UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
FORM 10-Q/A
(Amendment No. 1)
 
(Mark One)
x   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2013
 
or
 
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ________ to_________

Commission File Number:  333-173039

HEALTH REVENUE ASSURANCE HOLDINGS, INC.  

(Exact name of registrant as specified in its charter)
 
Nevada
 
99-0363866
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
8551 W. Sunrise Boulevard, Suite 304
Plantation, Florida 33322

(Address of principal executive offices) (Zip Code)
 
(954) 472-2340  

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x      No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for shorter period that the registrant was required to submit and post such files). Yes  o       No  x
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large Accelerated Filer               o
 
Accelerated Filer                               o
Non-Accelerated Filer                 o
(Do not check if a smaller reporting company)
Smaller Reporting Company            x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨    No  x
 
There were 54,677,294 shares of the Registrant’s Common Stock outstanding at November 14, 2013.
 


 
 

 
 
HEALTH REVENUE ASSURANCE HOLDINGS, INC.
QUARTERLY REPORT ON FORM 10-Q
For the Period Ended September 30, 2013

TABLE OF CONTENTS
 
 
Page
PART 1 - FINANCIAL INFORMATION
 
     
Item 1.
Condensed Consolidated Financial Statements (Unaudited)
1
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
15
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
26
Item 4.
Controls and Procedures
26
   
PART II - OTHER INFORMATION
 
     
Item 1.
Legal Proceedings
27
Item 1A.
Risk Factors
27
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
27
Item 3.
Defaults Upon Senior Securities
27
Item 4.
Mine Safety Disclosures
27
Item 5.
Other Information
27
Item 6.
Exhibits
27
   
SIGNATURES
28
 
 
 

 
 
EXPLANATORY NOTE
 
Health Revenue Assurance Holdings, Inc. (the “Company”) filed its Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2013 with the Securities and Exchange Commission on November 14, 2013 (“Original Filing”). The Company is filing this Amendment No. 1 on Form 10-Q/A (this “Amendment”) solely to amend Exhibits 31.1 (Certification of Principal Executive Officer) and Exhibit 31.2 (Certification of Principal Financial Officer).
 
No other changes have been made to the Original Filing. This Amendment speaks as of the original filing date of the Form 10-Q, does not reflect events that may have occurred subsequent to the original filing date and does not modify or update in any way disclosures made in the Original Filing. Accordingly, this Amendment should be read in conjunction with the Company’s other filings made with the Securities and Exchange Commission subsequent to the filing of the Original Filing.
 
 
 

 
 
CAUTIONARY STATEMENT ON FORWARD-LOOKING INFORMATION

This Quarterly Report on Form 10-Q (this “Report”) contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements discuss matters that are not historical facts. Because they discuss future events or conditions, forward-looking statements may include words such as “anticipate,” “believe,” “estimate,” “intend,” “could,” “should,” “would,” “may,” “seek,” “plan,” “might,” “will,” “expect,” “predict,” “project,” “forecast,” “potential,” “continue” negatives thereof or similar expressions. Forward-looking statements speak only as of the date they are made, are based on various underlying assumptions and current expectations about the future and are not guarantees. Such statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, level of activity, performance or achievement to be materially different from the results of operations or plans expressed or implied by such forward-looking statements.

We cannot predict all of the risks and uncertainties. Accordingly, such information should not be regarded as representations that the results or conditions described in such statements or that our objectives and plans will be achieved and we do not assume any responsibility for the accuracy or completeness of any of these forward-looking statements. These forward-looking statements are found at various places throughout this Report and include information concerning possible or assumed future results of our operations, including statements about potential acquisition or merger targets; business strategies; future cash flows; financing plans; plans and objectives of management; any other statements regarding future acquisitions, future cash needs, future operations, business plans and future financial results, and any other statements that are not historical facts.

These forward-looking statements represent our intentions, plans, expectations, assumptions and beliefs about future events and are subject to risks, uncertainties and other factors. Many of those factors are outside of our control and could cause actual results to differ materially from the results expressed or implied by those forward-looking statements. In light of these risks, uncertainties and assumptions, the events described in the forward-looking statements might not occur or might occur to a different extent or at a different time than we have described. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Report. All subsequent written and oral forward-looking statements concerning other matters addressed in this Report and attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this Report.

Except to the extent required by law, we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, a change in events, conditions, circumstances or assumptions underlying such statements, or otherwise.

CERTAIN TERMS USED IN THIS REPORT

When this report uses the words “we,” “us,” “our,” and the “Company,” they refer to Health Revenue Assurance Holdings, Inc.  “SEC” refers to the Securities and Exchange Commission.
 
 
 

 
 
HEALTH REVENUE ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
                                                                                                                                      
   
September 30,
   
December 31,
 
   
2013
   
2012
 
   
(unaudited)
       
Assets
           
             
Cash
  $ 185,600     $ 893,458  
Accounts receivable
   
1,011,929
      1,246,814  
Accounts receivable - Related Party, net of allowance $117,632 and $0, respectively
    -       -  
Prepaid expenses
    1,181,321       3,600  
Other current assets
    70,020       688  
   Total Current Assets
    2,448,870       2,144,560  
                 
Property and Equipment, net
    400,126       365,017  
                 
Software, net
    -       258,933  
Other assets
    8,865       8,871  
Finance costs, net
    2,232       2,477  
   Total Other Assets
    11,097       270,281  
                 
   Total Assets
  $ 2,860,093     $ 2,779,858  
                 
Liabilities and Stockholders' Equity (Deficit)
               
                 
Accounts payable
  $ 520,054     $ 207,741  
Due to officers
    115,000       75,000  
Accrued expenses
    103,142       64,077  
Accrued payroll
    693,826       412,186  
Loan payable to factor
    443,648       827,075  
Accrued interest
    -       4,524  
Line of credit, current portion
    46,166       25,000  
Capital Leases, current portion
    32,768       16,923  
Notes payable, current portion, net of discount
    372,161       202,557  
Long term debt, current portion
    43,956       37,513  
Settlement Payable
    -       115,278  
Other current liabilities
    51,257       -  
   Total Current Liabilities
    2,421,978       1,987,874  
Capital Leases (net of current portion)
    34,300       23,974  
Line of credit (net of current portion)
    -       125,000  
Notes payable (net of current portion), net of discount
    124,054       273,751  
Long term debt (net of current portion)
    286,549       181,457  
   Total Liabilities
  $ 2,866,881     $ 2,592,056  
                 
Commitments and Contingencies (see Note 8)
               
                 
Stockholders' Equity (Deficit):
               
Preferred stock ($0.001 par value, 25,000,000 shares authorized, none issued or outstanding)
  $ -     $ -  
Common stock ($0.001 par value, 500,000,000 shares authorized,  54,577,294 shares and 39,054,867 issued and outstanding at  September 30, 2013 and December 31, 2012, respectively)
    54,577       39,055  
Additional paid-in capital
    6,616,797       2,738,545  
Subscription receivable
    -       (5,000 )
Accumulated deficit
    (6,678,162 )     (2,584,798 )
   Total Stockholders' Equity (Deficit)
    (6,788 )     187,802  
                 
   Total Liabilities and Stockholders' Equity (Deficit)
  $ 2,860,093     $ 2,779,858  
 
The accompanying unaudited notes are an integral part of these unaudited consolidated financial statements.
 
 
1

 
 
 
HEALTH REVENUE ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
                         
   
(For the three months ended)
   
(For the nine months ended)
 
   
September 30,
   
September 30,
   
September 30,
   
September 30,
 
   
2013
   
2012
   
2013
   
2012
 
                         
Revenue
  $ 1,790,825       1,985,516     $ 5,787,811       3,619,611  
Revenue - Related Party
    60,552       -       287,626       -  
Total Revenue
    1,851,377       1,985,516       6,075,437       3,619,611  
                                 
Cost of Revenues
   
1,088,442
      758,267      
3,049,394
      1,642,619  
Gross Profit
   
762,935
      1,227,249      
3,026,043
      1,976,992  
                                 
Operating Expenses
                               
Selling and administrative expenses (includes stock compensation of $290,162 and $0 as of September 30, 2013 and 2012, respectively)
    1,898,595       1,069,870       5,284,354       2,726,475  
Research and development
    -       926       289       54,059  
Asset Impairment
    946,931       -       946,931       -  
Depreciation and amortization
   
19,616
      14,007      
64,214
      36,758  
Total Operating Expenses
   
2,865,142
      1,084,803      
6,295,788
      2,817,292  
                                 
Operating Income (Loss)
    (2,102,207 )     142,446       (3,269,745 )     (840,300 )
                                 
Other Income (Expense)
                               
Other income
    10,442       5,359       10,793       9,451  
Interest expense
    (357,127 )     (377,954 )     (721,829 )     (392,888 )
Loss on extinguishment of debt
    (112,583 )     -       (112,583 )      -  
Total Other Income (Expense), net
    (459,268 )     (372,595 )     (823,619 )     (383,437 )
                                 
(Loss) before provision for income taxes
    (2,561,475 )     (230,149 )     (4,093,364 )     (1,223,737 )
                                 
Net (Loss)
  $ (2,561,475 )   $ (230,149 )   $ (4,093,364 )   $ (1,223,737 )
                                 
Net Loss Per Share
                               
basic and diluted
  $ (0.05 )   $ (0.01 )   $ (0.09 )   $ (0.04 )
Weighted Average Number of Shares Outstanding
                               
basic and diluted
    49,438,329       32,843,413      
46,239,643
      31,468,471  
 
The accompanying unaudited notes are an integral part of these unaudited consolidated financial statements.
 
 
2

 
 
HEALTH REVENUE ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
 
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2013
   
2012
 
Cash flows from Operating Activities:
           
Net loss
  $ (4,093,364 )   $ (1,223,737 )
Adjustments to reconcile net loss to net cash
               
used in operating activities:
               
Depreciation and amortization
    128,351       36,758  
Stock issued for compensation
    290,162       -  
Amortization of debt discount
    322,476       300,000  
Asset Impairment
    946,931       -  
Loss on early extinguishment of debt
    112,583       -  
Bad debt expense
    124,082       -  
Change in operating assets and liabilities:
               
Accounts receivable, net
    110,803       (332,604 )
Prepaid expenses
    51,444       17,997  
Other assets
    (69,332 )     (3,211 )
Accounts payable
    312,313       40,149  
Unearned revenue
    -       (32,988 )
Accrued liabilities
   
309,871
      325,479  
Net Cash used in operating activities
   
(1,453,680
)     (872,157 )
                 
Cash flows from Investing Activities:
               
Capitalization of internally developed software
    (752,135 )     (92,727 )
Purchases of property and equipment
    (8,979 )     (9,639 )
Net Cash used in investing activities
    (761,114 )     (102,366 )
                 
Cash flows from Financing Activities:
               
Shareholder Loan
    40,000       -  
Borrowings (Repayments) on line of credit, net
    (24,606 )     51,500  
Payment for repurchase of common stock
    -       (25,000 )
Settlement payments
    (115,278 )     -  
Loan proceeds
    1,220,000       443,908  
Loan proceeds from factor, net
    (383,427 )     -  
Repayments of debt obligations
    (472,753 )     (31,786 )
Issuance of stock for cash net of offering cost
    1,243,000       394,583  
Net Cash provided by financing activities
    1,506,936       833,205  
                 
Net decrease in cash
    (707,858 )     (141,318 )
Cash at beginning of period
    893,458       198,500  
Cash at ending of period
  $ 185,600     $ 57,182  
                 
Supplemental schedule of cash paid during the period for:
               
Interest
  $
376,539
    $ 25,827  
Income Taxes
  $ -     $ -  
Supplemental schedule of non-cash investing and financing activities:
               
Issuance of stock to repay debt
  $ 514,667     $ 563,908  
Capital lease obligation incurred for use of equipment
  $ 90,099     $ 38,704  
Beneficial conversion feature on convertible debt charged to additional paid in capital
  $ -     $ 300,000  
Conversion of $300,000 notes to common stock
  $ -     $ 300,000  
Shares issued as a loan fee
  $ 679,353     $ -  
Insurance premium finance contract recorded as prepaid asset
  $ 57,573     $ -  
Prepaid common stock issued for services
  $ 1,278,021     $
-
 
Reclassification of line of credit to note payable   $ 133,333     -  
 
The accompanying unaudited notes are an integral part of these unaudited consolidated financial statements.
 
 
3

 
 
HEALTH REVENUE ASSURANCE HOLDINGS, INC.
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2013 (UNAUDITED)
 
1 – NATURE OF BUSINESS AND GOING CONCERN

Overview
 
Health Revenue Assurance Holdings, Inc. (the “Company”) is a trusted source of timely, accurate and critical resources, technology and information that supports the performance of revenue integrity in assuring the existence of healthcare organizations. The Company and its subsidiaries’ 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. The Company provides customized solutions to its clients with the highest regard for ethical standards and responsibility.
  
Dream Reachers, LLC, owns the Company’s offices and is the borrower on a mortgage loan related to such offices. Dream Reachers, LLC does not engage in real estate rental business. Its offices are 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 unaudited condensed consolidated financial statements for all periods presented. (see Note 2)
 
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 September 30, 2013, the Company has an accumulated deficit and for the three and nine months ended September 30, 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 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 unaudited condensed 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.
 
As of September 30, 2013, the Company has a cash balance of approximately $186,000. The Company is currently addressing the going concern and liquidity issues. The Company expects an increase in cash flow as the result of a growing customer demand for medical billing, IT consulting, training, education and services. In addition, the Company is evaluating financing opportunities through either equity or debt financing or a combination of both.
 
On November 12, 2013, the Company entered into a Securities Purchase Agreement for the equity sale of $5.4 million in Series A 8% convertible preferred stock (the “Series A Preferred Stock”) and warrants to purchase shares of the Company’s common stock. The net proceeds to the Company after commissions, professional fees, and payment of shareholder loans is $4,322,000. The net raise is sufficient to fund on-going operations for the next several months. However, the funding is not sufficient to alleviate the on-going concern issue. (see Note 11)
 
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited condensed 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 three months ended September 30, 2013 are not indicative of the results that may be expected for the year ending December 31, 2013 or for any other future period. These unaudited condensed 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, 2012 filed with the Securities and Exchange Commission (the “SEC”) on April 1, 2013 (our “10-K”).

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

The preparation of the consolidated financial statements in conformity with 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 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.
 
 
4

 
 
HEALTH REVENUE ASSURANCE HOLDINGS, INC.
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2013 (UNAUDITED)
 
Cash

For purposes of the statement of cash flows, the Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. The Company’s cash balances are maintained at various banks that are insured by the Federal Deposit Insurance Corporation subject to certain limitations.

Accounts Receivable and Factoring

Accounts receivable are stated at the amounts management expects to collect.  An allowance for doubtful accounts is recorded using a specific identification method based on a combination of historical experience, aging analysis and information on specific accounts.  Account balances are written off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.  Management has determined that an allowance in the amount of $117,632 is required as of September 30, 2013. The allowance arises from a website development project contracted with ResumeBear, a related party.  The Company accounts for its factoring arrangements as either a sale or a secured financing based on the criteria in ASC 860 "Transfers and Servicing".  Estimates of allowances for doubtful accounts are reflected as a recourse obligation, a liability, for factor arrangements treated as a sale with recourse or as a contra asset accounts receivable allowance account for arrangements accounted for as a secured financing.
 
Software

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

Software maintenance costs are charged to expense as incurred. Expenditures for enhanced functionality are capitalized. The cost of the software and the related accumulated amortization are removed from the accounts upon retirement of the software with any resulting loss being recorded in operations. On July 15, 2013   the Company issued a general release for one of its products Visualizer ™. After the general release, the Company recorded approximately $64,000 in amortization expense in the accompanying unaudited consolidated financial statements as of September 30, 2013. At the end of September, 2013, the Company has written off the capitalized research and development costs for the visualizer software suite of multiple offerings and the OMC Initiater after an evaluation based in part on the lack of cash flow and customer demand in ICD Visualizer after the general acceptance release date of July 15, 2013. In addition, the Company’s going concern opinion and cash liquidity concerns restrained the ability to make a capital investment in research and development to complete existing products in the pipeline as the available cash is needed to fund normal operating expenses. The resulting loss of $946,931 is presented as a line item entitled “asset impairment” on the consolidated statement of operations.
 
Share Based Compensation

Compensation expense for all stock-based employee and director compensation awards granted is based on the grant date fair value estimated in accordance with the provisions of ASC Topic 718, Stock Compensation (“ASC Topic 718”). The Company recognizes these compensation costs on a straight-line basis over the requisite service period of the award, which is generally the option vesting term. Vesting terms vary based on the individual grant terms.
 
The Company estimates the fair value of stock-based compensation awards on the date of grant using the Black-Scholes-Merton (“BSM”) option pricing model, which was developed for use in estimating the value of traded options that have no vesting restrictions and are freely transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. The BSM option pricing model considers, among other factors, the expected term of the award and the expected volatility of the Company’s stock price. Expected terms are calculated using the Simplified Method, volatility is determined based on the Company's historical stock price trends and the discount rate is based upon treasury rates with instruments of similar expected terms. Warrants granted to non-employees are accounted for in accordance with the measurement and recognition criteria of ASC Topic 505-50, Equity Based Payments to Non-Employees.

Fair Value Measurements and Fair Value of Financial Instruments

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants.  The Company classifies assets and liabilities recorded at fair value under the fair value hierarchy based upon the observability of inputs used in valuation techniques.  Observable inputs (highest level) reflect market data obtained from independent sources, while unobservable inputs (lowest level) reflect internally developed market assumptions. The fair value measurements are classified under the following hierarchy:
 
Level 1—Observable inputs that reflect quoted market prices (unadjusted) for identical assets and liabilities in active markets;
 
Level 2—Observable inputs, other than quoted market prices, that are either directly or indirectly observable in the marketplace for identical or similar assets and liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets and liabilities; and
   
Level 3—Unobservable inputs that are supported by little or no market activity that is significant to the fair value of assets or liabilities.
 
 
5

 
 
HEALTH REVENUE ASSURANCE HOLDINGS, INC.
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2013 (UNAUDITED)
 
The estimated fair value of certain financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued expenses are carried at historical cost basis, which approximates their fair values because of the short-term nature of these instruments.

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.
   
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.
 
On July 15, 2013   the Company issued a general release for one of its products Visualizer ™. 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.
 
 
6

 
 
HEALTH REVENUE ASSURANCE HOLDINGS, INC.
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2013 (UNAUDITED)
 
Cost of Revenues
 
Cost of revenues includes labor costs for services and education development costs. Amortization costs in 2013 of approximately $64,000 were allocable to cost of sales related to software amortization. In future periods, additional amortization of capitalized software costs may be included in costs of revenues.
 
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.
 
As the Company incurred a net loss in all periods presented, all potentially dilutive securities were excluded from the computation of diluted loss per share since the effect of including them is anti-dilutive. There were no dilutive securities outstanding at September 30, 2013 and 2012 respectively.
 
Recent Accounting Pronouncements

We have implemented all new accounting standards that are in effect and that may impact our unaudited condensed 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.

3 - ACCOUNTS RECEIVABLE

Accounts receivable at September 30, 2013 and December 31, 2012 was as follows:
 
   
September 30,
   
December 31,
 
   
2013
   
2012
 
Accounts receivable
 
$
1,011,929
   
$
1,246,814
 
Accounts receivable –Related party
   
117,632
      -  
Allowance for doubtful accounts
   
(117,632
   
-
 
 Total
 
$
1,011,929
   
$
1,246,814
 

We had $124,082 and $0 in bad debt expense on trade accounts receivable for nine months ended September 30, 2013 and 2012, respectively.
 
4 – RESEARCH AND DEVELOPMENT AND SOFTWARE
 
In Early 2012, the Company started developing the Visualizer ™ suite. This intuitive and easy to use 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 to develop pre-defined analytics targeted to address healthcare’s emerging concerns and needs.

HRAA’s Visualizer ™ suite encompasses multiple offerings. The first project is ICD Visualizer ™, which assists healthcare leaders with their need to understand the exponential impact 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.

The transition to ICD-10 is causing a paradigm shift in healthcare. In response, we have developed a new product called OMC Initiator (Outsourced Medical Coding) 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.

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 OMC Initiater which was included as Software on the accompanying consolidated balance sheet. As of September 30, 2013 we 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 of multiple offerings and the OMC Initiater after an evaluation based in part on the lack of cash flow and customer demand in ICD Visualizer after the general acceptance release date of July 15, 2013. In addition, the Company also considered its going concern opinion and cash liquidity concerns that restrain the ability to make capital investments in research and development to complete existing products in the pipeline as the available cash is needed to fund normal operating expenses. As a result of this evaluation, the Company recorded a loss of $946,931 that is presented as a line item entitled “asset impairment” on the consolidated statement of operations.
 
 
7

 
 
HEALTH REVENUE ASSURANCE HOLDINGS, INC.
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2013 (UNAUDITED)
 
Amortization expense for software, for the three months ended September 30, 2013 and 2012 was $64,137 and $0, respectively. Software consisted of the following at September 30, 2013 and December 31, 2012:

   
September 30,
2013
   
December 31,
2012
 
Software
 
$
1,011,068
   
$
258,933
 
Accumulated amortization
   
(64,137
)    
-
 
Asset Impairment
   
(946,931
   
-
 
Software, net
 
$
-
   
$
258,933
 
 
5 – LINES OF CREDIT

Bank
 
The Company had a $150,000 revolving line of credit with a bank, effective in December 2008, for its general working capital needs. The line of credit is secured by all business assets, collateral, and personal guarantees. The line of credit had a 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 with a monthly payment in the amount of $3,209 with a new maturity date of September 17, 2017. At the time of the conversion the line of credit had an outstanding balance in the amount of $133,334. (see Note 6)
 
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 September 30, 2013 was $46,166, which is included in line of credit, current portion in the accompanying unaudited condensed consolidated financial statements.
 
6 – LONG TERM DEBT AND NOTES PAYABLE

Long Term debt:

Long Term debt consisted of the following at September 30, 2013:
 
   
September 30,
2013
   
December 31,
2012
 
Bank term loan
 
$
154,030
   
$
38,897
 
Mortgage loan
   
176,475
     
180,073
 
     
330,505
     
218,970
 
Less current portion
   
(43,956
   
(37,513
)
Total long term portion
 
$
286,549
   
$
181,457
 
 
On September 19, 2013, the Company consolidated the existing bank term loan with an existing line of credit. The outstanding balance for the bank term loan and the bank credit line prior to consolidation was $20,697 and $133,334, respectively. The original term loan was established in March 2009 as a result of a conversion of a revolving line of credit.  The new consolidated term loan is personally guaranteed by one of the Company’s stockholders and is collateralized by the assets of the Company.  Payments of principal and interest are approximately $3,200 per month. The new consolidated term loan matures in four years and incurs interest at a rate per year equal to the bank’s prime rate plus 3.5%. The balance due as of September 30, 2013 for the new consolidated Term loan was approximately $154,030.
 
 
8

 
 
HEALTH REVENUE ASSURANCE HOLDINGS, INC.
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2013 (UNAUDITED)

The Company has a mortgage related to certain real estate, 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 payment of approximately $129,000 becomes due. The loan is collateralized by the real estate and is personally guaranteed by a principal stockholder of the Company. 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 September 30, 2013 was approximately $176,500 and is allocated to the current and long term debt line items in the accompanying unaudited condensed consolidated balance sheet. 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.
 
Notes payable:
 
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.  Principal and interest is payable over 26 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 $141,484 as of September 30, 2013.
 
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 26 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 9). 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 $425,634 as of September 30, 2013.

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 a finance expense.

Notes payable consisted of the following at September 30, 2013:
 
   
September 30, 2013
 
Principal amount of notes payable
 
$
1,063,333
 
Unamortized discount
   
(567,118
Notes payable, net of discount
   
496,215
 
Less current portion
   
(372,161
Total Long term portion
 
$
124,054
 

7 – 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 three months ended September 30, 2013, the Company had factored approximately $1,108,000 of receivables and had received cash advances of approximately $1,090,309. Outstanding receivables purchased by the factor as of September 30, 2013 were approximately $522,000 and are included in accounts receivable in the accompanying unaudited condensed consolidated balance sheet, and the secured loan due to the lender was approximately $444,000. Factor fees for the three and nine months ending September 30, 2013 were approximately $35,500 and $104,000, respectively and are included in interest expenses. (See Note 3)
 
 
9

 
 
HEALTH REVENUE ASSURANCE HOLDINGS, INC.
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2013 (UNAUDITED)
 
8 – 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 $500 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, 2012, the lease has been renewed for one year with a fixed payment of approximately $5,008 per month. For each year thereafter of the initial year, the rent will be subject to an increment of 4%.

Capital Leases:

The Company leases its property and equipment from Dell Financial Services L.L.C. under a capital lease. 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.
 
The following is an analysis of the leased assets included in Property and Equipment:
 
   
September 30,
2013
 
Equipment
 
79,210
 
Less accumulated depreciation
   
(27,006
)
Total
 
$
52,204
 
 
The lease agreement contains a bargain purchase option at the end of the lease term. The total amount due at September 30, 2013 is $67,068 of which $32,768 is included in short term liabilities.
 
The following is a schedule by years of future minimum payments required under the lease together with their present value as of September 30, 2013:
 
Year Ending December 31:
     
2013
 
$
8,193
 
2014
   
32,768
 
2015
   
22,527
 
2016
   
3,580
 
 
Total minimum lease payments
   
67,068
 
Less amount representing interest
   
(11,386
)
Present value of minimum lease payments
 
$
55,672
 
 
Amortization of assets held under capital leases is included with depreciation expense and is approximately $27,000 as of September 30, 2013.

Settlement Agreement:

On May 8, 2012, the Company terminated the employment of our Chief Marketing Officer (“CMO”) and subsequently amended its complaint to enforce certain non-competition clauses contained in the employment agreement. The Company sought a declaration of its obligations to pay severance under the terms of its then-existing employment agreement with the CMO.

On July 9, 2012, the Company and the former CMO entered into a Settlement Agreement to resolve two pending lawsuits arising out of the termination of his employment agreement. The lawsuit was initiated by the Company against the former CMO in the United States District Court for the Southern District of Florida.  In addition, the former CMO sued the Company in the United States District Court of the District of Colorado.
 
Pursuant to the Settlement Agreement, the former CMO agreed to abolish all claims and lawsuits against the Company and its CEO and COO and resigned any and all positions which he had or presently may have had with the Company. As part of the Settlement Agreement, the Company agreed to make eleven (11) payments totaling $232,500 pursuant to the terms of his prior employment agreement. Additionally, the CMO agreed to transfer his 3,299,802 shares to an officer of the Company in 2012. These payments commenced July 2012 and the final payment in the amount of $23,056 was disbursed on July 29, 2013. In addition, the Company has agreed to abolish all claims and lawsuits against the former CMO. The Settlement Agreement has a seven (7) day grace period for payments to the former CMO, after which time, he may seek court intervention to enforce the payments. The Company's Chief Executive Officer and Chief Operating Officer, respectively, have personally guaranteed the payments of the Settlement Agreement. As a result of the Settlement Agreement, both parties are dismissing their respective filings and have agreed to not enter any more lawsuits concerning the scope of this matter.
 
 
10

 
 
HEALTH REVENUE ASSURANCE HOLDINGS, INC.
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2013 (UNAUDITED)
 
Employment Agreements:
 
On October 2, 2013 the Company entered into employment agreements with four (4) of our officers and directors. The Employment agreements provide 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 September 30, 2013, no performance bonuses have been earned. The Company owes its CEO $75,000 as stated in the February 2012 merger agreement, which is accrued in the accompanying unaudited condensed consolidated Financial Statements as Due to officer. The balance due to the Company’s CEO was formalized in a promissory note in November 1, 2013. In Addition, the Company owes its President $40,000 for a promissory note dated November 1, 2013 for funds advanced in September 2013. On November 12, 2013, the promissory notes for the CEO and the president were paid in full with financing received in connection with the sale and issuance of Series A Preferred Stock and warrants to purchase shares of the Company’s common stock pursuant to the Stock Purchase Agreement dated and signed on November 12, 2013 with Great Point Partners, LLC. (see Note 11)
 
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.
 
9 – STOCKHOLDERS' EQUITY
 
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 the Company has granted a total of six hundred thirty six thousand (636,000) stock options to several directors and officers. 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 these grants as adoption of a stock option plan and board approval is considered a mere formality.

Stock Options
 
During the three months ended September 30, 2013, the Company recorded pre-tax compensation expense of $24,935 related to the Company’s stock option shares. As of September 30, 2013, there was approximately $62,313 of unrecognized compensation expense related to stock options, which will be recognized over the weighted-average remaining requisite service period of 1.7 years. There were no exercises of stock options for the three months ended September 30, 2013.

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model. The 636,000 options were valued at $87,249. The weighted-average estimated value of stock options granted during the three months ended September 30, 2013 was $0.42 per share, using the following weighted-average assumptions:
 
   
2013
 
Dividend yield  (1)
    0.0 %
Expected volatility  (2)
    118 %
5 Year Bond interest rate  (3)
    1.20 %
Expected life  (4)
    1.5  
 
(1)  Represents cash dividends paid as a percentage of the share price on the date of grant.
(2)  Based on historical volatility of the Company’s common stock over the expected life of the options.
(3)  Represents the U.S. Treasury STRIP rates over maturity periods matching the expected term of the options at the time of grant.
(4)  The period of time that options granted are expected to be outstanding based upon historical evidence.
 
The following table summarizes stock option activity for the three months ended September 30, 2013:
 
Options
 
Shares
   
Weighted-Average Exercise Price
 
Weighted-Average
 Remaining
Contractual Term
 
Aggregate
Intrinsic Value
($000)
 
Outstanding at January 1, 2013
    -       -          
Granted
    636,000       -  
1.7 yrs.
     
Exercised
    -       -          
Forfeited or expired
    -       -          
Outstanding at September 30, 2013
    636,000     $ 0.4225  
1.7 yrs.
  -  
Exercisable at September 30, 2013
    -       -  
-
  -  
        
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on the last trading day of the third quarter of 2013 and the exercise price, multiplied by the number of in-the-money options).
 
 
11

 
 
HEALTH REVENUE ASSURANCE HOLDINGS, INC.
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2013 (UNAUDITED)
 
Non-Vested Equity Shares
 
The Company calculates compensation cost for restricted stock grants to employees and non-employee directors by using the fair market value of its Common Stock at the date of grant and the number of shares issued. This compensation cost is amortized over the applicable vesting period. During the three months ended September 30, 2013, the Company recorded pre-tax compensation expense of $24,935, related to the Company’s non-vested equity shares. As of September 30, 2013, there was approximately $62,313 of unrecognized compensation expense related to stock options, which will be recognized over the weighted-average remaining requisite service period of 1.7 years.
 
The following table details the status and changes in non-vested equity shares for the three months ended September 30, 2013:
 
   
 
Shares
   
Weighted-Average
Grant Date
Fair Value
 
Non-vested equity shares, January 1, 2013
    -       -  
Granted
    636,000       -  
Vested
    -       -  
Forfeited
    -       -  
Non-vested equity shares, September 30, 2013
    636,000       -  
 
Common Stock
 
On January 15, 2013, the Company raised $13,000 through the issuance of 46,429 shares of common stock at a price per share of $0.28 per share.
 
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 6.
 
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 is being expensed over the term of the contract.  The shares were issued on April 4, 2013 to the consultant. During the three months ending June 30, 2013, the company expensed an additional $20,125 and recorded $57,021 as prepaid expense in connection with this transaction.
 
On April 1, 2013, the Company issued 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 raised $250,000 through the issuance of 625,000 shares of common stock at a price per share of $0.40 per share.

On May 24, 2013 and June 21, 2013, the Company raised $50,000 and $300,000 through the issuance of 125,000 and 750,000 shares of common stock at a price of $0.40 per share.
 
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 and August 7, 2013 pursuant to private placements, the Company issued 1,000,000 shares of common stock  in exchange for cash of $400,000 with a per share price of $0.40.
 
On August 21, 2013, August 27, and August 30, 2013, the Company raised $25,000, $100,000 and $100,000 through the issuance of 100,000, 400,000, and 400,000 shares of common stock at a price of $0.25 per share.
 
On August 22, 2013 and August 28, 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. The shares 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 (3) 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.
 
 
12

 
 
HEALTH REVENUE ASSURANCE HOLDINGS, INC.
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2013 (UNAUDITED)
 
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 Material Consulting Agreement with Mr. Michael Ciprianni 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 (2) 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.
 
10 – CONCENTRATIONS

Sales to six hospitals represented approximately 52% of net sales for the three months ended September 30, 2013.
 
Four and three vendors represented approximately 42% and 68% of the outstanding accounts payable balance as of September 30, 2013 and December 31, 2012, respectively.
 
Four customers represented approximately 55% and 62% of the accounts receivable as of September 30, 2013 and December 31, 2012 respectively.
 
11 – SUBSEQUENT EVENTS

On October 2, 2013 the Company entered into employment agreements with four (4) of our officers and directors. The Employment agreements provide 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.
 
On October 7, 2013, the Company entered into a one-year OID (Original Issue Discount) promissory note in the amount of $280,000 with a Utah corporation, (the “lender”). The purchase price for this note and the warrant is $250,000. The Company has the option to repay this note at any time on or before the date that is sixty (60) days from October 7, 2013 (the “effective date”).  The Company will record a debt discount for the OID of $30,000.  The debt will be treated as stock settled debt where a put premium of $120,000 will be recorded over the six month period to the first conversion date. The Lender has 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 lender was granted the right to purchase at any time on or after October 7, 2013 (the “issue date”) until the date which is the last calendar day of the month in which the fifth anniversary of the “issue date” occurs (the “Expiration date”), 350,000 fully paid and non-assessable shares (the “warrant shares”) of the company’s common stock, par value $.001 per share (the “Common Stock”), as such number may be the adjusted from time to time pursuant to the price protection terms and conditions of this warrant to purchase shares of common stock. The initial “exercise price” is $0.40 per share of common stock, as the same may be adjusted from time to time pursuant to the terms and conditions of the warrant. On November 12, 2013, the OID promissory note was paid in full with financing received in connection with the sale and issuance of Preferred Stock and Series A Warrants pursuant to the Stock Purchase Agreement dated and signed on November 12, 2013 with Great Point Partners, LLC. As mentioned above, the Company issued 350,000 free standing and detachable warrants related to the convertible promissory note. 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. Based on this guidance, the Company determined that the Company's warrants do not meet the criteria for classification as equity. 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.

On October 8, 2013, the Company amended its articles of incorporation by increasing the number of authorized shares of common stock from 75,000,000 to 500,000,000. This amendment has been retroactively disclosed on the Balance Sheet.
 
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 will be expensed over the term of the agreement, which is six (6) months.

On October 17, 2013, the Company amended its articles of incorporation to create a new class of stock by the authorization of 25,000,000 preferred shares of stock.   This amendment has been retroactively disclosed on the Balance Sheet.
 
 
13

 
 
HEALTH REVENUE ASSURANCE HOLDINGS, INC.
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2013 (UNAUDITED)
 
On October 17, 2013, the Company entered into a one-year OID (Original Issue Discount) promissory note in the amount of $142,500 with a Utah corporation, (the “Lender”). The purchase price for this note and the warrant is $125,000. The Company has the option to repay this note at any time on or before the date that is sixty (60) days from October 17, 2013 (the “effective date”). The Company will record a debt discount for the OID of $17,500. The remaining debt will be treated as stock settled debt where a put premium of $61,071 will be recorded over the six month period to the first conversion date. The Lender has 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 lender was granted the right to purchase at any time on or after October 17, 2013 (the “issue date”) until the date which is the last calendar day of the month in which the fifth anniversary of the “issue date” occurs (the “Expiration Date”), 175,000 fully paid and non-assessable shares (the “warrant shares”) of the Company’s common stock, par value $.001 per share (the “Common Stock”), as such number may be the adjusted from time to time pursuant to the price protection terms and conditions of this warrant to purchase shares of common stock. The initial “exercise price” is $0.40 per share of common stock, as the same may be adjusted from time to time pursuant to the terms and conditions of the warrant. On November 12, 2013, the OID promissory note was paid in full with financing received in connection with the sale and issuance of Series A Preferred Stock and warrants to purchase shares of the Company’s Common Stock pursuant to the Stock Purchase Agreement dated and signed on November 12, 2013 with Great Point Partners, LLC. As mentioned above, the Company issued 175,000 free standing and detachable warrants related to the convertible promissory note. 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. Based on this guidance, the Company determined that the Company's warrants do not meet the criteria for classification as equity. 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.
 
On November 12, 2013, the Company entered into a Securities Purchase Agreement (SPA) for the equity sale of Series A Convertible Preferred Stock and warrants to purchase shares of the Company’s common stock. The Company sold 13,500,000 of Series A 8% Convertible Preferred 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 debt offering costs is $4,885,000. The preferred stock is convertible into Common on a 2 for 1 basis. The Company recorded a beneficial conversion value for the preferred stock of approximately $2.6 million as an immediate charge to accumulated deficit as it is considered a constructive dividend to Series A preferred stockholders. The net raise is sufficient to fund on-going operations for the next several months. However, the funding is not sufficient to alleviate the going concern issue. As part of this equity financing transaction, the Company issued 27,000,000 warrants 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. 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. Based on this guidance, the Company determined that the Company's warrants do not meet the criteria for classification as equity. 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 estimated the fair value of these warrants at the issuance date at approximately $2,820,000 which will be reclassified from equity. The warrants will be revalued on 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. The SPA contains registration rights requiring registration within 30 days of the funding date and effectiveness within 90 days of the filing date. The registration rights agreement contains a liquidated damage provision whereby the Company must pay 1% per month of the investment amount if not filed or effective within stipulated time frames.
 
The Company owes its CEO $75,000 as stated in the February 2012 merger agreement, which is accrued in the accompanying unaudited condensed consolidated Financial Statements as Due to officer. The balance due to the Company’s CEO was formalized in a promissory note in November 1, 2013. In Addition, the Company owes its President $40,000 for a promissory note dated November 1, 2013 for funds advanced in September 2013. On November 12, 2013, the promissory notes for the CEO and the president were paid in full from the net proceeds of the Securities Purchase Agreement; no interest was accrued for the notes, as it was immaterial .
 
 
14

 
 
HEALTH REVENUE ASSURANCE HOLDINGS, INC.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
The following discussion and analysis of the results of operations and financial condition of Health Revenue Assurance Holdings, Inc. for the three and nine months ended September 30, 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,” “on going,” “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.
 
 
15

 
 
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 on-going 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
 
“Broward County Ultimate CEO Award” – October, 2013
 
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.
 
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.
 
 
16

 
 
We believe that the following tasks are essential to achieve on-going 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, charge master 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
 
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.
 
 
17

 
 
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 is 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 ICD Visualizer ™, 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.
 
 
18

 
 
Three months ended September 30, 2013 compared to September 30, 2012
 
Results of Operations
 
The following table presents a summary of operating information for the three months ended September 30, 2013 and 2012:
 
   
For the three months ended
             
   
September 30,
2013
   
September 30,
2012
   
Increase/
(Decrease) $
   
Increase/
(Decrease) %
 
Revenue
 
$
1,790,825
   
$
1,985,516
   
$
(194,691
)
   
(9.81)
%
Revenue – Related Party
   
60,552
     
-
     
60,552
     
100.00
%
Total Revenue
   
1,851,377
     
1,985,516
     
(134,139
)
   
(6.76
)%
Costs of Revenues
   
1,088,442
     
758,267
     
330,175
     
43.54
%
Gross profit
   
762,935
     
1,227,249
     
(464,314
)
   
(37.83
)%
                                 
Selling and administrative expenses
   
1,898,595
     
1,069,870
     
828,725
     
77.46
%
Research and development expenses
   
-
     
926
     
(926)
     
(100.00
)%
Asset impairment
   
946,931
     
-
     
946,931
     
100.00
%
Depreciation and amortization
   
19,616
     
14,007
     
5,609
     
40.04
%
Total operating expenses
   
2,865,142
     
1,084,803
     
1,780,339
     
164.11
%
Operating income (loss)
   
(2,102,207
)
   
142,446
     
(2,244,653
)
   
(1,575.79
)%
Other expense, net
   
(459,268
)
   
(372,595
)
   
(86,673
)
   
23.26
%
Net loss
 
$
(2,561,475
)
 
$
(230,149
)
 
$
(2,331,326
)
   
1,012.96
%
 
Revenue:

Revenue decreased by $134,139 or approximately 7%, from $1,985,516 for the three months ended September 30, 2012 to $1,851,377 for the three months ended September 30, 2013.  The decrease was due primarily to reduction in education revenue as a result of the shift in the Company’s focus to technology and research development of our business intelligence Visualizer business software products.
 
Cost of Revenues:
 
Cost of revenues increased by $1,406,775 or approximately 86%, from $1,642,619 for the nine months ended September 30, 2012 to $3,049,394 for the nine months ended September 30, 2013. The increase was due primarily to additional personnel and related training costs associated with the build-up of the Company’s audit and coding service provider personnel required to service the anticipated increase in service contracts in future periods.
 
Gross profit:
 
Gross profit decreased by $464,314, or approximately 38%, from $1,227,249 for the three months ended September 30, 2012 to $762,935 for the three months ended September 30, 2013.  The decrease in gross profit is primarily attributable to higher payroll cost, lower utilization rates, and a general decline in education revenue.
 
Selling and Administrative Expenses:
 
Selling and administrative expenses were $1,898,595 for the three months ended September 30, 2013, an increase of $828,725 or 77%, from $1,069,870 for the three months ended September 30, 2012.  The change in the 2013 period compared to the 2012 period was primarily due to:
 
Personnel costs have increased by $389,264 or approximately 63%, from approximately $615,000 for the three months ended September 30, 2012 to $1,005,075 for the three months ended September 30, 2013.  The increase is due primarily to increased compensation and related expenses associated with the build-up of the Company’s management, sales and administrative staff in anticipation of growth in business volume.
   
Professional fees have increased from $132,091 for the three months ended September 30, 2012 to $297,354 for the three months ended September 30, 2013, an increase of $165,242, or approximately 125%.This increase is attributable to legal, audit, consulting, investor and public relations, and accounting services provided in connection with expenses associated with financial reporting matters.
 
The remainder of the increase in Selling and administrative expenses is related to costs associated to the company’s business development such as marketing, communications, trade shows and seminars.
 
Research and Development Expenses:
 
We had no research and development expenses for the three months ended September 30, 2013, a decrease of $926, or 100%, for the three months ended September 30, 2012. The decrease is due to a significant reduction in the technology department personnel and Information Technology research projects. The Company lacked the available financial resources to invest in research and development.
 
Asset Impairment
 
At the end of September, 2013, the Company re-evaluated the capitalized research and development costs for the Visualizer software suite of multiple offerings and the OMC Initiater after an evaluation based in part on the lack of cash flow and customer demand in ICD Visualizer after the general acceptance release date of July 15, 2013. In addition, the Company also considered its going concern opinion and cash liquidity concerns that restrain the ability to make capital investments in research and development to complete existing products in the pipeline as the available cash is needed to fund normal operating expenses. As a result of this evaluation, the Company recorded a loss of $946,931 that is presented as a line item entitled “asset impairment” on the consolidated statement of operations.
 
 
19

 
 
Depreciation and Amortization Expenses:
 
Depreciation and amortization expenses were approximately $84,000 for the three months ended September 30, 2013, an increase of approximately $70,000, or 500%, from approximately $14,000 for the three months ended September 30, 2012. The increase was primarily due to the amortization of the Visualizer software product that had a general release date of July 15, 2013.
 
Interest Expense (included in other expenses, net):
 
Interest Expense was approximately $357,000 for the three months ended September 30, 2013, a decrease of approximately $21,000, from approximately $378,000 for the three months ended September 30, 2012. The decrease in interest expense is primarily due to reduced finance charges related to the amortization of debt.
 
Net Income (loss):
 
As a result of the above factors, a net loss of approximately $2,561,000 was recognized for the three months ended September 30, 2013 as compared to net loss of approximately $230,000 for the three months ended September 30, 2012, an increase of approximately $2,331,000 or approximately 1013%.  The increase in net loss is outlined above.
 
Nine months ended September 30, 2013 compared to September 30, 2012
 
Results of Operations
 
The following table presents a summary of operating information for the nine months ended September 30, 2013 and 2012:
 
   
For the nine months ended
   
Increase/
   
Increase/
 
   
September 30,
2013
   
September 30, 
2012
   
(Decrease)
$
   
(Decrease)
%
 
Revenue
 
$
5,787,811
   
$
3,619,611
   
$
2,168,200
     
59.90
%
Revenue – Related Party
   
287,626
     
-
     
287,626
     
100.00
Total Revenue
   
6,075,437
     
3,619,611
     
2,455,826
     
67.85
Costs of Revenues
   
3,049,394
     
1,642,619
     
1,406,775
     
85.64
%
Gross profit
   
3,026,043
     
1,976,992
     
1,049,054
     
53.06
%
                                 
Selling and administrative expenses
   
5,284,354
     
2,726,475
     
2,557,879
     
93.82
%
Research and development expenses
   
289
     
54,059
     
(53,770
)
   
(99.47
)%
Asset impairment
   
946,931
     
-
     
946,931
     
100.00
Depreciation and amortization
   
64,214
     
36,758
     
27,456
     
74.69
%
Total operating expenses
   
6,295,788
     
2,817,292
     
3,478,496
     
123.47
%
Operating income (loss)
   
(3,269,745
)
   
(840,300
)
   
(2,429,445
)
   
289.12
%
Other expense, net
   
(823,619
)
   
(383,437
)
   
(440,182
)
   
114.80
%
Net loss
 
$
(4,093,364
)
 
$
(1,223,737
)
 
$
(2,869,627
)
   
234.50
%
 
Revenue:

Revenue increased by $2,455,826 or approximately 68%, from $3,619,611 for the nine months ended September 30, 2012 to $6,075,437 for the nine months ended September 30, 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 $1,406,775 or approximately 86%, from $1,642,619 for the nine months ended September 30, 2012 to $3,049,394 for the nine months ended September 30, 2013. The increase was due primarily to additional  personnel and related training costs associated with the build-up of the Company’s audit and coding service provider personnel required to service the anticipated increase in service contracts in future periods.
 
Gross profit:
 
Gross profit increased by $1,049,054, or approximately 53%, from $1,976,992 for the nine months ended September 30, 2012 to $3,026,043 for the nine months ended September 30, 2013.  The increase in gross profit was due to the increase in business experienced during the year.
 
Selling and Administrative Expenses:
 
Selling and administrative expenses were $5,284,354 for the nine months ended September 30, 2013, an increase of $2,557,879 or 94%, from $2,726,475 for the nine months ended September 30, 2012.  The change in the 2013 period compared to the 2012 period was primarily due to:
 
Personnel costs have increased by approximately $1,604,308 or approximately 108%, from approximately $1,483,292 for the nine months ended September 30, 2012 to approximately $3,087,600 for the nine months ended September 30, 2013.  The increase is due primarily to increased compensation and related expenses associated with the build-up of the Company’s management, sales and administrative staff in anticipation of growth in business volume.
 
 
20

 
 
Professional fees have increased from $234,703 for the nine months ended September 30, 2012 to $618,195 for the nine months ended September 30, 2013, an increase of $383,492, or approximately 163%.
 
This increase is attributable to legal, audit, consulting, investor and public relations, and accounting services provided in connection with expenses associated with financial reporting matters.
 
The remainder of the increase in Selling and administrative expenses is related to costs associated to the company’s business development such as marketing, communications, trade shows and seminars.
 
Research and Development Expenses:
 
Research and development expenses were $289 for the nine months ended September 30, 2013, a decrease of approximately $54,000, or 100%, for the nine months ended September 30, 2012. The decrease is due to a significant reduction in the technology department personnel and Information Technology research projects. The Company lacked the available financial resources to invest in research and development. 
 
Asset Impairment
 
At the end of September, 2013, the Company re-evaluated the capitalized research and development costs for the Visualizer software suite of multiple offerings and the OMC Initiater after an evaluation based in part on the lack of cash flow and customer demand in ICD Visualizer after the general acceptance release date of July 15, 2013. In addition, the Company also considered its going concern opinion and cash liquidity concerns that restrain the ability to make capital investments in research and development to complete existing products in the pipeline as the available cash is needed to fund normal operating expenses. As a result of this evaluation, the Company recorded a loss of $946,931 that is presented as a line item entitled “asset impairment” on the consolidated statement of operations.

Depreciation and Amortization Expenses:
 
Depreciation and amortization expenses were approximately $128,300 (which includes $64,000 of amortization included in direct cost of sales) for the nine months ended September 30, 2013, an increase of approximately $91,500, or 249%, from approximately $36,800 for the nine months ended September 30, 2012. The increase was primarily due to the amortization of the Visualizer software product that had a general release date of July 15, 2013. There were also incremental depreciation costs associated with the Company’s purchases for computer equipment necessary to support the increase in personnel.

Interest Expense (included in other expenses, net):
 
Interest Expense was approximately $722,000 for the nine months ended September 30, 2013, an increase of approximately $329,000, or 84% from approximately $393,000 for the nine months ended September 30, 2012. The increase is due to the factoring fees experienced during the year 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 $4,093,000 was recognized for the nine months ended September 30, 2013 as compared to net loss of approximately $1,224,000 for the nine months ended September 30, 2012, an increase of approximately $2,869,000 or approximately 234%.  The increase 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.
 
 
21

 
 
The Company defines Adjusted EBITDA from continuing operations as earnings (or loss) before interest expense, income taxes, depreciation and amortization asset impairment, loss on early extinguishment of debt, and non-cash stock-based compensation.  The Company excludes stock-based compensation because it is non-cash in nature.  The following table presents a reconciliation of Adjusted EBITDA from continuing operations to Net Income (loss) from continuing operations allocable to common shareholders, a GAAP financial measure:
 
 
For the three months ended
 
For the nine months ended
 
September 30,
 
September 30,
 
September 30,
 
September 30,
 
 2013
 
 2012
 
 2013
 
 2012
Net loss
$
(2,561,475)
 
$
(230,149)
 
$
(4,093,364)
 
$
(1,223,737)
  Interest expense
 
357,127
   
377,954
   
721,829
   
392,888
  Asset Impairment
 
946,931
   
-
   
946,931
   
-
  Loss on early extinguishment of debt
 
112,583
   
-
   
112,583
   
-
  Depreciation and amortization
 
83,753
   
14,007
   
128,351
   
36,758
  Stock based compensation expense
 
192,130
   
-
   
290,162
   
-
Adjusted EBITDA (loss) from operations
$
(868,951)
 
$
161,812
 
$
(1,893,508)
 
$
(794,091)
 
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 nine months ended September 30, 2013, the Company generated $2,503,000 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 $1,454,000 and investment in capitalized software, property and equipment of approximately $761,000.
 
As of September 30, 2013, the Company had cash balances of approximately $186,000 as compared to approximately $57,000 as of September 30, 2012, an increase of approximately $129,000.
 
Net cash used in operating activities was approximately $1,454,000 for the nine months ended September 30, 2013. This compared to net cash used by operating activities of approximately $872,000 for the nine months ended September 30, 2012. The increase of $582,000 was used to fund a net loss of $4,093,364 reduced by non-cash depreciation of $128,351, asset impairment of $946,931, loss on early extinguishment of debt of $112,583 stock compensation expense of $290,162, amortization of debt discount of $322,476, bad debt of $124,082, and changes in operating assets and liabilities totaling $715,099.
 
Net cash used in investing activities for the nine months ended September 30, 2013 was approximately $761,000 compared to approximately $102,000 for the nine months ended September 30, 2012. The increase is primarily attributable to the development of software.
 
Net cash provided by financing activities amounted to approximately $1,507,000 for the nine months ended September 30, 2013, compared to net cash provided in the nine months ended September 30, 2012 of approximately $833,000, representing an increase in net cash flow from financing activities of approximately $674,000. 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 September 19, 2013. The loan no longer has an expiration date of December 18, 2018, but instead a final maturity date of September 19, 2017. The interest rate per year is equal to the Bank’s Prime Rate plus 3.5 percentage points. The revolving line of credit was consolidated with an existing bank term loan  Bank’s prime rate of interest at September 30, 2013 was 3.25%. First payment of approximately $3,200 was paid October 19, 2013.
 
2.
A term loan with Bank of America whose proceeds were used for general working capital. The term loan has been consolidated with an existing line of credit. The loan is personally guaranteed by one of the Company’s stockholders and is collateralized by the assets of HRAA. The balance due as of September 19, 2013 the date of the consolidation was approximately $20,697.
 
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 September 30, 2013 was approximately $176,000. 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 September 30, 2013, the Company had factored approximately $1,108,000 of receivables and had received cash advances of approximately $1,090,309. Outstanding receivables purchased by the factor as of September 30, 2013 were approximately $522,000 and included in accounts receivable in the accompanying unaudited condensed consolidated balance sheet, and the secured loan due to the lender was approximately $444,000. Factor fees in 2013 were approximately $104,000, and are included in interest expenses.
 
 
22

 
 
5.
The Company leases certain office equipment under non-cancellable operating lease arrangements.  Monthly payments under the lease agreements are approximately $500 as of September 30, 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 $1,685,000 of additional capital infusion. The Company has continued its build-up of the personnel and business development efforts and has incurred operating losses. As a result, the Company possesses a working capital of $26,892 at September 30, 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 September 30, 2013, the Company has an accumulated deficit and for the three and nine months ended September 30, 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 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.
 
On November 12, 2013, the Company entered into a Securities Purchase Agreement for the equity sale of $5.4 million in Series A Preferred Stock and warrants to purchase shares of the Company’s Common Stock. The net proceeds to the Company after commissions, professional fees, and payment of shareholder loans is $4,322,000. The net raise is sufficient to fund on-going operations for the next several months. However, the funding is not sufficient to alleviate the on-going concern issue. (see Note 11)
 
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 ICD  Visualizer   ™ . Utilizing knowledge from healthcare industry subject matter experts combined with exceptional insight into what providers really need, the ICD   Visualizer ™     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, ICD Visualizer ™  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.  ICD   Visualizer ™     contains a set of baseline analytics that quantify the impact across hospitals, service lines, departments and physicians.  Because ICD   Visualizer ™     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 exclusion 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.
 
Readmissions Visualizer ™  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.
 
Readmissions Visualizer ™  also trends and analyses 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.
 
 
23

 
 
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.

Allowance for doubtful accounts

Accounts receivable balances are subject to credit risk. Management has reserved for expected credit losses, sales returns and allowances, and discounts based upon past experience, as well as knowledge of current customer information. The Company believes that its reserves are adequate. It is possible, however, that the accuracy of our estimation process could be impacted by unforeseen circumstances. The Company continuously reviews its reserve balance and refines the estimates to reflect any changes in circumstances.
 
Software
 
Costs incurred in connection with the development of software products are accounted for in accordance with the Financial Accounting Standards Board Accounting Standards Codification ("ASC") 985    Costs of Software to Be Sold, Leased or Marketed.”     Costs incurred prior to the establishment of technological feasibility are charged to research and development expense. Software development costs are capitalized after a product is determined to be technologically feasible and is in the process of being developed for market and capitalization ceases after the general release of the software. Amortization of capitalized software development costs begins upon initial product shipment after general release. Capitalized software development costs are amortized over the estimated life of the related product (generally thirty-six months) using the straight-line method. The Company evaluates its software assets for impairment whenever events or change in circumstances indicate that the carrying amount of such assets may not be recoverable.  Recoverability of software assets to be held and used is measured by a comparison of the carrying amount of the asset to the future net undiscounted cash flows expected to be generated by the asset.  If such software assets are considered to be impaired, the impairment to be recognized is the excess of the carrying amount over the fair value of the software asset. 
 
Software maintenance costs are charged to expense as incurred. Expenditures for enhanced functionality are capitalized. The cost of the software and the related accumulated amortization are removed from the accounts upon retirement of the software with any resulting loss being recorded in operations.
 
Goodwill and other intangible assets

In accordance with the Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Intangible Assets,” goodwill and other intangible assets with indefinite useful lives are reviewed by management for impairment at least annually, or whenever events or changes in circumstances indicate the carrying amount may not be recoverable. If indicators of impairment are present, the determination of the amount of impairment would be based on management’s judgment as to the future operating cash flows to be generated from the assets. SFAS No. 142 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”

Asset Impairment
 
At the end of September, 2013, the Company re-evaluated the capitalized research and development costs for the Visualizer software suite of multiple offerings and the OMC Initiater after an evaluation based in part on the lack of cash flow and customer demand in ICD Visualizer after the general acceptance release date of July 15, 2013. In addition, the Company also considered its going concern opinion and cash liquidity concerns that restrain the ability to make capital investments in research and development to complete existing products in the pipeline as the available cash is needed to fund normal operating expenses. As a result of this evaluation, the Company recorded a loss of $946,931 that is presented as a line item entitled “asset impairment” on the consolidated statement of operations.
 
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.
 
 
24

 
 
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.
 
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.
 
Share Based Compensation

Compensation expense for all stock-based employee and director compensation awards granted is based on the grant date fair value estimated in accordance with the provisions of ASC Topic 718, Stock Compensation (“ASC Topic 718”). The Company recognizes these compensation costs on a straight-line basis over the requisite service period of the award, which is generally the option vesting term. Vesting terms vary based on the individual grant terms.
 
The Company estimates the fair value of stock-based compensation awards on the date of grant using the Black-Scholes-Merton (“BSM”) option pricing model, which was developed for use in estimating the value of traded options that have no vesting restrictions and are freely transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. The BSM option pricing model considers, among other factors, the expected term of the award and the expected volatility of the Company’s stock price. Expected terms are calculated using the Simplified Method, volatility is determined based on the Company's historical stock price trends and the discount rate is based upon treasury rates with instruments of similar expected terms. Warrants granted to non-employees are accounted for in accordance with the measurement and recognition criteria of ASC Topic 505-50, Equity Based Payments to Non-Employees.
 
 
25

 
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk.

Smaller reporting companies are not required to provide the information required by this item.
Item 4.
Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act that are designed to ensure that information required to be disclosed in our reports filed or submitted to the SEC under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms, and that information is accumulated and communicated to management, including the principal executive and financial officer as appropriate, to allow timely decisions regarding required disclosures. Our principal executive officer and principal financial officer evaluated the effectiveness of disclosure controls and procedures as of September 30, 2013, pursuant to Rule 13a-15(b) under the Exchange Act.  Based on that evaluation, our principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were not effective to ensure that information required to be included in our periodic SEC filings is recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms. We have concluded that our disclosure controls and procedures are not effective. We lack internal controls and procedures due in part to the Company’s lack of sufficient personnel with expertise in the area of SEC reporting, generally accepted accounting principles (GAAP) and tax accounting procedures, as well as our lack of sufficient financial resources to implement the policies and controls required pursuant to the Exchange act.  At this time, we also have insufficient segregation of duties among our accounting personnel. We began to take steps to address these matters as we have hired an internal control specialist to assist in the design, implementation, and test of adequate controls.
 
We have made pivotal progress to mitigate internal control weaknesses; however, we must still complete the process of design-specific control procedures and test their effectiveness, and maintaining sufficient personnel to implement these tasks before we can report that this weakness has been fully remediated. 
 
A system of controls, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the system of controls are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

Changes in Internal Control over Financial Reporting

No changes were made to our internal control over financial reporting during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
 
26

 
 
PART II—OTHER INFORMATION

Item 1.
Legal Proceedings.

From time to time, the Company may become involved in litigation relating to claims arising out of its operations in the normal course of business. We are not involved in any pending legal proceeding or litigation and, to the best of our knowledge, no governmental authority is contemplating any proceeding to which we are a party or to which any of our properties is subject, which would reasonably be likely to have a material adverse effect on the Company.
Item 1A.
Risk Factors

Smaller reporting companies are not required to provide the information required by this item.
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
 
On April 1, 2013, the Company issued 54,847 shares of its common stock, par value $0.001 (the “Common Stock”) as compensation to two employees for services rendered through June 30, 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 raised $250,000 through the issuance of 625,000 shares of Common Stock at a price per share of $0.40 per share.
 
On May 24, 2013 and June 21, 2013, the Company raised $50,000 and $300,000 through the issuance of 125,000 and 750,000 shares of Common Stock at a price of $0.40 per share.
 
On July 8, 2013 and August 7, 2013 pursuant to private placements, the Company issued 1,000,000 shares of common stock  in exchange for cash of $400,000 with a per share price of $0.40 share based on recent cash sales by the Company.
 
On August 21, 2013, August 27, and August 30, 2013, the Company raised $25,000, $100,000 and $100,000 through the issuance of 100,000, 400,000, and 400,000 shares of common stock at a price of $0.25 per share.
 
The above issuances of shares are exempt from registration, pursuant to Section 4(2) of the Securities Act.  These securities qualified for exemption under Section 4(2) of the Securities Act since the issuance securities by us did not involve a public offering. The offering was not a “public offering” as defined in Section 4(2) due to the insubstantial number of persons involved in the deal, size of the offering, manner of the offering and number of securities offered. We did not undertake an offering in which we sold a high number of securities to a high number of investors. In addition, these stockholders had the necessary investment intent as required by Section 4(2) since they agreed to and received share certificates bearing a legend stating that such securities are restricted pursuant to Rule 144 of the Securities Act. This restriction ensures that these securities would not be immediately redistributed into the market and therefore not be part of a “public offering.” Based on an analysis of the above factors, we have met the requirements to qualify for exemption under Section 4(2) of the Securities Act for this transaction.
 
Item 3.
Defaults Upon Senior Securities.

None.

Item 4.
Mine Safety Disclosure.

Not applicable.

Item 5.
Other Information.
 
None.
 
Item 6.
Exhibits.
 
Exhibit
Number
 
Description
31.1†
 
Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes - Oxley Act of 2002.
31.2†
 
Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes - Oxley Act of 2002.
32.1*
 
Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes - Oxley Act of 2002.
101.INS**
 
XBRL Instance Document
101.SCH**
 
XBRL Taxonomy Extension Schema Document
101.CAL**
 
XBRL Taxonomy Extension Calculation Link base Document
101.DEF**
 
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB**
 
XBRL Taxonomy Extension Label Linkbase Document
101.PRE**
 
XBRL Taxonomy Extension Presentation Linkbase Document
 
† Filed herewith.
 
* The certification attached as Exhibit 32.1 accompanying this Quarterly Report on Form 10-Q is being furnished herewith and is not deemed filed with the Securities and Exchange Commission.
 
** Previously furnished. XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
 
 
27

 
 
SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
HEALTH REVENUE ASSURANCE HOLDINGS, INC.
   
Dated: April 9, 2014
By:
/s/ Tim Lankes
   
Tim Lankes
   
Chief Executive Officer
(Duly Authorized and Principal Executive Officer)
 
Dated: April 9, 2014
By:
/s/ Evan McKeown
   
Evan McKeown
   
Chief Financial Officer
(Duly Authorized,  Principal Financial Officer and
Principal Accounting Officer)
 
 
28

 
Health Revenue Assuance (PK) (USOTC:HRAA)
Historical Stock Chart
From Nov 2021 to Dec 2021 Click Here for more Health Revenue Assuance (PK) Charts.
Health Revenue Assuance (PK) (USOTC:HRAA)
Historical Stock Chart
From Dec 2020 to Dec 2021 Click Here for more Health Revenue Assuance (PK) Charts.