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HEALTH REVENUE ASSURANCE HOLDINGS, INC. - 10-Q/A - Management's Discussion and Analysis of Financial Condition and Results of Operations.(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion and analysis of the results of operations and financial condition of Health Revenue Assurance Holdings, Inc. for the three months ended March 31, 2013 and 2012, should be read in conjunction with the Selected Consolidated Financial Data, Health Revenue Assurance Holdings' financial statements, and the notes to those financial statements that are included elsewhere in this Quarterly Report. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the Cautionary Notice Regarding Forward-Looking Statements in this Quarterly Report. We use words such as "anticipate," "estimate," "plan," "project," "continuing," "ongoing," "expect," "believe," "intend," "may," "will," "should," "could," and similar expressions to identify forward-looking statements. Overview On February 10, 2012, Health Revenue Assurance Holdings, Inc. (the "Company" or "HRAH") entered into an Agreement and Plan of Merger and Reorganization with Health Revenue Acquisition Corp., a Maryland corporation and our wholly-owned subsidiary ("Acquisition Sub"), and Health Revenue Assurance Associates, Inc., a Maryland corporation ("HRAA"), pursuant to which Acquisition Sub was merged with and into HRAA, and HRAA, as the surviving corporation, became our wholly-owned subsidiary (the "Merger"). HRAA improves the healthcare delivery experience for doctors, nurses and patients while assuring the existence of healthcare organizations. Since 2001, we have been providing Revenue Integrity programs for healthcare organizations across the country and are committed to providing the most intuitive and effective solutions in the industry. HRAA's products and services include business intelligence technology solutions, contract coding, billing, coding and compliance audits, education, revenue cycle consulting, physician services and ICD-10 transition services. Our collaborative approach provides the right solutions for our clients' needs with the highest regard for ethical standards and responsibility. On April 13, 2012, the Board unanimously approved a change in the Company's name from Anvex International, Inc. to Health Revenue Assurance Holdings, Inc. to be consistent with our current business following the Merger. We are subject to risks common to service providers and consulting companies, including competition and the ability to recruit, train, and put in place a sufficient quantity of proficient consultants and medical coders familiar with the requirements of IDC-10-CM/PCS, the uncertainty of future regulatory approvals and laws, the need for future capital and the retention of key employees. We cannot provide assurance that we will generate revenues or achieve and sustain profitability in the future. Recent Developments Certain significant items or events must be considered to better understand differences in our results of operations from period to period. We believe that the following items have had a material impact on our results of operations for the periods discussed below or may have a material impact on our results of operations in future periods. ICD-10 Transition In the short term, the main focus of our business will be with respect to the ICD-10 coding transition. In that regard, our potential clients are all hospitals and medical providers which currently maintain coding personnel in some form that are primarily responsible for seeking reimbursement for patients' procedures. The current system in place that drives the appropriate medical codes from hospitals/medical facilities to insurance companies is called ICD-9, which was implemented over 30 years ago. In January 2009, the United States Department of Health and Human Services ("HHS") published a final rule which mandated a change in medical coding in United States health care settings from the current system, International Classification of Diseases, 9th Edition, Clinical Modification (ICD-9-CM), to the International Classification of Diseases, 10th Edition, Clinical Modification/Procedure Coding System (ICD-10-CM/PCS). Compliance with this ruling was to be achieved by October 1, 2013. The new, mandated version expands the number of codes from 24,000 to 155,000, making it more precise and descriptive and more accurately describing the diagnoses and inpatient procedures of care delivered. The transition to ICD-10-CM/PS will require significant business and systems changes throughout the health care industry and will impact all processes and people from finance to compliance to doctors. On April 9, 2012, as published in the Federal Register, citing concerns about the ability of provider groups to meet the looming compliance deadline to adopt ICD-10-CM/PCS, HHS announced a proposed rule which would delay the implementation date to October 1, 2014. Interested parties had the ability to comment during a period ending 30 days after the date of the announcement. On August 27, 2012, HHS Secretary Kathleen Sebelius announced the release of a rule that makes final a one-year proposed delay-from October 1, 2013, to October 1, 2014 - in the compliance date for the industry's transition to ICD-10 codes. 12 --------------------------------------------------------------------------------The Company anticipates implementation of ICD-10-CM/PCS to be completed by the newly proposed effective date of October 1, 2014. We believe that we are capable of providing consulting and related services with respect to the ICD-10 coding transition and the potential issues that we believe medical providers will experience due to the transition. In that regard, we believe the following are some of the issues that will be experienced due to the changeover: ? The new system will require time, money and commitment by over 6,000 hospitals, 600,000 physicians and every health insurance provider in the United States. ? Re-education and training of every Health Information Management ("HIM") department is required of every hospital and medical facility in the United States. ? All claims submitted by hospitals and physicians for reimbursement without utilizing ICD-10 will result in immediate rejection and non-payment. HRAA's vision regarding ICD-10 Transition: ? Hospitals and medical facilities will incur massive backlogs in their billing and coding departments. Backlog in coding will lead to greater time between payments and crippling financial deficits. ? There will likely be an increase in coding errors, resulting in incorrect payments that can lead to hefty fines. ? Initial estimates based on other countries that have already converted to ICD-10 predict a 50% loss of productivity due to the complexity of the new system - a result of more time being allocated to the preparation of each individual patient case. ? The sheer number of codes and time for each entry will dramatically impact the workload. Currently there are not enough coders to meet this demand, resulting in an ongoing shortfall, with an accelerating shortfall anticipated after ICD-10 is implemented. ? Every discipline in the hospital will be affected as they all revolve around the same coding system. ? For each code in the ICD-9 format, there will be additional, more descriptive codes in the ICD-10 format. This will greatly increase the quality of patient care, but simultaneously put a burden on hospitals and their medical coders. ? Currently under ICD-9, hundreds of millions of dollars of revenue are lost each year due to medical coding and billing errors. ? The average age of a medical coder is 54. It is estimated that 20% of coders plan to retire or change activities because of this transition. HRAH Chairman, CEO and Founder Andrea Clark, RHIA, CCS, CPC-H, continues to build the Company to meet the changing needs of the healthcare community and her accomplishments continue to be acknowledged. A few recent awards include: ? "Female Executive of the Year" Gold Award Winner - Stevie Awards for Women in Business - December, 2012 ? "Maverick of the Year" Bronze Award Winner - Stevie Awards for Women in Business - December, 2012 ? "Mentor of the Year" - 2012 AHIMA Triumph Awards - June, 2012 ? "10 HIM Heroes, Professionals Who Have Made a Difference" - For The Record Magazine - October, 2011 HRAA has also been recognized for tremendous growth and industry leadership. Recent acknowledgments include: ? "Fastest Growing Company of the Year" Bronze Award Winner- Stevie Awards for Women in Business - December, 2012 ? "Top Ten Best Places To Work" - South Florida Business Journal - 2011 We believe we are able to provide hospitals and medical providers with the ability to effectively transition to ICD-10 and prevent massive backlogs that lead to crippling financial deficits. Our team of certified coders provides hospitals with the expertise needed to successfully input the proper data set into the Health Information Management (HIM) system which drives reimbursement from insurance providers such as Medicare and Medicaid, as well as private insurance companies. We offer above industry standards ICD-9 and ICD-10 training to coders, equipping them with the knowledge to effectively assign the appropriate codes. We also conduct medical billing audits, identifying risks of lost revenue and ensuring the correct amounts have been paid. In doing so, we shorten the revenue cycle and prevent financial stress on healthcare providers. 13 -------------------------------------------------------------------------------- The transition from ICD-9 to ICD-10 is and will drastically affect the entire healthcare industry, especially patients, hospitals, medical facilities, physicians, insurance providers and the coding workforce. Our goal is to optimize revenue integrity by providing expert contract coding and consulting services to hospitals and medical facilities throughout the United States. We will implement marketing tools in order to create our own brand identity and leverage this rapidly growing awareness of the upcoming switch to ICD-10 and the potential financial pressure a hospital will face if not properly prepared and trained. We believe that the following tasks are essential to achieve ongoing success: ? development of long lasting relationships with new clients and strengthen relationships with existing clients; ? recruitment and proper training of qualified personnel; ? appropriate fiscal planning and execution; ? development of an extensive sales network; ? effective and broad-reaching promotional programs; ? connecting effectively with executive-level decision makers of hospitals and medical facilities; ? accurately and efficiently audit the medical billing records to maximize revenue integrity; ? ensure that we are supplying hospitals and medical facilities with top quality, certified medical coders; ? developing and deploying dynamic and effective marketing strategies; and ? informing healthcare professionals of the products, services and benefits of being an HRAA client. In addition to the above, our ICD-10 coding transition services will also include the training of our client's staff with respect to the ICD-10 coding system; providing coding resources while the client's staff is undergoing training; coding resources to handle backlog as productivity levels drop off; and auditing resources to ensure retention and accuracy of the ICD-10 coding. Products and Services We provide our customers with customized, hands-on, strategy-focused and in-depth analysis of a hospital's Revenue Cycle and their compliance, as well as APC and DRG coding and documentation audits. We also offer customized education and certification programs, chargemaster data integrity, reviews, and solutions yielding measurable results, increased productivity, reduced DNFB, improved APC accuracy and optimized Revenue Integrity. We are committed to providing the most intuitive Revenue Integrity solutions in the industry through various means including APC AuditPro™, our proprietary internal auditing technology for outpatient claims. HRAA provides an in-depth analysis of a hospital's revenue cycle and their compliance, and offers the only full suite of business intelligence products and consulting services required to keep up with the ever-changing healthcare industry. All of our products and services yield measurable results, increased productivity, reduced unbilled accounts, improved payment accuracy and provide optimized revenue integrity for hospitals and physicians. Products Visualizer™ Healthcare is traversing a period of significant change with the dawning of Accountable Care Organizations ("ACOs"), the declaration of Meaningful Use, and probably the most important of these agents of change is the transition from ICD-9 to ICD-10. To understand the importance of these changes, healthcare's decision makers need to recognize the impact these changes are having on their organizations. To do this they must visualize and analyze their available data to produce actionable results that improve the organization's overall performance. ICD-10 Education Curriculum We provide our customers with an online internally developed education curriculum focused on ICD-10 CM Diagnosis and ICD-10-PCS Procedure course material. Visualizer™ Visualizer™ is an analytic platform that provides healthcare decision makers with an integrated view of financial, operational, and clinical data across multiple sources of data. Each Visualizer™ building block is designed to meet a specific analytic need. OMC Initiator The Outsourced Medical Coding Initiator was created for processing healthcare claims within hospitals. This product captures data from the physician or the hospital's financial systems and correlates the data in a manner that expedites the processing of a claim. To validate our new product, our team of Emergency Department Coders (ED Coders) is continuously evaluating the process of coding claims in order to enhance our product Verifier™ (Inpatient and Outpatient) Healthcare organizations need executable tactics that can be implemented up and down the revenue cycle, with both inpatients and outpatients. These steps taken must be clear and simple to really improve the patient experience. Creating a successful revenue integrity program will have the most immediate impact in that initiative. However, there is a significant challenge in today's environment of complex regulations, changing payer requirements, and RAC, CERT, HIPAA along with ICD-10 pressures and increasing financial and workforce resource constraints. Under the Center for Medicare and Medicaid Services' ("CMS'") value-based purchasing rules, hospitals will be assessed on quality performance, with clinical measures weighted at 70% and patient experience measures weighted at 30%. Verifier™ Suite is the most comprehensive solution for healthcare organizations performing internal auditing that provides insight into both clinical quality and service quality. This proven technology has been stress tested by HRAA providing internal auditing services to our clients for over 10 years. Although, conducting regular audits and taking a high level view of the reimbursement landscape is required, it's not until you roll up your sleeves and start digging into the claim details, that you will uncover hidden revenue integrity issues. 14 -------------------------------------------------------------------------------- Services Coding Services The HRAA coding solution provides hospitals and physicians across the United States with an experienced team of backlog coders to assist facility coding departments or provide outsourcing services. Certified HRAA associates supply hospitals and physicians with medical coding and billing expertise, while reducing the risk of error and maximizing accuracy, efficiency and profitability. Medical coding is the process of taking information from a wide variety of patient medical records, charts and notes, and converting it into an alphanumeric data set. The data set then drives the payment for the services rendered when submitted to Medicare, Medicaid, commercial payers and other healthcare providers. Medical coders analyze the documentation maintained within medical records and assign codes that drive reimbursement. Additionally, the data set is utilized as a collection methodology for tracking diseases, quality of care and treatment. Billing & Coding Audits HRAA's team motivates excellence and reimbursement proficiency through customized, hands-on, strategy-focused and in-depth approach to the issues facing hospitals today and preparing them for tomorrow. While increasing profits for healthcare professionals remains a moving target, it's paramount to focus attention on compliant reimbursement dollars. Education We offer various training and educational opportunities to our clients, including Education Sessions, Coding Boot Camps, Workshops, and Webinars. Consulting We have specialized in building reimbursement proficiency by focusing on the entire revenue cycle, not just coding, and by providing RAC oriented audits, education and consulting services. Because our approach is to focus on the client's needs and develop the solution on an individual basis, our team possesses extensive experience in revenue cycle issues. We focus not merely on the revenue and codes, but on their operational uses. HRAA's consulting services provide secure and effective solutions for complex regulatory challenges, internal inefficiencies and revenue cycle analysis. ICD-10 Transition Services The transition to ICD-10 codes is not just a coding conversion; it is a change that impacts virtually all areas of the revenue cycle. HRAA's unique approach to this business transition is multidimensional, providing organizations with a smooth and sustainable transition. HRAA offers "turn-key ICD-10 services" to assist clients with all aspects of the transition, with great emphasis on streamlined comprehensive training while maintaining productivity. HRAA's ICD-10 Transition Services Include ICDVisualizer™, Needs Assessment, ICD-9/ICD-10 Dual Audit, Education, Reserved Medical Coder Personnel, Auditing, Continuous Support. Business Intelligence HRAA offers Business Intelligence Services to help clients interpret data and make healthcare organizations more efficient and effective. HRAA Business Intelligence team offers a number of solutions including: Implementation of Visualizer™ Suite products, Deployment of solution templates, Development of custom applications. HRAA solution template offers the flexibility to customize the solution to meet client's needs without having to start application development from scratch. HRAA's implementation experience of templates include: Surgery Center Analytics, Revenue Cycle Management, Customer satisfaction surveys, Hospital Statistics, Quality measures. Physician Services Certified coders and auditors are fully trained and are required to maintain continuing education each year to uphold their certification. HRAA is proactive providing each coder and auditor with many opportunities for additional training to make certain we are always providing the highest quality standard you expect from HRAA. HRAA takes each encounter through a rigorous review in-line with the documentation guidelines used by CMS. The education that follows an audit includes the basic fundamentals of appropriate documentation for the levels of service billed. Physician will be introduced to the specific issues noted within the documented service. Recommendations on how to improve upon the documentation will be discussed, including template usage, appropriate EHR revisions, form creation, and so forth. 15 --------------------------------------------------------------------------------Three months ended March 31, 2013 compared to March 31, 2012 Results of Operations The following table presents a summary of operating information for the three months ended March 31, 2013 and 2012: Increase/ Increase/ For the three months ended (Decrease) (Decrease) March 31, 2013 March 31, 2012 $ % Revenue $ 2,156,597 $ 605,830 $ 1,550,767 256.0 % Costs of Revenues 985,321 431,120 554,201 128.5 % Gross profit 1,171,276 174,710 996,566 570.4 % Selling and administrative expenses 1,444,085 609,270 835,815 137.0 % Research and development expenses 289 32,213 (31,924 ) (99.1 )% Depreciation and amortization 25,429 9,872 15,557 157.6 % Total operating expenses 1,469,803 651,355 818,448 125.7 % Operating income (loss) (298,527) (476,645 ) 178,118 (37.4) % Other expense, net (136,301 ) (5,922 ) 130,379 2,201.6 % Net loss $ (434,828 ) $ (482,567 ) $ 47,739 (9.9) % Revenue: Revenue increased by approximately $1,551,000 or approximately 256%, from approximately $606,000 for the three months ended March 31, 2012 to $2,157,000 for the three months ended March 31, 2013. The increase was due primarily to increased revenue generated as a result of an increase in business development and marketing efforts put forth by HRAA. Cost of Revenues: Cost of revenues increased by approximately $554,000 or approximately 128%, from approximately $431,000 for the three months ended March 31, 2012 to approximately $985,000 for the three months ended March 31, 2013. The increase was due primarily to greater personnel and related training costs associated with the buildup of the Company's audit and coding service provider personnel required to service the anticipated increase in service contracts in future periods. Specifically, as of March 31, 2013, the Company employed 98 service providers, who have to go through a period of training, as compared to 22 service providers as of March 31, 2012. Gross profit: Gross profit increased by approximately $997,000, or approximately 570%, from approximately $175,000 for the three months ended March 31, 2012 to approximately $1,171,000 for the three months ended March 31, 2013. The increase in gross profit was due to the increase in business experienced in the year. Selling and Administrative Expenses: Selling and administrative expenses were approximately $1,444,000 for the three months ended March 31, 2013, an increase of approximately $836,000 or 137%, from approximately $609,000 for the three months ended March 31, 2012. The change in the 2013 period compared to the 2012 period was primarily due to: ? Personnel costs have increased by approximately $574,000 or approximately 226%, from approximately $254,000 for the three months ended March 31, 2012 to approximately $828,000 for the three months ended March 31, 2013. The increase is due primarily to increased compensation and related expenses associated with the buildup of the Company's management, sales and administrative staff in anticipation of growth in business volume. ? Professional fees have increased from approximately $35,000 for the three months ended March 31, 2012 to approximately $135,000 for the three months ended March 31, 2013, an increase of approximately $100,000, or 288%. This increase is attributable to legal and accounting services provided in connection with expenses associated with financial reporting matters. ? The remainder of the increase in Selling and administrative expenses is related to costs associated to the company's business development such as marketing, trade shows and seminars. 16--------------------------------------------------------------------------------Research and Development Expenses: Research and development expenses were approximately $300 for the three months ended March 31, 2013, a decrease of approximately $32,000, or 99%, from approximately $32,200 for the three months ended March 31, 2012. The decrease is due to the capitalization of expenses related to the development of the Visualizer™ suite. Depreciation and Amortization Expenses: Depreciation and amortization expenses were approximately $25,000 for the three months ended March 31, 2013, an increase of approximately $16,000, or 158%, from approximately $9,900 for the three months ended March 31, 2012. The increase was primarily due to depreciation costs associated with the Company's purchases for office furniture and computer necessary to support the increase in personnel. Interest Expense (included in other expenses, net): Interest Expense was approximately $136,000 for the three months ended March 31, 2013, an increase of approximately $130,000, from approximately $6,000 for the three months ended March 31, 2012. The increase is due to the factoring fees experienced in the quarter along with interest on outstanding debt obligations and amortization of debt discounts. Net Income (loss): As a result of the above factors, a net loss of approximately $435,000 was recognized for the three months ended March 31, 2013 as compared to net loss of approximately $483,000 for the three months ended March 31, 2012, a decrease of approximately $48,000 or approximately 10%. The decrease in net loss is outlined above. Non-GAAP - Financial Measures The following discussion and analysis includes both financial measures in accordance with GAAP, as well as a non-GAAP financial measure. Generally, a non-GAAP financial measure is a numerical measure of a company's performance, financial position or cash flows that either excludes or includes amounts that are not normally included or excluded in the most directly comparable measure calculated and presented in accordance with GAAP. Non-GAAP financial measures should be viewed as supplemental to, and should not be considered as alternatives to net income, operating income, and cash flow from operating activities, liquidity or any other financial measures. They may not be indicative of the historical operating results of the Company nor is it intended to be predictive of potential future results. Investors should not consider non-GAAP financial measures in isolation or as substitutes for performance measures calculated in accordance with GAAP. We believe that both management and shareholders benefit from referring to the following non-GAAP financial measure in planning, forecasting and analyzing future periods. Our management uses this non-GAAP financial measure in evaluating its financial and operational decision making and as a means to evaluate period-to-period comparison. Our management uses and relies on the following non-GAAP financial measure: Adjusted EBITDA from continuing operations Our management believes Adjusted EBITDA from continuing operations is an important measure of our operating performance because it allows management, investors and analysts to evaluate and assess our core operating results from period to period after removing the impact of items of a non-operational nature that affect comparability. Our management recognizes that Adjusted EBITDA from continuing operations, like EBITDA from continuing operations, has inherent limitations because of the excluded items. We have included a reconciliation of our non-GAAP financial measures to the most comparable financial measure calculated in accordance with GAAP. We believe that providing the non-GAAP financial measure, together with the reconciliation to GAAP, helps investors make comparisons between the Company and other companies. In making any comparisons to other companies, investors need to be aware that companies use different non-GAAP measure to evaluate their financial performance. Investors should pay close attention to the specific definition being used and to the reconciliation between such measure and the corresponding GAAP measure provided by each company under applicable SEC rules. 17 -------------------------------------------------------------------------------- The Company defines Adjusted EBITDA from continuing operations as earnings (or loss) before interest expense, income taxes, depreciation and amortization, and non-cash stock-based compensation. The Company excludes stock-based compensation because it is non-cash in nature. The following table presents a reconciliation of Adjusted EBITDA from continuing operations to Net Income (loss) from continuing operations allocable to common shareholders, a GAAP financial measure: For the three months ended March 31, 2013 March 31, 2012 Net loss $ (434,828 ) $ (482,567 ) Interest expense 136,018 5,922 Depreciation and amortization 25,429 9,872 Stock based compensation expense 27,984 - Adjusted EBITDA (loss) from operations $ (245,397 ) $ (466,773 ) Liquidity and Capital Resources The Company's principal sources of liquidity include proceeds from long term debt and private placement of its shares. Overall, for the three months ended March 31, 2013, the Company generated approximately $1,238,000 from its financing activities primarily associated with the debt and equity financing. Such proceeds, coupled with its beginning cash balances, were utilized by the Company to fund its negative cash flow from operating activities in the amount of approximately $149,000 and investment in property and equipment of approximately $334,000. As of March 31, 2013, the Company had cash balances of approximately $1,063,000 as compared to approximately $894,000 as of December 31, 2012, an increase of approximately $169,000. Net cash used in operating activities was approximately $149,000 for the three months ended March 31, 2013. This compared to net cash used by operating activities of approximately $533,000 for the three months ended March 31, 2012. The increase of $384,000 was primarily due to increased revenue generated as a result of an increase in business development and management efforts put forth by HRAA. Net cash used in investing activities for the three months ended March 31, 2013 was approximately $334,000 compared to approximately $3,000 for the three months ended March 31, 2012. The increase is primarily attributable to the development of software. Net cash provided by financing activities amounted to approximately $652,000 for the three months ended March 31, 2013, compared to net cash provided in the three months ended March 31, 2012 of approximately $420,000, representing an increase in net cash flow from financing activities of approximately $232,000. This was due to the receipt of net proceeds from the Company's issuance of stock, net borrowings from new and existing debt obligations, offset by various debt repayments. Financing: The Company has the following financing arrangements: 1. The revolving line of credit for $150,000 with Bank of America for working capital needs was modified on December 18, 2012. The loan no longer has an expiration date of December 18, 2012, but instead a final maturity date of December 18, 2018. The interest rate per year is equal to the Bank's Prime Rate plus 6.5 percentage points. The Bank's prime rate of interest at March 31, 2013 was 3.25%. First payment of $2,083 was paid January 18, 2013. 2. A term loan with Bank of America whose proceeds were used for general working capital. The loan is personally guaranteed by one of the Company's stockholders and is collateralized by the assets of HRAA. Payments of principal and interest are approximately $2,700 per month. The loan matures in five years from September 2009, and incurs interest at the rate of 6.75% per annum. The balance due as of April, 2013 was approximately $30,000. 3. A mortgage made to HRAA's subsidiary related to certain real estate which houses HRAA's main offices in Plantation, Florida. The loan originated in July 2010 in the amount of $192,500 and matures July 2020, when a balloon principal payment of approximately $129,000 becomes due. The loan is collateralized by the real estate and is personally guaranteed by a stockholder of HRAA. Interest is fixed at 6.625% for the first five years of the loan, and converts to an adjustable rate for the second five years at the Federal Funds Rate plus 3.25%, as established by the United State Federal Reserve. The balance under this mortgage loan as of March 31, 2013 was approximately $179,000. Monthly payments for principal and interest are approximately $1,500 until July 2015, when the total monthly payment may vary due to the adjustable interest rate provision in the note. 4. A factoring facility with a finance company whereby, under the terms of the agreement, the Company, at its discretion, assigns the collection rights of its receivables to the finance company in exchange for an advance rate of 85% of face value. The assignments are transacted with recourse in the event of non-payment. For the three months ended March 31, 2013, the Company had factored approximately $1,227,000 of receivables and had received cash advances of approximately $1,043,000. Outstanding receivables purchased by the factor as of March 31, 2013 were approximately $505,000 and included in accounts receivable in the accompanying unaudited condensed consolidated balance sheet, and the secured loan due to the lender was approximately $439,000. Factor fees in 2013 were approximately $38,000, and are included in interest expenses. 18--------------------------------------------------------------------------------5. The Company leases certain office equipment under non-cancelable operating lease arrangements. Monthly payments under the lease agreements are approximately $500 as of March 31, 2013. 6. During December 2012 and January 2013, the Company entered into a round of Loan Agreement and Promissory notes totaling $2,035,000. As of December 31, 2012, the Company had received $815,000. The remainder of $1,220,000 was received in January and February 2013. The Company's merger yielded cash from the sale of common stock that was approximately $600,000 short of the expected amount to be raised in order in order to execute its growth plan for the near future. Since the time of the Merger, the Company has transacted equity capital raises totaling approximately $1,060,000 of additional capital infusion. The Company has continued its buildup of the personnel and business development efforts and has incurred operating losses. As a result, the Company possesses working capital of approximately $332,000 at March 31, 2013 and continues to hold discussions with interested parties regarding additional investment in the Company's common stock in amounts which approximate its current estimated working capital shortfall. Should efforts to raise additional capital prove to be unsuccessful; the Company will reduce its growth plans accordingly. 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, management believes they can raise the appropriate funds needed to support their business plan and develop an operating company which is cash flow positive. However, as of March 31, 2013, the Company has an accumulated deficit and for the three months ended March 31, 2013, incurred net losses, and has used net cash in operations. The Company has not been able to generate sufficient cash from operating activities to fund its ongoing 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. 2013 Outlook Now that the deadline for the ICD-10 Transition is finalized for October 2014, many healthcare executives are asking, "How should we get back on track in order to mitigate our financial and compliance risk?" In response to this question, HRAA developed the ICDVisualizerTM. Utilizing knowledge from healthcare industry subject matter experts combined with exceptional insight into what providers really need, the ICDVisualizerTM assists healthcare leaders with their need to understand the exponential impact of the transition to ICD-10 and how it relates to reimbursement risks, clinical documentation quality, coding productivity and process changes. By utilizing a business intelligence platform known for its ease of use and visualization capabilities, ICDVisualizerTM is designed as a multidimensional environment that enables chief financial officers, vice presidents of payer relations, revenue cycle directors, HIM directors, coders and clinicians to explore the impact ICD-10 will have across the enterprise and within both inpatient and outpatient services. ICDVisualizerTM contains a set of baseline analytics that quantify the impact across hospitals, service lines, departments and physicians. Because ICDVisualizerTM has customizable analytics, analysts and executives are able to explore their own data and visualize a unique representation of their financial and operational needs well beyond the ICD-9 to ICD-10 transition phase. Another factor in the outlook for 2013 is the new Hospital Readmission Reduction Program, (HRRP), an Affordable Care Act provision, creates increasing financial penalties for hospitals with higher than expected adjusted readmissions within 30 days. The Centers for Medicare and Medicaid Services, (CMS) expect HRRP to help to control IPPS payment penalties to hospitals having higher than average readmissions within 30 days for 3 conditions: Acute Myocardial Infarction, (AMI), Heart Failure, (HF), and Pneumonia, (PN). The measures included in the policy represent high volume and high cost conditions and are endorsed by the National Quality Forum (NQF). The measures have some exclusions for readmissions that are unrelated to the prior discharge (such as planned admissions for scheduled procedures subsequent to AMI or transfers to another hospital). In 2013, DRG payment rates will be reduced based on a hospital's ratio of actual to expected readmissions. The reduction applies to the base DRG payment only and does not include IME, DSH or outlier payments. In FY 2013, the maximum payment reduction is 1 percent. In 2014, penalties double to 2% and cap at 3% in 2015. According to the CMS a total of 2,217 hospitals are expected to be penalized in the first year of the program. Of those hospitals, 307 will pay the maximum penalty at 1 percent of their regular Medicare reimbursements. The penalty cap will increase to two percent in 2014 and three percent in 2015 and new measures and metrics will be added. ReadmissionsVisualizerTM is a significant aspect of our value proposition for this factor. This business intelligence product is built on a premier business discovery platform that provides the ability to view current inpatient and historical readmission information through an intuitive Web interface for the purpose of decreasing readmissions within the healthcare system and to classify current census risk for readmission so care management can allocate appropriate resources. Users can view current census including Reason for Admission, History of HF, AMI, PN, LACE Readmission Score, Emergency Room History, and more. 19 --------------------------------------------------------------------------------ReadmissionsVisualizerTM also trends and analyzes performance for predictive models to plan enterprise resource budgeting, partner planning, resource allocation and workflow interventions for care management at transitions to improve care quality and continuity. The company is poised to leverage these factors and more facing the healthcare industry through the sales of its products and solutions that allow healthcare organizations to view patient lifecycles horizontally as opposed to vertically thus reducing the cost of delivery and improving the delivery experience for Doctors, Nurses and Patients. Off-Balance Sheet Arrangements None. Critical Accounting Policies The preparation of unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States requires our management to make assumptions, estimates, and judgments that affect the amounts reported, including the notes thereto, and related disclosures of commitments and contingencies, if any. We have identified certain accounting policies that are significant to the preparation of our consolidated financial statements. These accounting policies are important for an understanding of our financial condition and results of operations. Critical accounting policies are those that are most important to the portrayal of our financial condition and results of operations and require management's difficult, subjective, or complex judgment, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Certain accounting estimates are particularly sensitive because of their significance to financial statements and because of the possibility that future events affecting the estimate may differ significantly from management's current judgments. We believe the following critical accounting policies involve the most significant estimates and judgments used in the preparation of our consolidated financial statements. The Company is an emerging growth company; therefore we have elected to use the extended transition period for complying with new or revised accounting standards under Section 102(b)(2)(B) of the Jumpstart Our Business Startups Act. As a result of this election, our consolidated financial statements may not be comparable to companies that comply with public company effective dates. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Health Revenue Assurance Associates, Inc. and Dream Reachers, LLC. All significant inter-company transactions and balances are eliminated in consolidation. Use of Estimates Management uses estimates and assumptions in preparing financial statements. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could differ from those estimates. Significant accounting estimates reflected in the Company's consolidated financial statements include valuation of accounts receivable, valuation of property and equipment, valuation and amortization period of software, valuation of beneficial conversion features in convertible debt, valuation of equity based instruments issued for other than cash, revenue recognition, and the valuation allowance on deferred tax assets. Revenue Recognition The Company recognizes services revenue based on the proportional performance method of recognizing revenue. A portion of the Company's revenue is generated from medical coding audit services. Auditing revenue is invoiced in accordance with the contract, generally at three benchmark time periods which coincide with when specific, obligatory field work services have been rendered and completed, the value of this portion of the contract price has been predetermined and agreed upon, and the client has received benefit or value in the form of the independent identification of system weaknesses and risk analysis. Further, collectability is reasonably assured due to the existence of a fixed fee contract and the size and financial health of the Company's clients. Below is a description of the general benchmarks and work phases associated with the Company's audit services: ? Planning Phase - work commences prior to and as soon as the contract is signed and includes setting the audit scope, scheduling of the job, assignment of audit staff, understanding the client and their systems, determination of sample size and sampling methods to be employed, and other specific items as outlined in the contract. The planning phase includes the determination of deliverables as defined in the contract, generally consisting of a listing of errors, training and a final report. The Company generally invoices and recognizes 50% of the contract value at the completion of the Planning Phase. Although all of the contracts contain a clause making the first 50% of the engagement fee due and non-refundable at this point, the Company does not deem this initial fee to be recognized as deferred revenue under SAB 104 due to the extensive amount of work to be done prior to accepting the contract. 20--------------------------------------------------------------------------------? Field Work Phase - is performed at the client location and generally lasts one week and encompasses actual testing of sample claims preselected in the Planning Phase. The auditor generally preloads the selected claims into the Company's proprietary software and audits the claim records by reviewing actual medical records. The software assists the auditor in determining proper classifications and allows the auditor to compare the proper classification against what was filed in the submission made by the client to Medicare. Notes and comments are recorded and audit reports are generated. The Company generally invoices and recognizes 40% of the contract value at the completion of the Field Work Phase. ? Reporting Phase - includes a summary of audit findings, exit conference with clients, and any other specific deliverables as determined by the contract. The Company generally invoices and recognizes the remaining 10% of the contract value at the completion of the Report Phase. A portion of the Company's revenue is derived from consulting, training and coding services provided. Revenue from these revenue streams is recognized after services are performed based on the quoted and agreed upon fee contained in its contracts. For our education products sold on a self-study standalone basis or in multiple element contracts which include training and the product and training are separable elements (see below) revenue is recognized for the product upon passing of title which occurs once the end user is granted access to our online curriculum courses. The Company intends a general release of its first software product in the second quarter of 2013. Software sales on a standalone basis will be recognized upon delivery of the software when evidence of the purchase arrangement exists and the price is determinable, and when collectability is reasonably assured. Arrangements with customers may involve multiple elements including software products, education products, training, software product maintenance, coding services, coding audit services and other consulting services. Training on education products will occur after the education product sale. Education products are sold and may be used as a self-study product, although most of our customers elect to purchase our training services and therefore most of our contracts to date are multiple element contracts including one price for the education product and related training. We allocate the selling price to each element as discussed below. Training and maintenance on software products will generally occur after the software product sale. Other services may occur before or after the product sales and may not relate to the products. Revenue recognition for multiple element arrangement is as follows: Each element is accounted for separately when each element has value to the customer on a standalone basis and there is Company specific objective evidence of selling price of each deliverable. For revenue arrangements with multiple deliverables, the Company allocates the total customer arrangement to the separate units of accounting based on their relative selling prices as determined by the price of the items when sold separately. Once the selling price is allocated, the revenue for each element is recognized using the general and specific criteria under GAAP as discussed above for elements sold in non-multiple element arrangements. A delivered item or items that do not qualify as a separate unit of accounting within the arrangement are combined with the other applicable undelivered items within the arrangement. The allocation of arrangement consideration and the recognition of revenue is then determined for those combined deliverables as a single unit of accounting. The Company has historically sold its services with established rates which it believes is Company specific objective evidence of selling price. For the new software products, management has established selling prices which qualifies as Company specific objective evidence of selling price. Generally all elements in multiple element arrangements with Company customers qualify as separate units of account for revenue recognition purposes. 21-------------------------------------------------------------------------------- |