

Show all filings for HEALTH REVENUE ASSURANCE HOLDINGS, INC.

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


20-May-2014

Quarterly Report


Item 2. 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 three months ended March 31, 2014 and 2013, should be read in conjunction with the, Health Revenue Assurance Holdings' financial statements, and the notes to those financial statements that are included elsewhere in this Quarterly 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 in this Quarterly Report. We use words such as "anticipate," "estimate," "plan," "project," "continuing," "on going," "expect," "believe," "intend," "may," "will," "should," "could," and similar expressions to identify forward-looking statements.

Overview

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

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 item has 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. Presently, ICD-10 is scheduled to take effect on October 1, 2015 as a result of April 2014 legislation, although that date could be extended by further legislation or by the HHS.

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. However, our customers may anticipate further delays and thereby delay their engaging us for consulting services.

Our Services

We provide the following categories of services to our customers either on a standalone basis or bundled within a comprehensive solution. Depending on a customer's needs, we offer a mix of the following services as part of our solutions:

? Coding services

? Coding consulting services

? Education services

Coding Services

Coding services can be performed under short term or multi-year contracts in which we assume operational responsibility for various aspects of our customers' coding operations, including departmental or physician specialty coding, staff augmentation, or full outsource of a hospital or physician group coding operation. In the outsource contracts we typically hire part or the entire customer's coding staff that supported these functions prior to the transition of services. We then apply our coding expertise and operating methodologies and utilize technology to increase the efficiency of the operations, which usually results in increased coding quality at a lower cost.


Coding Consulting Services

Coding consulting services are typically performed under short term contracts in which we conduct billing and coding audits. In connection with such audits, we collect and analyze the clients' clinical documentation, the coding applied, and reimbursements and provide recommendations for improvement.

Billing and Coding Audits - We apply proven audit techniques to the review of medical records and revenue cycle operations. We assess all components of the medical record to include operative reports, nurses' & doctors' notes, records, and other ancillary tests and orders. Our methodology enhances our ability to identify procedures and diagnoses that may not be documented by the medical staff. The information derived these reviews enables our customers to analyze medical staff documentation and review the coding accuracy that drives reimbursements and contributes to resource utilization. In addition, the results provide a baseline for follow-on assessments enabling continuous improvement and customized coding and compliance training for departmental staff.

Consulting - Our consultants assist our customers keep pace with industry and regulatory changes, including consulting in health information management and revenue integrity.

Education Services

We offer various training and educational solutions to our customers including on-site training, coding boot camps, workshops, video training, and on demand webinars.

Our Contracts

Our contracts include services priced using a variety of pricing mechanisms. In determining how to price our services, we consider the delivery, credit and pricing risk of a business relationship. Depending on a customer's business requirements and the pricing structure of the contract, the amount of profit generated from a contract can vary significantly during a contract's term. Fixed- or unit-priced contracts, or an outsourcing services contract will typically produce less profit at the beginning of the contract with significantly more profit being generated as efficiencies are realized later in the term. Time and materials contracts are where our billings are based on measurements such as hours, days or months and an agreed upon rate. In some cases, the rate the customer pays for a unit of time can vary over the term of contract, which may result in the customer realizing immediate savings at the beginning of a contract.


Change in Officers and Directors

On March 26, 2014, the Company notified Dean Boyer, its chief technology officer, that the Company was terminating his employment with the Company as well as that certain employment agreement with the Company dated October 1, 2013, as amended on November 13, 2013, effective March 31, 2014.

On April 2, 2014 and April 4, 2014, respectively, directors Mitchell D. Kaye and David Kroin resigned from the board of directors.

On April 15, 2014, the Company notified Joseph Brophy, its senior vice president of operations that the Company was terminating his employment with the Company as well as that certain letter agreement, dated December 5, 2012, both effective April 25, 2014.

On April 16, 2014, Tim Lankes resigned as the Chief Executive Officer and as a member of the board of directors. Mr. Lankes did not serve on any committees or hold any other positions in the Company.

On April 18, 2014, Mr. Evan McKeown resigned as Chief Financial and Accounting Officer of the Company.

On April 22, 2014, the board of directors of Health Revenue Assurance Holdings, Inc. appointed Mr. Todd Willis as its interim Chief Executive Officer. Since October 2013, Mr. Willis has served as the Senior Vice President of the Company's Coding Business Unit.

On April 29, 2014, the board of directors of Health Revenue Assurance Holdings, Inc. appointed Gina Hicks as its interim Chief Financial Officer.


Three months ended March 31, 2014 compared to March 31, 2013

Results of Operations

The following table presents a summary of operating information for the three months ended March 31, 2014 and 2013:

                                             For the three months ended
                                              March 31,         March 31,         Increase/          Increase/
                                                2014              2013           (Decrease) $       (Decrease) %
Revenue                                    $     1,877,398     $ 2,156,597      $     (279,199 )           (12.95 )%
Costs of Revenues                                1,139,717         985,321             154,396              15.67 %
Gross profit                                       737,681       1,171,276            (433,595 )           (37.02 )%

Selling and administrative expenses              1,966,612       1,444,696             521,916              36.12 %
Depreciation and amortization                       19,821          25,429              (5,608 )           (22.05 )%
Total operating expenses                         1,986,433       1,470,125             516,308              35.12 %
Operating income (loss)                         (1,248,752 )      (298,849 )           949,903             317.85 %
Other expense, net                               1,112,684        (135,979 )         1,248,663                918 %

Net loss                                   $      (136,068 )   $  (434,828 )    $      298,760              68.70 %

Revenue:

Revenue decreased by approximately $279,200 or 13.0%, from approximately $2,156,600 for the three months ended March 31, 2013 to approximately $1,877,400 for the three months ended March 31, 2014. The decrease in revenue was due primarily to reductions in education and coding consulting services partially attributable the deceleration in the service demand due to the delay in the implementation of ICD-10 and lower utilization rates for coding services.

Cost of Revenues:

Cost of revenues increased by approximately $154,400 or 16.0%, from approximately $985,300 for the three months ended March 31, 2013 to approximately $1,139,700 for the three months ended March 31, 2014. The increase in cost was due primarily to the salaries, training and related employee costs for hiring of additional experienced coding and audit/consulting service personnel to service the anticipated growth in contracts from the ICD-10 implementation.

Gross profit:

Gross profit decreased by approximately $433,600, or 37.0%, from approximately $1,171,300 for the three months ended March 31, 2013 to approximately $737,700 for the three months ended March 31, 2014. The decrease in gross profit is primarily attributable to declines in education, consulting services, and coding revenues and increased employee costs.

Selling and Administrative Expenses:

Selling and administrative expenses were approximately $1,966,600 for the three months ended March 31, 2014, an increase of approximately $521,900 or 36.0%, from approximately $1,444,700 for the three months ended March 31, 2013. The change in the 2014 period compared to the 2013 period was primarily due to:

? Personnel costs have increased by approximately $120,500 or 15.0%, from approximately $827,600 for the three months ended March 31, 2013 to approximately $948,100 for the three months ended March 31, 2014. Increased personnel costs represents 23% of the total increase is due primarily to higher compensation and related expenses associated with the build-up of the Company's executive management, sales and administrative staff in anticipation of accelerated business volume.

? Consulting and professional fees have increased from approximately $134,400 for the three months ended March 31, 2013 to approximately $591,300 for the three months ended March 31, 2014, an increase of approximately $456,900, representing 87% of the total increase. Consulting fees increased approximately $347,000 due to the amortization of stock compensation for investor relations and business developments services. Other professional fees increased approximately $59,000 are primarily attributable to increased accounting, including an evaluation of the Company's internal control review services and tax related services. Legal fees increased approximately $51,000 are primarily attributable to increased legal services.

? The increase in selling and administrative expenses is partially offset by decreases in travel, stock compensation expense, and marketing expenses.

The Company is currently conducting a cost reduction initiative to improve efficiencies, reduce costs, and streamline and focus its efforts on its profitable business services including strategic workforce reductions and consolidating its real estate facilities.


Depreciation and Amortization Expenses:

Depreciation and amortization expenses were approximately $19,800 for the three months ended March 31, 2014, a decrease of approximately $5,600, or 22.0%, from approximately $25,400 for the three months ended March 31, 2013. The decrease was primarily due to amortization for the Visualizer software product that was fully impaired in September 2013.

Interest Expense (included in other expenses, net):

Interest Expense was approximately $189,200 for the three months ended March 31, 2014, an increase of approximately $53,200, from approximately $136,000 for the three months ended March 31, 2013. The increase in interest expense is primarily due to increase in interest paid on notes and finance charges related to the amortization of debt issue costs.

Change in Fair Value of Warrant Liability:

The warrants are subject to re-measurement at each balance sheet date, with any change in fair value recognized as a component of other income (expense), net in the statements of operations. We estimate the fair value of these warrants at the respective balance sheet dates, based on the estimated market value of the underlying common stock at the valuation measurement date, the remaining contractual term of the warrant, risk-free interest rates and expected dividends and expected volatility of the price of the underlying common stock. For the three months ended March 31, 2014 approximately $1,301,900 gain in fair value of warrant liability was recorded attributable to re-measurement. The resulting decrease in the warrant liability is primarily due to the decrease in the market value of the Company's common stock from a closing price of $0.25 per share at December 31, 2013 to a closing price of $0.20 per share at March 31, 2014.

If the Company's common stock closing price at June 30, 2014 is higher than the closing price at March 31, 2014, the Company may record a non-cash loss from change in fair value of warrant liability which may be material. Conversely, if the Company's common stock closing price at June 30, 2014 is lower than the closing price at March 31, 2014, the Company may record a non-cash gain from change in fair value of warrant liability which may be material.

Net Income (loss):

As a result of the above factors, a net loss of approximately $136,100 was
recognized for the three months ended March 31, 2014 as compared to net loss of
approximately $434,800 for the three months ended March 31, 2013, a decrease of
approximately $298,800 or approximately 69.0%. The decrease in net loss is
primarily attributable to the gain in fair value of warrant liability.

Liquidity and Capital Resources

                                                        For the Three Months-Ended
                                                         March 31,         March 31,
                                                           2014               2013
Net Cash used in operating activities                        (856,673 )      (148,613 )
Net Cash used in investing activities                          (4,084 )      (334,101 )
Net Cash (used in) provided by financing activities          (225,587 )       652,166
                                                           (1,086,344 )       169,452

Net cash used in operating activities was approximately $856,700 for the three months ended March 31, 2014 compared to $148,600 for the same period in 2013. For the three months ended March 31, 2014, net cash used by operating activities consisted primarily of net loss available to common stockholders of approximately $574,600 increased by non-cash adjustments of approximately $1,301,900 for the gain from change in fair market value of warrants offset by $358,800 of amortization of prepaid shares issued for services, $330,600 of accretion of series A redeemable convertible preferred stock redemption value differential, $108,000 of cumulative series a redeemable convertible preferred stock dividend, $101,600 of amortization of debt discount, $19,800 of depreciation and amortization, and $3,900 of net stock compensation expense. Additionally, changes in working capital approximately $97,100 decreased the net cash used in operating activities. For the three months ended March 31, 2013, net cash used by operating activities consisted primarily of net loss available to common stockholders of approximately $434,800 offset by non-cash adjustments of approximately $91,900 of amortization of debt discount, $25,400 depreciation, $28,000 of stock compensation expense, and $6,450 of bad debt expense. Additionally, changes in working capital approximately $134,500 decreased the net cash used in operating activities.

Net cash used in investing activities was approximately $4,100 for the three months ended March 31, 2014 compared to $334,100 for the same period in 2013. Net cash used in investing activities for three months ended March 31, 2014 of approximately $4,100 was used for the purchase of computer equipment. Net cash used in investing activities for the three months ended March 31, 2013 of approximately $334,100 represent the cost of internally developed software.

Net cash used in financing activities was approximately $225,600 for the three months ended March 31, 2014 compared to cash provided by financing activities of $652,200 for the same period in 2013. Net cash used by financing activities amounted to approximately $225,600 for the three months ended March 31, 2014, and relates to the repayment of debt obligations. Net cash provided by financing activities in the three months ended March 31, 2013, of approximately $652,200, and represented the proceeds from notes payable net of debt repayments.


                              March 31,       December 31,
                                2014              2013
Cash                         $ 1,967,141     $    3,053,485
Total Assets                 $ 3,835,609     $    5,428,951
Percentage of total assets            51 %               56 %

As of May 15, 2014, the Company had a cash balance of approximately $1,100,000. The Company expects to pay approximately $392,000 in severances to its former President and Chief Technology Officer through the remainder of 2014 and first quarter of 2015. As of May 15, 2014, the Company owes approximately $553,500 of notes payable due through February 2015 and capital lease debt of approximately $48,000 due through 2016. As of May 15, 2014, the Company's term loan balance is approximately $129,000, requires monthly principal and interest payments of approximately $4,000, and contains restrictive covenants prohibiting the granting any security interests or liens on the Company's assets. Under the Company's automatically renewing factoring agreement it assigns the collection rights of its receivables to a finance company in exchange for an advance rate of 85% of face value. (See Note 8 to our unaudited interim consolidated financial statements for the quarter ended March 31, 2014 for factoring activity and related balances.) As of May 15, 2014, the Company is current in its financial obligations under the factoring agreement, but the Company's management believes it may be violating one or more agreement covenants. The Company has not been notified of any default by the factor company.

Trends and Uncertainties

In 2014, we have encountered a series of resignations and other events, which may affect our future results of operations. In addition to the resignations in April of our former chief executive officer and chief financial officer, other employees resigned. Claims have been made for severance, which in at least two instances seem unwarranted. As of the date of this report, it is not feasible to quantify our exposure.

Going Concern

The Company's ability to continue as a going concern is dependent upon its ability to generate cash from operating activities and obtain additional financing to fund its business plan and to support working capital requirements.

However, as of March 31, 2014, the Company has a working capital deficiency, stockholders' deficit and accumulated deficit of approximately $2,461,400, $4,724,900, and $11,327,000, respectively, for the three months ended March 31, 2014, incurred net losses available to common stockholders of approximately $574,600, and has used net cash in operations of approximately $856,700. The Company has not been able to generate sufficient cash from operating activities to fund its on-going operations. To meet our working capital needs, the Company will be required to raise capital through the sale of equity and/or debt. The Company has also moved its focus of its business away from non-revenue generating business services which will improve efficiencies and reduce our operating expenses. 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.

On November 12, 2013, the Company entered into a Securities Purchase Agreement for the equity sale of $5.4 million in Series A Preferred Stock and Warrants to purchase shares of the Company's common stock. The net proceeds to the Company after commissions and professional fees were $4,903,652. The net raise as well as revenues generated from current operations are sufficient to fund on-going operations for approximately 4 months. However, the funding and our current level of revenues are not sufficient to alleviate the going concern issue.

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.

Principles of Consolidation

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

Allowance for doubtful accounts

Accounts receivable balances are subject to credit risk. Management has reserved for expected credit losses, sales returns and allowances, and discounts based upon past experience, as well as knowledge of current customer information. The Company believes that its reserves are adequate. It is possible, however, that the accuracy of our estimation process could be impacted by unforeseen circumstances. The Company continuously reviews its reserve balance and refines the estimates to reflect any changes in circumstances.


Software

Costs incurred in connection with the development of software products are accounted for in accordance with the Financial Accounting Standards Board Accounting Standards Codification ("ASC") 985 Costs of Software to Be Sold, Leased or Marketed." Costs incurred prior to the establishment of technological feasibility are charged to research and development expense. Software development costs are capitalized after a product is determined to be technologically feasible and is in the process of being developed for market and capitalization ceases after the general release of the software. Amortization of capitalized software development costs begins upon initial product shipment after general release. Capitalized software development costs are amortized over the estimated life of the related product (generally thirty-six months) using the straight-line method. The Company evaluates its software assets for impairment whenever events or change in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of software assets to be held and used is measured by a comparison of the carrying amount of the asset to the future net undiscounted cash flows expected to be generated by the asset. If such software assets are considered to be impaired, the impairment to be recognized is the excess of the carrying amount over the fair value of the software asset.

Software maintenance costs are charged to expense as incurred. Expenditures for enhanced functionality are capitalized. The cost of the software and the related accumulated amortization are removed from the accounts upon retirement of the software with any resulting loss being recorded in operations.

Asset Impairment

At the end of September 2013, the Company re-evaluated the capitalized research and development costs for the Visualizer software suite of multiple offerings and the OMC Initiator 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 opinion 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 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 . . .

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