UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
FORM 10-K
 
(Mark One)
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 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, Unit 304
Plantation, Florida 33322

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

(Registrant’s telephone number, including area code)
 
Securities Registered Pursuant to Section 12(b) of the Act:
None
 
Securities Registered Pursuant to Section 12(g) of the Act:
None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. £ Yes    S No
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. £ Yes   S No
 
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 x     No o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of the chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. £
 
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
 
The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant computed by reference to the price at which the common stock was last sold on the OTC Bulletin Board on the last business day of the registrant’s most recently completed second fiscal quarter (June 30, 2013) was $15,989,850.

As of April 10, 2014, 54,752,294 shares of our common stock, par value $0.001, were outstanding.
 


 
 

 
 
TABLE OF CONTENTS
 
   
Page
PART I
     
1
5
16
16
16
16
PART II
     
17
17
18
25
F-1
26
26
27
PART III
     
30
32
36
38
39
     
PART IV
     
40
 
41
  F-1
 
Certifications
 
 
 
i

 
 
PART I
 
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
This Annual Report on Form 10-K contains "forward-looking statements", within the meaning of 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”), that reflect our current estimates, expectations and projections about our future results, performance, prospects and opportunities. Forward-looking statements include, without limitation, statements about our market opportunities, our business and growth strategies, our projected revenue and expense levels, possible future consolidated results of operations, the adequacy of our available cash resources, our financing plans, our competitive position and the effects of competition and the projected growth of the industries in which we operate, as well as the following statements:
 
 
·
that we believe we are employing people that are highly motivated personnel with strong character, above average competence and leadership traits;
 
·
that we believe with our approach, our customers benefit from integrated service offerings that enhances their revenue integrity;
 
·
that we believe we help our customers achieve their business objectives and patient care objectives;
 
·
that we expect to encounter additional competitors;
 
·
that we may not accurately anticipate the application of laws and regulations, or that we may not comply such laws or regulations;
 
·
that we can raise the appropriate funds needed to support our business plan and develop an operating company which is cash flow positive;
 
·
that our growth strategy might be hindered, which could materially affect our business and limit our ability to increase revenues, if our key employees were to leave us;
 
·
that we may need to hire additional financial reporting, internal controls and other finance staff or consultants in order to develop and implement appropriate internal controls and reporting procedures;
 
·
that we plan to grow, in part, by capitalizing on perceived market opportunities to provide our services to new customers;
 
·
that if third parties fail to deliver their commitments on time or at all, our ability to perform may be adversely affected, which could have a material adverse effect on our business, revenue, profitability or cash flow;
 
·
that we may not achieve our objectives through our strategic alliances;
 
·
that we do not believe that we have infringed or are infringing on any proprietary rights of third parties;
 
·
that we believe that we have all rights necessary to use the data that is incorporated into our training programs and our services;
 
·
that we do not anticipate paying any cash dividends on our common stock in the foreseeable future;
 
·
that we plan to retain future earnings to finance growth;
 
·
that if we are unable to raise additional capital as and when we need it, our financial condition and results of operations may be materially and adversely affected;
 
·
that we believe the impacts to the ICD-10 delay will have minimal impacts on our near term coding staffing and consulting services and will not affect our ability to acquire long term coding outsourcing service contracts;
 
·
that we believe our reserves are adequate;
 
·
that we no longer intend to market or sell internally developed software on a stand alone basis;
 
·
that we believe we may be in default under the solvency provisions and certain non-financial default provisions under the factoring agreement; and
 
·
that we believe we may be in default of certain non-financial covenants under the term loan.

This Annual Report on Form 10-K also contains forward-looking statements attributed to third parties relating to their estimates regarding the size of the future market for products and systems such as our products and systems, and the assumptions underlying such estimates. Forward-looking statements include all statements that are not historical facts and can be identified by forward-looking statements such as “may,” “might,” “should,” “could,” “will,” “intends,” “estimates,” “predicts,” “projects,” “potential,” “continue,” “believes,” “anticipates,” “plans,” “expects” and similar expressions. Forward-looking statements are only predictions based on our current expectations and projections, or those of third parties, about future events and involve risks and uncertainties.
 
 
ii

 
 
Although we believe that the expectations reflected in the forward-looking statements contained in this Annual Report on Form 10-K are based upon reasonable assumptions, no assurance can be given that such expectations will be attained or that any deviations will not be material. In light of these risks, uncertainties and assumptions, the forward-looking statements, events and circumstances discussed in this Annual Report on Form 10-K may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. Important factors that could cause our actual results, level of performance or achievements to differ materially from those expressed or forecasted in, or implied by, the forward-looking statements we make in this Annual Report on Form 10-K are discussed under “Item 1A. Risk Factors,” “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation” and elsewhere in this Annual Report on Form 10-K and include:
 
 
·
our ability to continue as a going concern;
 
·
our ability to comply with the Sarbanes-Oxley Act;
 
·
our ability to grow and the willingness of new customers to outsource their coding work to us;
 
·
the loss of any of our large customers;
 
·
our ability to accurately estimate the costs of the services and the timing of the completion of the projects;
 
·
our ability to perform on contracts on which we partner with third parties if third parties fail to successfully or timely deliver their commitments;
 
·
our failure to compete successfully in the highly competitive markets in which operate;
 
·
our increased costs related to the increasing complex regulatory environments;
 
·
our ability to collect our receivables;
 
·
our ability to enhance our service offerings and to bring those services to market;
 
·
the delay by the Department of Health and Human Services in initiating the implementation of the ICD-10 system;
 
·
our ability to offer new and valuable services and to remain competitive;
 
·
our ability to generate revenues if potential clients take a long time to evaluate our services;
 
·
our successful implementation of our services;
 
·
our ability to maintain our strategic alliances or enter into new alliances;
 
·
our failure to comply with federal and state laws governing submission of false or fraudulent claims to government healthcare programs and financial relationships among healthcare providers;
 
·
our ability to comply with the various covenants contained in our bank financing documents;
 
·
the increased costs of operation and exposure to civil and criminal statutes as a result of Federal and state privacy and security laws; and
 
·
our status as an “Emerging Growth Company” under the Jobs Act of 2012.
 
You should not place undue reliance on any forward-looking statements. In addition, past financial or operating performance is not necessarily a reliable indicator of future performance, and you should not use our historical performance to anticipate future results or future period trends. Except as otherwise required by federal securities laws, we disclaim any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained in this Annual Report on Form 10-K to reflect any change in our expectations or any change in events, conditions or circumstances on which any such statement is based. All forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the cautionary statements included in this Annual Report on Form 10-K.
 
CERTAIN TERMS USED IN THIS REPORT
 
As used in this report, the terms “Company,” “we,” “us” and “our” refer to Health Revenue Assurance Holdings, Inc., a Nevada corporation, and its wholly-owned subsidiary, Health Revenue Assurance Associates, Inc., a Maryland corporation (“HRAA”).
 
 
iii

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

Health Revenue Assurance Holdings, Inc., formerly known as Anvex International, Inc., was formed as a Nevada corporation on December 13, 2010.
 
On February 10, 2012, the Company entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”) with Health Revenue Acquisition Corp., a Nevada corporation and its wholly-owned subsidiary (“Acquisition Sub”), and HRAA, pursuant to which Acquisition Sub was merged with and into HRAA, and HRAA, as the surviving corporation, became a wholly-owned subsidiary of the Company (the “Merger”). Before the entry into the Merger Agreement, no material relationship existed between the Company and the Acquisition Sub or HRAA.
 
Prior to the closing of the Merger, the Company transferred all of its operating assets and liabilities to Anvex Split Corp., a Nevada corporation (the “Split-Off Subsidiary”), and contemporaneously with the closing of the Merger, the Company sold all of the outstanding capital stock of the Split-Off Subsidiary to Anna Vechera, its former sole officer, director and stockholder (the “Split-Off Buyer”). In connection with the sale, an aggregate of 3,500,000 shares of the Company’s common stock held by the Split-Off Buyer were surrendered and cancelled without further consideration.
 
Pursuant to the terms and conditions of the Merger Agreement, and upon the consummation of the Merger:
 
Each share of HRAA’s common stock issued and outstanding immediately prior to the closing of the Merger was converted into the right to receive 1,271.111 shares of the Company’s common stock. An aggregate of 1,271,111 shares of the Company’s common stock were issued to the holders of HRAA’s common stock. Immediately prior to the Merger, HRAA had no outstanding securities other than shares of its common stock.
 
Anna Vechera resigned as the Company’s sole officer and director, and simultaneously with the Merger, a new board of directors and new officers were appointed. The Company’s new board of directors consisted of Robert Rubinowitz, Andrea Clark and Keith Siddel, previously the directors of HRAA. In addition, immediately following the Merger, Andrea Clark was appointed as the Company’s President and Chief Executive Officer, Robert Rubinowitz was appointed as the Company’s Chief Operating Officer, Secretary and Treasurer and Keith Siddel was appointed as the Company’s Chief Marketing Officer. Andrea Clark, Robert Rubinowitz and Keith Siddel no longer hold these positions.

On April 13, 2012, the Company changed its name from Anvex International, Inc. to Health Revenue Assurance Holdings, Inc.

On April 13, 2012, the board of directors authorized a 12.98-for-1 split of the Company’s common stock to stockholders of record as of April 13, 2012 (the “Stock Split”). The shares resulting from the Stock Split were issued on April 26, 2012. All share and per share amounts for all periods presented have been retroactively adjusted to reflect the Stock Split.

Private Placement Offering
 
Concurrently with the closing of the Merger and in contemplation of the Merger, we sold 2,676,255 shares of our common stock, $0.001 par value, for gross proceeds of $663,908, at a purchase price of $0.25 per share (the “Purchase Price”), in a private placement offering (the “Offering”). The Offering was subject to a minimum offering amount of $470,000 (the “Minimum Offering Amount”) and a maximum offering amount of $1,500,000 (the “Maximum Offering Amount”). We agreed to file a registration statement on Form S-1 registering the resale under the Securities Act of all shares sold in the Offering within 60 days after the Maximum Offering Amount was sold.
 
On April 12, 2012, we closed the Offering by selling an additional $349,000 at the purchase price of $0.25 and issuing 1,394,909 shares of common stock. The total raised in the Offering was $1,012,908.
 
In addition, as part of the Offering, (i) holders of certain convertible notes of HRAA in an aggregate principal amount of $313,908, which principal amount were included in computing the Minimum Offering Amount, automatically converted into an aggregate of 1,265,381 shares of our common stock at a conversion price of $0.25 per share which is equal to the Purchase Price, and (ii) holders of certain senior secured bridge loan promissory notes of HRAA in the aggregate principal amount of $250,000 automatically converted into an aggregate of 1,343,749 shares of our common stock at a conversion price of $0.19 per share which is equal to a discount of 25% to the Purchase Price.
 
 
1

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

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

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

Coding Consulting Services

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

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

Education Services

We offer various training and educational solutions to our customers including on-site training, coding boot camps, workshops, video training, and on demand webinars.
 
 
2

 

Our Contracts

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

Our Significant Customers
 
Sales to four (4) hospital customers represented approximately 60% of our revenues for the year ended December 31, 2013.  We have direct relationships with the individual hospitals and the health systems.

Hospital Customer A
   
42.0%
 
Hospital Customer B
   
6.0%
 
Hospital Customer C
   
6.0%
 
Hospital Customer D
   
6.0%
 
             Total
   
60.0%
 
 
Sales to thirteen (13) hospitals were approximately 89% of our revenues for the year ended December 31, 2012.
 
Five and four vendors represented approximately 56% and 67% of our outstanding accounts payable balance as of December 31, 2013 and December 31, 2012, respectively.
 
Four and one customers represented approximately 64% and 62% of our accounts receivable as of December 31, 2013 and December 31, 2012, respectively.
 
Our People

The markets for medical coding and billing personnel and consulting professionals are intensely competitive. A key part of our business strategy is the hiring, training, and retaining of highly motivated personnel with strong character, above average competence and leadership traits. We believe that employing people with such traits is — and will continue to be — an integral factor in differentiating us from our competitors in the revenue cycle industry. In seeking such employees, we screen candidates for employment through a rigorous interview process, skills testing and other profiling to ensure both a cultural/role fit and demonstrable skills. We continue to mature our various compensation programs to remain competitive for talented people resources.

Competition
 
We operate in an extremely competitive market, and the resources required to meet our customers’ needs changes with their competitive and regulatory landscape. In each of our service lines we frequently compete with companies that have greater financial resources; more sales, and marketing capacity; and larger customer bases than we do. Because many of the factors on which we compete, as discussed below, are outside of our control, we cannot be sure that we will be successful in the markets in which we compete. If we fail to compete successfully, our business, financial condition, and results of operations will be materially and adversely affected.

Competitors
 
We compete with a number of different revenue cycle service providers depending upon the region, and/or market we are addressing. Some of our competitors include: Precyse Solutions, LLC., KForce, Inc., VersoGenics, Inc. (d/b/a Comforce), Trust Healthcare Consulting Services, LLC, Parallon Business Solutions, Conifer Health Solutions, Inc., Kiwi Technologies, Inc., The Advisory Board Company, DocuCoders, LLC, Reimbursement Management Consultants, Inc., Optum, Inc., MedAssets Inc., Healthcare Cost Solutions, Inc., and Aviacode Incorporated. As we enter new markets or new service lines in the healthcare revenue cycle, we expect to encounter additional competitors. We also frequently compete with our customers’ own internal revenue cycle capability, which may constitute a fixed cost for our customer.

How We Compete
 
We compete on the basis of a number of factors, including the attractiveness and focused professional services that we offer, pricing, brand recognition, utilization of technology, industry expertise, and quality and reliability of service. Our consulting practice also competes on our tools, process methodologies and our past successes in executing assignments. For hospitals and physician groups, we frequently compete in an environment of declining budgets and reimbursements, which creates pressure to lower our prices. In addition, the market for coding services is affected by an undersupply of coding talent, which results in upward cost pressure on our services. All of these factors may increase pricing and profit pressure on us.
 
 
3

 
  
Marketing
 
We utilize the following sales and marketing methods to reach our target markets:
 
Direct Sales – We sell direct to targeted hospitals and physician groups with a focus on small hospital systems, independent community hospitals and medium to large physician groups.
 
Local, Federal and State Industry Associations – We actively participate in several medical association events and our subject matter experts are published and/or speak at their events.
 
Trade Shows and Conferences – We exhibit at select trade shows and industry conferences across the United States, which provide access to clients, prospects and aid our talent recruitment.
 
Internet Marketing & E-commerce Strategy – We utilize Internet marketing methods to increase the brand name by search engine optimization, mining and partner links.
 
Public Relations and Branding –We actively communicate our brand and position on matters important to our business through press releases and our website.
 
Subsidiaries
 
Following the Merger, HRAA became our wholly-owned subsidiary.
 
Dream Reachers, LLC, a Florida limited liability company (“Dream Reachers”), owns an office utilized by the Company for employees and training and is the borrower on a loan related to that office. Dream Reachers does not engage in the real estate rental business. Its office is occupied by the Company at no cost and the Company pays the related mortgage’s principal and interest, taxes and maintenance. Dream Reachers is a wholly-owned subsidiary of the Company.
 
Regulatory Matters/Compliance
 
The healthcare industry is highly regulated and is subject to changing political, legislative, regulatory and other influences. Existing and new federal and state laws and regulations affecting the healthcare industry could create unexpected liabilities for us, could cause us or our clients to incur additional costs and could restrict our or our client’s operations. Many healthcare laws are complex and their application to us, our clients or the specific services and relationships we have with our clients are not always clear. In particular, many existing healthcare laws and regulations, when enacted, did not anticipate the comprehensive products and revenue cycle management solutions that we provide, and these laws and regulations may be applied to our products and services in ways that we do not anticipate. Our failure to accurately anticipate the application of these laws and regulations, or our other failure to comply, could create liability for us, result in adverse publicity and negatively affect our business. See Part I, Item 1A. “Risk Factors” for more information regarding the impact of government regulation on the Company.

Intellectual Property
 
APC AuditPro™ is our registered trademark. This Annual Report on Form 10-K contains trademarks and trade names of other organizations and corporations.
 
Research and Development
 
For the calendar year ended December 31, 2013 and December 31, 2012, the Company spent $0 and $64,386, respectively, on research and development expenses. None of these costs were borne directly by customers. There was no cost associated with compliance of environmental laws. Cumulative software development costs previously capitalized were charged to operations as an impairment expense in an  amount  totaling $946,931 as of September 30, 2013.
 
Employees
 
As of April 8, 2014, we had 109 employees, of these employees, 94 were full-time employees. None of these employees are represented by collective bargaining agreements and the Company considers it relations with its employees to be good.
 
Corporation Information
 
Our principal executive offices are located at 8551 West Sunrise Boulevard, Unit 304, Plantation, FL 33322. Our telephone number is (954) 472-2340 and our fax number is (954) 370-0157. Our website is www.healthrevenue.com.
 
 
4

 
 
Other Information
 
News and information about us and our wholly-owned subsidiary is available on and/or may be accessed through our website, www.healthrevenue.com. In addition to news and other information about us, we have provided access through this site to our filings with the Securities and Exchange Commission (“SEC”) as soon as reasonably practicable after we file or furnish them electronically. Information on our website does not constitute part of and is not incorporated by reference into this Annual Report on Form 10-K or any other report we file or furnish with the SEC. You may also read and copy any document that we file at the public reference facilities of the SEC in Washington, D.C. You may call the SEC at 1-800-SEC-0330 for further information on the public reference rooms. Our SEC filings are also available to the public from the SEC’s website at http://www.sec.gov.

 
RISK FACTORS

The following risks and the risks described elsewhere in this Annual Report on Form 10-K, including the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” could materially affect our business, prospects, financial condition, operating results and cash flows. If any these risks materialize, the trading price of our common stock could decline, and you may lose all or part of your investment.

Risks Related to Our Business

We believe that there is substantial doubt about our ability to continue as a going concern.
 
Our future success is dependent upon our 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. We have not been able to generate sufficient cash from operating activities to fund its ongoing operations. There is no guarantee that we will be able to generate enough revenue and/or raise capital to support our operations. These factors raise substantial doubt about our ability to continue as a going concern.

Key employees are essential to expanding our business.

Tim Lankes, our chief executive officer, Evan McKeown, our chief financial officer and chief administrative officer, Denise Williams, our senior vice president of revenue integrity services, and Todd Willis, our senior vice president of coding business unit are essential to our ability to continue to grow and expand our business. They have established relationships within the industry in which we operate. If they were to leave us, our growth strategy might be hindered, which could materially affect our business and limit our ability to increase revenue.

If we are unable to establish appropriate internal financial reporting controls and procedures, it could cause us to fail to meet our reporting obligations, result in the restatement of our financial statements, harm our operating results, subject us to regulatory scrutiny and sanction, cause investors to lose confidence in our reported financial information and have a negative effect on the market price for shares of our common stock.

Effective internal controls are necessary for us to provide reliable financial reports and to effectively prevent fraud. We currently do not maintain a system of internal control over financial reporting, which is defined as a process designed by, or under the supervision of, our principal executive officer and principal financial officer, or persons performing similar functions, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

As a public company, we have significant requirements for financial reporting and internal controls. We are required to implement, document and test internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, which requires annual management assessments of the effectiveness of our internal controls over financial reporting. The process of designing and implementing effective internal controls is a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environments and to expend significant resources to maintain a system of internal controls that is adequate to satisfy our reporting obligations as a public company.
 
We cannot assure you that we will, in the future, be able to successfully implement proper internal control over financial reporting. We cannot assure you that the measures we will take to implement in any area of financial reporting in need of internal controls will be successful or that we will implement and maintain adequate controls over our financial processes and reporting in the future as we continue our growth. If we are unable to establish appropriate internal financial reporting controls and procedures, it could cause us to fail to meet our reporting obligations, result in the restatement of our financial statements, harm our operating results, subject us to regulatory scrutiny and sanction, cause investors to lose confidence in our reported financial information and have a negative effect on the market price for shares of our common stock.

In order to improve our internal controls and procedures we began to take steps to address and improve these matters. As of the date of this Annual Report, we have hired an internal control consultant 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.
 
 
5

 
 
Lack of experience as officers of publicly-traded companies of our management team may hinder our ability to comply with Sarbanes-Oxley Act.

It may be time consuming, difficult and costly for us to develop and implement the internal controls and reporting procedures required by the Sarbanes-Oxley Act. We may need to hire additional financial reporting, internal controls and other finance staff or consultants in order to develop and implement appropriate internal controls and reporting procedures.
 
Our growth is dependent on the willingness of new customers to outsource their coding work to us.

We plan to grow, in part, by capitalizing on perceived market opportunities to provide our services to new customers. These new customers must be willing to outsource functions which may otherwise have been performed within their organizations. Many customers may prefer to remain with their current provider or keep their coding in-house rather than outsource such services to us. Also, as the maintenance of accurate medical records is a critical element of a healthcare provider’s ability to deliver quality care to its patients and to receive proper and timely reimbursement for the services it renders, potential customers may be reluctant to outsource or change providers of such an important function.
 
Our largest customers account for a substantial portion of our revenue and profits, and the loss of any of these customers could result in decreased revenue and profits.
 
Our 4 largest customers accounted for 60% of our revenue for 2013. Generally, we may lose a customer as a result of a merger or acquisition, contract expiration, the selection of another provider of revenue cycle services, business failure or bankruptcy, or our performance. Our staffing and outsourcing contracts typically require us to maintain specified performance levels with respect to the services that we deliver to our customer, with the result that if we fail to perform at the specified levels, we may be required to pay or credit the customer with amounts specified in the contract. In the event of significant failures to deliver the services at the specified levels, a number of these contracts provide that the customer has the right to terminate the agreement. In addition, some of these contracts provide the customer the right to terminate the contract at the customer’s convenience. The customer’s right to terminate for convenience typically requires the customer to pay us a fee. We may not retain long-term relationships or secure renewals of short-term relationships with our large customers in the future.
 
If we fail to comply with the various covenants contained in our bank financing documents, we may be in default thereunder, which could limit our ability to fund our operations.

As of December 31, 2013, we had borrowed approximately $859,000 under that certain term loan, factoring agreement and mortgage. If we default on any of the financial or operating covenants in any of our agreements evidencing such indebtedness and are unable to obtain an amendment or waiver, the lenders could cause all amounts outstanding under these agreements to be due and payable immediately and, if secured, proceed to foreclose on the collateral securing the indebtedness. Our assets or cash flow may not be sufficient to repay fully the borrowings under our different forms of indebtedness, either upon maturity or if accelerated upon an event of default. A default or potential acceleration could impact our ability to attract and retain customers and could negatively impact trade credit availability and terms, which could have a material adverse effect on our business, financial condition or results of operations.
 
Profitability of our contracts may be materially, adversely affected if we do not accurately estimate the costs of services and the timing of the completion of projects.

The services that we provide, and projects we undertake, pursuant to our contracts are sometimes complex. Our success in accurately estimating the costs of services and the timing of the completion of projects and other initiatives to be provided pursuant to our contracts is critical to our ability to price our contracts for long-term profitability. While these estimates reflect our best judgment regarding preexisting costs, efficiencies that we will be able to deliver, and resources that will be required for implementation and performance, any increased or unexpected costs, delays or failures to achieve anticipated cost reductions could materially, adversely affect the profitability of these contracts.
 
Our ability to perform on contracts on which we partner with third parties may be materially and adversely affected if these third parties fail to successfully or timely deliver their commitments.
 
Our engagements often require that our services incorporate or coordinate with the services, software or systems of other vendors and service providers. Our ability to deliver our commitments may depend on the delivery by these vendors and service providers of their commitments. If these third parties fail to deliver their commitments on time or at all, our ability to perform may be adversely affected, which could have a material adverse effect on our business, revenue, profitability or cash flow. In addition, in some cases, we may be responsible for the performance of other vendors or service providers delivering software, systems or other requirements for our services.
 
 
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Our contracts generally contain provisions that could allow customers to terminate the contracts and sometimes contain provisions that enable the customer to require changes in pricing, decreasing our revenue and profits and potentially damaging our business reputation.

Our contracts with customers generally permit termination in the event our performance is not consistent with service levels specified in those contracts. The ability of our customers to terminate contracts creates an uncertain revenue and profit stream. If customers are not satisfied with our level of performance, our reputation in the industry may suffer, which may also adversely affect our ability to market our services to other customers.
 
If we fail to compete successfully in the highly competitive markets in which we operate, our business, financial condition, and results of operations will be materially and adversely affected.
 
We operate in an extremely competitive market, and the resources required to meet our customers’ needs changes with market and regulatory changes. In all of our service lines, we frequently compete with companies that have greater financial resources; sales, and marketing capacity; and larger customer bases than we do. Because many of the factors on which we compete are outside of our control, we cannot be sure that we will be successful in the markets in which we compete. If we fail to compete successfully, our business, financial condition, and results of operations will be materially and adversely affected.

Increasingly complex regulatory environments may increase our costs.
 
Our customers are subject to complex and constantly changing regulatory environments. These regulatory environments change and in ways that cannot be predicted. For example, our customers in the hospital sector have been made subject to increasingly complex and pervasive privacy laws and regulations as well as changes to code sets used by our coders and consultants. These regulations may increase our potential liabilities if our services contribute to a failure by our customers to comply with the regulatory regime and may increase the cost to comply as regulatory requirements increase or change.
 
If we are unable to collect our receivables, our results of operations and cash flows could be adversely affected.
 
Our business depends on our ability to successfully obtain payment from our clients of the amounts they owe us for work performed. We evaluate the financial condition of our clients and usually bill and collect on relatively short cycles. We maintain allowances against receivables, but actual losses on client balances could differ from those that we currently anticipate and as a result we might need to adjust our allowances. There is no guarantee that we will accurately assess the creditworthiness of our clients. In addition, timely collection of client balances   depends on our ability to complete our contractual commitments and bill and collect our contracted revenues. If we are unable to meet our contractual requirements, we might experience delays in collection of and/or be unable to collect our client balances, and if this occurs, our results of operations and cash flows could be adversely affected.
 
Technology innovations in the markets that we serve may create alternatives to our products and result in reduced sales.

Technology innovations to which our current and potential customers might have access could reduce or eliminate their need for our services. A new or other disruptive technology that reduces or eliminates the use of one or more of our services could negatively impact the need for our services. Our failure to develop, introduce or enhance our services able to compete with new technologies in a timely manner could have an adverse effect on our business, results of operation and financial condition.
 
 
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Our growth objectives are largely dependent on the timing and market acceptance of our new service offerings, including our ability to continually enhance our service offerings and to bring those services to market.

Our ability to continually enhance our service offerings and bring those services to market may be adversely affected by difficulties or delays in service implementation, such as the inability to identify viable new services, or gain market acceptance of new services. There are no guarantees that new services will prove to be commercially successful.

The Department of Health and Human Services has announced a delay in initiating the implementation of the ICD-10 system.

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/PCS requires significant business and systems changes throughout the health care industry and impacts both business and clinical processes.

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 made 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.  On April 1, 2014, the President signed into law legislation delaying the implementation date of ICD-10-CM/PCS until at least October 1, 2015.
 
If we are not able to offer new and valuable services, we may not remain competitive and our revenue and results of operations may suffer.
 
Our success depends on providing services that healthcare providers use to improve financial performance. Our competitors are constantly developing products and services that may become more efficient or appealing to our clients. Our services may become obsolete in light of rapidly evolving industry standards, technology and client needs, including changing regulations and provider reimbursement policies, such as the transition from fee-for-service reimbursement models to value-based payment, bundled payment and episodic care models. Additionally, some healthcare information technology providers have begun to incorporate enhanced revenue cycle management analytical tools and services into their core product and service offerings used by healthcare providers. These developments may adversely impact the demand for our services. We must invest appropriately proportional to our revenue in order to enhance our existing services, maintain or improve our service capability, competence and breadth; and introduce new high-quality services that clients and potential clients will want.
 
We may experience significant delays in generating, or an inability to generate, revenues if potential clients take a long time to evaluate our products and services.
 
Our strategy is to market our strategic outsource services directly to small and medium size healthcare providers, such as small health systems and acute care hospitals; and to increase the breadth of our services utilized by existing clients. The evaluation process is often lengthy and involves significant business risk and business case evaluation and commitment of personnel by these organizations. The use of our services may also be delayed due to an inability or reluctance to change or modify existing procedures or outsource existing functions done internally. Additionally, healthcare providers’ resources may be focused on other mission critical initiatives which could delay their evaluation of our services. If we are unable to sell additional services to existing clients, or enter into and maintain favorable relationships with other similar size healthcare providers, our revenue could grow at a slower rate or even decrease.
 
 
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Unsuccessful implementation of our products and services with our clients may harm our future financial success.
 
Some of our new-client engagements are complex and require lengthy and significant work to implement our services. Each client’s situation may be different, and unanticipated difficulties and delays may arise as a result of failure by us or by the client to meet respective implementation responsibilities. If the client implementation process is not executed successfully or if execution is delayed, our relationships with some of our clients, and our results of operations may be adversely impacted. In addition, cancellation of any implementation of our services after it has begun may involve the loss to us of time, effort and resources invested in the cancelled implementation as well as lost opportunity for acquiring other clients over that same period of time. These factors may contribute to substantial fluctuations in our quarterly operating results.
 
If our services fail to provide accurate information, or if any other element of our services is associated with incorrect, inaccurate or faulty coding, billing, or claims submissions to Medicare or any other third-party payor, we could be liable to clients or the government which could adversely affect our business.
 
Our services and content were developed based on the laws, regulations and third-party payor rules in existence at the time such content was developed. If we interpret those laws, regulations or rules incorrectly; the laws, regulations or rules materially change at any point after the content was developed; we fail to provide up-to-date, accurate information; or our services are otherwise associated with incorrect, inaccurate or faulty coding, billing or claims submissions, then clients could assert claims against us or the government or qui tam relators on behalf of the government could assert claims against us under the Federal False Claims Act or similar state laws. The assertion of such claims and ensuing litigation, regardless of its outcome, could result in substantial costs to us, divert management’s attention from operations, damage our reputation and decrease market acceptance of our services. We attempt to limit by contract our liability to clients for damages. We cannot, however, limit liability the government could seek to impose on us under the False Claims Act. Further, the allocations of responsibility and limitations of liability set forth in our contracts may not be enforceable or otherwise protect us from liability for damages.
 
If we are unable to establish and maintain  healthcare strategic alliances , we may be unable to grow our current base business.
 
Our business strategy includes entering into strategic alliances and affiliations with leading healthcare service and information technology providers. We work closely with our strategic partners to either expand our penetration in certain areas of the revenue cycle operations for hospitals and physician groups, or expand our market capabilities. We may not achieve our objectives through these alliances. Many of these companies have multiple relationships and they may not regard us as significant to their business. These companies may pursue relationships with our competitors or develop or acquire products and services that compete with our products and services. In addition, in many cases, these companies may terminate their relationships with us with little or no notice. If existing alliances are terminated or we are unable to enter into alliances with leading healthcare service and information technology providers, we may be unable to maintain or increase our market presence.
 
 
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If we are alleged to have infringed on the rights of others, we could incur unanticipated costs and be prevented from providing our products and services.
 
We could be subject to intellectual property infringement claims as the number of our competitors grows and our applications’ content overlaps with competitor products. While we do not believe that we have infringed or are infringing on any proprietary rights of third parties, we cannot assure you that infringement claims will not be asserted against us or that those claims will be unsuccessful. Any intellectual property rights claim against us or our clients, with or without merit, could be expensive to litigate, cause us to incur substantial costs and divert management resources and attention in defending the claim. Furthermore, a party making a claim against us could secure a judgment awarding substantial damages, as well as injunctive or other equitable relief that could effectively block our ability to provide products or services. In addition, we cannot assure you that licenses for any intellectual property of third parties that might be required for our products or services will be available on commercially reasonable terms, or at all. As a result, we may also be required to develop alternative non-infringing technology, which could require significant effort and expense.
 
In addition, a number of our contracts with our clients contain indemnity provisions whereby we indemnify them against certain losses that may arise from third-party claims that are brought in connection with the use of our services.
 
Our exposure to risks associated with the use of intellectual property may be increased as a result of acquisitions, as we have limited visibility into the development process with respect to such technology or the care taken to safeguard against infringement risks. In addition, third parties may make infringement and similar or related claims after we have acquired technology that had not been asserted prior to our acquisition.
 
Our sources of data might restrict our use of or refuse to license data, which could adversely impact our ability to provide certain products or services.
 
Some of the data that we may use from time to time  may either be purchased or licensed from third parties or may be obtained from our clients for specific client engagements. We may also obtain a portion of the data that we use from public records. We believe that we have all rights necessary to use the data that is incorporated into our training programs and our services. However, in the future, data providers could withdraw their data from us if there is a competitive reason to do so; if legislation is passed restricting the use of the data; or if judicial interpretations are issued restricting use of the data that we currently use in our training programs and services. Further, we cannot assure you that our licenses for information will allow us to use that information for all potential or contemplated uses. If a substantial number of data providers were to withdraw their data, our ability to provide training and services to our clients could be materially adversely impacted.

Risks Related to Regulatory Matters/Compliance

The healthcare industry is highly regulated. Any material changes in the political, economic or regulatory healthcare environment that affect the purchasing practices and operations of healthcare organizations, or that lead to consolidation in the healthcare industry, could require us to modify our services or reduce the funds available to providers to purchase our products and services.

Our business, financial condition and results of operations depend upon conditions affecting the healthcare industry generally and hospitals and health systems particularly. Our ability to grow will depend upon the economic environment of the healthcare industry generally as well as our ability to increase the number of programs and services that we sell to our clients. The healthcare industry is highly regulated and is subject to changing political, economic and regulatory influences. Factors such as changes in reimbursement policies for healthcare expenses; consolidation in the healthcare industry; regulation; litigation; and general economic conditions affect the purchasing practices, operations and the financial health of healthcare organizations.
 
 
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In March 2010, President Obama signed into law the Patient Protection and Affordable Care Act, amended by the Health Care and Education and Reconciliation Act of 2010 (collectively, the “Affordable Care Act”). The Affordable Care Act is a sweeping measure designed to expand access to affordable health insurance, control health care spending, and improve health care quality. The law includes provisions to tie Medicare provider reimbursement to health care quality and incentives; mandatory compliance programs; enhanced transparency disclosure requirements; increased funding and initiatives to address fraud and abuse; and incentives to state Medicaid programs to promote community-based care as an alternative to institutional long-term care services. In addition, the law provides for the establishment of a national voluntary pilot program to bundle Medicare payments for hospital and post-acute services, which could lead to changes in the delivery of health care services. Likewise, many states have adopted or are considering changes in health care policies in part due to state budgetary shortfalls. While many of the provisions of the Affordable Care Act have begun to be implemented, we do not know what long-term effect the federal Affordable Care Act or other future changes to federal or state laws may have on our business.

The Budget Control Act of 2011, as amended by the American Taxpayer Relief Act of 2012 and the Bipartisan Budget Act of 2013, established a budget process known as sequestration that imposes across-the-board federal spending cuts (with certain exceptions) to meet budget targets. Under this process, a two percent reduction to Medicare provider and plan payments has been in effect since April 1, 2013, and this reduction will continue through 2023 unless additional Congressional action is taken to achieve alternative budget savings or otherwise modify the terms of sequestration. There can be no assurances that reimbursement reductions under sequestration or alternative federal or state budgetary actions will not have an adverse impact on our clients and in turn our business.
 
If our clients who operate as not-for profit entities lose their tax-exempt status, those clients would suffer significant adverse tax consequences which, in turn, could adversely impact their ability to purchase products or services from us.

State tax authorities have challenged the tax-exempt status of hospitals and other healthcare facilities claiming such status on the basis that they are operating as charitable and/or religious organizations. The outcome of these cases has been mixed with some facilities retaining their tax-exempt status while others have been denied the ability to continue operating as not-for profit, tax-exempt entities under state law. In addition, many states have removed sales tax exemptions previously available to not-for-profit entities, and both the internal revenue service (“IRS”) and the United States Congress are investigating the practices of not-for profit hospitals. The Affordable Care Act added new requirements for hospitals operating as charitable organizations, which the IRS is in the process of implementing through regulations. Those facilities denied tax exemptions could be subject to the imposition of tax penalties and assessments which could have a material adverse impact on their cash flow, financial strength and possibly ongoing viability. If the tax exempt status of any of our clients is revoked or compromised by new legislation, regulation, or interpretation of existing legislation or regulation, that client’s financial health could be adversely affected, which could adversely impact our sales and revenue.
 
If we fail to comply with federal and state laws governing submission of false or fraudulent claims to government healthcare programs and financial relationships among healthcare providers, we may be subject to civil and criminal penalties or loss of eligibility to participate in government healthcare programs.

We are subject to federal and state laws and regulations designed to protect patients, governmental healthcare programs, and private health plans from fraudulent and abusive activities. These laws include anti-kickback restrictions and laws prohibiting the submission of false or fraudulent claims. These laws are complex and their application to our specific products, services and relationships may not be clear and may be applied to our business in ways that we do not anticipate. Federal and state regulatory and law enforcement authorities have recently increased enforcement activities with respect to Medicare and Medicaid fraud and abuse regulations and other reimbursement laws and rules. From time to time participants in the healthcare industry have received inquiries or subpoenas to produce documents in connection with such activities. We could be required to expend significant time and resources to comply with these requests, and the attention of our management team could be diverted to these efforts. Furthermore, if we are found to be in violation of any federal or state fraud and abuse laws, we could be subject to civil and criminal penalties, and we could be excluded from participating in federal and state healthcare programs such as Medicare and Medicaid. The occurrence of any of these events could significantly harm our business and financial condition.
 
 
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Provisions in Title XI of the Social Security Act, commonly referred to as the federal Anti-Kickback Statute, prohibit the knowing and willful offer, payment, solicitation or receipt of remuneration, directly or indirectly, in return for the referral of patients or arranging for the referral of patients, or in return for the recommendation, arrangement, purchase, lease or order of items or services that are covered, in whole or in part, by a federal healthcare program such as Medicare or Medicaid. The definition of “remuneration” has been broadly interpreted to include anything of value such as gifts, discounts, rebates, waiver of payments or providing anything at less than its fair market value. Many states have adopted similar prohibitions against kickbacks and other practices that are intended to induce referrals which are applicable to all patients regardless of whether the patient is covered under a governmental health program or private health plan. We attempt to scrutinize our business relationships and activities to comply with the federal anti-kickback statute and similar laws; and we attempt to structure our arrangements in a manner that is consistent with the requirements of applicable safe harbors to these laws. We cannot assure you, however, that our arrangements will be protected by such safe harbors or that such increased enforcement activities will not directly or indirectly have an adverse effect on our business financial condition or results of operations. Any determination by a state or federal agency that any of our activities or those of our vendors or clients violate any of these laws could subject us to civil or criminal penalties; could require us to change or terminate some portions of or operations or business, or could disqualify us from providing services to healthcare providers doing business with government programs; and, thus could have an adverse effect on our business.

Our business, particularly our provision of contract billing and coding services, is also subject to numerous federal and state laws that forbid the submission or “causing the submission” of false or fraudulent information or the failure to disclose information in connection with the submission and payment of claims for reimbursement to Medicare, Medicaid, federal healthcare programs or private health plans. These laws and regulations may change rapidly, and it is frequently unclear how they apply to our business. Errors created by our products or services that relate to entry, formatting, preparation or transmission of claim or cost report information may be determined or alleged to be in violation of these laws and regulations. Any failure of our products or services to comply with these laws and regulations could result in substantial civil or criminal liability; could adversely affect demand for our services; could invalidate all or portions of some of our client contracts; could require us to change or terminate some portions of our business; could require us to refund portions of our services fees; could cause us to be disqualified from serving clients doing business with government payors; and could have an adverse effect on our business.
 
Federal and state privacy and security laws may increase the costs of operation and expose us to civil and criminal sanctions.

We must comply with extensive federal and state requirements regarding the use, disclosure, retention and security of patient healthcare information. The Health Insurance Portability and Accountability Act of 1996 and its implementing regulations, as amended by the regulations promulgated pursuant to the HITECH Act, which we refer to collectively as HIPAA, contain substantial restrictions and requirements with respect to the use and disclosure of individuals’ protected health information. These restrictions and requirements are set forth in the HIPAA Privacy, Security and Breach Notification Rules. The HIPAA Privacy Rule prohibits a covered entity from using or disclosing an individual’s protected health information unless the use or disclosure is subject to the terms of a business associate agreement; is authorized by the individual; or is specifically required or permitted under the Privacy Rule. The Privacy Rule imposes a complex set of requirements on covered entities for complying with this basic standard. Under the HIPAA Security Rule, covered entities must establish administrative, physical and technical safeguards to protect the confidentiality, integrity and availability of electronic protected health information created, received, maintained or transmitted by them or by others on their behalf. The Breach Notification Rule requires covered entities to report breaches of unsecured protected health information to affected individuals, the Secretary of HHS, and, in some circumstances, the media.
 
 
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Our healthcare provider clients that engage in HIPAA-defined standard electronic transactions, and our own business operations as a healthcare clearinghouse, are directly subject to the HIPAA Privacy, Security and Breach Notification Rules governing “covered entities.” Additionally, because some of our clients are covered entities who disclose protected health information to us so that we may use that information to provide certain consulting or other services to those clients, we are a “business associate” of those clients. In these cases, in order to provide clients with services that involve the use or disclosure of protected health information, the HIPAA Privacy and Security Rules require us to enter into business associate agreements with our clients. Such agreements must, among other things, provide adequate written assurances:
 
 
·
as to how we will use and disclose the protected health information;
     
 
·
that we will implement reasonable administrative, physical and technical safeguards to protect such information from misuse;
     
 
·
that we will enter into agreements with our subcontractors that create, receive, maintain or transmit the information on our behalf that impose the same restrictions and conditions that apply to us with respect to such information;
     
 
·
that we will report breaches of unsecured protected health information, security incidents and other inappropriate uses or disclosures of the information; and
     
 
·
that we will assist the covered entity with certain of its duties under the Privacy Rule.
 
On January 25, 2013, the Office for Civil Rights of HHS published a major final rule modifying the HIPAA Privacy, Security, Breach Notification and Enforcement Rules, including revisions and changes made pursuant to the HITECH Act. Among other things, this rule expanded the security and certain privacy requirements for business associates that create, receive, maintain or transmit protected health information for or on behalf of covered entities, increased penalties for noncompliance, and strengthened requirements for reporting of breaches of unsecured protected health information. The rule also made business associates and their subcontractors directly liable for civil monetary penalties for impermissible uses and disclosures of protected health information. The rule went into effect March 23, 2013, and as a covered entity and business associate we were, with limited exceptions, required to comply with the applicable requirements of this final rule by September 23, 2013.

Any failure or perceived failure of our products or services to meet HIPAA standards and related regulatory requirements could expose us to certain notification, penalty and/or enforcement risks and could adversely affect demand for our products and services, and force us to expend significant capital, research and development and other resources to modify our products or services to address the privacy and security requirements of our clients and HIPAA.

In addition to our obligations under HIPAA, most states have enacted patient confidentiality laws that protect against the disclosure of confidential medical information, and many states have adopted or are considering adopting further legislation in this area, including privacy safeguards, security standards, and data security breach notification requirements. These state laws, if more stringent than HIPAA requirements, are not preempted by the federal requirements, and we are required to comply with them as well.
 
We are unable to predict what changes to HIPAA or other federal or state laws or regulations might be made in the future or how those changes could affect our business or the associated costs of compliance. For example, the federal Office of the National Coordinator for Health Information Technology (“ONCHIT”), created in 2004, through an Executive Order, and legislatively mandated in the Health Information Technology for Economic and Clinical Health Act (HITECH Act) of 2009, is coordinating the development of national standards for creating an interoperable health information technology infrastructure based on the widespread adoption of EHRs in the healthcare sector. Several organizations, selected as ONCHIT-Authorized Testing and Certification Bodies for EHR certification, test and certify that EHR products are compliant with the standards, implementation specifications, and certification criteria adopted by the U.S. Department of Health and Human Services. Certified EHR technologies are eligible to be used for the CMS EHR Incentive Programs. Eligible providers may use EHR technology that is certified to 2011 edition certification criteria, 2014 edition certification criteria, or a combination of 2011 and 2014 edition certification criteria. We are yet unable to predict what, if any, impact the development and ongoing refinement of such standards and related ONCHIT activities will have on our products, services or compliance costs.
 
Failure by us to comply with any of the federal and state standards regarding patient privacy, identity theft prevention and detection, and data security may subject us to penalties, including civil monetary penalties and in some circumstances, criminal penalties. In addition, such failure may injure our reputation and adversely affect our ability to retain clients and attract new clients.

HIPAA and its implementing regulations also mandate format, data content and provider identifier standards that must be used in certain electronic transactions, such as claims, payment advice and eligibility inquiries. Although our systems are fully capable of transmitting transactions that comply with these requirements, some payers and healthcare clearinghouses with which we conduct business may interpret HIPAA transaction requirements differently than we do or may require us to use legacy formats or include legacy identifiers as they make the transition to full compliance. In cases where payers or healthcare clearinghouses require conformity with their interpretations or require us to accommodate legacy transactions or identifiers as a condition of successful transactions, we attempt to comply with their requirements, but may be subject to enforcement actions as a result.
 
 
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Risks Related to Our Securities

The market price of our common stock may be volatile.

The market price of our common stock has been and will likely continue to be highly volatile, as is the stock market in general, and the market for OTC Bulletin Board quoted stocks in particular. Some of the factors that may materially affect the market price of our common stock are beyond our control, such as changes in financial estimates by industry and securities analysts, conditions or trends in the industry in which we operate or sales of our common stock. These factors may materially adversely affect the market price of our common stock, regardless of our performance. In addition, the public stock markets have experienced extreme price and trading volume volatility. This volatility has significantly affected the market prices of securities of many companies for reasons frequently unrelated to the operating performance of the specific companies. These broad market fluctuations may adversely affect the market price of our common stock.

Because we were engaged in a reverse merger, it may not be able to attract the attention of major brokerage firms.

Additional risks may exist since we were engaged in a “reverse merger.” Securities analysts of brokerage firms may not provide coverage of the Company since there is little incentive to brokerage firms to recommend the purchase of the common stock. No assurance can be given that brokerage firms will want to conduct any secondary offerings on behalf of the Company in the future.
 
Our common stock will be considered a “penny stock” which may be subject to restrictions on marketability, so you may not be able to sell your shares.

If our common stock becomes tradable in the secondary market, we will be subject to the penny stock rules adopted by the SEC that require brokers to provide extensive disclosure to their customers prior to executing trades in penny stocks. These disclosure requirements may cause a reduction in the trading activity of our common stock, which in all likelihood would make it difficult for our stockholders to sell their securities.

Penny stocks generally are equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges or quoted on the NASDAQ system). Penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document that provides information about penny stocks and the risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, and monthly account statements showing the market value of each penny stock held in the customer’s account. The broker-dealer must also make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These requirements may have the effect of reducing the level of trading activity, if any, in the secondary market for a security that becomes subject to the penny stock rules. The additional burdens imposed upon broker-dealers by such requirements may discourage broker-dealers from effecting transactions in our securities, which could severely limit the market price and liquidity of our securities. These requirements may restrict the ability of broker-dealers to sell our common stock and may affect your ability to resell our common stock.
 
 
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The market for penny stocks has experienced numerous frauds and abuses which could adversely impact investors in our stock.

OTCBB securities are frequent targets of fraud or market manipulation, both because of their generally low prices and because OTCBB reporting requirements are less stringent than those of the listed stock exchanges.

Patterns of fraud and abuse include:

 
Control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer;
 
Manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases;
 
“Boiler room” practices involving high pressure sales tactics and unrealistic price projections by inexperienced sales persons;
 
Excessive and undisclosed bid-ask differentials and markups by selling broker-dealers; and
 
Wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the inevitable collapse of those prices with consequent investor losses.

Our management is aware of the abuses that have occurred historically in the penny stock market.

We have not paid dividends in the past and do not expect to pay dividends in the future, and any return on investment may be limited to the value of our stock.

We have never paid any cash dividends on our common stock and do not anticipate paying any cash dividends on our common stock in the foreseeable future and any return on investment may be limited to the value of our common stock. We plan to retain any future earning to finance growth.

We are an “Emerging Growth Company,” and any decision on our part to comply only with curtained reduced disclosure requirements applicable to “Emerging Growth Company” could make our common stock less attractive to investors.

We are an “emerging growth company,” as defined in the JOBS Act, and, for as long as we continue to be an “emerging growth company,” we may choose to take advantage of exemptions from various reporting requirements applicable to other public companies but not to “emerging growth companies,” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We could be an “emerging growth company” for up to five years, or until the earliest of (i) the last day of the first fiscal year in which our annual gross revenues exceed $1 billion, (ii) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter, or (iii) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three year period.
 
In addition, Section 107 of the JOBS Act also provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to opt in to the extended transition period for complying with the revised accounting standards.

Because we have elected to defer compliance with new or revised accounting standards, our financial statement disclosure may not be comparable to similar companies.

We have elected to use the extended transition period for complying with new or revised accounting standards under Section 102(b)(1) of the JOBS Act. This allows us to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies. As a result of our election, our consolidated financial statements may not be comparable to companies that comply with public company effective dates.
 
 
15

 

Our status as an “Emerging Growth Company” under the JOBS Act of 2012 may make it more difficult to raise capital as and when we need it.

Because of the exemptions from various reporting requirements provided to us as an “emerging growth company” and because we will have an extended transition period for complying with new or revised financial accounting standards, we may be less attractive to investors and it may be difficult for us to raise additional capital as and when we need it. Investors may be unable to compare our business with other companies in our industry if they believe that our financial accounting is not as transparent as other companies in our industry. If we are unable to raise additional capital as and when we need it, our financial condition and results of operations may be materially and adversely affected.
 
 
None.
 
 
The Company’s corporate headquarters is located at 8551 West Sunrise Boulevard, Unit 304, Plantation, Florida 33322, and is owned by the Company's subsidiary, Dream Reachers. There is a mortgage on the property in the original principal amount of $192,500.
 
The Company also currently leases 3,293 square feet of office space located at 8551 West Sunrise Boulevard, Unit 305, Plantation, Florida 33322, pursuant to a commercial lease agreement dated September 1, 2011. This property is located adjacent to the Company's corporate headquarters and is used by the Company for employees and training. The lease term is one year with five successive one-year renewal options. The Company is required to enter into a new lease with the landlord for each renewal term. On September 1, 2013, the lease was renewed for one year with a fixed payment of approximately $5,800 per month.
 
 
From time to time, we become involved in legal proceedings arising in the ordinary course of our business. We are not presently involved in any pending legal proceedings, the outcome of which, if determined adversely to us, would have a material adverse effect on our business, operating results or financial condition.
 
 
Not applicable.
 
 
16

 
 
PART II
 
 
Price Range of Common Stock
 
Our common stock has been quoted on the OTC Bulletin Board since July 2012 under the symbol “HRAA”. On April 11, 2014, the last reported bid price of our common stock was $0.15 per share. The following table presents the high and low sales price for our common stock for the periods indicated:
 
   
Fiscal 2014
 
   
High
   
Low
 
             
First Quarter (January 1 - March 31)
 
$
0.29
   
$
0.18
 
Second Quarter (April 1 through April 11)
 
$
0.20
   
$
0.15
 
       
   
Fiscal 2013
 
   
High
   
Low
 
             
First Quarter (January 1 - March 31)
 
$
0.52
   
$
0.25
 
Second Quarter (April 1 - June 30)
 
$
0.62
   
$
0.25
 
Third Quarter (July 1 - September 30)
 
$
0.52
   
$
0.20
 
Fourth Quarter (October 1 - December 31)
 
$
0.30
   
$
0.11
 
 
   
Fiscal 2012
 
   
High
   
Low
 
             
Third Quarter (July 12 - September 30)
 
$
0.40
   
$
0.15
 
Fourth Quarter (October 1 - December 31)
 
$
0.35
   
$
0.10
 
 
Stockholders
 
The approximate number of holders of record of our common stock as of April 10, 2014 was 400 including those brokerage firms and/or clearing houses holding shares of common stock for their clientele (with each such brokerage house and/or clearing house being considered as one holder). As of April 10, 2014, we had 54,752,294 shares of common stock outstanding.
 
Dividends
 
We have never declared or paid dividends on our common stock. We do not intend to declare dividends in the foreseeable future because we anticipate that we will reinvest any future earnings into the development and growth of our business. Any decision as to the future payment of dividends will depend on our results of operations and financial position and such other factors, as our board of directors in its discretion deems relevant.

Equity Compensation Plan Information

See Part III, Item 12, under the heading, “Securities Authorized for Issuance Under Equity Compensation Plans” for information on compensation plans under which our equity securities are authorized for issuance.

 
Not required for smaller reporting companies.
 
 
17

 
 
 
The following discussion and analysis of the results of operations and financial condition of the Company for the fiscal years ended December 31, 2013 and 2012 should be read in conjunction with the Company’s financial statements, and the notes to those financial statements that are included elsewhere in this Annual Report.

Overview

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

On February 10, 2012, the Company entered into the Merger Agreement with Acquisition Sub and HRAA, pursuant to which Acquisition Sub was merged with and into HRAA, and HRAA, as the surviving corporation, became a wholly-owned subsidiary of the Company. Before the entry into the Merger Agreement, no material relationship existed between the Company and the Acquisition Sub or HRAA.
 
Prior to the closing of the Merger, the Company transferred all of its operating assets and liabilities to the Split-Off Subsidiary, and contemporaneously with the closing of the Merger, the Company sold all of the outstanding capital stock of the Split-Off Subsidiary to the Split-Off Buyer. In connection with the sale, an aggregate of 3,500,000 shares of the Company’s common stock held by the Split-Off Buyer were surrendered and cancelled without further consideration.
 
Pursuant to the terms and conditions of the Merger Agreement, and upon the consummation of the Merger:
 
 
Each share of HRAA’s common stock issued and outstanding immediately prior to the closing of the Merger was converted into the right to receive 1,271.111 shares of the Company’s common stock. An aggregate of 1,271,111 shares of the Company’s common stock were issued to the holders of HRAA’s common stock. Immediately prior to the Merger, HRAA had no outstanding securities other than shares of its common stock.
 
 
Anna Vechera resigned as the Company’s sole officer and director, and simultaneously with the Merger, a new board of directors and new officers were appointed. The Company’s new board of directors consisted of Robert Rubinowitz, Andrea Clark and Keith Siddel, previously the directors of HRAA. In addition, immediately following the Merger, Andrea Clark was appointed as the Company’s President and Chief Executive Officer, Robert Rubinowitz was appointed as the Company’s Chief Operating Officer, Secretary and Treasurer and Keith Siddel was appointed as the Company’s Chief Marketing Officer. Andrea Clark, Robert Rubinowitz and Keith Siddel no longer hold these positions.

On April 13, 2012, the Company changed its name from Anvex International, Inc. to Health Revenue Assurance Holdings, Inc.

On April 13, 2012, the board of directors authorized the Stock Split. The shares resulting from the Stock Split were issued on April 26, 2012. All share and per share amounts for all periods presented have been retroactively adjusted to reflect the Stock Split.
 
 
18

 

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/PCS requires significant business and systems changes throughout the health care industry and impacts both business and clinical processes.
 
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 made 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.  On April 1, 2014, the President signed into law legislation delaying the implementation date of ICD-10-CM/PCS until at least October 1, 2015.
 
We believe the impacts to the ICD-10 delay will have minimal impacts on our near term coding staffing and consulting services and do not affect our ability to acquire long term coding outsourcing service contracts.
 
Securities Purchase Agreement

On November 12, 2013, the Company entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with certain investors named therein (each a “Purchaser” and, collectively, the “Purchasers”) for an aggregate of $5,400,000. Pursuant to the Securities Purchase Agreement, the Company issued the following to the Purchasers: (i) 13,500,000 shares of its Series A 8% Redeemable Convertible Preferred Stock (the “Series A Preferred Stock”) and (ii) 5-year warrants (the “Warrants”) to purchase an aggregate of 27,000,000 shares of common stock for an exercise price of $0.30 per share. The Series A Preferred Stock is convertible into common stock on a 2 for 1 basis and is redeemable by the Company, at the option of the investor, 48 months from November 12, 2013 at the stated value of $0.30 per share or a total of $5,400,000 plus accumulated but unpaid dividends, whether declared or not. The Company also issued 1,890,000 warrants as a fee to the placement agent at an exercise price of $0.30 per share.

In connection with the Securities Purchase Agreement, the Company entered into a registration rights agreement  with the Purchasers, pursuant to which the Company agreed to register all of the shares of common stock underlying the Series A Preferred Stock and the shares of common stock underlying the Warrants on a registration statement on Form S-1 (the “Registration Statement”) to be filed with the SEC within 30 calendar days following the Closing Date (the “Filing Deadline”) and to use its best efforts to cause the Registration Statement to be declared effective under the Securities Act within 90 calendar days following the Filing Deadline. The Registration Statement was filed on December 11, 2013, as amended December 20, 2013 and declared effective on December 24, 2013.

Separation Agreement with Robert Rubinowitz
 
On April 14, 2014, the Company entered into a separation agreement with Robert Rubinowitz, its President, Chief Operating Officer, Secretary, Treasurer and director, which provides for the termination of Mr. Rubinowitz's employment and his resignation as an officer and director of the Company, and the termination of that certain Employment Agreement dated October 1, 2013, as amended on November 12, 2013, between the Company and Mr. Rubinowitz. See Part II, “Item 9B, Other Information,” included elsewhere in this Form 10-K.
 
Resignation of Directors
 
Directors Mitchell D. Kaye and David Kroin resigned from the board of directors on April 2, 2014 and April 4, 2014, respectively. See Part II, “Item 9B, Other Information,” included elsewhere in this Form 10-K.
 
Appointment of Tim Lankes as Director
 
On April 12, 2014, Tim Lankes, the Company's chief executive officer was appointed to the board of directors of the Company. See Part II, "Item 9B, Other Information," included elsewhere in this Form 10-K.
 
 
19

 
 
Year ended December 31, 2013 compared to the year ended December 31, 2012
 
Results of Operations
 
The following table presents a summary of operating information for the year ended December 31, 2013 and 2012:
 
   
For the years ended
             
   
December 31,
2013
   
December 31,
2012
   
Increase/
(Decrease) $
   
Increase/
(Decrease) %
 
Revenue
 
$
7,099,514
   
$
5,806,848
   
$
1,292,666
     
22.26
%
Revenue – Related Party
   
211,239
     
-
     
211,239
     
100.00
%
Total Revenue
   
7,310,753
     
5,806,848
     
1,503,905
     
25.90
%
Costs of Revenues
   
4,061,644
     
2,830,008
     
1,231,636
     
43.52
%
Gross profit
   
3,249,109
     
2,976,840
     
272,269
     
9.15
%
                                 
Selling and administrative expenses
   
7,016,533
     
3,853,820
     
3,162,713
     
82.07
%
Research and development expenses
   
-
     
64,386
     
(64,386
   
(100.00
)%
Asset impairment
   
946,931
     
-
     
946,931
     
100.00
%
Depreciation and amortization
   
83,900
     
50,765
     
33,135
     
65.27
%
Total operating expenses
   
8,047,364
     
3,968,971
     
4,078,393
     
102.76
%
Operating income (loss)
   
(4,798,255
)
   
(992,131
)
   
(3,806,124
)
   
383.63
%
Other expense, net
   
(674,985
)
   
(465,339
)
   
(209,646
)
   
45.05
%
Net Income (loss)
 
$
(5,473,240
)
 
$
(1,457,470
)
 
$
(4,015,770
)
   
275.53
%
Cumulative preferred stock dividend
    (60,000 )     -       (60,000 )     100 %
Deemed dividend for beneficial conversion feature of preferred stock
    (2,634,185     -       (2,634,185 )     100 %
Net Income (loss) available to common stockholders
    (8,167,425 )     (1,457,470     (6,709,955 )     460 %
 
Revenue:
 
Revenue increased by $1,503,905 or approximately 26%, from $5,806,848 for the year ended December 31, 2012 to $7,310,753 for the year ended December 31, 2013. The increase was due primarily to increased revenue generated as a result of the growing business development and marketing efforts by the Company.
 
Cost of Revenues:
 
Cost of revenues increased by $1,231,636 or approximately 44%, from $2,830,008 for the year ended December 31, 2012 to $4,061,644 for the year ended December 31, 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 $272,269, or approximately 9%, from $2,976,840 for the year ended December 31, 2012 to $3,249,109 for the year ended December 31, 2013. The increase in gross profit was primarily attributable to increase in business experienced during the year.
 
Selling and Administrative Expenses:
 
Selling and administrative expenses were $7,016,533 for the year ended December 31, 2013, an increase of $3,162,713 or approximately 82%, from $3,853,820 for the year ended December 31, 2012. The change in the 2013 period compared to the 2012 period was primarily due to:
 
 
Personnel costs have increased by approximately $1,895,000 or 91%, from approximately $2,075,000 for the year ended December 31, 2012 to approximately $3,970,000 for the year ended December 31, 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.
     
 
Travel/business development has decreased by approximately $97,000 or approximately 23%, from approximately $429,000 for the year ended December 31, 2012 to approximately $332,000 for the year ended December 31, 2013.
     
 
Professional fees have increased from approximately $395,000 for the year ended December 31, 2012 to approximately $1,218,000 for the year ended December 31, 2013, an increase of $823,000, or approximately 208%. 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.
 
 
20

 
 
Research and Development Expenses:
 
We had no research and development expenses for the year ended December 31, 2013, a decrease of $64,386 or 100%, for the year ended December 31, 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 associated with the Visualizer software suite of multiple offerings and the OMC (Outsourced Medical Coding) 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 risk and cash liquidity concerns that restrain the ability to make capital investments in research and development to complete existing products in the pipeline as the available cash is needed to fund normal operating expenses. As a result of this evaluation, the Company recorded a loss of $946,931 for that is presented as a line item entitled “asset impairment” on the consolidated statement of operations. The Company will continue to use the Visualizer suite of functionality as internally developed software to generate customized reports for revenue integrity auditing and compliance services but the Company no longer intends to market or sell internally developed software on a stand alone basis.
 
Depreciation and Amortization Expenses:
 
Depreciation and amortization expenses were approximately $84,000 for the year ended December 31, 2013, an increase of approximately $33,000, or 65%, from approximately $51,000 for the year ended December 31, 2012. The increase was primarily due to depreciation costs associated with the Company’s purchases for office furniture and computers necessary to support the increase in personnel.
 
Other Expenses, net:
 
Total other expenses, net of other income and gains were $674,985 and $465,339 for the years ended December 31, 2013 and December 31, 2012, respectively. The 2013 amount includes a gain of $365,255 from the change in fair value of warrant liability, $33,364 from the gain on extinguishment of debt relating to a put premium, $146,624 loss on extinguishment of debt, other income of $67 and interest expense of $927,047 while the 2012 amount is primarily interest expense.

Interest expense increased approximately $462,000, from approximately $465,000 for the year ended December 31, 2012. The increase is due to the factoring fees experienced during the year along with interest on finance charges, outstanding debt obligations and amortization of debt discounts.
 
Net Income (loss) and net income (loss) available to common stockholders:
   
As a result of the above factors, a net loss of approximately $5,473,240 was recognized for the year ended December 31, 2013 as compared to net loss of approximately $1,457,470 for the year ended December 31, 2012, an increase of approximately $4,015,770 or approximately 276%. The increase in net loss is outlined above. However, the net loss available to common stockholders was $8,167,425 as a result of $60,000 in undeclared Series A preferred stock dividends and a $2,634,185 deemed dividend relating to the value of the beneficial conversion feature on the Series A preferred stock.
 
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 stockholders 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 earnings before interest tax depreciation and amortization (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 stockholders, a GAAP financial measure:
 
   
For the year ended
 
   
December 31,
   
December 31,
 
   
2013
   
2012
 
Net loss
 
$
(5,473,240
)
 
$
(1,457,470
)
Interest expense
   
927,047
     
465,349
 
Asset Impairment
   
946,931
     
-
 
Loss on early extinguishment of debt
   
146,624
     
-
 
Depreciation and amortization
   
148,037
     
50,765
 
Share based compensation expense
   
639,328
     
-
 
Gain on put premium extinguishment of debt
   
(33,364
)
   
-
 
Change in fair value of warrant liability
   
(365,255
)
   
-
 
Adjusted EBITDA (loss) from operations
 
$
(3,063,892
)
 
$
(941,356
)
 
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 year ended December 31, 2013, the Company generated a net $6,287,000 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 $3,365,005 and investment in capitalized software, property and equipment of approximately $762,439.
 
As of December 31, 2013, the Company had cash balances of approximately $3,053,485 as compared to approximately $893,458 as of December 31, 2012, an increase of approximately $2,160,027 or 242%.
 
Net cash used in operating activities was $3,365,005 for the year ended December 31, 2013. This compared to net cash used by operating activities of $1,699,466 for the year ended December 31, 2012. The increase of $1,665,539 was used to fund a net loss of $8,167,425 reduced by non-cash depreciation and amortization of $148,037, software impairment of $946,931, loss on early extinguishment of debt of $146,624 stock based compensation expense of $173,827, amortization of prepaid shares issued for services of $465,501, accretion of premium on debt $33,364, amortization of debt discount of $556,028, cumulative preferred stock dividend of $60,000, deemed dividend for beneficial conversion feature of preferred stock of $2,634,185, bad debt of $26,116, gain from change in fair market value of warrant of $365,255 and changes in operating assets and liabilities totaling ($22,938).
 
Net cash used in investing activities for the year ended December 31, 2013 was $762,439 compared to $279,918 for the year ended December 31, 2012. The increase is primarily attributable to the development of software.
 
Net cash provided by financing activities amounted to $6,287,471 for the year ended December 31, 2013, compared to net cash provided in the year ended December 31, 2012 of $2,674,342, representing an increase in net cash flow from financing activities of $3,613,129. This was due to the receipt of net proceeds from the Company’s issuance of stock, equity capital raises, net borrowings from new and existing debt obligations, offset by various debt repayments.
 
Financing:
 
The Company and HRAA have the following financing arrangements:
 
1.
The Company entered into a revolving line of credit for $150,000 with Bank of America in December 2008, for its general working capital needs. The line of credit contains certain restrictive covenants including restrictions on granting liens on the Company's assets. The line is also guaranteed by certain officers of the Company, Robert Rubinowitz and Andrea Clark, and was modified on September 19, 2013. The line of credit had a maturity date of December 18, 2009 and was renewed until December 18, 2012. The line of credit was modified on December 18, 2012 so that the loan no longer had an expiration date of December 18, 2012, but instead, a final maturity date of December 18, 2018. The interest rate per year was equal to the bank’s prime rate plus 6.50%. The bank’s prime rate of interest at December 31, 2012 was 3.25%. First payment of approximately $3,200 was paid October 19, 2013.
 
2.
The Company entered into a term loan in March 2009 with Bank of America whose proceeds were used for general working capital. The term loan was personally guaranteed by Robert Rubinowitz and Andrea Clark and contain certain restrictive covenants including restrictions on granting liens on the Company's assets. The term loan matured in five years and incurred interest at the rate of 6.75% per annum. The term loan has been consolidated with an existing line of credit. The balance due as of September 19, 2013, the date of the consolidation was approximately $20,697.
 
3.
On September 19, 2013, The Company consolidated the term loan with the line of credit. The outstanding balance for the term loan and the line of credit prior to consolidation was $20,697 and $133,334, respectively. The new consolidated term loan is personally guaranteed by Robert Rubinowitz and Andrea Clark and contains restrictive covenants, which among other things, prohibit the Company from granting any security interests or liens on the assets of the Company. Payments of principal and interest are approximately $3,200 per month. The new consolidated term loan matures on September 19, 2017 and incurs interest at a rate per year equal to the bank’s prime rate plus 3.5%. The balance due as of December 31, 2013 for the new consolidated term loan was approximately $142,000. Although the Company is current in its payments on this loan, management believes the Company may be in default of certain non-financial covenants. The bank has not notified the Company of any default.
 
4.
A mortgage made to Dream Reachers related to certain real estate, which houses the Company’s main office 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 Robert Rubinowitz. 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 December 31, 2013 was approximately $174,600. Monthly payments of 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.
 
 
22

 
 
5.
In June 2012, HRAA 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, HRAA, 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. HRAA’s obligations under the factoring agreement are secured by substantially all of the assets of HRAA. For the year ended December 31, 2013, HRAA had factored approximately $4,693,000 of receivables and had received cash advances of approximately $4,708,000. Outstanding receivables purchased by the factor as of December 31, 2013 were approximately $638,000 and are included in accounts receivable in the accompanying consolidated balance sheet, and the secured loan due to the lender was approximately $543,000. Factor fees in 2013 were approximately $138,000, and are included in interest expenses. Although the Company is current in its financial obligations under the factoring agreement, management believes the Company may be in default under the solvency provision and certain non-financial default provisions. The Company has not been notified of any default by the factor company.
 
6.
The Company leases certain office equipment under non-cancellable operating lease arrangements. Monthly payments under the lease agreements are approximately $500 as of December 31, 2013.
 
7.
On May 14, 2012, the Company entered into a round of convertible promissory notes totaling $300,000.  The term of each note was 12 months. Interest was computed at 6% based on a 360 day year and was payable on the maturity date, and the conversion rate was $0.10 per share. Interest was due and payable only if the notes were repaid in cash. These notes were converted into common stock at their contractual conversion rate of $0.10 per share on July 15, 2012.
 
8.
During December 2012, January 2013 and February 2013, the Company entered eighteen loan agreements 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.   Of the eighteen loans, (i) thirteen of the loans are secured by contract accounts receivable of a Company customer which security interest is subordinate to the lender under the factoring agreement, and (ii) one of the loans is secured by the stock of HRAA. As of December 31, 2013, five of the notes had been converted into an aggregate of 1,608,333 shares of the Company's common stock.
 
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 $6,643,000 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 negative working capital of $2,292,754, at December 31, 2013.

Going Concern
 
The Company’s ability to continue as a going concern is dependent upon its ability to generate cash from operating activities and obtain additional financing to fund its business plan and to support working capital requirements.
 
However, as of December 31, 2013, the Company had a working capital deficit, stockholders deficit and accumulated deficit and for the year ended December 31, 2013, incurred net losses, and has used net cash in operations. The Company has not been able to generate sufficient cash from operating activities to fund its 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 and professional fees was $4,903,652. 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.
 
 
23

 
 
Off-Balance Sheet Arrangements
 
None.
 
Critical Accounting Policies
 
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires our management to make assumptions, estimates, and judgments that affect the amounts reported, including the notes thereto, and related disclosures of commitments and contingencies, if any. We have identified certain accounting policies that are significant to the preparation of our consolidated financial statements. These accounting policies are important for an understanding of our financial condition and results of operations. Critical accounting policies are those that are most important to the portrayal of our financial condition and results of operations and require management’s difficult, subjective, or complex judgment, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Certain accounting estimates are particularly sensitive because of their significance to financial statements and because of the possibility that future events affecting the estimate may differ significantly from management’s current judgments. We believe the following critical accounting policies involve the most significant estimates and judgments used in the preparation of our consolidated financial statements.
 
We are an emerging growth company; therefore we have elected to use the extended transition period for complying with new or revised accounting standards under Section 102(b)(2)(B) of the Jumpstart Our Business Startups Act. As a result of this election, our consolidated financial statements may not be comparable to companies that comply with public company effective dates.
 
Principles of Consolidation
 
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, HRAA and Dream Reachers. All significant inter-company transactions and balances are eliminated in consolidation.
 
Allowance for doubtful accounts
 
Accounts receivable balances are subject to credit risk. Management has reserved for expected credit losses, sales returns and allowances, and discounts based upon past experience, as well as knowledge of current customer information. The Company believes that its reserves are adequate. It is possible, however, that the accuracy of our estimation process could be impacted by unforeseen circumstances. The Company continuously reviews its reserve balance and refines the estimates to reflect any changes in circumstances.
 
Software
 
Costs incurred in connection with the development of software products are accounted for in accordance with the Financial Accounting Standards Board Accounting Standards Codification ("ASC") 985 Costs of Software to Be Sold, Leased or Marketed.” Costs incurred prior to the establishment of technological feasibility are charged to research and development expense. Software development costs are capitalized after a product is determined to be technologically feasible and is in the process of being developed for market and capitalization ceases after the general release of the software. Amortization of capitalized software development costs begins upon initial product shipment after general release. Capitalized software development costs are amortized over the estimated life of the related product (generally thirty-six months) using the straight-line method. The Company evaluates its software assets for impairment whenever events or change in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of software assets to be held and used is measured by a comparison of the carrying amount of the asset to the future net undiscounted cash flows expected to be generated by the asset. If such software assets are considered to be impaired, the impairment to be recognized is the excess of the carrying amount over the fair value of the software asset.
 
Software maintenance costs are charged to expense as incurred. Expenditures for enhanced functionality are capitalized. The cost of the software and the related accumulated amortization are removed from the accounts upon retirement of the software with any resulting loss being recorded in operations.
 
Asset Impairment
 
At the end of September 2013, the Company re-evaluated the capitalized research and development costs for the Visualizer software suite of multiple offerings and the OMC 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. The Company will continue to use the Visualizer suite of functionality as internally developed software to generate customized reports for revenue integrity auditing and compliance services but the Company no longer intends to market or sell internally developed software on a stand alone basis.
 
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.
 
 
24

 
 
Revenue Recognition
 
The Company recognizes medical coding audit 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 Reporting Phase.
 
A portion of the Company’s revenue is derived from consulting 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.
 
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 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 arrangements 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.
 
For our education products sold we have determined to account for the course materials and training components as one unit of accounting.  Accordingly, revenue is recognized for the single unit upon delivery of the training through our online webinars.

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. The Company will continue to use the Visualizer suite of functionality as internally developed software to generate customized reports for revenue integrity auditing and compliance services but the Company no longer intends to market or sell internally developed software on a stand alone basis.
 
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. 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.
 
Segment Reporting
 
Financial Accounting Standards Board ASC Topic 280, Segment Reporting (“ASC 280”), establishes standards for the way public business enterprises report information about operating segments. ASC 280 also establishes standards for related disclosures about products and services, geographic areas and major customers. The Company has determined that based on these criteria it only operates one segment, consulting services, as all other services do not meet the minimum threshold for separate reporting of a segment.
 
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
 
Not required for smaller reporting companies.
 
 
25

 
 
 
   
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    F-7  
 
 
F-1

 
 
 
Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of:
Health Revenue Assurance Holdings, Inc.
 
We have audited the accompanying consolidated balance sheets of Health Revenue Assurance Holdings, Inc. and Subsidiaries as of December 31, 2013 and 2012, and the related consolidated statements of operations, changes in stockholders’ equity (deficit) and cash flows for each of the two years in the period ended December 31, 2013.  These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation.  We believe that our audits provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Health Revenue Assurance Holdings, Inc. and Subsidiaries as of December 31, 2013 and 2012, and the consolidated results of its operations and its cash flows for each of the two years in the period ended December 31, 2013 in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.  As discussed in Note 1 to the consolidated financial statements, the Company has a net loss available to common stockholders and net cash used in operating activities in 2013 of $8,167,425 and $3,365,005, respectively, and has a working capital deficiency, stockholders’ deficiency and  accumulated deficit of $2,292,754, $4,154,247 and $10,752,223, respectively at December 31, 2013. These matters raise substantial doubt about the Company's ability to continue as a going concern. Management’s Plan in regards to these matters is also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 
/s/ Salberg & Company, P.A.

SALBERG & COMPANY, P.A.
Boca Raton, Florida
April 15, 2014
 
 
2295 NW Corporate Blvd., Suite 240 • Boca Raton, FL 33431-7328
Phone: (561) 995-8270 • Toll Free: (866) CPA-8500 • Fax: (561) 995-1920
www.salbergco.com • info@salbergco.com
Member National Association of Certified Valuation Analysts • Registered with the PCAOB
Member CPA Connect with Affiliated Offices Worldwide • Member AICPA Center for Audit Quality
 
 
F-2

 
 
HEALTH REVENUE ASSURANCE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
           
   
December 31,
   
December 31,
 
   
2013
   
2012
 
Assets
           
             
Cash
 
$
3,053,485
   
$
893,458
 
Accounts receivable
   
901,918
     
1,246,814
 
Accounts receivable - Related Party, net of allowance $16,244 and $0 respectively
   
25,000
     
-
 
Prepaid expenses
   
1,050,210
     
3,600
 
Other current assets
   
1,676
     
688
 
Total Current Assets
   
5,032,289
     
2,144,560
 
                 
Property and Equipment, net
   
381,847
     
365,017
 
Software, net
   
-
     
258,933
 
Other assets
   
12,665
     
8,871
 
Finance costs, net
   
2,150
     
2,477
 
Total Other Assets
   
14,815
     
270,281
 
                 
Total Assets
 
$
5,428,951
   
$
2,779,858
 
                 
Liabilities and Stockholders' Equity (Deficit)
               
                 
Accounts payable
 
$
154,324
   
$
207,741
 
Due to officers
   
-
     
75,000
 
Accrued expenses
   
40,373
     
64,077
 
Accrued payroll
   
414,684
     
412,186
 
Loan payable to factor
   
542,530
     
827,075
 
Accrued interest
   
5,850
     
4,524
 
Line of credit
   
44,692
     
25,000
 
Capital Leases, current portion
   
32,768
     
16,923
 
Notes payable, current portion, net of discount
   
380,326
     
202,557
 
Long term debt, current portion
   
44,084
     
37,513
 
Settlement Payable
   
7,000
     
115,278
 
Deferred Revenue
   
209,033
     
-
 
Other current liabilities
   
43,379
     
-
 
Warrant derivative fair value
   
5,406,000
     
-
 
Accrued preferred stock dividend payable
   
-
     
-
 
Total Current Liabilities
   
7,325,043
     
1,987,874
 
Capital Leases (net of current portion)
   
26,108
     
23,974
 
Line of credit (net of current portion)
   
-
     
125,000
 
Notes payable (net of current portion), net of discount
   
31,694
     
273,751
 
Long term debt (net of current portion)
   
272,353
     
181,457
 
Total Liabilities
   
7,655,198
     
2,592,056
 
                 
Temporary Equity
               
Series A 8% redeemable convertible preferred stock (13,500,000 and 0 shares issued and outstanding at December 31, 2013 and 2012, respectively –Redemption value of $5,460,000)
   
1,928,000
     
-
 
                 
Commitments and Contingencies (See Note 10)
               
                 
Stockholders' Equity (Deficit):
               
Common stock ($0.001 par value, 500,000,000 shares authorized, 54,752,294 and 39,054,867 shares issued and outstanding at December 31, 2013 and December 31, 2012, respectively)
 
54,752
     
39,055
 
Additional paid-in capital
   
6,543,224
     
2,738,545
 
Subscription receivable
   
-
     
(5,000
)
Accumulated deficit
   
(10,752,223
)
   
(2,584,798
)
Total Stockholders' Equity (Deficit)
   
(4,154,247
)
   
187,802
 
                 
Total Liabilities and Stockholders' Equity (Deficit)
 
$
5,428,951
   
$
2,779,858
 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
F-3

 
 
CONSOLIDATED STATEMENTS OF OPERATIONS
           
   
For the Year-Ended
 
   
December 31,
   
December 31,
 
   
2013
   
2012
 
             
Revenue
 
$
7,099,514
   
$
5,806,848
 
Revenue - Related Party
   
211,239
     
-
 
Total Revenue
   
7,310,753
     
5,806,848
 
                 
Cost of Revenues
   
4,061,644
     
2,830,008
 
Gross Profit
   
3,249,109
     
2,976,840
 
                 
Operating Expenses
               
Selling and administrative expenses (includes stock compensation of $639,328 and $0 in 2013 and 2012, respectively)
   
7,016,533
     
3,853,820
 
Research and development
   
-
     
64,386
 
Asset Impairment
   
946,931
     
-
 
Depreciation and amortization
   
83,900
     
50,765
 
Total Operating Expenses
   
8,047,364
     
3,968,971
 
                 
Operating Loss
   
(4,798,255
)
   
(992,131
)
                 
Other Income (Expense)
               
Other income
   
67
     
10
 
Interest expense
   
(927,047
)
   
(465,349
)
Gain on extinguishment of debt for put premium
   
33,364
     
-
 
Gain from change in fair value of warrant liability
   
365,255
     
-
 
Loss on extinguishment of debt
   
(146,624
)
   
-
 
Total Other Income (Expense), net
   
(674,985
)
   
(465,339
)
                 
Net Loss
   
(5,473,240
)
   
(1,457,470
)
Cumulative preferred stock dividend
   
(60,000
)
   
-
 
Deemed dividend for beneficial conversion feature of preferred stock
   
(2,634,185
)
   
-
 
Net Loss available to common stockholders
 
$
(8,167,425
)
 
$
(1,457,470
)
                 
Net Loss Per Share
               
basic and diluted
 
$
(0.17
)
 
$
(0.04
)
Weighted Average Number of Shares Outstanding
               
basic and diluted
   
48,385,115
     
32,730,809
 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
F-4

 
 
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012
 
               
Additional
               
Total
 
   
Common Stock
   
Paid-in
   
Subscription
   
Accumulated
   
Stockholders'
 
   
Shares
   
Amount
   
Capital
   
Receivable
   
Deficit
   
Equity (Deficit)
 
                                     
Balance at December 31, 2011
   
16,499,021
   
$
16,499
   
$
751,010
   
$
-
   
$
(1,127,328
)
 
$
(359,819
)
                                                 
Recapitalization
   
13,499,206
     
13,499
     
(13,499
)
   
-
     
-
     
-
 
2011 bridge note converted in 2012 related to reverse merger
   
1,343,729
     
1,344
     
248,656
     
-
     
-
     
250,000
 
Issuance of common stock for cash
   
4,352,312
     
4,352
     
1,051,742
     
-
     
-
     
1,056,094
 
Repayment of advances with shares
   
1,265,381
     
1,266
     
312,642
     
-
     
-
     
313,908
 
Value of Beneficial conversion feature in convertible debt
 
-
-
     
300,000
     
-
     
-
     
300,000
 
Repurchase of shares pursuant to settlement agreement
   
(3,299,802
)
   
(3,300
)
   
(229,200
)
   
-
     
-
     
(232,500
)
Conversion of convertible debt
   
3,000,000
     
3,000
     
297,000
     
-
     
-
     
300,000
 
Shares issued to lender as fees
   
2,375,000
     
2,375
     
341,125
     
-
     
-
     
343,500
 
Offering costs
   
-
     
-
     
(325,911
)
   
-
     
-
     
(325,911
)
Subscription receivable
   
20,000
     
20
     
4,980
     
(5,000
)
   
-
     
-
 
Fractional rounding
   
26
     
-
     
-
     
-
     
-
     
-
 
Net Loss 2012
   
-
     
-
     
-
     
-
     
(1,457,470
)
   
(1,457,470
)
Balance at December 31, 2012
   
39,054,867
     
39,055
     
2,738,545
     
(5,000
)
   
(2,584,798
)
   
187,802
 
                                                 
Conversion of convertible debt
   
1,608,333
     
1,608
     
513,059
     
-
     
-
     
514,667
 
Issuance of common stock as compensation
   
462,665
     
463
     
158,542
     
-
     
-
     
159,005
 
Issuance of common stock for cash
   
3,446,429
     
3,446
     
1,234,554
     
-
     
-
     
1,238,000
 
Deemed dividend for series A preferred stock's beneficial conversion feature
   
-
     
-
     
-
     
-
     
(2,634,185
)
   
(2,634,185
)
Dividends on series A preferred stock
    -      
-
     
-
     
-
     
(60,000
)
   
(60,000
)
Public offering costs
   
-
     
-
     
(9,553
)
   
-
     
-
     
(9,553
)
Reclassification of warrant liability
   
-
     
-
     
(101,418
)
   
-
     
-
     
(101,418
)
Receipt of subscription receivable
   
-
     
-
     
-
     
5,000
     
-
     
5,000
 
Shares issued as loan fees
   
5,575,000
     
5,575
     
673,778
     
-
     
-
     
679,353
 
Shares issued for services
   
4,605,000
     
4,605
     
1,320,895
     
-
     
-
     
1,325,500
 
Stock option expense
   
-
     
-
     
14,822
     
-
     
-
     
14,822
 
                                                 
Net Loss 2013
   
-
     
-
     
-
     
-
     
(5,473,240
)
   
(5,473,240
)
Balance at December 31, 2013
   
54,752,294
   
$
54,752
   
$
6,543,224
   
$
-
   
$
(10,752,223
)
 
$
(4,154,247
)
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
F-5

 
CONSOLIDATED STATEMENTS OF CASH FLOWS
   
For the Year-Ended
 
   
December 31,
   
December 31,
 
   
2013
   
2012
 
Cash flows from Operating Activities:
           
Net loss available to common stockholders
 
$
(8,167,425
)
 
$
(1,457,470
)
Adjustments to reconcile net loss to net cash used in operating activities:
               
Cumulative series A preferred stock dividend
   
60,000
     
-
 
Deemed dividend for beneficial conversion feature of series A preferred stock
   
2,634,185
     
-
 
Amortization of debt discount
   
556,028
     
304,808
 
Amortization of debt issue costs
   
327
     
-
 
Depreciation expense
   
83,573
     
50,765
 
Amortization of software
   
64,137
     
-
 
Software impairment
   
946,931
     
-
 
Accretion of premium on debt
   
33,364
     
-
 
Bad debt expense
   
26,116
     
-
 
Amortization of prepaid shares issued for services
   
465,501
     
-
 
Stock option expense
   
14,822
     
-
 
Shares issued for services
   
159,005
     
-
 
Loss on early extinguishment of debt
   
146,624
     
-
 
Gain from change in fair market value of warrant derivative liability
   
(365,255
)
   
-
 
Change in operating assets and liabilities:
               
Accounts receivable
   
(17,655
)
   
(1,103,257
)
Other assets
   
(4,788
)
   
5,146
 
Prepaid expenses
   
(129,038
)
   
20,912
 
Accounts payable
   
(53,417
)
   
53,783
 
Accounts payable related party
   
-
     
75,000
 
Settlement accrual
   
7,000
     
-
 
Accrued liabilities
   
(85,801
)
   
383,835
 
Other accrued liabilities
   
49,229
     
-
 
Accrued payroll
   
2,499
     
-
 
Deferred revenue
   
209,033
     
(32,988
)
Net Cash used in operating activities
   
(3,365,005
)
   
(1,699,466
)
                 
Cash flows from Investing Activities:
               
Capitalization of internally developed software
   
(752,135
)
   
(258,933
)
Purchases of property and equipment
   
(10,304
)
   
(20,985
)
Net Cash used in investing activities
   
(762,439
)
   
(279,918
)
                 
Cash flows from Financing Activities:
               
Proceeds from issuance of common stock
   
1,243,000
     
730,183
 
Proceeds from series A 8% redeemable convertible preferred stock issuance
   
5,400,000
     
-
 
Preferred and common stock offering costs
   
(505,901
)
   
-
 
Stockholder loan repayment -related party
   
(115,000
)
   
-
 
Stockholder loan - related party
   
40,000
     
-
 
Payment for repurchase of common stock
   
-
     
(94,165
)
Loan proceeds
   
1,595,000
     
1,193,908
 
Loan proceeds from factor, net
   
26,890
     
827,075
 
Repayments of loans
   
(1,237,145
)
   
(33,087
)
Repayment of capital lease
   
(18,015
)
   
(1,072
)
Settlement payments
   
(115,278
)
   
-
 
Borrowings (repayments) on line of credit, net
   
(26,080
)
   
51,500
 
Net Cash provided by financing activities
   
6,287,471
     
2,674,342
 
                 
Net increase in cash
   
2,160,027
     
694,958
 
Cash at beginning of year
   
893,458
     
198,500
 
Cash at ending of year
 
$
3,053,485
   
$
893,458
 
                 
Supplemental schedule of cash paid during the period for:
         
Interest
 
$
376,539
   
$
36,156
 
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
   
$
343,500
 
Transfer of accounts payable to notes payable
 
$
-
   
$
65,000
 
Insurance premium finance contract recorded as prepaid asset
 
$
57,573
   
$
-
 
Shares issued for prepaid services
 
$
1,325,500
   
$
-
 
Reclassification of line of credit to note payable
 
$
133,333
   
$
-
 
Constructive dividend
 
$
2,634,185
   
$
-
 
Reclassification of derivative to warrant liability
 
$
5,771,255
   
$
-
 
Debt discount
 
$
37,500
   
$
-
 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
F-6

 
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013 and 2012
 
1 – NATURE OF BUSINESS AND GOING CONCERN
 
Overview
 
Health Revenue Assurance Holdings, Inc. (the “Company”) is a provider of revenue cycle services to a broad range of healthcare providers. We offer our customers integrated solutions designed around their specific business needs, including revenue cycle data analysis, contract and outsourced coding, billing, coding and compliance audits, coding education, coding consulting, physician coding services and ICD-10 education and transition services. With this approach, our customers benefit from integrated service offerings that we believe enhances their revenue integrity. As a result, we believe we help our customers achieve their business objectives and patient care objectives.
 
Dream Reachers, LLC, owns the Company’s 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 consolidated financial statements for all periods presented. (See Note 2)
 
On February 10, 2012, HRAA entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”) with Health Revenue Assurance Holdings, Inc. (formerly known as Anvex International, Inc., "HRAH"), a Nevada company, and its wholly-owned subsidiary Health Revenue Acquisition Corporation (“Acquisition Sub”), which was treated for accounting purposes as a reverse recapitalization with HRAA, considered the accounting acquirer. Each share of HRAA's common stock was exchanged for the right to receive approximately 1,271 shares of HRAH’s common stock. Before their entry into the Merger Agreement, no material relationship existed between HRAH and Acquisition Sub or HRAA. (See Note 12)
 
On April 13, 2012, the Company changed its name from Anvex International, Inc. to Health Revenue Assurance Holdings, Inc.
 
On April 13, 2012, the Company’s board of directors authorized a 12.98 for 1 split of its common stock to stockholders of record as of April 13, 2012. Shares resulting from the split were issued on April 26, 2012. In connection therewith, the Company transferred $32,747 from additional paid in capital to common stock, representing the par value of additional shares issued. As a result of the stock split, fractional shares were rounded up. All share and per share amounts for all periods presented have been retroactively adjusted to reflect the stock split. (See Note 12)
 
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 December 31, 2013, the Company has a working capital deficiency, stockholders’ deficit and accumulated deficit of $2,292,754, $4,154,247, and $10,752,223, respectively, for the year ended December 31, 2013, incurred net losses available to common stockholders of $8,167,425, and has used net cash in operations of $3,365,005. 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 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 December 31, 2013, the Company has a cash balance of approximately $3,053,000. 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, consulting, training, and education.
 
On November 12, 2013, the Company entered into a Securities Purchase Agreement for the sale of $5.4 million in Series A 8% redeemable convertible preferred stock (the “Series A Preferred Stock”) and warrants to purchase shares of the Company’s common stock. The Series A Preferred Stock is convertible into common stock on a 2 for 1 basis and is redeemable by the Company, at the option of the investor, 48 months from November 12, 2013 at the stated value of $0.30 per share or a total of $5,400,000 plus accumulated but unpaid dividends, whether declared or not. The net proceeds to the Company after commissions and professional fees was $4,903,652 and after payment of stockholder 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 going concern risk. (See Note 12)
 
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
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.
 
 
F-7

 
 
HEALTH REVENUE ASSURANCE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013 and 2012
 
Use of Estimates
 
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts in the consolidated financial statements. Actual results could differ from those estimates. Significant accounting estimates reflected in the Company’s consolidated financial statements include valuation of accounts receivable, valuation of property and equipment, valuation and amortization period of software, valuation of beneficial conversion features in convertible debt, valuation of derivatives, valuation of equity based instruments issued for other than cash, revenue recognition, and the valuation allowance on deferred tax assets.
 
Cash
 
For purposes of the statement of cash flows, the Company considers all highly liquid investments with 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 $16,244 is required as of December 31, 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.
 
Property and Equipment
 
Property and equipment is recorded at cost. Depreciation is computed using the straight-line method over estimated useful asset lives, which range from 5 to 39 years. Repairs and maintenance are expensed, while additions and betterments are capitalized. The cost and related accumulated depreciation of assets sold or retired are eliminated from the accounts and any gains or losses are reflected in earnings.
 
Leases
 
We perform a review of newly acquired leases to determine whether a lease should be treated as a capital or operating lease. Capital lease assets are capitalized and depreciated over the term of the initial lease. A liability equal to the present value of the aggregated lease payments is recorded utilizing the stated lease interest rate. If an interest rate is not stated, we will determine an estimated cost of capital and utilize that rate to calculate the present value. If the lease has an increasing rate over time, and (or) is an operating lease, all leasehold incentives, rent holidays, or other incentives will be considered in determining if a deferred rent liability is required. Leasehold incentives are capitalized and depreciated over the initial term of the lease.
 
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.
 
 
F-8

 
 
HEALTH REVENUE ASSURANCE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013 and 2012
 
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 consolidated financial statements for the year ended December 31, 2013. On September 30, 2013, the Company impaired 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. The Company will continue to use the Visualizer suite of functionality as internally developed software to generate customized reports for revenue integrity auditing and compliance services but the Company no longer intends to market or sell internally developed software on a stand alone basis.
 
Long-Lived Assets
 
The Company reviews the carrying value of its long-lived assets whenever events or changes in circumstances indicate that the carrying values may no longer be appropriate. Recoverability of carrying values is assessed by estimating future net cash flows from the assets. Impairment assessment inherently involves judgment as to assumptions about expected future cash flows and the impact of market conditions on those assumptions. Future events and changing market conditions may impact management's assumptions as to sales prices, rental rates, costs, holding periods or other factors that may result in changes in the Company’s estimates of future cash flows. Although management believes the assumptions used in testing for impairment are reasonable, changes in any one of the assumptions could produce a significantly different result.
 
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.
 
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.
 
Accounting for Derivatives

The Company evaluates its convertible instruments, options, warrants or other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for under ASC Topic 815, “Derivatives and Hedging.”  The result of this accounting treatment is that the fair value of the derivative is marked-to-market each balance sheet date and recorded as a liability.  In the event that the fair value is recorded as a liability, the change in fair value is recorded in the statement of operations as other income (expense).  Upon conversion or exercise of a derivative instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity.  Equity instruments that are initially classified as equity that become subject to reclassification under ASC Topic 815 are reclassified to liabilities at the fair value of the instrument on the reclassification date.
 
Revenue Recognition
 
The Company recognizes medical coding audit 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 Reporting Phase.
 
 
F-9

 
 
HEALTH REVENUE ASSURANCE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013 and 2012
 
A portion of the Company’s revenue is derived from consulting 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.
 
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 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 arrangements 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.
 
For our education products sold we have determined to account for the course materials and training components as one unit of accounting.  Accordingly, revenue is recognized for the single unit upon delivery of the training through our online webinars.

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. The Company will continue to use the Visualizer suite of functionality as internally developed software to generate customized reports for revenue integrity auditing and compliance services but the Company no longer intends to market or sell internally developed software on a stand alone basis.
 
Cost of Revenues
 
Cost of revenues includes labor costs for services and education development costs. Amortization costs in 2013 of approximately $64,000 were allocated to cost of sales related to software amortization.
 
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. 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.
 
Research and Development Costs
 
In accordance with ASC 730-10, research and development costs are expensed when incurred. Total research and development costs for the years ended December 31, 2013 and 2012 were $0 and $64,386, respectively.
 
Advertising
 
The cost of advertising is expensed as incurred. Advertising and marketing expenses amounted to approximately $121,000 and $130,000 for the year ended December 31, 2013 and 2012, respectively and the total is included in selling and administrative expenses.
 
Income Taxes
 
The Company’s subsidiary, HRAA, elected to convert from a Subchapter S corporation for Federal income tax purposes to a C corporation effective October 21, 2011. Upon HRAA’s C corporation election, it began to use the asset and liability method to account for income taxes. Under this method, deferred income taxes are determined based on the differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements which will result in taxable or deductible amounts in future years and are measured using the currently enacted tax rates and laws. A valuation allowance is provided to reduce net deferred tax assets to the amount that, based on available evidence, is more likely than not to be realized.
 
 
F-10

 
 
HEALTH REVENUE ASSURANCE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013 and 2012
 
The Company follows the provisions of ASC 740-10, Accounting for Uncertain Income Tax Positions. When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. In accordance with the guidance of ASC 740-10, the benefit of a tax position is recognized in the financial statements   in the period during which, based on all available evidence, management believes it is more likely than not that the position will be   sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or   aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest   amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The   portion of the benefits associated with tax positions taken that exceeds the amount measured as described above should be reflected as   a liability for unrecognized tax benefits in the accompanying consolidated balance sheets along with any associated interest and penalties that would   be payable to the taxing authorities upon examination.
 
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. Dilutive securities outstanding at December 31, 2013 were 1,000,000 stock options, 29,940,000 warrants, and Series A Preferred Stock convertible into 27,000,000 shares of common stock. No dilutive securities were outstanding in 2012.
 
Segment Reporting
 
Financial Accounting Standards Board (“FASB”) ASC Topic 280, Segment Reporting (“ASC 280”), establishes standards for the way public business enterprises report information about operating segments. ASC 280 also establishes standards for related disclosures about products and services, geographic areas and major customers. The Company has determined that based on these criteria it only operates one segment, consulting services, as all other services do not meet the minimum threshold for separate reporting of a segment.
 
Contingencies
 
We accrue for contingent obligations, including legal costs and restructuring costs, when the obligation is probable and the amount can be reasonably estimated. As facts concerning contingencies become known we reassess our position and make appropriate adjustments to the consolidated financial statements. Estimates that are particularly sensitive to future changes include those related to tax, legal, and other regulatory matters that are subject to change as events evolve and additional information becomes available. Total legal settlement accrued costs for the year ended December 31, 2013 was $7,000. (See Note 10)

Recent Accounting Pronouncements
 
We have implemented all new accounting standards that are in effect and that may impact our 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 December 31, 2013 and December 31, 2012 was as follows:
 
   
December 31,
   
December 31,
 
   
2013
   
2012
 
Accounts receivable
 
$
901,918
   
$
1,246,814
 
Accounts receivable –Related party
   
41,244
     
-
 
Allowance for doubtful accounts
   
(16,244
)
   
-
 
Total
 
$
926,918
   
$
1,246,814
 
 
We had $26,116 and $0 in bad debt expense on trade accounts receivable for years ended December 31, 2013 and 2012, respectively.
 
4 - PROPERTY AND EQUIPMENT
 
Property and equipment consists of the following:
 
   
December 31,
 
   
2013
   
2012
 
Building and improvements
 
$
227,603
   
$
227,603
 
Furniture