Quarterly Report (10-q)

Share Name	Share Symbol	Market	Type
Healthcare Corporation of America (GM)	USOTC:HCCA	OTCMarkets	Common Stock

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: September 30, 2013

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to____________

Commission File Number: 000-54527

HEALTHCARE CORPORATION OF AMERICA

(Exact name of the registrant as specified in its charter)

Delaware		27-4563770
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

66 Ford Road, Suite 230 Denville, New Jersey		07834
(Address of principal executive offices)		(Zip Code)

(973) 983-6300

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☐ No ☒

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Sec.232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐		Accelerated filer	☐
Non-accelerated filer	☐	(Do not check if a smaller reporting company)	Smaller Reporting Company	☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):

Yes ☒ No ☐

Number of shares of common stock outstanding as of March 20, 2014: 8,832,692

Table of Contents

		Page

PART I – FINANCIAL INFORMATION		2

ITEM 1.	FINANCIAL STATEMENTS	F-1

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.	2

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	9

ITEM 4.	CONTROLS AND PROCEDURES	9

PART II – OTHER INFORMATION		9

ITEM 1.	LEGAL PROCEEDINGS	9

ITEM 1A. RISK FACTORS		10

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	10

ITEM 3.	DEFAULT UPON SENIOR SECURITIES	10

ITEM 4.	MINE SAFETY DISCLOSURES	10

ITEM 5.	OTHER INFORMATION	10

ITEM 6.	EXHIBITS	10

CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS

This Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, or the Exchange Act. The statements contained in this report that are not purely historical are forward-looking statements. Our forward-looking statements include, but are not limited to, statements regarding our or our management’s expectations, hopes, beliefs, intentions or strategies regarding the future. In addition, any statements that refer to projections, forecasts or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. The words “anticipates,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “possible,” “potential,” “predict,” “project,” “should,” “would” and similar expressions may identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking.

The forward-looking statements contained in this report are based on our current expectations and beliefs concerning future developments and their potential effects on us. There can be no assurance that future developments affecting us will be those that we have anticipated. These forward-looking statements involve a number of risks, uncertainties (some of which are beyond our control) or other assumptions that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements. These risks and uncertainties include, but are not limited to, those factors described under the heading “Risk Factors,” which include, among other things:

changing principles of generally accepted accounting principles;

market acceptance of our products;

changes in government regulations related to the pharmaceutical industry;

changes in government regulations related to healthcare, generally;

fluctuations in customer demand;

management of growth;

general economic conditions;

relationships with suppliers;

overall economic conditions and local market conditions;

our ability to keep information confidential;

the volume of prescriptions for certain drugs or drugs generally; and

retaining key customer relationships.

Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, actual results may vary in material respects from those projected in these forward-looking statements. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws and/or if and when management knows or has a reasonable basis on which to conclude that previously disclosed projections are no longer reasonably attainable.

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Healthcare Corporation of America

Consolidated Financial Statements

As of September 30, 2013

F- 1

HEALTHCARE CORPORATION OF AMERICA

CONDENSED CONSOLIDATED BALANCE SHEETS

As of September 30, 2013 and June 30, 2013

	September 30, 2013			June 30, 2013
	(Unaudited)
Assets

Current assets:
Cash and cash equivalents	$	3,434,173		$	1,792,026
Accounts receivable		1,848,006			1,251,579
Inventory		527,011			442,945
Rebates receivable		1,829,598			1,574,659
Prepaid expenses and other current assets		314,308			322,638

Total current assets		7,953,096			5,383,847
Property and equipment, net		1,217,471			1,236,734
Investment held in trust		-			8,652,482
Deferred financing costs, net		314,691			548,394
Software, net		326,928			262,142
Other assets		424,857			443,251

Total assets	$	10,237,043		$	16,526,850

Liabilities, Redeemable Securities and Stockholders’ Deficit

Current liabilities:
Accounts payable	$	6,104,688		$	5,214,355
Accrued expenses		3,061,762			2,428,033
Deferred revenue		1,144,052			495,286
Senior Convertible Note, net of debt discount		3,267,057			-
Line of credit		-			534,343
Current portion of capital leases		214,242			189,989
Other current liabilities		17,193			162,387

Total current liabilities		13,808,994			9,024,393

Incentive Notes		2,959,395			2,771,514
Capital leases, net of current portion		630,261			658,092
Derivative liabilities		3,444,376			3,559,188
Other liabilities		49,724			143,546

Total liabilities		20,892,750			16,156,733

Commitments and contingencies

Redeemable securities:
Redeemable common stock, $.001 par value; 839,965 shares issued and outstanding		-			8,651,639

Total redeemable securities		-			8,651,639

Stockholders’ deficit:

Common stock, $.0001 par value; 30,000,000 shares authorized; 8,953,494 shares issued and outstanding at September 30, 2013 and June 30, 2013		895			895
Additional paid-in capital		18,752,332			16,423,417
Accumulated deficit		(29,408,934	)		(24,705,834	)

Total stockholders’ deficit		(10,655,707	)		(8,281,522	)

Total liabilities, redeemable securities and stockholders’ deficit	$	10,237,043		$	16,526,850

The accompanying notes are an integral part of these condensed financial statements.

F- 2

HEALTHCARE CORPORATION OF AMERICA

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

For the Three Months Ended September 30, 2013 and September 30, 2012

(Unaudited)

	Three Months Ended September 30, 2013			Three Months Ended September 30, 2012

Sales	$	16,715,144		$	7,817,435
Cost of sales		15,762,918			7,506,873

Gross Profit		952,226			310,562

Operating expenses:
Selling, general and administrative		4,545,929			2,189,392
Loss from operations		(3,593,703	)		(1,878,830	)

Other income (expense):
Interest expense		(1,224,209	)		(127,026	)
Change in fair value of derivative liabilities		114,812			-

Total other income (expense)		(1,109,397	)		(127,026	)

Loss before provision for income taxes		(4,703,100	)		(2,005,856	)

Provision for income taxes		-			-

Net loss	$	(4,703,100	)	$	(2,005,856	)

Earnings per share:
Basic and diluted loss per share	$	(0.53	)	$	(0.05	)

Weighted average number of shares outstanding		8,953,494			40,000,009

The accompanying notes are an integral part of these condensed financial statements.

F- 3

HEALTHCARE CORPORATION OF AMERICA

Consolidated Statement of Redeemable Securities and Stockholders' Deficit

For the Three Months Ended September 30, 2013

(Unaudited)

							Stockholders’ Defecit
	Redeemable Common Stock						Common Stock				Additional		Accumulated			Stockholders'
	Shares			Amount			Shares		Amount		Paid-In Capital		Defecit			Deficit

Balance at July 1, 2013		839,965		$	8,651,639			8,953,494	$	895	$	16,423,417	$	(24,705,834	)	$	(8,281,522	)
Recognition of beneficial conversion feature on the senior convertible note											$	654,144				$	654,144
Issuance of equity warrants in connection with the senior convertible note											$	1,154,144				$	1,154,144
Issuance of equity warrants in connection with line of credit											$	88,730				$	88,730
Purchase of redeemable common stock		(839,965	)	$	(8,651,639	)										$	-
Cancelation of accrued underwriters fees											$	148,008				$	148,008
Stock based compensation											$	283,889				$	283,889
Net loss		-			-			-		-		-		(4,703,100	)		(4,703,100	)
Balance at September 30, 2013		-		$	-			8,953,494	$	895		18,752,332	$	(29,408,934	)	$	(10,655,707	)

The accompanying notes are an integral part of these condensed financial statements.

F- 4

HEALTHCARE CORPORATION OF AMERICA

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Three Months Ended September 30, 2103 and September 30, 2012

(Unaudited)

	Three Months Ended September 30, 2013			Three Months Ended September 30, 2012
Cash used in operating activities:
Net loss	$	(4,703,100	)	$	(2,005,856	)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization		101,598			52,000
Non cash interest expense		1,097,641			25,499
Stock-based compensation		283,889			-
Note-based compensation		18,394			-
Common stock issued to consultant		-			641,642
Mark to market adjustment on warrant liability		(114,812	)		-
Changes in assets and liabilities:
Accounts receivable		(596,427	)		(1,663,837	)
Rebates receivable		(254,939	)		157,497
Inventory		(84,066	)		(62,823	)
Prepaid expenses and other current assets		8,330			2,141
Accounts payable and accrued expenses		1,252,062			2,301,974
Deferred revenues		648,766			(250,000	)
Other		(2,278	)		(26,042	)

Total cash used in operating activities		(2,344,942	)		(827,805	)

Cash used in investing activities:
Purchase of property, equipment and software		(104,513	)		(94,426	)

Total cash used in investing activities		(104,513	)		(94,426	)

Cash from financing activities:
Proceeds from cash released from trust		8,652,482			-
Redemption of common stock		(8,651,639	)		-
Proceeds from notes payable		5,000,000			5,925,000
Repayments on line of credit		(534,343	)		-
Debt costs		(328,712	)		(631,106	)
Payments of capital leases		(46,186	)		(30,222	)

Total cash provided by financing activities		4,091,602			5,263,672

Net increase (decrease) in cash		1,642,147			4,341,441

Cash, beginning of period		1,792,026			488,801

Cash, end of period	$	3,434,173		$	4,830,242

The accompanying notes are an integral part of these condensed financial statements.

(Continued)

F- 5

HEALTHCARE CORPORATION OF AMERICA

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

For the Three Months Ended September 30, 2013 and September 30, 2012

(Unaudited)

	Three Months Ended September 30, 2013		Three Months Ended September 30, 2012
Supplemental disclosures:

Interest	$	126,568	$	101,527

Income taxes	$	-	$	-

Conversion of other loans payable to equity	$	-	$	-

Equipment purchases under capital leases	$	42,608	$	-

Cost of raising capital written off against paid-in capital	$	-	$	-

Cancellation of accrued underwriters' fees	$	148,008	$	-

The accompanying notes are an integral part of these condensed financial statements.

F- 6

HEALTHCARE CORPORATION OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of September 30, 2013 and June 30, 2013 and for the Three Months Ended September 30, 2013 and September 30, 2012

Description of Business

Selway Capital Acquisition Corporation (“SCAC” or “Selway”) was originally incorporated under the laws of Delaware on January 12, 2011 for the purpose of acquiring one or more operating businesses through merger or capital stock exchange. On January 25, 2013, an agreement and plan of merger (the “Merger”) was entered into between SCAC and Healthcare Corporation of America (“HCCA”). The Merger closed on April 10, 2013 with SCAC being the surviving entity upon the consummation of the Merger (see Note 3).

HCCA and its wholly-owned subsidiaries, Prescription Corporation of America Benefits (“PCA Benefits”) and Prescription Corporation of America (“PCA”), are engaged in providing benefits management and mail order pharmaceutical fulfillment services to companies primarily in the northeast United States.

On June 3, 2013, SCAC amended its articles of incorporation to change its name to Healthcare Corporation of America (collectively with its subsidiaries, the “Company”).

On April 22, 2013, the Company’s board of directors approved the change of its fiscal year end from December 31 to June 30.

On November 7, 2013, the board of directors approved the change of its fiscal year end back to December 31.

The accompanying historical consolidated financial statements represent the financial position and results of operations of HCCA through April 10, 2013 and the financial position and results of operations of the Company thereafter (See Note 3).

Liquidity and Financial Condition

The Company has a working capital deficit and a history of recurring losses and negative cash flows from operating activities. As of September 30, 2013 and June 30, 2013, the Company has a working capital deficit of $5,855,898 and $3,640,546, respectively and stockholders’ deficit of $10,655,707 and $8,281,522, respectively. During the three months ended September 30, 2013 and the six months ended June 30, 2013, the Company incurred net losses of $4,703,100 and $14,066,292, respectively, and negative cash flows from operating activities of $2,344,942 and $4,784,185, respectively. Collectively, these factors raise substantial doubt about the Company’s ability to continue as a going concern.

The Company is currently making efforts to raise capital in the form of debt and/or equity. No assurance can be given that the debt and/or equity can be raised and if available it will be on terms acceptable to the Company.

The accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern. The ability of the Company to continue as a going concern is dependent upon adequate capital to fund operating losses until it becomes profitable. If the Company is unable to obtain adequate capital, it could be forced to cease operations.

The Merger

On January 25, 2013, an Agreement and Plan of Merger (the “Agreement”) was entered into by and among the Company, Selway Merger Sub, Inc., a New Jersey corporation and wholly owned subsidiary of the Company (“Merger Sub”), HCCA, PCA, and representatives of HCCA and the Company. On April 10, 2013 (the “Closing Date”), the Merger and other transactions contemplated by the Agreement closed.

Pursuant to the Agreement, Merger Sub merged with and into HCCA, resulting in HCCA becoming a wholly owned subsidiary of the Company. PCA and PCA Benefits, a dormant entity, remain wholly owned subsidiaries of HCCA.

F- 7

HEALTHCARE CORPORATION OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

As of September 30, 2013 and June 30, 2013 and for the Three Months Ended September 30, 2013 and September 30, 2012

3. The Merger (Continued)

Holders of all of the issued and outstanding shares of common stock of HCCA immediately prior to the time of the Merger had each of their shares of common stock of HCCA converted into the right to receive: (i) a proportional amount of 5,200,000 shares of the Company’s Series C common stock and promissory notes with an aggregate face value of $7,500,000 (collectively, the “Closing Payment”); plus (ii) a proportional amount of up to 2,800,000 shares of the Company’s common stock, if any, (the “Earn-out Payment Shares”) issuable upon the Company achieving certain consolidated gross revenue thresholds as more fully described below; plus (iii) the right to receive a proportional amount of the proceeds from the exercise of certain warrants being issued to Selway Capital Holdings, LLC, Selway’s sponsor, as more fully described below. A portion of the Closing Payment (520,000 shares and promissory notes with an aggregate face value of $750,000) was being held in escrow for a period of 12 months following the Merger to satisfy indemnification obligations of HCCA. Effective December 20, 2013, the escrowed portion of the Closing Payment, together with a portion of the shares issued to HCCA’s investment banking advisor (an aggregate of 546,002 shares, and promissory notes with an aggregate face value of $750,000) were released from escrow and cancelled.

The promissory notes included in the Closing Payment are non-interest bearing and subordinated to all senior debt of the combined company in the event of a default under such senior debt. The notes will be repaid from 18.5% of the Company’s free cash-flow (as defined) in excess of $2,000,000. The Company will be obligated to repay such notes if, among other events, there is a transaction that results in a change of control of the Company. The Company valued the notes at $1,977,570, which represented the present value of the estimated future cash flows to be generated by the combined companies discounted using an interest rate reflective of the uncertainty and credit risk of the notes.

Certain members of HCCA’s management received an aggregate of 1,500,000 shares of our common stock (the

“Management Incentive Shares”), which shares were placed in escrow and subject to release in three installments through June 30, 2015. Subsequently, certain members of HCCA management agreed to cancel an aggregate of 750,000 shares pursuant to rescission agreements entered into June 2013. Of the remaining Management Incentive Shares outstanding, 400,000 shares have vested but remain in escrow until June 30, 2014 and 350,000 shares will vest on June 30, 2015 and will remain in escrow until June 30, 2015.

As part of the Merger, Selway’s net liabilities, consisting primarily of warrant liabilities, were assumed. As part of its Initial Public Offering, Selway issued 2,000,000 warrants, with an exercise price of $7.50 and an expiration date of November 6, 2016 (“Selway IPO Warrants”). These warrants are classified as liabilities based on certain anti-dilution features. The Selway IPO Warrants were recorded at $4,018,000 based on the closing price of the warrants on the date of Merger.

The Earn-out Payment Shares, if any, will be issued as follows: (i) 1,400,000 shares if the Company achieves consolidated gross revenue of $150,000,000 for the twelve months ended March 31, 2014 or June 30, 2014; and (ii) 1,400,000 shares if the Company achieves consolidated gross revenue of $300,000,000 for the twelve months ended March 31, 2015 or June 30, 2015. In the event the Company does not achieve the first earn-out threshold, but does achieve the second earn-out threshold, then all of the Earn-out Payment Shares shall be issued. If the Company consolidates, merges or transfers substantially all of its assets prior to June 30, 2015 at a valuation of at least $15.00 per share, then all of the Earn-out Payment Shares not previously paid out shall be issued immediately prior to such transaction. If, prior to achieving either earn-out threshold the Company acquires another business in exchange for its equity or debt securities, then any remaining earn-out thresholds may be adjusted by the independent members of the Company’s board of directors at their sole discretion. The Company estimates that it will not achieve any of the abovementioned revenue targets and therefore no provision has been made for the Earn-out Payment Shares.

The Agreement required 10% of the consideration, or 520,000 shares of the Company’s Series C common stock and promissory notes with a face value of $750,000 to be held in escrow for a period of one year. As a result of the investigation and subsequent restatement, in December 2013 these shares of stock and promissory notes were returned to the Company. Also in December 2013, the rights to additional proceeds from the exercise of certain warrants issued to Selway Capital Holdings, LLC as part of the merger were cancelled.

In connection with a bridge financing (the “Bridge Financing”) completed by HCCA in September 2012, HCCA issued 59.25 units, each unit consisted of 10,000 Convertible Preferred Shares, a warrant for 5,000 shares of common stock that, upon a merger with Selway, converted to warrants with the same terms as Selway IPO warrants and a Promissory Note with a face value of $100,000 (“Promissory Notes”). At the time of the Merger, holders of all of the issued and outstanding shares of preferred stock of HCCA, by virtue of the Merger, had each of their shares of Preferred Stock of HCCA converted into the right to receive a proportional amount of 592,500 shares of the Company’s Series C common stock and warrants to purchase 296,250 shares of the Company’s Series C common stock. If a Merger with Selway or equivalent, as defined in the Preferred Stockholder agreement, occurred before the maturity date of the promissory notes, the preferred stock converted on a 1 to 1 basis into Series C Common Stock of Selway. If such Merger did not occur, then at the maturity of the Promissory Notes, the Preferred Stock converted into 3.7% of common stock of HCCA on a fully diluted basis. Upon issuing the preferred stock, HCCA determined the contingent beneficial conversion feature to the holders of the Preferred Stock if the Merger with Selway occurred to be $3,532,858 and recorded that as a deemed dividend to the Preferred Stockholders upon the closing of the Merger.

F- 8

HEALTHCARE CORPORATION OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

As of September 30, 2013 and June 30, 2013 and for the Three Months Ended September 30, 2013 and September

The warrants issued in connection with the bridge loan were initially exercisable at $7.50 into shares of common stock of HCCA and expired on November 7, 2016. The warrants contained certain anti-dilution that caused them to be classified as liabilities. Upon completion of the Merger with Selway, the warrants became exercisable in Series C shares of Common Stock of Selway. The exercise price and expiration date remained the same.

The Promissory Notes bore interest at 8%, were convertible into 10,000 shares of Series C Common Stock if a transaction with Selway occurred and matured on the earlier of a transaction with Selway or September 12, 2013. HCCA allocated the value received from the sale of the units first to the estimated fair value of warrants. The residual value was then allocated to the preferred stock and promissory note based on their relative fair values. As a result of the allocation, HCCA recorded a debt discount of $2,445,242. The debt discount was amortized to interest expense over the term of the Promissory Note. HCCA recorded interest expense of $1,732,047, including $1,018,851 to recognize the unamortized debt discount at the transaction date in the period ending June 30, 2013. HCCA recorded interest expense of $713,196 related amortization of the debt discount in the year ended December 31, 2012. Upon issuing the promissory notes, HCCA determined the contingent beneficial conversion feature to the holders of the Promissory Notes, if they converted into shares of Selway and recorded additionally $1,182,327, as additional interest expense upon the conversion of the promissory notes. In accordance with the terms of the promissory notes issued in the Bridge Financing, at the time of the Merger, notes in the aggregate amount of $3,159,624 (including principal and interest accrued to date) were converted into 315,959 shares of the Company’s Series C common stock and notes in the aggregate principal amount of $3,025,000 were repaid in full. The promissory note included in the Bridge Financing was only convertible into shares of common stock if the transaction with Selway closed before the maturity of the note. At the issuance of the Bridge Financing, the Company determined that a contingent beneficial conversion feature existed representing the difference in the value of the underlying shares and the allocated value to the promissory note. Upon closing of the transaction, the Company recognized the contingent beneficial conversion feature and recorded $1,182,327 as additional interest expense in the period ended June 30, 2013.

In connection with the Bridge Financing, HCCA executed a registration rights agreement that required it to register the shares underlying the Bridge Financing if the transaction was completed. The agreement required HCCA to file a registration statement within 60 days of the completion of the transaction with Selway and have the registration statement declared effective within 120 days. The agreement requires damages of 1% per month of the Bridge Financing, capped at 10%, for each month the Company does not comply with the requirement. As a result of the restatements and investigation (see the Company’s financial statements for the six month period ending June 30, 2013), the Company concludes that it is probable it will not file a registration statement and have declared within the period required and estimates that it will incur the maximum damages under the agreement. The Company recorded $592,500 to interest expense for the period ended June 30, 2013. This amount is included in accrued expenses as of September 30, 2013.

In conjunction with the merger of Merger Sub into HCCA:

The Company entered into exchange agreements with three beneficial holders of HCCA’s bridge loan who were also beneficial holders of greater than 5% of the Company’s Series A common stock. Pursuant to the exchange agreements, such holders converted an aggregate of 281,554 shares of the Company’s Series A common stock to the Company’s Series C common stock. In conjunction with the exchange, such holders were repaid bridge notes in the aggregate principal amount of $3,025,000.

The Company entered into exchange agreements with three beneficial holders of greater than 5% of the Company’s Series A common stock. Pursuant to the exchange agreements, such holders converted an aggregate of 878,481 shares of the Company’s Series A common stock to the Company’s Series C common stock and received $3.53 per share of Series A common stock exchanged, or an aggregate of $3,101,038.

F- 9

HEALTHCARE CORPORATION OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

As of September 30, 2013 and June 30, 2013 and for the Three Months Ended September 30, 2013 and September

An aggregate of $11,948,361 was released from the Company’s trust account, reflecting the number of shares of the Company’s Series A common stock that were converted into the Company’s Series C common stock, of which $237,007 was paid to the underwriters from the Company’s initial public offering. The Company incurred other costs related to the transaction totaling $577,069 and recorded both these costs and the costs paid to the underwriters as a reduction to Additional Paid In Capital.

The placement warrants held by the Company’s founders were converted into the right to receive: (i) an aggregate of 100,000 shares of common stock; and (ii) warrants to purchase an aggregate of 1,000,000 shares of common stock at an exercise price of $10.00 per share. The proceeds from the exercise of the exchange warrants will be paid: (i) 75% to the holders of all of the issued and outstanding shares of common stock of HCCA immediately prior to the time of the merger; and (ii) 25% to certain members of HCCA management. The exchange warrants are only exercisable for cash, may not be exercised on a cashless basis, and must be exercised if the closing price for the combined company’s common stock exceeds $12.00 per share for 20 trading days in any 30-trading-day period. On November 22, 2013, the Company cancelled these warrants and issued a new warrant to purchase 1 million shares of common stock. The replacement warrant was recorded to additional paid in capital. Per the terms of the warrant agreement, the warrant’s initial exercise price was $7.50 per share, subject to adjustment upon the first subsequent financing of the Company. This financing occurred on December 31, 2013 upon which the exercise price of this warrant was adjusted from $7.50 to $1.50. The new warrants do not include the provision to share the exercise proceeds with former shareholders of HCCA or management. The Company will record a charge in the quarter ended December 31, 2013 reflecting the value of the modification to the warrant.

Pursuant to an engagement letter entered into by HCCA with its investment banking adviser, 5% of all consideration received was owed to the adviser. Accordingly the Company issued 335,000 shares of common stock representing 5% of the common stock and incentive stock, as adjusted, received by HCCA and issued an incentive note of $500,000 representing 5% of the incentive notes issued to HCCA. The present value of the incentive note was recorded to additional paid in capital and is included in liabilities assumed.

The business combination of the Company and HCCA was accounted for as a reverse recapitalization of HCCA, since prior to the merger the Company was a shell corporation as defined under Rule 12b-2 of the Exchange Act. HCCA was treated as the accounting acquirer in this transaction due to the following factors:

HCCA’s management pre-closing remained as the management of the Company post-closing;

The members of the board of directors of HCCA pre-closing represent the majority of directors of the Company post- closing; and

The majority of shares of the Company post-closing were still owned by HCCA shareholders, who represented 60% of the Company’s shares outstanding immediately after closing, if all shares subject to conversion in our post-closing tender offer actually convert to Series C (non-redeemable) common shares, and 65% of the Company’s shares outstanding if all shares subject to conversion do not convert to Series C shares and opt to receive their pro rata cash in trust at the time of the post-closing tender offer. Estimates of HCCA’s ownership do not include shares underlying warrants held by public investors and the Company’s sponsors restricted incentive shares held by management. However, HCCA shareholders would still have 51% of the Company’s shares post-closing when including shares underlying warrants and restricted shares and assuming all redeemable shares convert to Series C shares, and 54% of the Company’s shares post-closing if all shares subject to conversion do not convert to Series C shares and opt to receive their pro rata cash in trust at the time of the post-closing tender offer.

F- 10

HEALTHCARE CORPORATION OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

As of September 30, 2013 and June 30, 2013 and for the Three Months Ended September 30, 2013 and September

Significant Accounting Policies

Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”).

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements including disclosure of contingent assets and liabilities, at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period and accompanying notes. The Company’s critical accounting policies are those that are both most important to the Company’s financial condition and results of operations and require the most difficult, subjective or complex judgments on the part of management in their application, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Because of the uncertainty of factors surrounding the estimates or judgments used in the preparation of the financial statements, actual results could differ from these estimates.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances have been eliminated in consolidation.

Accounts Receivable

Accounts receivable represent amounts owed to the Company for products sold and services rendered net of an allowance for doubtful accounts. The Company grants unsecured credit to its customers. The Company continuously monitors the payment performance of its customers to ensure collections and minimize losses. Management does not believe that significant credit risks exist. An allowance for doubtful accounts is based upon the credit profiles of specific customers, economic and industry trends and historic payment experience. There is no allowance for doubtful accounts at September 30, 2013 and June 30, 2013.

Inventory

Inventories consist of finished pharmaceutical products and are recorded at the lower of cost or market, with the cost determined on a first-in, first-out basis. The Company periodically reviews the composition of inventory in order to identify obsolete, slow-moving or otherwise non-saleable items. If non-saleable items are observed and there are no alternate uses for the inventory, the Company will record a write-down to net realizable value in the period that the decline in values is first recognized.

Rebates

Pharmaceutical manufacturers offer rebates for selected brand drugs. The Company currently receives these rebates through a third party administrator. The rebates are considered earned when members (employees of customers) order the drugs. Rebates earned are paid to the Company by the third party administrator quarterly. Rebates earned are recognized as a reduction to cost of sales. The portion of the rebate payable to customers is simultaneously recognized as a reduction of revenue. Management evaluates rebates receivable at the end of every reporting period and adjusts the amount reflected on the accompanying balance sheet to net realizable value. An adjustment is also made to the rebate payable to customers to correspond with any adjustment that applies to rebates receivable.

Property and Equipment

Property and equipment are stated at cost less accumulated amortization and depreciation. Leasehold improvements are amortized using the straight-line method over the shorter of the term of the lease or the estimated useful lives of the assets. Furniture and fixtures are depreciated using the straight-line method over the estimated useful lives of the assets of 5 years. Computer equipment and software are depreciated using the straight-line method over the estimated useful lives of the assets, which range from 3 to 5 years.

F- 11

HEALTHCARE CORPORATION OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

As of September 30, 2013 and June 30, 2013 and for the Three Months Ended September 30, 2013 and September

4. Significant Accounting Policies (Continued)

Internal-Use Software Development Costs

The Company capitalizes certain costs associated with the purchase and/or development of internal-use software, including its website. Generally, external and internal costs incurred during the application development stage of a project are capitalized. The application development stage of a project generally includes software design and configuration, coding, testing and installation activities. Training and maintenance costs are expensed as incurred. Upgrades and enhancements are capitalized if it is probable that such expenditures will result in additional functionality. Capitalized software costs are amortized using straight-line method over the estimated useful life of the asset, which approximates 3 years.

Long-Lived Assets

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. The Company assesses recoverability by determining whether the net book value of the related asset will be recovered through the projected undiscounted future cash flows of the asset. If the Company determines that the carrying value of the asset may not be recoverable, it measures any impairment based on the fair value of the asset as compared to its carrying value. During the three months ended September 30, 2013 and September 30, 2012, the Company did not record any impairment charges.

Investments Held in Trust

The Company applies the provisions of ASC Topic 320-10, Investment – Debt and Equity , to account for investments held in trust, which comprise only of held-to maturity securities. Held-to-maturity securities are those securities, which the Company has the ability and intent to hold until maturity. Held-to-maturity securities are recorded at amortized cost on the accompanying balance sheets and adjusted for any amortization or accretion of premiums or discounts.

Deferred Financing Costs

Costs relating to obtaining debt have been capitalized and amortized over the term of the related debt using the straight line method. Amortization of deferred financing costs charged to interest expense was $562,415 and $12,749 in the three months ended September 30, 2013 and September 30, 2012, respectively. The unamortized balance was $314,691 and $548,394 at September 30, 2013 and June 30, 2013, respectively.

Derivative Financial Instruments

The Company applies the provisions of ASC Topic 815-40, Contracts in Entity’s Own Equity (“ASC Topic 815-40”), under which convertible instruments and warrants, which contain terms that protect holders from declines in the stock price (reset provisions), may not be exempt from derivative accounting treatment. As a result, such warrants are recorded as a liability and are revalued at fair value at the end of each reporting period. Furthermore, under derivative accounting, the warrants are initially recorded at their fair value. If the fair value of the warrants exceeds the face value of the related debt, the excess is recorded as a change in fair value in the statement of operations on the issuance date.

Debt Discounts

Debt discounts are amortized using the effective interest rate method over the term of the related debt. The result achieved using the straight-line method is not materially different than those which would result using the effective interest method.

F- 12

HEALTHCARE CORPORATION OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of September 30, 2013 and June 30, 2013 and for the Three Months Ended September 30, 2013 and September 30, 2012

Significant Accounting Policies (Continued)

Share-Based Payments

Share-based payments to employees are measured at the fair value of the award on the date of grant based on the estimated number of awards that are ultimately expected to vest. The compensation expense resulting from such awards is recorded over the vesting period of the award in selling, general and administrative expenses on the accompanying consolidated statements of operations.

Share-based payments to non-employees for services rendered are recorded at either the fair value of the services rendered, or the fair value of the awards, whichever is more readily determinable. The expense resulting from such awards is marked to market over the vesting period of the award in selling general and administrating expenses on the accompanying consolidated statements of operations.

Revenue Recognition

The Company typically enters into annual renewable agreements with its customers to provide pharmacy benefit management on a fixed price or self-insured basis. The Company records revenues from all its current contracts with customers gross as the Company acts as principal based on the following factors: 1) the Company has a separate contractual relationship with its customers and with its claims adjudicator to whom the Company pays the costs of the prescription drugs consumed by its customers (the claims), 2) the Company through its claim adjudicator is responsible to validate and manage the claims, and 3) the Company bears the credit risk for the amount due from the customers. Revenues are recorded monthly as earned. The Company also operates a mail order pharmacy that services plan members. All revenues and associated costs from dispensing drugs by the mail order pharmacy to our plan members, excluding the members’ co-pay are eliminated as inter-company revenues. Some of the contracts contain terms whereby the Company makes certain financial guarantees regarding prescription costs. Actual performance is compared to the guaranteed measure throughout the period and accruals are recorded as an offset to revenue if the Company fails to meet a financial guarantee.

Cost of Sales

Cost of sales includes claim payments for both fixed- price and self-insured programs, administrative fees paid for processing the claims to the claims adjudicator and, the cost of prescription drugs of the mail order pharmacy.

Advertising Expenses

Advertising expenses are expensed as incurred and included in selling, general and administrative expenses on the accompanying statements of operations. Advertising expenses were approximately $36,787 and $16,951 for the three months ended September 30, 2013 and September 30, 2012 respectively.

Income Taxes

The Company accounts for income taxes using the liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. A valuation allowance is established when realization of net deferred tax assets is not considered more likely than not.

F- 13

HEALTHCARE CORPORATION OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of September 30, 2013 and June 30, 2013 and for the Three Months Ended September 30, 2013 and September 30, 2012

Significant Accounting Policies (Continued)

Income Taxes (Continued)

Uncertain income tax positions are determined based upon the likelihood of the positions being sustained upon examination by taxing authorities. The benefit of a tax position is recognized in the consolidated financial statements in the period during which management believes it is more likely than not that the position will not be sustained. Income tax positions taken are not offset or aggregated with other positions. Income tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of income tax benefit that is more than 50 percent likely of being realized if challenged by the applicable taxing authority. The portion of the benefits associated with income tax positions taken that exceeds the amount measured is reflected as income taxes payable.

The Company recognizes interest related to uncertain tax positions in interest expense. The Company recognizes penalties related to uncertain tax positions in income tax expense.

Fair Value Measurements

The Company applies recurring fair value measurements to its derivative instruments in accordance with ASC 820, Fair Value Measurements . In determining fair value, the Company uses a market approach and incorporates assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and/or the risks inherent in the inputs to the valuation techniques. These inputs can be readily observable, market corroborated or generally unobservable internally-developed inputs. Based upon the observability of the inputs used in these valuation techniques, the Company’s derivative instruments are classified as follows:

Level 1: The fair value of derivative instruments classified as Level 1 is determined by unadjusted quoted market prices in active markets for identical assets or liabilities that are accessible at the measurement date.

Level 2: The fair value of derivative instruments classified as Level 2 is determined by quoted market prices for similar assets or liabilities in active markets, quoted market prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data.

Level 3: The fair value of derivative instruments classified as Level 3 is determined by internally-developed models and methodologies utilizing significant inputs that are generally less readily observable from objective sources.

The Company’s valuation methodology for warrants classified as derivative liabilities qualifies as a level 2 fair value measurement since it is determined using internally developed models and analysis.

At September 30, 2013 the Company had 2,000,000 warrants exercisable into its Class C shares that were issued in connection with Selway’s initial public offering (“Selway IPO Warrants”). These warrants are publicly traded and are classified as liabilities. Additionally, HCCA issued 296,250 warrants in connection with the Bridge Financing with identical terms as the Selway IPO Warrants. The Company has valued all of these warrants as September 30, 2013 based on the closing price of the Selway IPO Warrants. Because the market for the Selway IPO Warrants is not active, the valuation is classified as a Level 2 measurement. These warrants are exercisable at $7.50 a share and expire on November 7, 2016.

The table below presents the Company’s fair value hierarchy for those derivative instruments measured at fair value on a recurring basis as of September, 2013:

	Level 1		Level 2		Level 3		Total

Warrants	$	-	$	3,444,376	$	-	$	3,444,376

Total derivative liabilities	$	-	$	3,444,376	$	-	$	3,444,376

F- 14

HEALTHCARE CORPORATION OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of September 30, 2013 and June 30, 2013 and for the Three Months Ended September 30, 2013 and September 30, 2012

Significant Accounting Policies (Continued)

The table below presents the Company’s fair value hierarchy for those derivative instruments measured at fair value on a recurring basis as of June 30, 2013:

	Level 1		Level 2		Level 3	Total

Warrants	$	-	$	3,559,188	$	$	3,559,188

Total derivative liabilities	$	-	$	3,559,188	$	$	3,559,188

Fair Value of Financial Instruments

The fair values of cash and cash equivalents, accounts receivable, rebates receivable and accounts payable approximate their carrying values due to the short-term nature of the instruments. The fair values of long-term debt and revolving loans approximates their carrying value due to their variable interest rates. The fair value of investments held in trust is not materially different than its carrying value because of the short-term nature of the investments.

Risks and Concentrations

The Company utilizes the services of a single claims adjudicator. If there is an adverse situation in this relationship, the Company’s mail order pharmaceutical fulfillment services would be ineffective until a replacement claims adjudicator was obtained.

Approximately 22% of the Company’s revenues for the three months ended September 30, 2013 were derived from one customer. Revenues from a different customer accounted for 15% of the Company’s revenues for the three months ended September 30, 2012. No amounts were due from these customers at September 30, 2103 and June 30, 2013, respectively. In addition, one reseller’s customers accounted for approximately 19% and 14% of the Company’s revenue for the three months ended September 30, 2013 and September 30, 2012, respectively. Amounts due from the customers represented 61% and 32% of the Company’s accounts receivable at September 30, 2013 and June 30, 2013, respectively.

Cash and Cash Equivalents

The Company considers all cash in bank, money market funds and certificates of deposit with an original maturity of less than three months to be cash equivalents. The Company maintains its cash and cash equivalents in one financial institution. Cash balances on hand at this financial institution may exceed the insurance coverage provided to the Company by the Federal Deposit Insurance Corporation at various times during the year.

Earnings (Loss) Per Share

Basic earnings (loss) per share is computed by dividing net income (loss) available to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted earnings (loss) per share are determined in the same manner as basic earnings (loss) per share, except that the number of shares is increased to include potentially dilutive securities using the treasury stock method. Because the Company incurred a net loss in all periods presented, all potentially dilutive securities were excluded from the computation of diluted loss per share because the effect of including them is anti-dilutive.

Basic and Diluted:	Three Months Ended September 30, 2013			Three Months Ended September 30, 2012

Net loss	$	(4,703,100	)	$	(2,005,856	)
Weighted average shares		8,953,494			40,000,009
Basic (loss) per common share	$	(0.53	)	$	(0.05	)

The following table summarizes the number of shares of common stock attributable to potentially dilutive securities outstanding for each of the periods which are excluded in the calculation of diluted loss per share:

F- 15

HEALTHCARE CORPORATION OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of September 30, 2013 and June 30, 2013 and for the Three Months Ended September 30, 2013 and September 30, 2012

Dilutive Potential Common Shares	Three Months Ended September 30, 2013		Three Months Ended September 30, 2012

Warrants		3,534,023		1,585,833
Restricted stock awards		-		75,292
Senior convertible notes		625,000		2,666,667

Property and Equipment

Property and equipment is as follows:

	September 30, 2013			June 30, 2013

Furniture and fixtures	$	1,661,051		$	1,606,404
Leasehold improvements		35,010			25,260
Capitalized software					-
		1,696,061			1,631,664
Accumulated depreciation and amortization		(478,590	)		(394,930	)

Net property and equipment	$	1,217,471		$	1,236,734

Depreciation and amortization expenses were $83,660 and $52,000 for the three months ended September 30, 2013 and September 30, 2012, respectively.

Software, net

Software, net is as follows:

	September 30, 2013			June 30, 2013

Software costs	$	376,834		$	294,109
Accumulated amortization		(49,906	)		(31,967	)

Net software costs	$	326,928		$	262,142

Amortization expense was $17,939 and $0 for the three month period ended September 30, 2013 and September 30, 2012, respectively.

Investments Held in Trust

Following the initial public offering (“IPO”) of the Company in November 2011, a total of $20.6 million was placed in a trust account maintained by American Stock Transfer as a trustee. None of the funds held in trust were to be released from the trust account, other than interest income, net of taxes, until the earlier of (i) consummation of an acquisition and (ii) redemption of 100% of the public shares sold in the IPO if the Company fails to consummate an acquisition prior to May 14, 2013.

F- 16

HEALTHCARE CORPORATION OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of September 30, 2013 and June 30, 2013 and for the Three Months Ended September 30, 2013 and September 30, 2012

On April 10, 2013, the Company closed the acquisition of HCCA through the Merger (see Notes 1 and 3). At the time of the merger, holders of 1,160,035 shares of redeemable common stock decided not to redeem their shares and accordingly, approximately $11,948,000 was released from escrow. As per the articles of incorporation of the Company, the remaining balance in the trust account of approximately $8,652,000 was used to redeem the remaining 839,965 redeemable common shares through a tender offer which closed on August 15, 2013.

The amount in trust can be invested only in United States “government securities” within the meaning of Section 2(a)(16) of the Investment Company Act of 1940 having a maturity of 180 days or less. As of June 30, 2013 the total trust balance of $8,652,482 was in cash.

The Company classifies its United States Treasury and equivalent securities as held-to-maturity in accordance with FASB ASC 320, “Investments – Debt and Equity Securities.” Held-to-maturity treasury securities are recorded at amortized cost on the accompanying balance sheet and adjusted for the amortization or accretion of premiums or discounts.

Deferred Financing Costs

Deferred financing costs are as follows:

Balance July 1, 2013	$	548,394
Cost incurred for the senior convertible note for the three months ended September 30, 2013		328,712
Amortization for the three months ended September 30, 2013 *		(562,415	)

Balance June 30, 2013	$	314,691

* Including fully amortizing deferred costs of $538,637 relating to the line of credit terminated in September 2013 (see Note 10).

Accrued Expenses

Accrued expenses are as follows:

	September 30, 2013		June 30, 2013

Accrued severence costs*	$	750,000	$	750,000
Accrued rebates		512,665		364,196
Accrued registration rights penalties**		864,000		592,000
Accrued professional fees		111,738		290,777
Accrued payroll		332,000		-
Accrued expenses other		491,359		431,060

	$	3,061,762	$	2,428,033

*Payable to a former executive of the Company.

**Estimated penalties relating to late registration of shares of common stock in connection with the Bridge Notes and Senior Convertible Note.

F- 17

HEALTHCARE CORPORATION OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of September 30, 2013 and June 30, 2013 and for the Three Months Ended September 30, 2013 and September 30, 2012

10.

Line of Credit

On April 11, 2013, the wholly-owned subsidiaries of HCCA, entered into a credit and security agreement for a secured revolving credit facility with an initial aggregate credit limit of $5,000,000. The facility has a term of 3 years, through April 11, 2016, during which the loan proceeds are to be used solely for working capital. The facility was terminated in September 2013 due to the Company’s inability to meet certain financial covenants and all outstanding balances under the line were repaid, and the carrying value of the related financing costs of $538,637 were written off to interest expense.

11.

Senior Convertible Note

On July 17, 2013, the Company entered into a loan and security agreement with Partners for Growth III, LP (“PFG”) for a one-time convertible secured loan of $5,000,000 with a maturity date of July 17, 2018. Pursuant to the terms of the Loan Agreement, the loan is convertible at $8 per share and interest on the PFG Loan is payable on a monthly basis at an annual rate of prime plus 5.25% per annum, subject to certain reductions if certain financial targets are met.

If the Company fails to achieve certain revenue and earnings targets, PFG may elect to accelerate the repayment of the loan portion of the PFG Loan over the shorter of the 24-month period from the date of the election or the remaining term of the loan. Upon acceleration of repayment, the Company must make monthly payments of principal and interest, such that 60% of the outstanding principal is repaid in the first year and 40% is paid in the second year.

The Loan Agreement contains certain financial covenants as well as customary negative covenants and events of default

As part of consideration for the PFG Loan, the Company issued to Lender and its designees warrants to purchase an aggregate of 220,000 shares of Series C common stock, for $7.50 per share, at any time on or prior to July 17, 2018 (the “PFG Warrants”).

At the time of the transaction, the Company recorded a beneficial conversion feature in the amount $654,144, the warrants were recorded as equity warrants in the amount of $1,154,144 and the notes were recorded at the residual value of $3,191,711 reflecting a loan discount of $1,808,289. In addition, the Company incurred loan costs amounting to $328,712. In the three months period ending September 30, 2013 the Company recorded interest expense associated with the amortization of the loan discount and the capitalized loan costs amounting to $89,365.

In addition as of September 30, 2013 the Company recorded an accrual of $272,000 and a corresponding interest charge reflecting the estimated penalty relating to the late registration of the underlying shares of common stock.

On October 15, 2013, the Company received a notice of events of default from PFG.

On December 31, 2013, the Company entered into a Forbearance, Waiver and Modification to the loan agreement. Pursuant to the terms of the modification PFG (i) lent an additional $500,000 to the Company, (ii) The conversion price of the promissory notes issued under the original loan agreement and the modification was reduced to $2.50 per share from $7.50 per share, (iii) PFG’s right to accelerate repayment of the loan if certain conditions were not met was eliminated, (iv) The Company agreed to pay certain fees, (v) Certain financial covenants were revised, (vi) The number of shares issuable upon exercise of warrants issued to PFG was increased from 220,000 to 555,000 and the exercise price of the warrants was reduced to $3.00 per share from $8.00 per share, (VII) The Company issued 425,000 shares of its common stock to PFG, and (viii) PFG has the option, until June 30, 2019, to require the Company to purchase from it, at PFG’s option, up to 25,000 shares (of the 425,000) of common stock for a purchase price of $250,000.

The revised financial covenants of the Senior Convertible Note, beginning July 1, 2014, require the Company to maintain a specified ratio of cash and accounts receivable to the outstanding Senior Convertible Note. The Company is currently not in compliance with this covenant and needs additional equity investments to meet this requirement. There is no guarantee that such equity investments would be available to the Company in order to comply with this covenant, and accordingly the Senior Convertible Note is presented as current in the accompanying consolidated balance sheet.

F- 18

HEALTHCARE CORPORATION OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of September 30, 2013 and June 30, 2013 and for the Three Months Ended September 30, 2013 and September 30, 2012

12.

Bridge Notes

On September 12, 2012, the Company completed a bridge financing (the “Bridge Financing”) consisting of 59.25 units, each unit consisting of 10,000 preferred shares, 5,000 warrants and a promissory note with a face value of $100,000. At the time of the transaction, the value of the units was allocated as follows: Preferred Stock was recorded at a value of $2,362,517, the warrants were recorded as a warrant liability of $82,726 and the notes were recorded at a value of $3,479,757, reflecting a loan discount of $2,445,242. In addition, the Company incurred loan fees amounting to $673,229. The Company recorded interest expense associated with the amortization of the loan discount and the loan fees through the Merger date.

At the time of the Merger, holders of all of the issued and outstanding shares of preferred stock of HCCA, by virtue of the Merger, had each of their shares of preferred stock of HCCA converted into the right to receive a proportional amount of 592,500 shares of the Company’s Series C common stock and warrants to purchase 296,250 shares of the Company’s Series C common stock. In accordance with the terms of the promissory notes issued in the Bridge Financing, at the time of the Merger, notes in the aggregate amount of $3,159,592 (including principal and interest accrued to date) were converted into 315,959 shares of the Company’s Series C common stock and notes in the aggregate principal amount of $3,025,000 were repaid in full.

13.

Long-Term Debt

Incentive Notes

Upon consummation of the merger (see Note 3), Holders of all of the issued and outstanding shares of common stock of HCCA immediately prior to the time of the Merger had each of their shares of common stock of HCCA converted into the right to receive: (i) a proportional amount of 5,200,000 shares of the Company’s Series C common stock and promissory notes with an aggregate face value of $7,500,000 (collectively, the “Closing Payment”).

In addition, the Company issued to its management $2,500,000 of Management Incentive Notes and paid fees in connection with the transaction by issuing promissory notes having an aggregate principal amount of $500,000, which reflects five percent of all promissory notes issued in the transaction.

The above described notes with an aggregate face value of $10,500,000 have identical terms and conditions, are non-interest bearing and are subordinated to all senior debt of the Company in the event of a default under such senior debt. The notes will be repaid from 18.5% of the Company’s free cash-flow (defined as in the notes) in excess of $2,000,000. The Company will be obligated to repay such notes if, among other events, there is a transaction that results in a change of control of the Company.

The notes were recorded at their estimated present value, based on the estimated time of repayment discounted to the balance sheet date. The Company will continue to re-evaluate its estimates on a periodic basis and adjust the present value of the notes accordingly. Of the Management Incentive Notes, $222,477, net of discount vested immediately and $395,514 is being recognized as management incentive compensation over the estimated payment periods.

F- 19

HEALTHCARE CORPORATION OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of September 30, 2013 and June 30, 2013 and for the Three Months Ended September 30, 2013 and September 30, 2012

	September 30, 2013			June 30, 2013

Shareholder notes	$	7,500,000		$	7,500,000
Placement notes		500,000			500,000
Management incentive notes		2,500,000			2,500,000
		10,500,000			10,500,000

Less debt discount		(7,540,605	)		(7,728,486	)

	$	2,959,395		$	2,771,514

Future maturities of the Incentive Notes based on the Company’s estimates are as follows:

June 30,

2014	$	-
2015		-
2016		399,000
2017		1,789,000
2018		3,622,000
Thereafter		4,690,000

	$	10,500,000

Capital Leases

The Company has entered into capital lease agreements for equipment, which expire at various dates through November 2019. The assets capitalized under these leases and associated accumulated depreciation at September 30, 2013 and June 30, 2013 are as follows:

Equipment under Capital Leases

	September 30, 2013			June 30, 2013

Furniture and equipment	$	1,050,343		$	1,007,735
Accumulated depreciation		(310,547	)		(250,821	)

	$	739,796		$	756,914

F- 20

HEALTHCARE CORPORATION OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of September 30, 2013 and June 30, 2013 and for the Three Months Ended September 30, 2013 and September 30, 2012

Amortization of capital leases is included in depreciation expense.

Minimum future lease payments under capital lease obligations as of September 30, 2013 are as follows:

Future payments:

Year Ended September 30,

2014	$	278,338
2015		251,395
2016		202,281
2017		157,978
2018		75,920
Thereafter		41,704

Total future minimum lease payments		1,007,616
Less amount representing interest		(163,113	)
Present value of net minimum lease payments		844,503
Less current portion		(214,242	)

	$	630,261

14.

Redeemable Securities

Redeemable common stockholders are entitled to redeem all or a portion of such shares in connection with the Company’s initial public offering, as defined in the Company’s Certificate of Incorporation, and are entitled to share ratably in the trust account, including the deferred underwriting discounts and commissions and accrued but undistributed interest, net of (i) taxes payable, (ii) interest income earned on the trust account (approximately $10.30 per share) and (iii) a pro rata share of the trust account released to the Company for each Share converted to a Series C Share upon completion of a Business Transaction. 839,965 shares of Series B common stock were redeemed from the trust account on August 15, 2013.

15.

Stockholders’ Equity

The Company is authorized 30,000,000 shares of common stock, par value $.0001, which shares may, but are not required to, be designated as part of one of three series, callable Series A, callable Series B and Series C shares. The holders of all common shares shall possess all voting power and each share shall have one vote.

Series A – Holders of shares of Series A Common Stock are entitled to cause the Corporation to redeem all or a portion of their shares in connection with an acquisition transaction. If the holders of Series A Common Stock do not elect to have their shares redeemed, then they will automatically be converted to Series B Common Stock. As of September 30, 2013 there are no outstanding Series A Common Stock.

Series B – Holders of shares of Series B Common Stock have the same rights as Series A Common Stock, except Series B Common Stock cannot be issued until such time as all outstanding shares of Series A Common Stock are converted to Series B Common Stock. The holders of Series B Common Stock have the right to participate in a Post-Acquisition Tender Offer or Post-Acquisition Automatic Trust Liquidation. 839,965 shares of Series B common shares were redeemed from the trust account on August 15, 2013. As of September 30, 2013 there were no outstanding redeemable shares.

Series C – Holders of shares of Series C Common Stock have the same rights as Series A Common Stock, except holders of Series C Common Stock are not entitled to (1) cause the Corporation to redeem all or a portion of such Series C Common Stock in connection with the Acquisition Transaction, (2) share ratably in the Trust Account or (3) participate in a Post-Acquisition Tender Offer or Post-Acquisition Automatic Trust Liquidation. As of September 30, 2013, there are 8,953,494 shares of Series C Common Stock outstanding.

F- 21

HEALTHCARE CORPORATION OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of September 30, 2013 and June 30, 2013 and for the Three Months Ended September 30, 2013 and September 30, 2012

The Series A Common Stock, Series B Common Stock and Series C Common Stock will be automatically consolidated into one series of Common Stock after the consummation of the Post-Acquisition Tender Offer or Post-Acquisition Automatic Trust Liquidation. The consolidation shall be on a one-for-one basis of the then outstanding shares of each series of common stock. Following the automatic consolidation, only one series of Common Stock will be authorized, which will be referred to as “Common Stock”, which occurred after June 30, 2013.

Prior to the merger the Company’s operations were conducted under the HCCA corporate entity (See Note 1). HCCA had authorized 50,000,000 shares of common stock, no par value. Upon the merger, every 7.6923 HCCA shares of common stock were exchanged into 1 share of the Company’s common stock.

During 2012, the Company issued 2,120,200 shares of common stock with a fair value range of $0.01 to $0.31. These shares are freely tradable.

During 2012, the Company settled a suit with a shareholder to repurchase 500,000 shares of its common stock. These shares were recorded as a stock redemption for $100,000 and the shares were received in February 2013. In February 2013, these shares were issued to employees in recognition of service performed and an expense of $480,000 was recorded representing the estimate fair value of the shares issued.

As part of the Merger, 750,000 restricted shares of stock were issued to certain members of management. The shares were valued at $7.30, the share price at the date of the merger. 400,000 shares vested immediately and the remaining vest through June 30, 2015. In the period ending September 30, 2013, the Company recorded an expense of $283,889 for the shares that vest through June 30, 2015.

16.

Commitments and Contingencies

Operating Leases

The Company has certain non-cancelable operating leases for facilities and equipment that expire over the next four years. Future minimum payments for non-cancelable operating leases are as follows as of September 30, 2013:

Minimum Rental Payments

2014	$	210,578
2015		206,992
2016		218,505
2017		91,575
	$	727,650

Rent expense was 48,346 for the three months ended September 30, 2013 and for the three months ended September 30, 2012.

Employment Agreements

As of September 30, 2013, the Company had entered into employment agreements with senior officers and other members of management. The agreements specify aggregate guaranteed annual salaries of $2.4 million for each year of employment and extended through May 2017. The agreements allowed the Company to terminate these individuals for cause and not for cause. Depending on the terms of the individual contract upon termination without cause the Company would either be required to continue to pay salary throughout the original term of the contract or pay severance, typically one year of salary.

F- 22

HEALTHCARE CORPORATION OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of September 30, 2013 and June 30, 2013 and for the Three Months Ended September 30, 2013 and September 30, 2012

From September 2013 to January 2014, the Company terminated agreements representing $1 million in annual compensation. The Company made severance payments of $120,000 and in one case replaced an existing agreement with an annual consulting agreement that renews annually and permits the Company to terminate at any time with 90 days notice.

As of September 30, 2013, the Company entered into employment contracts or employment arrangement letters with certain members of management that among other things committed the Company to issuing approximately 650,000 stock options. Subsequent to September 30, 2013, the Company entered into additional arrangements committing to issue an additional 841,000 of stock options. The Company does not currently have a stock option plan and these stock options will be granted at the time the stock option plan is appropriately established.

Litigation

During 2012, the Company filed a lawsuit against its past adjudicator of claims for overcharges, over payment on claims, errors and misclassifications, and rebates owed from drug manufacturers claiming damages of over $5 million. Additionally, the Company has recorded an expense for the amount owed for claims payable. The adjudicator of claims filed a counterclaim for amounts it claims are owed to it by the Company.

In August 2013, the Company settled the suit with the claims adjudicator. Under the terms of the settlement the Company agreed to pay the claims adjudicator $2.7 million over 15 months commencing in September 2013. This amount was recorded as a liability as of December 31, 2012, in accounts payable.

On August 14, 2012, the Company entered into an agreement with a shareholder to buy back 500,000 shares of common stock for $100,000. The order also called upon the payment of $50,000 in legal fees. As of December 31, 2012, the Company had not received the 500,000 shares of common stock but had paid the settlement. The Company received these shares in February 2013. A stock redemption was recorded on December 31, 2012 in the amount of $100,000.

17.

Related Party

Otis Fund, a company controlled by a former consultant to the Company who owned in excess of 5% of the common stock of the Company, had a consulting agreement to provide marketing and sales services to HCCA. The contract was due to expire on January 2, 2017; however, the Company terminated this agreement for cause in September 2013.The annual fees related to these services were $360,000.

In September 2012, 2,068,200 shares were issued to two entities believed to be controlled by a former consultant of the Company. The Company is currently investigating the circumstances under which these shares were issued to the two entities. The Company recorded a charge equal to the estimated market value of the shares of $641,142 as selling, general and administrative expense.

18.

Subsequent Events

On October 15, 2013, Partners For Growth iii LP (“PFG”), the holder of the senior convertible note, notified the Company of events of Default. On December 31, 2013 the Company and PFG entered into a forbearance waiver and modification agreement to the Loan agreement (see Note 12).

The Company issued a total of 555,000 warrants to PFG in connection with the loan agreement and the forbearance waiver and modification agreement.

On November 7, 2013, the Company’s Board of Directors decided to change the Company’s fiscal year end from June 30 to December 31.

F- 23

HEALTHCARE CORPORATION OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of September 30, 2013 and June 30, 2013 and for the Three Months Ended September 30, 2013 and September 30, 2012

On December 31, 2013, the Company entered into a securities purchase agreement (the “SPA”) with certain purchasers (each a “Purchaser” and collectively, the “Purchasers”) named therein and Charden Capital Markets, LLC (“Agent”) as administrative and collateral agent. Pursuant to the SPA, the Company issued $2,112,500 of Junior Secured Convertible Term Notes (the “Notes”), which Notes are convertible into shares of the Company’s stock at the initial fixed conversion price equal to $1.50 per share. The Purchasers of Notes also received warrants (“the Warrants”) to purchase one share for every $1.50 of Notes purchased by such Purchaser. The Company completed the initial closing of a private placement of Notes and Warrants under the SPA on December 31, 2013, and may continue to make subsequent placement under the SPA until it has placed an aggregate of $6,000,000 in Notes under the SPA or the date that is 30 days after the date of such initial closing (the private placements under the SPA are collectively referred to as the “Private Placement”).

In connection with the Private Placement at the Company agreed to pay the Agent a fee representing 9% of the principle amount of the Notes plus the $500,000 additional loan from the Lender, less $250,000, or $2,362,500. The fee was paid in the form of additional Notes (with a pro rata number of warrants) in the amount of $212,625 (for the total principle amount of Notes equal to $2,325,125).

In connection with the issuance of the Notes under the SPA, the Company issued warrants to purchase an aggregate of 1,550,083 shares of common stock (including warrants to purchase 141,750 shares issued to the Agent for its fees), at an exercise price of $3.00 per share (the “Exercise Price”), at any time on or prior to December 31, 2018 (the “Warrants”). The Warrants may also be exercised on a cashless basis.

The Company and its subsidiaries entered into a Master Security Agreement with the Agent pursuant to which the Company and its subsidiaries agreed to secure the payment of all obligations under the Notes by granting and pledging to the Agent a continuing security interest in all of the Company’s and its subsidiaries’ property now owned or at any time hereafter acquired by them.

F- 24

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Overview

We are a company that was organized under the laws of the State of Delaware on January 12, 2011 to acquire, through a merger, capital stock exchange, asset acquisition, stock purchase or similar acquisition transaction, one or more operating businesses. Although we were not limited to a particular geographic region or industry, we focused on acquiring operating businesses in the United States. Until the acquisition the Acquisition, we did not operate a business and our activities were limited to locating a business to acquire. As a result of the closing of the Acquisition, we operate our business through our wholly owned subsidiary, HCCA.

Our subsidiary, HCCA, is a Pharmacy Benefit Manager, or PBM. Its mission is to reduce prescription drug costs for clients while improving the quality of care. HCCA administers prescription drug benefits programs for employers who contract with HCCA directly in order to provide this component of healthcare benefits to their employees. It also is the PBM for healthcare management companies who partner with HCCA in order to provide prescription drug benefits along with their core offering, other health benefits products, to their clients.

Restatement of Financial Information

On May 9, 2013, we issued a Current Report on Form 8-K announcing that our Board of Directors, after consultation with, and upon recommendation from, our management, concluded the previously issued audited financial statements for the years ended December 31, 2011 and 2012 for HCCA, which we recently acquired and which is currently our wholly owned subsidiary, should no longer be relied upon and that disclosure should be made, and action should be taken, to prevent future reliance on such financial statements. For a description of the basis for the Board’s determination, please see our Current Report on Form 8-K dated May 9, 2013, which description is incorporated by reference herein.

Our officers discussed the foregoing matters with HCCA’s independent registered public accounting firm during the period, Thomas J. Harris, Certified Public Accountant. The Board of Directors authorized and directed that our officers take the appropriate and necessary actions to amend and restate the Current Report on Form 8-K (the “Original 8-K”), pursuant to which HCCA’s financial statements were filed with the SEC on May 16, 2013.

The restated financial statements also include certain reclassifications related to revenue and cost of sales for the fiscal years ended December 31, 2011 and 2012. We previously disclosed in our Current Reports on Form 8-K filed on March 25, 2013 and April 16, 2013 HCCA’s practice of recognizing revenue from rebates as well as from its mail-order pharmacy business. HCCA has reclassified these figures as decreases to cost of sales, with the exception of co-pays from members who order from its mail-order facility. There is no impact on gross profit, nor is there an impact on operating expenses related to this reclassification.

On September 16, 2013, the Board of Directors of the Company, after consultation with, and upon recommendation from, management of the Company, concluded that the previously issued and restated audited financial statements for the years ended December 31, 2011 and 2012 of HCCA, and the previously issued unaudited financial statements for the quarter ended March 31, 2013 of HCCA, should no longer be relied upon and that disclosure should be made, and action should be taken, to prevent future reliance on such financial statements. The Company reported this information in its Current Report on Form 8-K dated September 16, 2013.

Our officers discussed the foregoing matters with HCCA’s independent registered public accounting firm during the period, Thomas J. Harris, Certified Public Accountant. The Board of Directors authorized and directed that our officers take the appropriate and necessary actions to amend and restate the Original 8-K. As a result we reviewed our financial statements in an attempt to discover all the material errors and misstatements that were included therein. As part of this review we engaged external consultants to review and investigate our books and records and other related transactions and activities for 2012 and 2011.

On November 11, 2013, the Company issued a press release announcing that the Company had discovered additional issues that necessitated an in-depth analysis of the books and records of HCCA for 2011, 2012 and the three months ended March 31, 2013. As a result of this review our management concluded that it will be unable to complete our restated 2011 financial statements, due to lack of sufficient source documents and other information, and that, as a result of the analysis, management had decided to exclude the 2011 income statement from our Transition Report on Form 10-K, in which it would otherwise be required, and that we would adjust the financial statements for 2012 and the 6 months ended June 30, 2013 to reflect the correction of the errors that were discovered. The Transition Report on Form 10-K was filed on March 13, 2013.

The errors requiring a restatement of HCCA’s financial statements resulted in material weaknesses in internal control over financial reporting which were noted in the amended filings. In order to help prevent similar accounting errors in the future, the Company has hired a new CFO effective as of June 3, 2013 and instituted new procedures and controls where all material schedules and related journal entries are reviewed by the CFO on a monthly basis. On January 7, 2014, the Company’s Board of Directors established an Audit Committee consisting of Mr. Thomas Rebar and Edmundo Gonzalez, with Mr. Rebar as Chairman. In addition, the Company is in the process of locating additional independent directors eligible to serve on the audit committee.

New Chief Executive Officer

On December 31, 2013, the Company appointed Natasha Giordano to serve as Chief Executive Officer, President and director of the Company, effective January 1, 2014. Also on December 31, 2013, Gary Sekulski resigned as Chief Executive Officer of the Company effective upon the appointment of his successor, Natasha Giordano. He will continue to serve as a director of the Company. In addition, Mr. Sekulski entered into a one year renewable consulting agreement whereby he will provide sales and marketing consulting services to the Company.

Change in Fiscal Year

On November 7, 2013, the Company determined to change its fiscal year end from June 30 to December 31. As a result of the change in fiscal year, the Company will file a transition report on Form 10-K for the six months ended December 31, 2013.

Debt Modification

On October 15, 2013, the Company received a notice of events of default (the “Notice”) from Partners For Growth III, L.P. (the “Lender”) pursuant to that certain Loan and Security Agreement dated as of July 17, 2013 (the “Loan Agreement”) by and among the Company, Healthcare Corporation of America, a New Jersey corporation and wholly owned subsidiary of the Company (“HCA”), Prescription Corporation of America, a New Jersey corporation and wholly owned subsidiary of HCA (“PCA”), and PCA Benefits, Inc., a New Jersey corporation and wholly owned subsidiary of HCA (“PCAB”; and collectively with the Company, HCA and PCA, the “Borrowers”). On December 31, 2013, the Company entered into a Forbearance, Waiver and Modification No. 1 to Loan Agreement with the Lender (the “Modification”) that is described in the Company’s Current Report on Form 8-K dated December 31, 2013.

Private Placement

On December 31, 2013, the Company entered into a securities purchase agreement (the “SPA”) with certain purchasers (each a “Purchaser” and collectively, the “Purchasers”) named therein and Chardan Capital Markets, LLC (“Agent”) as administrative and collateral agent. Pursuant to the SPA, the Company issued $2,112,500 of Junior Secured Convertible Term Notes (the “Notes”), which Notes are convertible into shares of the Company’s common stock at an initial fixed conversion price equal to $1.50 per share. The Purchasers of Notes also received warrants (the “Warrants”) to purchase one share for every $1.50 of Notes purchased by such Purchaser. The Company completed the initial closing of a private placement of Notes and Warrants under the SPA on December 31, 2013, and may continue to make subsequent placements under the SPA until it has placed an aggregate of $6,000,000 in Notes under the SPA or the date that is 30 days after the date of such initial closing (the private placements under the SPA are collectively referred to as the “Private Placement”).

In connection with the Private Placement the Company agreed to pay the Agent a fee representing 9% of the principal amount of the Notes plus the $500,000 additional loan from the Lender, less $250,000, or $2,362,500. The fee was paid in the form of additional Notes (with a pro rata number of warrants) in the amount of $212,625 (for total principal amount of Notes equal to $2,325,125).

Pursuant to a registration rights agreement entered into in connection with the Private Placement, the Company is required to file a registration statement covering all securities issued or issuable pursuant to the SPA (the “SPA Securities”) no later than ten business days following the filing with the Commission of the Company’s annual or quarterly report for the period ending December 31, 2013 (or, if the Company does not file a report for such period, the report for the period ending closest to December 31, 2013), but in no event later than April 14, 2014. The holders of SPA Securities are entitled to liquidated damages in the amount of 1% of the face value of the Notes for each 30 day period the company fails to comply with its obligations under the registration rights agreement. In the event the Company fails to timely make such liquidated damages payment, the such amounts shall accrue interest at a rate of 1.5% for every 30 day period such failure continues.

Going Concern

We continue generating substantial losses and expect to into the foreseeable future, while successfully completing various financings as described herein during 2012 and 2013. Nevertheless, as of the date of this report we have not yet established an ongoing source of revenues sufficient to cover our operating costs to allow us to continue as a going concern. Our ability to continue as a going concern is dependent on our obtaining additional adequate capital to fund operating losses until we become profitable and generate cash flows from our operations. If we are unable to obtain adequate capital, we could be forced to cease operations. We are contemplating conducting additional offering of our debt or equity securities to obtain additional operating capital. There are no assurances we will be successful and without sufficient financing it would be unlikely for us to continue as a going concern.

Results of Operations

THREE MONTHS ENDED SEPTEMBER 30, 2013 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2012

Sales

HCCA’s sales includes sales earned on its fully funded and self- funded plans. Sales for the three months ended September 30, 2013 was $16,715,144, an increase of $8,897,709, or 114% as compared to sales of $7,817,435 for the three months ended September 30, 2012. The increase was primarily attributable to significant growth in HCCA’s core PBM business (Fully-Funded and Self-Funded). HCCA’s sales is based on contracts that generally last for one year and are billed on a monthly basis. Sales are recognized as the products and services are delivered to members (typically employees of the client).

We estimate that the Fully- Funded business line which accounted for approximately 72% of our sales for the three months ending September 30, 2013, and which generated substantial operating losses, will decline in the months to come as annual renewable contracts may not renew due to our demand for substantial price increases as a condition for contract renewals.

Cost of Sales

Cost of sales for the three months ended September 30, 2013 was $15,762,918, an increase of $8,256,045 or 110%, as compared to $7,506,873 for the three months ended September 30, 2012. The increase was primarily attributable to HCCA’s growth in its core business.

HCCA’s cost of sales for its PBM business derives from the cost of claims related to its clients. All claims are adjudicated via the Argus system. Cost of claims includes the cost of drugs dispensed and charged by pharmacies servicing HCCA’s members and an administrative fee charged by Argus. The cost of claims relating to HCCA’s mail-order pharmacy, which directly services our members, exclusively comes from the cost of each individual drug as set by the manufacturer. HCCA’s mail-order pharmacy purchases drugs from various suppliers, who are mainly drug wholesalers.

Rebates received from pharmaceutical manufacturers are recorded as reduction of cost of sales, and the portion of the rebate payable to customers is treated as reduction of sales.

Gross Profit

HCCA’s gross profit increased from $310,562 in the three months ended September 30, 2012 to $952,226 in the three months ended September 30, 2013. Gross margin was 5.7% in the three months ended September 30, 2013 compared to 4.0% in the three months ended September 30, 2012.

SG&A Costs

HCCA’s SG&A costs totaled $4,545,929 in the three months ended September 30, 2013 compared to $2,189,392 in the three months ended September 30, 2012, representing an increase of 108%. SG&A costs derive primarily from wages and stock based compensation, which represented 44% of SG&A in the three months ended September 30, 2013, as well as from commissions on sales to brokers, professional fees and reinsurance costs relating to the fully funded programs that collectively amounted to 39% of SG&A costs.

The increase in SG&A costs is primarily attributable to; wages and related costs as well as stock based compensation which increased by approximately $1.3 million, Professional fees which increased by approximately $0.3 million due to public company costs, reinsurance fees relating to our fully funded business which increased by approximately $0.4 million and, commission expenses mostly relating to our fully funded business which increased by approximately $0.3 million.

Interest Expense and Other Expense, net

Interest expense and other expenses, net for the three months ended September 30, 2013 totaled $1,224,209 compared to $127,026 for the three months ended September 30, 2012. Interest expenses for the three months ended September 30, 2013 included a charge of approximately $0.5 million due previously capitalized expenses relating to a line of credit which was terminated during the quarter. In addition we recorded interest expenses amounting to approximately $0.4 million in connection with the Senior Convertible Note that we issued in July 2013, including $0.3 million representing the expected penalty on the late registration of the underlying shares of common stock. Interest expenses also included interest expenses relating to the Incentive Notes of approximately $0.2 million and expenses relating to the capital leases. Interest expenses for the three months ended September 30, 2012 were in connection with the Bridge Notes that were fully repaid in cash and shares of common stock at the time of the Merger in April 2013.

Liquidity and Capital Resources

Our sources of liquidity have historically primarily consisted of cash provided from purchases of equity and debt securities of the company by investors.

Since our inception through September 30, 2013 we incurred accumulated (deficit) of ($29,408,934) and continued to generate losses since October 1, 2013.

We have generated substantial losses, while successfully completing various financings as described herein during 2012 and 2013. Nevertheless, as of the date of this report we have not yet established an ongoing source of revenues sufficient to cover our operating costs to allow us to continue as a going concern. Our ability to continue as a going concern is dependent on our obtaining additional adequate capital to fund operating losses until we become profitable and generate cash flows from our operations. If we are unable to obtain adequate capital, we could be forced to cease operations. We are contemplating conducting additional offering of our debt or equity securities to obtain additional operating capital. There are no assurances we will be successful and without sufficient financing it would be unlikely for us to continue as a going concern.

Net cash used in operating activities for the three months ended September 30, 2013 was $2.3 million. Net loss for the period was $4.7 million offset by noncash adjustments for approximately $1.4 million for stock and note based compensation, non-cash interest expense, depreciation and amortization expense, and the mark to market adjustment on the warrant liability. Net changes in working capital increased cash from operating activities by approximately $1.0 million, primarily due to an increase in accounts payable and accrued expenses of $1.3 million due in part to the timing of invoice payments, payroll payments and registration right penalties.

Cash outflows on purchases of property, equipment and software were $104,513.

For the three months ended September 30, 2013 cash provided by financing activities was approximately $4.1 million. The Company’s cash in–flow from the issuance of the Senior Convertible Note was $5 million while incurring debt costs relating to the Senior Convertible Note of $328,712. The Company paid off its line of credit in the amount of $534,343 on its line of credit and repaid capital leases of $46,186. The Company used the cash held in trust in the amount of $8.65 million to redeem 839,965 shares of Series B Common Stock as mandated by its articles of incorporation.

In connection with the Bridge Financing completed by HCCA in September 2012, HCCA issued 59.25 units, each unit consisting of 10,000 preferred shares and a promissory note with a face value of $100,000. At the time of the Merger, holders of all of the issued and outstanding shares of preferred stock of HCCA, by virtue of the Merger, had each of their shares of preferred stock of HCCA converted into the right to receive a proportional amount of 592,500 shares of Selway Series C common stock and warrants to purchase 296,250 shares of Selway Series C common stock. In accordance with the terms of the promissory notes issued in the Bridge Financing, at the time of the Merger, notes in the aggregate amount of $3,159,591.78 (including principal and interest accrued to date) were converted into 315,959 shares of Selway Series C common stock and notes in the aggregate principal amount of $3,025,000 were repaid in full.

In addition to the conversion of the Notes described at the completion of the Merger, HCCA received $4.9 million in cash, after expenses related to the transaction, including investment banking fees, legal and other costs. In connection with the Merger, on April 10, 2013, Selway entered into exchange agreements with 3 beneficial holders of greater than 5% of Selway’s Series A common stock. Pursuant to the exchange agreements, such holders converted an aggregate of 878,481 shares of Selway’s Series A common stock to Selway’s Series C common stock and received $3.53 per share of Series A common stock exchanged, or an aggregate of $3,101,037.93.

Subsequent to the closing of the Merger, on April 11, 2013, PCA and PCA Benefits, Inc. (together, the “Borrower”), the wholly-owned subsidiaries of HCCA, entered into a credit and security agreement, as amended, with a fund managed by Muneris Capital Group (“Muneris”) for a secured revolving credit facility with an initial aggregate credit limit of $2,000,000 (the “Muneris Facility”). The facility was terminated in September 2013 due to HCCA’s inability to meet certain financial covenants.

On July 17, 2013, the Company obtained a $5,000,000 loan (the “PFG Loan”) from Partners for Growth III, LP (“PFG”) for a term of five years, with HCCA, PCA and PCA Benefits, Inc. serving as guarantors. Interest on the PFG Loan is payable on a monthly basis at an annual rate of prime (as quoted by the Wall Street Journal or other nationally recognized rate quoting service reasonably acceptable to Lender) plus 5.25% per annum, provided that the interest rate will automatically be reduced to prime plus 3.25% if our revenues and EBITDA for the six months ending December 31, 2013 exceed $35.5 million and $(3.1 million), respectively. The principal amount of the PFG Loan and all other accrued and unpaid monetary obligations under the loan and security agreement shall be repaid on July 17, 2018, unless earlier amortized, converted, or prepaid.

The agreement governing the PFG Loan contains certain financial covenants, including the requirement to: (i) maintain a cash and cash equivalents balance of at least $2 million from July 17, 2013 to January 31, 2014 and at least $3 million from February 1, 2014 to July 17, 2018; and (ii) limit our principal borrowings under the Muneris Facility at any given time to no more than $5 million, unless our EBITDA exceeds $0 in three consecutive months, upon which any increase in the amount of indebtedness under the Muneris Facility may not result in principal borrowings under the facility to exceed $25,000,000 without PFG’s consent. The agreement also includes customary negative covenants and financial reporting requirements, as well as certain customary events of default that would render all outstanding amounts under the agreement immediately due and payable, including but not limited to: (i) our failure to pay amounts due within 3 business days after the due date; (ii) PFG ceasing to have a valid perfected first priority security interest in any material portion of the collateral; (iii) we or any current subsidiary undergoing a change in the ownership of 35% or more of the voting power of its then outstanding securities; (iv) we or any current subsidiary acquiring or disposing of any assets, except as relates to certain permitted investments, including but not limited the incorporation of certain new subsidiaries, provided however that PFG may elect to add such new subsidiaries as guarantors for the PFG Loan.

Pursuant to the terms of agreement governing the PFG Loan, we issued a senior convertible note to PFG, in the amount of $5,000,000, representing the principal amount of the PFG Loan. All amounts owing under the Note are convertible, at PFG’s option, into Selway Series C common stock at an initial rate of $8.00 per share. The Note is also subject to mandatory conversion by us in the event that certain conditions are met. Additionally, as part of consideration for the PFG Loan, we issued to PFG and its designees warrants to purchase an aggregate of 220,000 shares of Series C common stock, for $7.50 per share, at any time on or prior to July 17, 2018. In order to include a provision in the loan and security agreement allowing us to prepay the PFG Loan, we issued to PFG and its designees an aggregate of 625,000 warrants that are not exercisable unless and until we choose to prepay the PFG Loan in full. These warrants will become exercisable, for $8.00 per share, only upon our optional prepayment of the loan in full, and will expire on July 17, 2018.

For a more detailed description of the terms of the PFG Loan, please see our Current Report on Form 8-K dated July 23, 2013, which description is incorporated by reference herein.

On December 31, 2013, we entered into a Forbearance, Waiver and Modification No. 1 to the PFG Loan. Pursuant to the terms of the modification, we received an additional $500,000 in loan proceeds, the conversion price was reduced from $7.50 to $2.50, the number of shares issuable upon exercise of the warrants was increased from 220,000 to 555,000 shares, among other changes. For a more detailed description of the terms of the modification, please see our Current Report on Form 8-K dated January 3, 2014, which description is incorporated by reference herein.

On December 31, 2013, we entered into a securities purchase agreement (the “SPA”) with certain purchasers (each a “Purchaser” and collectively, the “Purchasers”) named therein and Chardan Capital Markets, LLC (“Agent”) as administrative and collateral agent. Pursuant to the SPA, we issued $2,112,500 of Junior Secured Convertible Term Notes (the “Notes”), which Notes are convertible into shares of the Company’s common stock at an initial fixed conversion price equal to $1.50 per share. The Purchasers of Notes also received warrants (the “Warrants”) to purchase one share for every $1.50 of Notes purchased by such Purchaser. We completed the initial closing of a private placement of Notes and Warrants under the SPA on December 31, 2013, and may continue to make subsequent placements under the SPA until it has placed an aggregate of $6,000,000 in Notes under the SPA or the date that is 30 days after the date of such initial closing. For a more detailed description of the terms of the SPA, the Notes and the Warrants, please see our Current Report on Form 8-K dated January 3, 2014, which description is incorporated by reference herein.

Off-Balance Sheet Arrangements

HCCA has no off-balance sheet arrangements.

Critical Accounting Policies and Estimates

The preparation of financial statements and related disclosures in conformity with generally accepted accounting principles in the United States, or GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and income and expenses during the periods reported. Actual results could materially differ from those estimates. We have identified the following as our critical accounting policies:

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements including disclosure of contingent assets and liabilities, at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period and accompanying notes. The Company's critical accounting policies are those that are both most important to the Company's financial condition and results of operations and require the most difficult, subjective or complex judgments on the part of management in their application, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Because of the uncertainty of factor surrounding the estimates or judgments used in the preparation of the financial statements, actual results could differ from these estimates.

Rebates Receivable

Pharmaceutical manufacturers offer rebates for selected brand drugs. We currently receive these rebates through a third party administrator. The rebates are considered earned when our members (employees of customers) order the drugs, Rebates earned are paid to us by the third party administrator quarterly. Rebates earned are recognized as a reduction to cost of revenue. The portion of the rebate payable to customers is simultaneously recognized as a reduction of revenue. Management evaluates rebates receivable at the end of every reporting period and adjusts the amount reflected on the accompanying balance sheet to net realizable value. An adjustment is also made to the rebate payable to customers to correspond with any adjustment that Management applies to rebates receivable. Management estimates the rebates receivable based on the estimated number of brands dispensed through the end of reporting date multiplied by the rebate per prescription as agreed with the third party administrator.

Revenue Recognition

The Company typically enters into annual renewable agreements with its customers to provide pharmacy benefit management on a fixed price or self-insured basis. The Company records revenues from all its current contracts with customers gross as the Company acts as principal based on the following factors: 1) the Company has a separate contractual relationship with its customers and with its claims adjudicator to whom the Company pays the costs of the prescription drugs consumed by its customers (the claims), 2) the Company through its claim adjudicator is responsible to validate and manage the claims, and 3) the Company bears the credit risk for the amount due from the customers. Revenues are recorded monthly as earned. The Company also operates a mail order pharmacy that services our plan members. All revenues and associated costs from dispensing drugs by our mail order pharmacy to our plan members, excluding the members' co-pay are eliminated as inter-company revenues. Some of the contracts contain terms whereby we make certain financial guarantees regarding prescription costs. Actual performance is compared to the guaranteed measure throughout the period and accruals are recorded as an offset to revenue if we fail to meet a financial guarantee.

Incentive Notes

Upon consummation of the merger, Holders of all of the issued and outstanding shares of common stock of HCCA immediately prior to the time of the Merger had each of their shares of common stock of HCCA converted into the right to receive: (i) a proportional amount of 5,200,000 shares of the Company's Series C common stock and promissory notes with an aggregate face value of $7,500,000 (collectively, the "Closing Payment").

In addition the Company issued to its management $2,500,000 of Management Incentive Notes and paid fees in connection with the transaction by issuing promissory notes having an aggregate principal amount of $500,000, which reflects five percent of all promissory notes issued in the transaction.

The above described notes with an aggregate face value of $10,500,000 have identical terms and conditions, are non-interest bearing and are subordinated to all senior debt of the Company in the event of a default under such senior debt. The notes will be repaid prorate from 75% of 25% of the Company's free cash-flow (defined as in the notes) in excess of $2,000,000. The Company will be obligated to repay such notes if, among other events, there is a transaction that results in a change of control of the Company.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As a smaller reporting company, we are not required to respond to this Item.

ITEM 4.

CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in reports filed or submitted under the Securities Exchange Act of 1934 ("Exchange Act") is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. Disclosure controls include, without limitation, controls and procedures designed to ensure that information required to be disclosed under the Exchange Act is accumulated and communicated to management, including principal executive and financial officers, as appropriate, to allow timely decisions regarding required disclosure. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.

Management carried out an evaluation, under the supervision of the Chief Executive Officer and Chief Financial Officer, of the effectiveness of disclosure controls and procedures as of September 30, 2013. Based upon that evaluation, management, including the Chief Executive Officer and Chief Financial Officer, concluded that the design and operation of disclosure controls and procedures were not effective as of September 30, 2013.

Changes in internal control over financial reporting

During the most recently completed fiscal quarter, there has been no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

During 2012, we filed a lawsuit against our past adjudicator of claims for overcharges, over payment on claims, errors and misclassifications, and rebates owed from drug manufacturers claiming damages of over $5 million. Additionally, we have recorded an expense for the amount owed for claims payable. The adjudicator of claims filed a counterclaim for amounts it claims are owed to it by us. In August 2013, we settled the suit with the claims adjudicator. Under the terms of the settlement we agreed to pay the claims adjudicator $2.7 million over 15 months commencing in September 2013. This amount was recorded as a liability as of December 31, 2012, in accounts payable.

On August 14, 2012, we entered into an agreement with a shareholder to buy back 500,000 shares of common stock for $100,000. The agreement also called for the payment of $50,000 in legal fees. As of December 31, 2012, we had not received the 500,000 shares of common stock but had paid the settlement. We received these shares in February 2013. A stock redemption was recorded on December 31, 2012 in the amount of $100,000.

ITEM 1A.

RISK FACTORS

As a smaller reporting company, we are not required to respond to this Item.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None that have not been previously reported.

ITEM 3.

DEFAULT UPON SENIOR SECURITIES

None that have not been previously reported.

ITEM 4.

MINE SAFETY DISCLOSURES

Not Applicable.

ITEM 5.

OTHER INFORMATION

None.

ITEM 6.

EXHIBITS

Exhibit No.		Description
31.1		Certification of Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1		Certification of the Chief Executive Officer and Chief Financial Officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		XBRL Taxonomy Extension Label Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	HEALTHCARE CORPORATION OF AMERICA

Date: March 21, 2014	By:	/s/ Yoram Bibring
	Name:	Yoram Bibring
	Title:	Chief Financial Officer
		(Principal Accounting and Financial Officer)

EXHIBIT INDEX

Exhibit No.		Description
31.1		Certification of Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1		Certification of the Chief Executive Officer and Chief Financial Officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		XBRL Taxonomy Extension Label Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

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HCCA Healthcare Corporation of America (GM)