NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2014 (UNAUDITED)
1
– NATURE OF BUSINESS AND GOING CONCERN
Overview
Health
Revenue Assurance Holdings, Inc. (the “Company”) is a provider of revenue cycle services to a broad range of healthcare
providers. We offer our customers integrated solutions designed around their specific business needs, including revenue cycle
data analysis, contract and outsourced coding, billing, coding and compliance audits, coding education, coding consulting, physician
coding services and ICD-10 education and transition services. With this approach, our customers benefit from integrated service
offerings that we believe enhances their revenue integrity. As a result, we believe we help our customers achieve their business
objectives and patient care objectives.
Dream
Reachers, LLC, owns the Company’s office and is the borrower on a mortgage loan related to such offices. Dream Reachers,
LLC does not engage in real estate rental business. Its office is occupied by Health Revenue Assurance Associates, Inc. (“HRAA”)
at no cost and HRAA pays the related mortgage’s principal and interest, taxes and maintenance. The Company’s subsidiary
HRAA is the sole member effective May 2011. Dream Reachers has been treated as a subsidiary for accounting purposes in the Company’s
consolidated financial statements for all periods presented. (See Note 2) On June 16, 2014, the Company with authorization of
its board of directors listed its office for sale. Accordingly, the property and fixtures related to the Company’s office
have been reclassified to property held for sale on the unaudited consolidated financial statements.
On
February 10, 2012, HRAA entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”) with
Health Revenue Assurance Holdings, Inc. (formerly known as Anvex International, Inc., "HRAH"), a Nevada company, and
its wholly-owned subsidiary Health Revenue Acquisition Corporation (“Acquisition Sub”), which was treated for accounting
purposes as a reverse recapitalization with HRAA, considered the accounting acquirer. Each share of HRAA's common stock was exchanged
for the right to receive approximately 1,271 shares of HRAH’s common stock. Before their entry into the Merger Agreement,
no material relationship existed between HRAH and Acquisition Sub or HRAA.
Going
Concern
As of June 30, 2014, the Company had
a working capital deficiency, stockholders’ deficit and accumulated deficit of approximately $443,000, $3,065,000, and $9,666,000,
respectively, for the six months ended June 30, 2014, incurred a net operating loss of approximately $2,495,000, and has used net
cash in operations of approximately $1,849,000. As of June 30, 2014, the Company has a cash balance of approximately $778,000.
The Company had not been able to generate sufficient cash from operating activities to fund its on-going operations. There is no
guarantee that the Company will be able to generate enough revenue and/or raise capital to support its operations. These factors
raise substantial doubt about the Company’s ability to continue as a going concern. The Company’s future success is
dependent upon its ability to achieve profitable operations and generate cash from operating activities, and upon additional financing.
The Company’s unaudited consolidated
financial statements are presented on a going concern basis since its wholly owned operating subsidiary, Health Revenue Assurance
Associates, Inc. filed a petition for relief under Chapter 11 of the federal bankruptcy laws in the United States Bankruptcy Court
for the Southern District of Florida on August 11, 2014. (See Note 15) The unaudited consolidated financial statements do not
include any adjustments relating to the recoverability or classification of recorded assets and liabilities that might result
should the Company be unable to continue as a going concern.
HEALTH
REVENUE ASSURANCE HOLDINGS, INC.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2014 (UNAUDITED)
2 - SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
The
accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting
principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation
S-X.
Accordingly,
they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion
of management, all adjustments (all of which are of a normal recurring nature) considered necessary for a fair presentation have
been included. Operating results for the six months ended June 30, 2014 are not indicative of the results that may be expected
for the year ending December 31, 2014 or for any other future period. These unaudited consolidated financial statements and the
unaudited notes thereto should be read in conjunction with the audited financial statements and notes thereto included in our
Annual Report on Form 10-K for the year ended December 31, 2013 filed with the Securities and Exchange Commission (the “SEC”)
on April 15, 2014 (our “10-K”).
Principles
of Consolidation
The
unaudited consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Health Revenue
Assurance Associates, Inc. and Dream Reachers, LLC. All significant inter-company transactions and balances are eliminated in
consolidation.
Reclassifications
Certain prior period amounts in the
unaudited consolidated financial statements have been reclassified from research and development to selling and administrative
expenses to conform to the current period’s presentation. Further, the Company reclassified $197,367 from the December 31,
2013 line item property and equipment to property held for sale.
Use
of Estimates
The
preparation of the unaudited consolidated financial statements in conformity with accounting principles generally accepted in
the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported
amounts in the consolidated financial statements. Actual results could differ from those estimates. Significant accounting estimates
reflected in the Company’s consolidated financial statements include valuation of accounts receivable, valuation of property
and equipment, valuation of loss on assets held for sale, valuation and amortization period of software, valuation of beneficial
conversion features in convertible debt, valuation of derivatives, valuation of equity based instruments issued for other than
cash, revenue recognition, and the valuation allowance on deferred tax assets.
Earnings
Per Share
The
Company computes and presents earnings or losses per share in accordance with FASB ASC Topic 260,
Earnings per share
. Basic
earnings or losses per share are computed by dividing net income (loss) attributable to common stockholders by the weighted average
number of common shares outstanding. Diluted earnings or loss per share is computed by dividing net income (loss) attributable
to common stockholders by the weighted average number of common shares and common stock equivalents outstanding, calculated on
the treasury stock method for options and warrants using the average market prices during the period.
HEALTH
REVENUE ASSURANCE HOLDINGS, INC.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2014 (UNAUDITED)
As the Company incurred net income
for the three and six months ended June 30, 2014, we have computed basic and diluted earnings per share for both periods as required.
For the three and six months ended June 30, 2014 diluted income per share, all potentially dilutive securities were excluded from
the computation since the effect of including them is anti-dilutive. Dilutive securities outstanding at June 30, 2014 include
29,940,000 of warrants and Series A Preferred stock convertible into 27,000,000 shares of common stock. There were no dilutive
securities outstanding at June 30, 2013 respectively.
Segment
Reporting
Financial
Accounting Standards Board (“FASB”) ASC Topic 280, Segment Reporting (“ASC 280”), establishes standards
for the way public business enterprises report information about operating segments. ASC 280 also establishes standards for related
disclosures about products and services, geographic areas and major customers. The Company has determined that based on these
criteria it only operates one segment, consulting services, as all other services do not meet the minimum threshold for separate
reporting of a segment.
Contingencies
We
accrue for contingent obligations, including legal costs and restructuring costs, when the obligation is probable and the amount
can be reasonably estimated. As facts concerning contingencies become known we reassess our position and make appropriate adjustments
to the consolidated financial statements. Estimates that are particularly sensitive to future changes include those related to
tax, legal, and other regulatory matters that are subject to change as events evolve and additional information becomes available.
Recent
Accounting Pronouncements
We
have implemented all new accounting standards that are in effect and that may impact our unaudited consolidated financial statements
and do not believe that there are any other new accounting pronouncements that have been issued that might have a material impact
on our consolidated financial position or results of operations.
In June 2014, FASB issued
Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers”. The update gives
entities a single comprehensive model to use in reporting information about the amount and timing of revenue resulting from contracts
to provide goods or services to customers. The proposed ASU, which would apply to any entity that enters into contracts to provide
goods or services, would supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific
guidance throughout the Industry Topics of the Codification. Additionally, the update would supersede some cost guidance included
in Subtopic 605-35, Revenue Recognition – Construction-Type and Production-Type Contracts. The update removes inconsistencies
and weaknesses in revenue requirements and provides a more robust framework for addressing revenue issues and more useful information
to users of financial statements through improved disclosure requirements. In addition, the update improves comparability of revenue
recognition practices across entities, industries, jurisdictions, and capital markets and simplifies the preparation of financial
statements by reducing the number of requirements to which an entity must refer. The update is effective for annual reporting
periods beginning after December 15, 2016, including interim periods within that reporting period. This updated guidance is not
expected to have a material impact on our results of operations, cash flows or financial condition.
3 - ACCOUNTS
RECEIVABLE
Accounts
receivable was as follows at:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2014
|
|
|
2013
|
|
Accounts receivable
|
|
$
|
661,801
|
|
|
$
|
901,918
|
|
Accounts receivable –Related party
|
|
|
-
|
|
|
|
41,244
|
|
Allowance for doubtful accounts
|
|
|
-
|
|
|
|
(16,244
|
)
|
Total
|
|
$
|
661,801
|
|
|
$
|
926,918
|
|
We
had $0 and $6,450 in bad debt expense on trade accounts receivable for six months ended June 30, 2014 and 2013, respectively.
Accounts receivable includes outstanding receivables of $452,583 and $638,270 purchased by the factor as of June 30, 2014 and
December 31, 2013, respectively. (See Note 8)
HEALTH
REVENUE ASSURANCE HOLDINGS, INC.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2014 (UNAUDITED)
4 - PROPERTY
AND EQUIPMENT
Property
and equipment consists of the following:
|
|
June 30,
2014
|
|
|
December 31,
2013
|
|
Building and improvements
|
|
$
|
-
|
|
|
$
|
-
|
|
Furniture
|
|
|
36,908
|
|
|
|
119,810
|
|
Computers and Equipment
|
|
|
233,816
|
|
|
|
260,872
|
|
|
|
|
270,724
|
|
|
|
380,682
|
|
Less - Accumulated depreciation
|
|
|
(157,070
|
)
|
|
|
(196,202
|
)
|
Total
|
|
$
|
113,654
|
|
|
$
|
184,480
|
|
Depreciation
expense for the six months ended June 30, 2014 and 2013 was approximately $39,500 and $44,600, respectively.
On
June 16, 2014, the Company listed its office condominium for sale in conjunction with cost savings initiatives. Accordingly $206,932
the net balance of related building and fixtures were reclassified to property held for sale and depreciation of the related assets
was ceased.
5 –
RESEARCH AND DEVELOPMENT AND SOFTWARE
In
early 2012, the Company started developing the
Visualizer
suite. This business intelligence product is designed to meet
the emerging need for healthcare analytics. Customer data is infused into the suite, and the Company uses this data in its consulting
services to develop pre-defined analytics targeted to address healthcare’s emerging concerns and needs.
The
Company’s
Visualizer
suite offers our consultants a range of functionality.
Visualizer
also assists healthcare
leaders with their need to understand the impacts of the transition to ICD-10 including work flow, productivity, process changes
and documentation and reimbursement risks. The application helps to visualize the reimbursement and operational effects of transitioning
organizations to ICD-10 and identify where to focus education and documentation issues. It enables clients to develop a custom
work plan to mitigate risks from the highest areas of exposure to the least.
At
September 30, 2013, the Company had accumulated a total of $1,011,068 in capitalized costs related to the development of the
Visualizer
suite and the other functionality which was included as software on the accompanying consolidated balance sheet.
As of September 30, 2013, we had amortized $64,137 of the capitalized software after the general release on July 15, 2013 for
the
Visualizer
project.
At
the end of September 2013, the Company re-evaluated the capitalized research and development costs for the
Visualizer
software
suite. The evaluation was based in part on the lack of cash flow and customer demand in ICD
Visualizer
after its general
acceptance release date of July 15, 2013. In addition, the Company also considered its going concern risk and cash liquidity concerns
that restrain the ability to make capital investments in research and development to complete existing products in the pipeline
as the available cash is needed to fund normal operating expenses. As a result of this evaluation, the Company recorded a loss
of $946,931 for the year ended December 31, 2013 that is presented as a line item entitled “asset impairment” on the
consolidated statement of operations. The Company will continue to use the
Visualizer
suite of functionality as internally
developed software to generate customized reports for revenue integrity auditing and compliance services but the Company no longer
intends to market or sell internally developed software on a stand-alone basis. There was no amortization expense for software
for the six months ended June 30, 2014 and 2013, respectively.
HEALTH
REVENUE ASSURANCE HOLDINGS, INC.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2014 (UNAUDITED)
Software
consisted of the following at:
|
|
June 30,
2014
|
|
|
December 31,
2013
|
|
Software
|
|
$
|
-
|
|
|
$
|
1,011,068
|
|
Accumulated amortization
|
|
|
-
|
|
|
|
(64,137
|
)
|
Asset Impairment
|
|
|
-
|
|
|
|
(946,931
|
)
|
Software, net
|
|
$
|
-
|
|
|
$
|
-
|
|
6 –
LINES OF CREDIT
Bank
The Company has a $150,000 revolving
line of credit with a bank (the “Line of Credit”), effective in December 2008, for its general working capital needs.
The line contains certain restrictive covenants including restrictions on granting liens on the Company's assets. The line is also
guaranteed by certain former officers of the Company. The line of credit matured on December 18, 2009 and was renewed and was due
on December 18, 2012. The revolving line was modified on December 18, 2012 so that the loan no longer has an expiration date of
December 18, 2012, but instead, a final maturity date of December 18, 2018.
On September 19, 2013, the Company converted
the Line of Credit to a term note. The Company consolidated the Line of Credit and an existing bank term loan into a consolidated
term loan. Monthly payments of principal and interest are approximately $3,900 per month, and a new maturity date of September
19, 2017. Interest is calculated at a rate per year equal to the bank’s prime rate plus 3.5% or 6.75%. At the time of the
conversion the line of credit had an outstanding balance in the amount of $133,334. (See Note 7)
Dell
The
Company maintains a Dell Business Credit line of up to $50,000. Interest rates vary under the line based on difference types of
payment plans. The balance due under the line as of June 30, 2014 and December 31, 2013 was $40,075, and $44,692, respectively,
which is included in line of credit, current portion in the accompanying unaudited consolidated financial statements.
7 –
LONG TERM DEBT AND NOTES PAYABLE
Long
Term debt:
Long Term
debt consisted of the following at:
|
|
June 30,
2014
|
|
|
December 31,
2013
|
|
Bank term loan
|
|
$
|
122,603
|
|
|
$
|
141,857
|
|
Mortgage loan
|
|
|
171,622
|
|
|
|
174,580
|
|
|
|
|
294,225
|
|
|
|
316,437
|
|
Less current portion
|
|
|
(44,254
|
)
|
|
|
(44,084
|
)
|
Total long term portion
|
|
$
|
249,971
|
|
|
$
|
272,353
|
|
In
March 2009, HRAA entered into a term loan with Bank of America which proceeds were used for general working capital needs (the
“Term Loan”). The Term Loan was established as a result of a conversion of a revolving line of credit. The Term Loan
is personally guaranteed by Robert Rubinowitz and Andrea Clark-Rubinowitz and contains certain restrictive covenants including
restrictions on granting liens on the Company's assets. The Term Loan matured in five years and incurred interest at the rate
of 6.75% per annum.
HEALTH
REVENUE ASSURANCE HOLDINGS, INC.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2014 (UNAUDITED)
On September 19, 2013, HRAA consolidated
the above March 2009 Term Loan with the Line of Credit. (See Note 6) The outstanding balance for the Term Loan and the Line of
Credit prior to consolidation was $20,697 and $133,334, respectively. The new consolidated term loan is personally guaranteed by
Robert Rubinowitz and Andrea Clark-Rubinowitz and contains restrictive covenants, and prohibits the Company from granting any security
interests or liens on the assets of the Company. Payments of principal and interest are approximately $3,900 per month. The new
consolidated term loan matures on September 19, 2017 and incurs interest at a rate per year equal to the bank’s prime rate
plus 3.5% or 6.75% at June 30, 2014.
The Company’s subsidiary has a
mortgage related to certain real estate, a building condominium, which houses the Company’s main offices in Plantation, Florida.
The loan originated July 2010 in the amount of $192,500 and matures July 2020, when a balloon principal and interest payment of
approximately $129,000 becomes due. The loan is collateralized by the real estate and is personally guaranteed by Robert Rubinowitz,
a former officer and stockholder of the Company. Interest is fixed at 6.625% for the first five years of the loan, and converts
for the second five years to an adjustable indexed rate at the Federal Funds Rate plus 3.25%, as established by the United State
Federal Reserve but under no circumstances will the effective interest rate of interest on the mortgage be less than 6.625%. Monthly
payments for principal and interest are approximately $1,500 until July 2015, when the total monthly payment may vary due to the
adjustable interest rate provision in the note.
Although the Company is current in
its payments on these loans at June 30, 2014, management believes the Company may be in default of certain non-financial covenants.
Default provisions were likely triggered since the Company’s wholly owned operating subsidiary, Health Revenue Assurance
Associates, Inc. filed a petition for relief under Chapter 11 of the federal bankruptcy laws in the United States Bankruptcy Court
for the Southern District of Florida on August 11, 2014. The banks have not notified the Company of any default.
Notes
payable:
The
Company has eighteen notes payable, (i) thirteen of the loans are secured by contract accounts receivable of a Company customer
which security interest is subordinate to the lender under the factoring agreement, and (ii) one of the loans is secured by the
stock of HRAA.
In
December 2012, the Company entered into loan agreements with various investors and issued promissory notes upon receipt of $815,000.
The loan agreements have an interest rate of 12% per annum calculated on the original loan balances resulting in an effective
interest rate of 24% over the term of the loans. Principal and interest is payable over 24 months. Additionally, in connection
with the financing, the Company issued 2,375,000 shares of common stock to the lenders as loan fees. The fair value per share
of $0.28 (based on recent cash sales prices) was used to compute the relative fair value of the shares in accordance with ASC
470-20 which totaled $343,500 which was recorded as a debt discount with a credit to additional paid-in-capital and such discount
is being amortized over the term of the loans. The unamortized discount was $61,900 and $114,958 as of June 30, 2014 and December
31, 2013, respectively.
In
January and February 2013, the Company entered into loan agreements with various investors and issued promissory notes upon receipt
of $1,220,000. The loan agreements have an interest rate of 12% per annum. Principal and interest is payable over 24 months. Additionally,
in connection with the financing, the Company issued 5,575,000 shares of common stock to the lenders as loan fees. (See Note 11)
The fair value per share of $0.28 (based on recent cash sales prices) was used to compute the relative fair value of the shares
in accordance with ASC 470-20 which totaled approximately $679,500 which was recorded as a debt discount with a credit to additional
paid-in-capital and such discount is being amortized over the term of the loans. The unamortized discount was $200,298 and $350,522
as of June 30, 2014 and December 31, 2013, respectively.
The Company began paying principal and
interest on the above mentioned notes in early 2013 in accordance with the payment terms. On August 2013, the Company converted
$402,083 in unsecured investor promissory notes for five (5) individuals into one million six hundred eight thousand three hundred
and thirty three (1,608,333) common shares at a conversion price of $0.25 per share. As a result of the conversion the Company
expensed $128,452 of the unamortized discount as interest expense for the year ended December 31, 2013. Additionally, the Company
recorded a loss on conversion of $112,584 as a result of issuing stock at a discount from fair market value in 2013.
Although the Company is current in its
payments on these notes at June 30, 2014, management believes default provisions were likely triggered since the Company’s
wholly owned operating subsidiary, Health Revenue Assurance Associates, Inc. filed a petition for relief under Chapter 11 of the
federal bankruptcy laws in the United States Bankruptcy Court for the Southern District of Florida on August 11, 2014. The note
holders have not notified the Company of any default.
HEALTH
REVENUE ASSURANCE HOLDINGS, INC.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2014 (UNAUDITED)
Notes payable
consisted of the following at:
|
|
June 30,
2014
|
|
|
December 31,
2013
|
|
Principal amount of notes payable
|
|
$
|
488,902
|
|
|
$
|
877,500
|
|
Unamortized discount
|
|
|
(262,198
|
)
|
|
|
(465,480
|
)
|
Notes payable, net of discount
|
|
|
226,704
|
|
|
|
412,020
|
|
Less current portion
|
|
|
(226,704
|
)
|
|
|
(380,326
|
)
|
Total Long term portion
|
|
$
|
-
|
|
|
$
|
31,694
|
|
8 –
FACTORING AGREEMENT
In June 2012, the Company entered into
a one-year factoring agreement with a finance company. The agreement automatically renews annually unless terminated by either
party. Under the terms of the agreement, the Company, at its discretion, assigns the collection rights of its receivables to the
finance company in exchange for an advance rate of 85% of face value. The assignments are transacted with recourse only at the
option of the finance company in the event of non-payment. The Company's obligations under the factor agreement are secured by
substantially all assets of the Company. In accordance with ASC 860 "Transfers and Servicing" regarding transfers of
receivables with recourse, this factoring arrangement is accounted for as a secured financing. For the six months ended June 30,
2014, the Company had factored approximately $2,234,000 of receivables and had received cash advances of approximately $2,262,600.
Outstanding receivables purchased by the factor as of June 30, 2014 were approximately $452,600 and are included in accounts receivable
in the accompanying unaudited consolidated balance sheet, and the secured loan due to the lender was approximately $364,800. Factor
fees for the three months ending June 30, 2014 and 2013 were approximately $30,000 and $138,400, respectively. Factor fees for
the six months ended June 30, 2014 and 2013 were approximately $70,600 and $76,100, respectively, and are included in interest
expenses. (See Note 3)
Although the Company is current in
its financial obligations under this factoring agreement, management believes the Company may be in default under the solvency
provision and certain non-financial default provisions. The Company has not been notified of any default by the factor company.
9 –
CONVERTIBLE PROMISSORY NOTES
On
October 7, 2013, the Company entered into a one-year original issue discount (OID) convertible promissory note with warrants in
the amount of $280,000 with Tonaquint, Inc., a Utah corporation (“Tonaquint”). The purchase price for this note and
the warrants was $250,000. The Company had the option to repay this note at any time on or before the date that is sixty (60)
days from October 7, 2013. The Company recorded a debt discount for the OID of $25,000 and expensed $5,000. The debt was treated
as stock settled debt where a put premium of $120,000 was to be recorded over the six-month period to the first conversion date.
Tonaquint had the right at any time after the date that is six (6) months from the effective date, at its election, to convert
all or any part of the outstanding balance of the note into shares of fully paid and non-assessable common stock of the company
based upon a formula that is seventy (70%) percent of the average of the two (2) lowest intra-day trade prices in the fifteen
(15) trading days immediately preceding the conversion (the “Conversion Formula”). Tonaquint was granted the right
to purchase at any time on or after October 7, 2013 until the date which is the last calendar day of the month in which the fifth
anniversary of the “issue date” occurs, 350,000 fully paid and non-assessable shares of the Company’s common
stock, par value $.001 per share, as such number may be the adjusted from time to time pursuant to the full ratchet price protection
terms and conditions of the warrant. The initial “exercise price” is $0.40 per share of common stock. On November
12, 2013, the note was paid in full with financing received in connection with the sale and issuance of Series A Preferred Stock
and warrants pursuant to the Securities Purchase Agreement, dated November 12, 2013, between the Company and the investors named
therein. (See Note 11) As mentioned above, the Company issued 350,000 free standing and detachable warrants related to the note.
The Company accounted for these warrants issued in accordance with the GAAP accounting guidance under ASC 815 applicable to derivative
instruments, which requires every derivative instrument within its scope to be recorded on the balance sheet as either an asset
or liability measured at its fair value, with changes in fair value recognized in earnings. Based on this guidance, the Company
determined that the Company's warrants do not meet the criteria for classification as equity due to the price protection provisions.
Accordingly, the Company classified the warrants as current liabilities. The warrants are subject to re-measurement at each balance
sheet date, with any change in fair value recognized as a component of other income (expense), net in the statements of operations.
We will estimate the fair value of these warrants at the respective balance sheet dates, based on the estimated market value of
the underlying common stock at the valuation measurement date, the remaining contractual term of the warrant, risk-free interest
rates and expected dividends on and expected volatility of the price of the underlying common stock. (See Note 12) As a result
of the November 12, 2013 financing and the full ratchet protection, the exercise price of the warrants was reduced to $0.20 per
share and 350,000 additional warrants were issued to Tonaquint.
HEALTH
REVENUE ASSURANCE HOLDINGS, INC.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2014 (UNAUDITED)
On
October 17, 2013, the Company entered into a one-year OID convertible promissory note in the amount of $142,500 with Tonaquint.
The purchase price for this note and the warrant was $125,000. The Company had the option to repay this note at any time on or
before the date that is sixty (60) days from October 17, 2013. The Company recorded a debt discount for the OID of $12,500 and
expensed $5,000. The debt was treated as stock settled debt where a put premium of $61,071 was to be recorded over the six-month
period to the first conversion date. Tonaquint had the right at any time after the date that is six (6) months from the effective
date, at its election, to convert all or any part of the outstanding balance of the note into shares of fully paid and non-assessable
common stock of the Company based upon the Conversion Formula. Tonaquint was granted the right to purchase at any time on or after
October 17, 2013 until the date which is the last calendar day of the month in which the fifth anniversary of the “issue
date” occurs, 175,000 fully paid and non-assessable shares of the Company’s common stock, as such number may be the
adjusted from time to time pursuant to the full ratchet price protection terms and conditions of the warrant. The initial “exercise
price” is $0.40 per share of common stock. On November 12, 2013, the note was paid in full with financing received in connection
with the sale and issuance of Series A Preferred Stock and warrants pursuant to the Securities Purchase Agreement, dated November
12, 2013, between the Company and the investors named therein. (See Note 11) As mentioned above, the Company issued 175,000 free
standing and detachable warrants related to the note. The Company accounted for these warrants issued in accordance with the US
GAAP accounting guidance under ASC 815 applicable to derivative instruments, which requires every derivative instrument within
its scope to be recorded on the balance sheet as either an asset or liability measured at its fair value, with changes in fair
value recognized in earnings. Based on this guidance, the Company determined that the Company's warrants do not meet the criteria
for classification as equity due to the price protection provisions. Accordingly, the Company classified the warrants as current
liabilities. The warrants are subject to re-measurement at each balance sheet date, with any change in fair value recognized as
a component of other income (expense), net in the statements of operations. We estimate the fair value of these warrants at the
respective balance sheet dates, based on the estimated market value of the underlying common stock at the valuation measurement
date, the remaining contractual term of the warrant, risk-free interest rates and expected dividends on and expected volatility
of the price of the underlying common stock. (See Note 12) As a result of the November 12, 2013 financing and the full ratchet
anti-dilution provision, the exercise price of the warrants was reduced to $0.20 per share and 175,000 additional warrants were
issued to Tonaquint.
At
the time the above two notes were paid off, the Company had accreted $33,364 of the put premium and according recognized a gain
on extinguishment of $33,364 relating to this put premium. Further, as only $3,459 of the discount was amortized, the Company
recorded a loss on early debt extinguishment of $34,041 in 2013.
10 –
COMMITMENTS AND CONTINGENCIES
Commitments:
Leases:
In
September 2012, the Company started a non-cancellable operating lease for office equipment. The lease term is 5 years. Lease payments
during the five years are approximately $560 per month.
On
September 1, 2011, the Company entered into a commercial lease agreement for additional office space. The lease term is one year
with five successive one year renewal options. Starting September 1, 2013, the lease has been renewed for one year with a fixed
payment of approximately $5,800 per month. The commercial leased was cancelled effective June 30, 2014. The related security deposit
of $8,865 was refunded to the Company on July 14, 2014.
Capital
Leases:
The
Company leases its equipment from Dell Financial Services L.L.C. under various capital leases. The economic substance of the lease
is that the Company is financing the acquisition of the assets through the lease and accordingly, it is recorded in the Company’s
assets and liabilities.
HEALTH
REVENUE ASSURANCE HOLDINGS, INC.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2014 (UNAUDITED)
The following
is an analysis of the leased assets included in property and equipment:
|
|
June 30,
2014
|
|
|
December 31,
2013
|
|
Equipment
|
|
$
|
79,210
|
|
|
$
|
79,210
|
|
Less accumulated depreciation
|
|
|
(46,808
|
)
|
|
|
(33,607
|
)
|
Total
|
|
$
|
32,402
|
|
|
$
|
45,603
|
|
The
lease agreement contains a bargain purchase option at the end of the lease term. The total amount due at June 30, 2014 is
$42,492 of which $30,989 is included in short term liabilities. Amortization of assets held under capital leases is included
with depreciation expense and is approximately $13,200 as of June 30, 2014.
Although the Company is current in its
payments on these leases at June 30, 2014, management believes the default provisions were likely triggered since the
Company’s wholly owned operating subsidiary, Health Revenue Assurance Associates, Inc. filed a petition for relief
under Chapter 11 of the federal bankruptcy laws in the United States Bankruptcy Court for the Southern District of Florida on
August 11, 2014. Dell Financial Services L.L.C. has not notified the Company of any default.
Settlement
Agreements:
On March 14, 2013, the Company and its
former regional sales manager entered into a settlement agreement to resolve one pending lawsuits arising out of the termination
of his employment. The lawsuit was initiated by the former regional sales manager against the Company in the United States District
Court for the city of Denver, Colorado. Pursuant to the settlement agreement, the former regional sales manager agreed to abolish
all claims and lawsuits against the Company. As part of the settlement agreement, the Company agreed to make a payment totaling
$11,000 pursuant to the terms of the settlement agreement and general release of all claims executed by both parties. The settlement
payments were paid in full as of June 30, 2014.
On April 14, 2014, the Company entered
into a separation agreement (the “Separation Agreement”) with Robert Rubinowitz, its former President, Chief Operating
Officer, Secretary, Treasurer and director, which provided for the termination of Mr. Rubinowitz's employment and his resignation
as an officer and director of the Company, and the termination of that certain Employment Agreement dated October 1, 2013, as amended
on November 12, 2013, between the Company and Mr. Rubinowitz (the “Employment Agreement”). The Separation Agreement
provides that Mr. Rubinowitz will receive from the Company (i) $175,000 to be paid in equal increments of $3,365.39 on each of
May 2, 2014, May 16, 2014, May 30, 2014, June 14, 2014 and June 27, 2014 and thereafter equal increments of $7,532.05 with the
last payment date being April 17, 2015, and (ii) $23,557.70 in accrued and unpaid base salary, bonus and vacation earned through
April 11, 2014 payable in equal installments of $1,121.80 beginning on July 11, 2014, in each case, less all applicable deductions
and withholdings. As of June 30, 2014, the Company has a settlement accrued of $181,700 in connection with Mr. Rubinowitz’s
Separation Agreement.
The Separation Agreement also requires
the Company to use commercially reasonable efforts to have Mr. Rubinowitz and Andrea Clark-Rubinowitz removed as guarantors under
certain of the Company's debt obligations. The Company paid an early termination fee for the early return of Mr. Rubinowitz's leased
vehicle. The Company further agreed to file a Registration Statement with the SEC to register the resale of Mr. Rubinowitz's outstanding
common stock as of the date of Separation Agreement.
The foregoing description of the Separation
Agreement does not purport to be complete and is qualified in its entirety by reference to the complete text of the Separation
Agreement, a copy of which is attached as Exhibit 10.22 to the Company’s 2013 Annual Report on Form 10-K filed April 15,
2014.
On March 26, 2014, the Company
terminated Dean Boyer’s employment as its chief technology officer. On May 15, 2014, a consulting agreement and a
termination and release agreement were executed with Mr. Boyer and the Company. The agreements provide that Mr. Boyer
will receive $200,000 to be paid $50,000 on May 16, 2014, and payments to be made thereafter in equal increments of $12,000 with
the Company’s scheduled payrolls, and with a final payment of $6,000 date being made on November 14, 2014. All payments
will be less applicable payroll tax deductions and withholdings. As of June 30, 2014, the Company accrued $114,000 payable to
Mr. Boyer in connection with his agreements.
HEALTH
REVENUE ASSURANCE HOLDINGS, INC.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2014 (UNAUDITED)
Employment
Agreements:
On October 2, 2013 the Company entered
into employment agreements with four (4) of our officers and directors. The Employment Agreements provided for severance benefits,
change in control provisions, accrued but unpaid wages and bonuses, accrued but unpaid vacation time, incentive awards, equity
and stock options, and other benefits. These four (4) employment agreements were amended on November 12, 2013. As of June 30, 2014,
no performance bonuses have been earned. The Company owed Andrea Clark-Rubinowitz $75,000. The balance due to Ms. Clark-Rubinowitz
was formalized in a promissory note dated November 1, 2013. The Company also owed Robert Rubinowitz $40,000 pursuant to a promissory
note dated November 1, 2013 for funds advanced in September 2013. On November 12, 2013 the promissory notes to Ms. Clark-Rubinowitz
and Mr. Rubinowitz were paid in full from the net proceeds of the Securities Purchase Agreement, dated November 12, 2013, among
the Company and the investors named therein.
Contingencies:
From
time to time, the Company is involved in litigation matters relating to claims arising from the ordinary course of business. While
the results of such claims and legal actions cannot be predicted with certainty, the Company’s management does not believe
that there are claims or actions, pending or threatened against the Company, the ultimate disposition of which would have a material
adverse effect on our business, results of operations, financial condition or cash flows. (See Note 15)
The
Company has not filed state tax returns and has a potential liability for unrecognized taxes relating primarily to state tax contingencies
in several jurisdictions. The Company cannot predict with certainty the amount of the potential state tax liability including
the associated interest and penalties. The Company also cannot predict with certainty the amount of unrecognized state tax benefits,
net of federal tax benefits, that if recognized would have impacted the prior year’s effective tax rates.
On August 11, 2014, the Company’s
wholly owned operating subsidiary, Health Revenue Assurance Associates, Inc. filed a petition for relief under Chapter 11 of the
federal bankruptcy laws in the United States Bankruptcy Court for the Southern District of Florida. (See Note 15)
HEALTH
REVENUE ASSURANCE HOLDINGS, INC.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2014 (UNAUDITED)
11
– STOCKHOLDERS' DEFICIT
Share
Based Compensation
The
Company is in the process of establishing a non-qualified stock option plan. In advance of the actual establishment of the plan
in 2013, the Company has granted a total of one million (1,000,000) stock options to an officer. The grant date is that which
an employer and its employee reach a mutual understanding of the key terms and conditions of a share-based payment arrangement.
This is the date on which the employer becomes contingently obligated to issue equity instruments or transfer assets to the employee
who renders the requisite service. The Company is obligated for this grant as adoption of a stock option plan and board approval
is considered a mere formality. The Company may cancel option grants and the unvested stock options are forfeited for an employee
at resignation and termination.
Stock
Options
During
the six months ended June 30, 2014, the Company recorded pre-tax recovery of compensation expense of $14,822 related the cancellation
of 1,000,000 stock options as result of an officer’s resignation. There was no unrecognized compensation expense related
to stock options at June 30, 2014. There were no exercises of stock options for the six months ended June 30, 2014.
The
fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model. The 1,000,000
options were valued at $221,121. Unvested stock options of 1,000,000 were forfeited and the related option grant was cancelled
as result of an officer’s resignation.
The following
table summarizes stock option activity for the six months ended June 30, 2014:
Options
|
|
Shares
|
|
|
Weighted-Average Exercise Price
|
|
|
Weighted-Average
Remaining
Contractual Term
|
|
|
Aggregate
Intrinsic
Value
($000)
|
|
Outstanding at January 1, 2014
|
|
|
1,000,000
|
|
|
$
|
0.26
|
|
|
|
-
|
|
|
|
-
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited or expired
|
|
|
(1,000,000
|
)
|
|
|
0.26
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding at June 30, 2014
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Common
Stock
2013:
On
January 15, 2013, the Company sold 46,429 shares of common stock for $13,000 at a price per share of $0.28.
On
January 31, 2013, the Company issued 50,266 shares of common stock as compensation to an employee for services rendered through
March 31, 2013. The shares were valued at $0.49 per share based on the quoted trading price per share or $24,630, which was expensed.
In
February 2013, the Company issued 5,575,000 shares of common stock in connection with a financing transaction as more fully described
in Note 7.
In
March 2013, the Company entered into a one-year agreement with a consultant for 230,000 vested shares and cash consideration.
The shares were valued on the agreement date, which was the measurement date at $0.35, based on the quoted trading price, and
the $80,500 was recorded as a prepaid asset and is being expensed over the term of the contract. The shares were issued on April
1, 2013 to the consultant.
HEALTH
REVENUE ASSURANCE HOLDINGS, INC.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2014 (UNAUDITED)
On
April 1, 2013, the Company issued an aggregate of 54,847 shares of common stock as compensation to two employees for services
rendered through March 31, 2013. The shares were valued at $0.40 per share based on recent cash sales by the Company or $21,939,
which was expensed.
On
May 19, 2013, the Company sold 625,000 shares of common stock for $250,000 at a price per share of $0.40.
On
May 24, 2013, the Company sold 125,000 shares of common stock for $50,000 at a price of $0.40 per share.
On
June 21, 2013, the Company sold 750,000 shares of common stock for $300,000 at a price per share of $0.40.
On
June 27, 2013, the Company entered into a financial advisor and agent placement agreement whereby the Company had the option to
pay in cash or issue 100,000 shares of common stock. The shares were valued on the agreement date, which was the measurement date
at $0.51 per share based on the quoted trading price, and the $51,000 is being expensed over the term of the contract. The Company
issued the shares in September 2013.
On
July 8, 2013, the Company sold 500,000 shares of common stock for $200,000 at a price per share $0.40.
On
August 7, 2013, the Company sold 500,000 shares of common stock for $200,000 at a price per share $0.40.
On
August 21, 2013, the Company sold 100,000 shares of common stock for $25,000 at a price per share of $0.25.
On
August 27, 2013, the Company issued 400,000 shares of common stock for $100,000 at a price per share of $0.25.
On
August 30, 2013, the Company issued 400,000 shares of common stock for $100,000 at a price per share of $0.25 per share.
On
August 22, 2013 and August 28, 2013, the Company converted $402,083 in unsecured promissory notes for five (5) individuals into
one million six hundred eight thousand three hundred and thirty three (1,608,333) shares of common stock at a conversion price
of $0.25 per share. The shares of common stock were valued at $514,666 based on the quoted trading price of $0.32 and accordingly,
the Company recorded a loss on conversion of $112,583.
In
September 2013, the Company issued 95,052 shares of common stock as compensation to three employees for services rendered through
June 30, 2013. The shares were valued at $0.48 per share based on the quoted trading price per share or $45,625, which was expensed.
On
September 6, 2013, the Company entered into a three-year agreement with a company to provide consulting and recruiting services.
Upon execution of the agreement, the Company issued 50,000 shares of common stock valued at $0.30 per share based on the quoted
trading price, in consideration of their services to be rendered for the first year of the agreement. The $15,000 is being expensed
over 12 months.
On
September 9, 2013, the Company entered into a one year consulting agreement with a stockholder to provide certain consulting services
related to the Company’s business in exchange for four million one hundred twenty five thousand (4,125,000) shares of common
stock in consideration of the services to be rendered. The shares were valued on the agreement date, which was the measurement
date at $0.28 per share based on the quoted trading price, and the $1,155,000 is being expensed over the term of the contract.
On
September 30, 2013, the Company issued 187,500 shares of common stock as compensation to two employees for services rendered through
September 30, 2013. The shares were valued at $0.23 per share based on the quoted trading price per share or $43,125, which was
expensed.
HEALTH
REVENUE ASSURANCE HOLDINGS, INC.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2014 (UNAUDITED)
On
October 9, 2013, the Company issued 100,000 shares of common stock as compensation to a consultant to provide services. The shares
were valued at $0.24 per share based on the quoted trading price per share or $24,000, which was recorded as prepaid and is being
expensed over the term of the agreement, which is six (6) months.
On
December 31, 2013, in accordance with a 2012 employment agreement, the Company issued 75,000 shares of common stock as compensation
to an employee for services rendered through December 31, 2013. The shares were valued at $0.25 per share based on the quoted
trading price per share or $18,750, which was expensed.
2014:
On March 31, 2014, in accordance with
a 2012 employment agreement, the Company issued 93,750 shares of common stock as compensation to an employee for services rendered
through March 31, 2014. The shares were valued at $0.20 per share based on the quoted trading price per share or $18,750, which
was expensed.
On May 19, 2014, a resolution was proposed
for a grant of restricted common stock for board members Mr. Michael Brainard and Mr. Peter Russo. Under Nevada law, in order
to take action through a written consent, the consent must be approved by all directors. The Company did not obtain written
consents from all board of directors members and accordingly, the board of directors did not approve the restricted stock grants.
The board of directors has waived any equity grants to a later date based on the Company’s future results of operations.
Temporary
Equity – Redeemable Convertible Preferred Stock
On
November 12, 2013, the Company entered into a Securities Purchase Agreement for the sale of Series A 8% Redeemable Convertible
Preferred Stock (“Series A stock”) and warrants to purchase shares of the Company’s common stock. The Company
sold 13,500,000 of Series A stock and warrants to purchase 27,000,000 shares of the Company’s common stock for gross proceeds
of $5,400,000. The net proceeds to the Company after offering costs were $4,903,652. The Series A stock is convertible into common
stock on a 2 for 1 basis and is redeemable by the Company, at the option of the investor, 48 months from November 12, 2013 at
the stated value of $0.40 per share or a total of $5,400,000 plus accumulated but unpaid dividends, whether declared or not. The
Company accounts for these preferred stock in accordance with the US GAAP accounting guidance under ASC 480 applicable to redeemable
instruments, which requires the differential between the issuance and redemption value to be accreted over the period that begins
on the issuance date and ends on the redemption date. The accretion increases accumulated deficits and net loss allocable to common
stockholders in calculating net loss per share.
Due
to the redemption feature the Series A Stock is reflected as temporary equity as follows:
Series A sale price
|
|
$
|
5,400,000
|
|
Less: Reclassification of warrant fair value to liability
|
|
|
(5,669,837
|
)
|
Offering costs
|
|
|
(496,348
|
)
|
Plus: Deemed dividend
|
|
|
2,634,185
|
|
Series A dividends
|
|
|
60,000
|
|
Series A at December 31, 2013
|
|
$
|
1,928,000
|
|
Plus: Accretion of Series A value differential
|
|
|
547,553
|
|
Series A dividends
|
|
|
220,573
|
|
Series A at June 30, 2014
|
|
$
|
2,696,126
|
|
The
Company also issued warrants to purchase 1,890,000 shares of common stock to a placement agent. (See Note 12)
The
Company recorded a beneficial conversion value for the preferred stock of approximately $2.6 million in 2013 as an immediate charge
to accumulated deficit as it is considered a constructive dividend to Series A preferred stockholders. As part of this equity
financing transaction, the Company issued 27,000,000 five-year warrants (See Note 12) with immediate vesting rights to convert
into common shares at an initial exercise price of $0.30 per share under price protection provisions. The warrants also contain
cashless exercise provisions. Due to price protection provisions in the warrants, the Company will account for these warrants
issued in accordance with the US GAAP accounting guidance under ASC 815 applicable to derivative instruments, which requires every
derivative instrument within its scope to be recorded on the balance sheet as either an asset or liability measured at its fair
value, with changes in fair value recognized in earnings.
HEALTH
REVENUE ASSURANCE HOLDINGS, INC.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2014 (UNAUDITED)
In
connection with the Securities Purchase Agreement, the Company entered into a registration rights agreement with the Purchasers,
pursuant to which the Company agreed to register all of the shares of common stock underlying the Series A Preferred Stock and
the shares of common stock underlying the Warrants on a registration statement on Form S-1 (the “Registration Statement”)
to be filed with the SEC within 30 calendar days following the Closing Date (the “Filing Deadline”) and to use its
best efforts to cause the Registration Statement to be declared effective under the Securities Act within 90 calendar days following
the Filing Deadline. The Registration Statement was declared effective prior to the Filing Deadline.
12
– WARRANTS AND FAIR VALUE MEASUREMENTS
Warrants
In
connection with the promissory notes issued to Tonaquint on October 7, 2013 and October 17, 2013, the Company issued 350,000 and
175,000 warrants, respectively. As a result of the Series A Preferred Stock and warrant sale on November 12, 2013, the exercise
price of both the 350,000 warrants and 175,000 warrants was reduced to $0.20 per share and an additional 525,000 warrants were
issued to Tonaquint pursuant to full ratchet anti-dilution provisions.
On
November 12, 2013 and in connection with the Series A Preferred Stock offering, the Company issued 27,000,000 warrants to investors
and 1,890,000 warrants were issued as a fee to the placement agent all at an exercise price of $0.30 per share.
Warrant
activity is as follows:
|
|
|
Number of
Warrants
|
|
|
Weighted
Average
Exercise Price
|
|
Outstanding at December 31, 2013
|
|
|
|
29,940,000
|
|
|
$
|
0.30
|
|
Granted
|
|
|
|
-
|
|
|
|
-
|
|
Anti-dilution issuance
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding at June 30, 2014
|
|
|
|
29,940,000
|
|
|
$
|
0.30
|
|
Exercisable at June 30, 2014
|
|
|
|
29,940,000
|
|
|
$
|
0.30
|
|
Aggregate intrinsic value
|
|
|
|
|
|
|
$
|
-
|
|
All
warrants were issued with an exercise term of 5 years.
Warrants
outstanding have a weighted average remaining contractual life of 4.36 years as of June 30, 2014.
Fair
Value Measurements – Derivative liability
:
The
accounting guidance for fair value measurements provides a framework for measuring fair value and requires expanded disclosures
regarding fair value measurements. Fair value is defined as the price that would be received for an asset or the exit price that
would be paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants
on the measurement date. The accounting guidance established a fair value hierarchy which requires an entity to maximize the use
of observable inputs, where available. This hierarchy prioritizes the inputs into three broad levels as follows. Level 1 inputs
are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar
assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly
through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs
based on the Company’s own assumptions used to measure assets and liabilities at fair value. An asset or liability’s
classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
HEALTH
REVENUE ASSURANCE HOLDINGS, INC.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2014 (UNAUDITED)
Assets
and liabilities measured at fair value on a recurring and non-recurring basis consisted of the following at:
|
|
Carrying
Value at
June 30,
|
|
|
Fair Value Measurements at June 30, 2014
|
|
|
|
2014
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant derivative liability (29,940,000 warrants)
|
|
$
|
683,267
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
683,267
|
|
The
following is a summary of activity of Level 3 liabilities:
Balance at December 31, 2013
|
|
$
|
5,406,000
|
|
|
|
|
|
|
Change in fair value
|
|
|
(4,722,733
|
)
|
Balance June 30, 2014
|
|
$
|
683,267
|
|
Changes
in fair value of the warrant derivative liability are included in other income (expense) in the accompanying unaudited consolidated
statements of operations.
The
Company estimates the fair value of the warrant liability utilizing the Binomial Lattice model, which is dependent upon several
variables such as the expected term (based on contractual term), expected volatility of our stock price over the expected term
(based on historical volatility), expected risk-free interest rate over the expected term, and the expected dividend yield rate
over the expected term. The Company also used the Black-Scholes pricing model as a comparison to the Binomial Lattice method and
the results were similar. The Company believes this valuation methodology is appropriate for estimating the fair value of the
warrant derivative liability. The following table summarizes the assumptions the Company utilized to estimate the fair value of
the embedded conversion option:
Assumptions
|
|
June 30,
2014
|
|
Expected term
|
|
|
0.875
|
|
Expected Volatility
|
|
|
131.31
|
%
|
Risk free rate
|
|
|
1.2
|
%
|
Dividend Yield
|
|
|
0.00
|
%
|
There
were no changes in the valuation techniques during 2014.
13
– CONCENTRATIONS
Sales
to six hospitals represented approximately 54% of net sales for the six months ended June 30, 2014.
Hospital Customer A
|
|
|
17.2
|
%
|
Hospital Customer B
|
|
|
9.6
|
%
|
Hospital Customer C
|
|
|
9.7
|
%
|
Hospital Customer D
|
|
|
1.3
|
%
|
Hospital Customer E
|
|
|
5.8
|
%
|
Hospital Customer F
|
|
|
10.5
|
%
|
Total
|
|
|
54.1
|
%
|
Four
and three customers represented approximately 59% and 64% of the accounts receivable as of June 30, 2014 and December 31, 2013
respectively.
HEALTH
REVENUE ASSURANCE HOLDINGS, INC.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2014 (UNAUDITED)
14
– RELATED PARTY TRANSACTIONS
In
March 2013, the Company entered into a contract with ResumeBear, Inc. (“ResumeBear”), a related party, to provide
website development services in the amount of $302,764. Mr. Peter Russo, a member of the Company’s board of directors, is
the chief executive officer and a director of ResumeBear. Mr. Michael Brainard, a member of the Company’s board of directors,
is also a director of ResumeBear. No revenues were recorded by the Company from ResumeBear for the six months ended June 30, 2014
and 2013. In January 2014, the Company wrote-off approximately $108,000 of the account receivable with ResumeBear which is reflected
in the December 31, 2013 consolidated financial statements as an allowance of $16,244 and a reduction of revenue of approximately
$92,000. Due to cost overruns and product delivery issues relating primarily to a third party subcontractor, the Company estimates
the cumulative total loss on this contract is approximately $220,200 through June 30, 2014, and $112,200 incurred for the six
months ended June 30, 2014.
ResumeBear hired Dean Boyer, the
Company’s former chief technology officer, as their chief technology officer in April 2014. (See Note 10 for severances due
to former officers)
15
– SUBSEQUENT EVENTS
On July 31, 2014, the Company’s
Board of Directors, after consulting with its management and reorganization attorney, directed management to file a petition under
Chapter 11 of the U.S. Bankruptcy Code subject to any change in the final recommendation of the reorganization attorney. On August
11, 2014, the Company’s wholly owned subsidiary and operating entity, Health Revenue Assurance Associates filed a petition
for relief under Chapter 11 of the federal bankruptcy laws in the United States Bankruptcy Court for the Southern District of Florida.
Under Chapter 11, certain claims against the Company in existence before the filing of the petition for relief under the federal
bankruptcy laws are stayed while the Company continues business operations as debtor-in-possession. Additional claims (liabilities
subject to compromise) may arise after the filing date resulting from rejection of executory contracts, including leases, and from
determination by the court of allowed claims for contingencies and other disputed amounts. Claims secured by the Company assets
(secured claims) also are stayed, although the holders of such claims have the right to move the court for relief from stay.
On August 6, 2014, the Company and Todd
Willis, the Company’s Chief Executive Officer, entered into a new two-year Employment Agreement. In accordance with the Agreement,
Mr. Willis shall receive an annual base salary of $175,000. The base salary shall increase upon the Company meeting certain performance
milestones.
HEALTH REVENUE ASSURANCE HOLDINGS, INC.