News Column

HEALTH REVENUE ASSURANCE HOLDINGS, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.

August 14, 2014

The following discussion and analysis of the results of operations and financial condition of Health Revenue Assurance Holdings, Inc. for the six months ended June 30, 2014 and 2013, should be read in conjunction with the, Health Revenue Assurance Holdings' financial statements, and the notes to those financial statements that are included elsewhere in this Quarterly Report. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the Cautionary Notice Regarding Forward-Looking Statements in this Quarterly Report. We use words such as "anticipate," "estimate," "plan," "project," "continuing," "on going," "expect," "believe," "intend," "may," "will," "should," "could," and similar expressions to identify forward-looking statements. Overview

Health Revenue 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. 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 item has 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. Presently, ICD-10 is scheduled to take effect on October 1, 2015 as a result of April 2014 legislation, although that date could be extended by further legislation or by the HHS. 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. However, our customers may anticipate further delays and thereby delay their engaging us for consulting services. 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 the entire 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. 20 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, and 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. 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.



Change in Officers and Directors

On March 26, 2014, the Company notified Dean Boyer, its chief technology officer, that the Company was terminating his employment with the Company as well as that certain employment agreement with the Company dated October 1, 2013, as amended on November 13, 2013, effective March 31, 2014.

On April 2, 2014 and April 4, 2014, respectively, directors Mitchell D. Kaye and David Kroin resigned from the board of directors.

On April 15, 2014, the Company notified Joseph Brophy, its senior vice president of operations that the Company was terminating his employment with the Company as well as that certain letter agreement, dated December 5, 2012, both effective April 25, 2014. On April 16, 2014, Tim Lankes resigned as the Chief Executive Officer and as a member of the board of directors. Mr. Lankes did not serve on any committees or hold any other positions in the Company.



On April 18, 2014, Mr. Evan McKeown resigned as Chief Financial and Accounting Officer of the Company.

On April 22, 2014, the board of directors of Health Revenue Assurance Holdings, Inc. appointed Mr. Todd Willis as its interim Chief Executive Officer. Since October 2013, Mr. Willis has served as the Senior Vice President of the Company's Coding Business Unit.



On April 29, 2014, the board of directors of Health Revenue Assurance Holdings, Inc. appointed Gina Hicks as its interim Chief Financial Officer.

On June 27, 2014, Ms. Andrea Clark-Rubinowitz resigned as a Chief Visionary Officer of Health Revenue Assurance Holdings, Inc. Ms. Clark-Rubinowitz also resigned as a director of the Company.

On July 28, 2014, the three-month Employment Agreement entered into between the Company and Gina Hicks, the Company's then interim Chief Financial Officer, expired.

21 Three months ended June 30, 2014 compared to June 30, 2013 Results of Operations



The following table presents a summary of operating information for the three months ended June 30, 2014 and 2013:

For the Three Months Ended Increase/ Increase/ June 30, June 30, (Decrease) (Decrease) 2014 2013 $ % Revenue $ 1,517,785$ 2,067,464$ (549,679 ) (26.59 )% Cost of revenues 882,608 975,632 (93,024 ) (9.53 )% Gross profit 635,177 1,091,832 (456,655 ) (41.82 )%

Selling and administrative expenses 1,861,052 1,941,675 (80,623 ) (4.15 )% Depreciation and amortization 19,886 19,169 717 3.74 % Total operating expenses 1,880,938 1,960,844 (79,906 ) (4.08 )% Operating income (loss) (1,245,761 ) (869,012 ) (376,749 ) 43.35 % Other income (expense), net 3,235,761 (228,049 )

3,463,810 (1518.89 )% Net Income (Loss) $ 1,990,000$ (1,097,061 )$ 3,087,061 (281.39 )% Revenue: Revenue decreased by approximately $549,700 or 26.6%, from approximately $2,067,500 for the three months ended June 30, 2013 to approximately $1,517,800 for the three months ended June 30, 2014. The decrease in revenue was due primarily to reductions in education and coding consulting services partially attributable the deceleration in the service demand due to the delay in the implementation of ICD-10 and lower utilization rates for coding services. Cost of Revenues: Cost of revenues decreased by approximately $93,000 or 9.5%, from approximately $975,600 for the three months ended June 30, 2013 to approximately $882,600 for the three months ended June 30, 2014. The decrease in cost was due primarily to decreased salaries resulting from a decrease in headcount and execution of cost savings initiatives which we began implementing at the end of April 2014. Gross profit: Gross profit decreased by approximately $456,700, or 41.8%, from approximately $1,091,800 for the three months ended June 30, 2013 to approximately $635,200 for the three months ended June 30, 2014. The decrease in gross profit is primarily attributable to declines in education, consulting services, net of cost reduction resulting from the implementation of cost savings initiatives.



Selling and Administrative Expenses:

Selling and administrative expenses were approximately $1,861,000 for the three months ended June 30, 2014, a decrease of approximately $80,700 or 4.2%, from approximately $1,941,700 for the three months ended June 30, 2013. The change in the 2014 period compared to the 2013 period was primarily due to:



? Personnel costs have decreased by approximately $379,900 or 35.5%, from

approximately $1,071,700 for the three months ended June 30, 2013 to

approximately $691,800 for the three months ended June 30, 2014. The

reduction in personnel costs represents the majority of the total decrease

and is due primarily to savings in compensation and related expenses

associated with reductions in workforce, including executive management,

sales and administrative staff, made in conjunction with cost saving

initiatives implemented during the three months ended June 30, 2014.

However, these reductions were offset by severance charges of approximately

$295,700 for former executive officers. 22



? Consulting and professional fees have increased from approximately $125,100

for the three months ended June 30, 2013 to approximately $526,600 for the

three months ended June 30, 2014, an increase of approximately $401,500,

representing the majority of the total increase. Consulting fees increased

approximately $282,400 due to the amortization of stock compensation for

investor relations and business developments services. Other professional

fees increased approximately $9,300 are primarily attributable to increased

accounting, including an evaluation of the Company's internal control review

services and tax related services. Legal fees increased approximately $109,900 and are primarily attributable to increased legal services primarily incurred in April of 2014.



? The increase in selling and administrative expenses is partially offset by

decreases in travel, stock compensation expense, and marketing expenses.

The Company is currently conducting a cost reduction initiative to improve efficiencies, reduce costs, and streamline and focus its efforts on its profitable business services including strategic workforce reductions and consolidating its real estate facilities.

Depreciation and Amortization Expenses:

Depreciation and amortization expenses were approximately $19,900 for the three months ended June 30, 2014, an increase of approximately $700, or 3.7%, from approximately $19,200 for the three months ended June 30, 2013. The decrease was primarily due to amortization for the Visualizer software product that was

fully impaired in September 2013.



Interest Expense (included in other expenses, net):

Interest Expense was approximately $185,100 for the three months ended June 30, 2014, a decrease of approximately $43,600, from approximately $228,700 for the three months ended June 30, 2013. The decrease in interest expense is primarily to debt modifications and conversion to common stock which took place in the August 2013 resulting in decreased in interest paid on notes.



Change in Fair Value of Warrant Liability:

The warrants are subject to re-measurement at each balance sheet date, with any change in fair value recognized as a component of other income (expense), net in the statements of operations. We estimate the fair value of these warrants at the respective balance sheet dates, based on the estimated market value of the underlying common stock at the valuation measurement date, the remaining contractual term of the warrant, risk-free interest rates and expected dividends and expected volatility of the price of the underlying common stock. For the three months ended June 30, 2014 approximately $3,420,900 gain in fair value of warrant liability was recorded attributable to re-measurement. The resulting decrease in the warrant liability is primarily due to the decrease in the market value of the Company's common stock from a closing price of $0.20 per share at March 31, 2014 to a closing price of $0.04 per share at June 30, 2014. If the Company's common stock closing price at September 30, 2014 or future periods is higher than the closing price at June 30, 2014, the Company may record a non-cash loss from change in fair value of warrant liability which may be material. Conversely, if the Company's common stock closing price at June 30, 2014 is lower than the closing price at September 30, 2014 or future periods, the Company may record a non-cash gain from change in fair value of warrant liability which may be material. Net Income (Loss):

As a result of the above factors, a net income of approximately $1,990,000 was recognized for the three months ended June 30, 2014 as compared to net loss of approximately $1,097,100 for the three months ended June 30, 2013, an increase of approximately $3,087,100 or over 280%. The increase in net income is primarily attributable to the gain in fair value of warrant liability. 23 Six months ended June 30, 2014 compared to June 30, 2013 Results of Operations



The following table presents a summary of operating information for the six months ended June 30, 2014 and 2013:

For the Six Months Ended Increase/ Increase/ June 30, June 30, (Decrease) (Decrease) 2014 2013 $ % Revenue $ 3,395,183$ 4,224,061$ (828,878 ) (19.62 )% Cost of revenues 2,022,325 1,960,952 61,373 3.13 % Gross profit 1,372,858 2,263,109 (890,251 ) (39.34 )%

Selling and administrative expenses 3,827,664 3,386,371 441,293 13.03 % Depreciation and amortization 39,707 44,598 (4,891 ) (10.97 )% Total operating expenses 3,867,371 3,430,969 436,402 12.72 % Operating income (loss) (2,494,513 ) (1,167,860 ) (1,326,653 ) 113.60 % Other income (expense), net 4,348,445 (364,028 )

4,712,473 (1294.54 )% Net Income (Loss) $ 1,853,932$ (1,531,888 )$ 3,385,820 (221.02 )% Revenue: Revenue decreased by approximately $828,900 or 19.6%, from approximately $4,224,100 for the six months ended June 31, 2013 to approximately $3,395,200 for the six months ended June 30, 2014. The decrease in revenue was due primarily to reductions in education and coding consulting services partially attributable the deceleration in the service demand due to the delay in the implementation of ICD-10 and lower utilization rates for coding services. Cost of Revenues: Cost of revenues increased by approximately $61,400 or 3.1%, from approximately $1,960,900 for the six months ended June 30, 2013 to approximately $2,022,300 for the six months ended June 30, 2014. The increase in cost was due primarily to the salaries, training and related employee costs for hiring of additional experienced coding and audit/consulting service personnel to service the anticipated growth in contracts from the ICD-10 implementation net of decreases in salaries resulting from a decrease in headcount and accomplishment of cost savings initiatives made during the second quarter of 2014. Gross profit: Gross profit decreased by approximately $890,300, or 39.3%, from approximately $2,263,100 for the six months ended June 30, 2013 to approximately $1,372,800 for the six months ended June 30, 2014. The decrease in gross profit is primarily attributable to declines in education, consulting services, and coding revenues and a net increase in employee costs.



Selling and Administrative Expenses:

Selling and administrative expenses were approximately $3,827,700 for the six months ended June 30, 2014, an increase of approximately $441,300 or 13.0%, from approximately $3,386,400 for the six months ended June 30, 2013. The net change in the 2014 period compared to the 2013 period was primarily due to: ? Personnel costs have increased by approximately $120,100 or 7.0%, from approximately $1,733,600 for the six months ended June 30, 2013 to



approximately $1,853,700 for the six months ended June 30, 2014. Increased

personnel costs represents severance settlement accrual for two officers in

the amount of $295,700 offset by reduced compensation and related expenses

associated with workforce reductions, including executive management, sales

and administrative staff, made in conjunction with cost saving initiatives

implemented during the second quarter of 2014. 24



? Consulting and professional fees have increased from approximately $239,400

for the six months ended June 30, 2013 to approximately $1,102,600 for the

six months ended June 30, 2014, an increase of approximately $863,200,

representing the majority of the total increase. Consulting fees increased

approximately $647,400 due to the amortization of stock compensation for

investor relations and business developments services. Other professional

fees increased approximately $54,900 are primarily attributable to increased

accounting, including an evaluation of the Company's internal control review

services and tax related services. Legal fees increased approximately

$160,900 are primarily attributable to increased legal services primarily

incurred in April 2014.



? The increase in selling and administrative expenses is partially offset by

decreases in travel, stock compensation expense, and marketing expenses.

The Company is currently conducting a cost reduction initiative to improve efficiencies, reduce costs, and streamline and focus its efforts on its profitable business services including strategic workforce reductions and consolidating its real estate facilities.

Depreciation and Amortization Expenses:

Depreciation and amortization expenses were approximately $39,700 for the six months ended June 30, 2014, a decrease of approximately $4,900, or 11.0%, from approximately $44,600 for the six months ended June 30, 2013. The decrease was primarily due to amortization for the Visualizer software product that was

fully impaired in September 2013.



Interest Expense (included in other expenses, net):

Interest Expense was approximately $374,300 for the six months ended June 30, 2014, an increase of approximately $9,600, from approximately $364,700 for the six months ended June 30, 2013. The increase in interest expense is primarily due to increase in interest paid on notes and finance charges related to the amortization of debt issue costs.



Change in Fair Value of Warrant Liability:

The warrants are subject to re-measurement at each balance sheet date, with any change in fair value recognized as a component of other income (expense), net in the statements of operations. We estimate the fair value of these warrants at the respective balance sheet dates, based on the estimated market value of the underlying common stock at the valuation measurement date, the remaining contractual term of the warrant, risk-free interest rates and expected dividends and expected volatility of the price of the underlying common stock. For the six months ended June 30, 2014 approximately $4,722,700 gain in fair value of warrant liability was recorded attributable to re-measurement. The resulting decrease in the warrant liability is primarily due to the decrease in the market value of the Company's common stock from a closing price of $0.25 per share at December 31, 2013 to a closing price of $0.04 per share at June 30, 2014. If the Company's common stock closing price at September 30, 2014 or future periods is higher than the closing price at June 30, 2014, the Company may record a non-cash loss from change in fair value of warrant liability which may be material. Conversely, if the Company's common stock closing price at September 30, 2014 or future periods is lower than the closing price at June 30, 2014, the Company may record a non-cash gain from change in fair value of warrant liability which may be material. Net Income (loss):

As a result of the above factors, a net income of approximately $1,854,000 was recognized for the six months ended June 30, 2014 as compared to net loss of approximately $1,531,900 for the six months ended June 30, 2013, an increase of approximately $3,385,900 or over 220.0%. The increase in net income is primarily attributable to the gain in fair value of warrant liability.



Liquidity and Capital Resources

For the Six Months Ended June 30, 2014June 30, 2013

Net Cash used in operating activities $ (1,849,104 )$ (1,086,450 ) Net Cash used in investing activities (2,164 ) (689,104 ) Net Cash (used in) provided by financing activities (423,887 ) 1,053,279 $ (2,275,155 )$ (722,275 ) 25

Net cash used in operating activities was approximately $1,849,100 for the six months ended June 30, 2014 compared to $1,086,500 for the same period in 2013. For the six months ended June 30, 2014, net cash used by operating activities consisted primarily of net income allocable to common stockholders of approximately $1,085,800 increased by non-cash adjustments of approximately $4,722,700 for the gain from change in fair market value of warrants offset by $689,900 of amortization of prepaid shares issued for services, $547,600 of accretion of series A redeemable convertible preferred stock redemption value differential, $220,600 of cumulative series a redeemable convertible preferred stock dividend, $203,300 of amortization of debt discount, $39,700 of depreciation and amortization, net loss on disposal of assets in the amount of $23,900 and $3,900 of net stock compensation expense. Additionally, changes in working capital approximately of $5,900 decreased the net cash used in operating activities. For the six months ended June 30, 2013, net cash used by operating activities consisted primarily of net loss allocable to common stockholders of approximately $1,531,900 offset by non-cash adjustments of approximately $209,900 of amortization of debt discount, $44,600 depreciation, and $70,000 of shares issued for services, and $6,450 of bad debt expense. Additionally, changes in working capital approximately $114,400 increased the net cash provided by operating activities. Net cash used in investing activities was approximately $2,200 for the six months ended June 30, 2014 compared to $689,100 for the same period in 2013. Net cash used in investing activities for six months ended June 30, 2014 of approximately $2,200 was provided by disposal of furniture and computer equipment. Net cash used in investing activities for the six months ended June 30, 2013 of approximately $689,100 represent the cost of internally developed software. Net cash used in financing activities was approximately $423,900 for the six months ended June 30, 2014 compared to cash provided by financing activities of $1,053,300 for the same period in 2013. Net cash used by financing activities amounted to approximately $423,900 for the six months ended June 30, 2014, and relates to the repayment of debt obligations. Net cash provided by financing activities in the six months ended June 30, 2013, of approximately $1,053,300, is attributable to approximately $383,100, the proceeds from notes payable net of debt repayments, $618,000 issuance of common stock offset by $92,200 of settlement payments and net repayments on line of credit. June 30, December 31, 2014 2013 Cash $ 778,330$ 3,053,485 Total Assets $ 2,162,064$ 5,428,951 Percentage of total assets 36 % 56 % As of August 11, 2014, the Company had a cash balance of approximately $282,000. As of August 11, 2014, the Company owed approximately $427,000 of notes payable due through February 2015, capital lease debt of approximately $39,800 due through 2016, mortgage debt of $171,100, and line of credit debt of $39,700. As of August 11, 2014, the Company's term loan balance was approximately $119,400, required monthly principal and interest payments of approximately $4,000, contains restrictive covenants prohibiting the granting any security interests or liens on the Company's assets. Under the Company's automatically renewing factoring agreement it assigns the collection rights of its receivables to a finance company in exchange for an advance rate of 85% of face value. (See Note 8 to our unaudited consolidated financial statements contained herein for factoring activity and related balances.) Although the Company was current in its debt payments as of June 30, 2014, management believes the Company may be in default of certain non-financial covenants. Default provisions were likely triggered since the Company's wholly owned operating subsidiary, Health Revenue Assurance Associates, Inc. filed a petition for relief under Chapter 11 of the federal bankruptcy laws in the United States Bankruptcy Court for the Southern District of Florida on August 11, 2014, as described below. The Company has not been notified of any defaults. 26



Petition under Chapter 11 of the U.S. Bankruptcy Code.

On July 31, 2014, the Company's Board of Directors, after consulting with its management and reorganization attorney, directed management to file a petition under Chapter 11 of the U.S. Bankruptcy Code (the "Bankruptcy Code") subject to any change in the final recommendation of the reorganization attorney. On August 11, 2014 (the "Petition Date"), as described above, the Company's wholly owned operating subsidiary, Health Revenue Assurance Associates Inc. (the "Company's Subsidiary"), filed a petition for relief under Chapter 11 of the federal bankruptcy laws in the United States Bankruptcy Court for the Southern District of Florida (the Bankruptcy Court") as administered as Case No. 14-28030-RBR. The Company's Subsidiary continues to operate its business as "debtor-in-possession" under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of Chapter 11 and orders of the Bankruptcy Court. Under Chapter 11, certain claims against the Company's Subsidiary in existence before the filing of the petition for relief under the federal bankruptcy laws are stayed while the Company's subsidiary continues business operations as debtor-in-possession. Additional claims (liabilities subject to compromise) may arise after the Petition Date resulting from rejection of executory contracts, including leases, and from determination by the Bankruptcy Court of allowed claims for contingencies and other disputed amounts. Claims secured by the Company's Subsidiary assets (secured claims) also are stayed, although the holders of such claims have the right to move the Bankruptcy Court for relief from stay. As part of the Chapter 11 Case and as discussed further below, the Company's Subsidiary's goal is to develop and implement a Chapter 11 plan that meets the standards for confirmation under the Bankruptcy Code. This includes a plan to either sell all or a portion of the Company's Subsidiary's assets pursuant to Section 363 of the Bankruptcy Code or to seek confirmation of a Chapter 11 reorganization plan providing for another arrangement. The confirmation of a Chapter 11 reorganization plan or a sale pursuant to Section 363 of the Bankruptcy code could materially alter the classifications and amounts reported in the accompanying unaudited consolidated financial statements, which do not give effect to any adjustments to the carrying values of assets or amounts of liabilities that might be necessary as a consequence of confirmation of a Chapter 11 plan or other arrangement or the effect of any operational changes that may be implemented. Under Section 362 of the Bankruptcy Code, the filing of voluntary bankruptcy petitions by the Company's Subsidiary automatically stayed most actions against the Company's Subsidiary, including most actions to collect indebtedness incurred prior to the Petition Date or to exercise control over the Company's Subsidiary property. Accordingly, although the Company defaulted on certain of the Company's Subsidiary's debt obligations, creditors are stayed from taking any actions as a result of such defaults. Absent an order of the Bankruptcy Court, substantially all of the Company's Subsidiary's pre-petition liabilities are subject to settlement under a reorganization plan or in connection with a Section 363 sale. As a result of the Bankruptcy Filing the realization of assets and the satisfaction of liabilities are subject to uncertainty. The Company's Subsidiary, operating as debtor-in-possession under the Bankruptcy Code, may, subject to approval of the Bankruptcy Court, sell or otherwise dispose of assets and liquidate or settle liabilities for amounts other than those reflected in the accompanying unaudited consolidated financial statements. Further, a confirmed reorganization plan or other arrangement may materially change the amounts and classifications in the accompanying unaudited consolidated financial statements.

Subsequent to the Petition Date, the Company's Subsidiary received approval from the Bankruptcy Court to pay or otherwise honor certain pre-petition obligations generally designed to stabilize the Company's Subsidiary's operations. These obligations related to certain employee wages, salaries and benefits, and the payment of vendors and other providers in the ordinary course for goods and services received after the Petition Date. The Company's Subsidiary has retained, pursuant to Bankruptcy Court approval, legal and financial professionals to advise the Company's Subsidiary in connection with the Bankruptcy Filing and certain other professionals to provide services and advice in the ordinary course of business. From time to time, the Company's Subsidiary may seek Bankruptcy Court approval to retain additional professionals. In order for the Company's Subsidiary to emerge successfully from Chapter 11, the Company's Subsidiary may determine that it is in the best interests of the Debtor' estates to seek Bankruptcy Court approval of a sale of all or a portion of the Company's Subsidiary's assets pursuant to Section 363 of the Bankruptcy Code or seek confirmation of a reorganization plan providing for such a sale or other arrangement. The Company's Subsidiary's ability to obtain such approval and financing will depend on, among other things, the timing and outcome of various ongoing matters related to the Bankruptcy Filing. A Section 363 Sale or a reorganization plan determines the rights and satisfaction of claims of various creditors and security holders, and is subject to the ultimate outcome of negotiations and Bankruptcy Court decisions ongoing through the date on which the reorganization plan is confirmed. The Company's Subsidiary presently expects that any proposed reorganization plan or Section 363 Sale will provide, among other things, mechanisms for settlement of claims against the Debtor' estates, treatment of the Company's Subsidiary's existing equity and debt holders, and certain corporate governance and administrative matters pertaining to the reorganized Company. Any proposed reorganization plan will be subject to revision prior to submission to the Bankruptcy Court based upon discussions with the Company's Subsidiary's creditors and other interested parties, and thereafter in response to creditor claims and objections and the requirements of the Bankruptcy Code or the Bankruptcy Court. There can be no assurance that the Company's Subsidiary will be able to secure approval for the Company's Subsidiary's proposed reorganization plan from the Bankruptcy Court or that the Company's Subsidiary's proposed plan will be accepted by its lenders. In the event the Company's Subsidiary does not secure approval of the reorganization plan, the outstanding principal and interest could become immediately due and payable. The accompanying unaudited consolidated financial statements have been prepared assuming that the Company's Subsidiary will continue as a going concern and contemplate the realization of assets and the satisfaction of liabilities in the normal course of business. The Company's Subsidiary's ability to continue as a going concern is contingent upon the Bankruptcy Court's approval of the Company's Subsidiary's reorganization plan or Section 363 Sale and the Company's Subsidiary's ability to successfully implement the Company's Subsidiary's plan and obtain exit financing, among other factors. As a result of the Chapter 11 Case, the realization of assets and the satisfaction of liabilities are subject to uncertainty. While operating as debtor-in-possession under Chapter 11, the Company's Subsidiary may sell or otherwise dispose of or liquidate assets or settle liabilities, subject to the approval of the Bankruptcy Court or as otherwise permitted in the ordinary course of business, for amounts other than those reflected in the accompanying unaudited consolidated financial statements. Further, the reorganization plan could materially change the amounts and classifications of assets and liabilities reported in the unaudited consolidated financial statements. The accompanying unaudited consolidated financial statements do not include any adjustments related to the recoverability and classification of assets or the amounts and classification of liabilities or any other adjustments that might be necessary should the Company's Subsidiary be unable to continue as a going concern or as a consequence of the Chapter 11

Case. 27 Trends and Uncertainties In 2014, we have encountered a series of resignations and other events, which may affect our future results of operations. In addition to the resignations in April of our former chief executive officer and chief financial officer, other employees resigned. Claims have been made for severance, which in at least three instances seem unwarranted. As of the date of this report, it is not feasible to quantify our exposure. We have been advised by our bankruptcy attorney that these claims for severance are subordinate to any secured creditor. Going Concern As of June 30, 2014, the Company had a working capital deficiency, stockholders' deficit and accumulated deficit of approximately $443,000, $3,065,000, and $9,666,000, respectively, for the six months ended June 30, 2014, incurred a net operating loss of approximately $2,495,000, and has used net cash in operations of approximately $1,849,000. As of June 30, 2014, the Company has a cash balance of approximately $778,000. The Company had not been able to generate sufficient cash from operating activities to fund its on-going operations. There is no guarantee that the Company will be able to generate enough revenue and/or raise capital to support its operations. These factors raise substantial doubt about the Company's ability to continue as a going concern. The Company's future success is dependent upon its ability to achieve profitable operations and generate cash from operating activities, and upon additional financing. 28



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. Principles of Consolidation



The unaudited 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 Initiator 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. 29 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 of loss on assets held for sale, valuation and amortization period of software, valuation of beneficial conversion features in convertible debt, valuation of equity based instruments issued for other than cash, revenue recognition, and the valuation allowance on deferred tax assets. Revenue Recognition



The Company recognizes 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. 30 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.



Recent Accounting Pronouncements

See Note 2 to our unaudited consolidated financial statements regarding recent accounting pronouncements.

Cautionary Note Regarding Forward-Looking Statements

This report includes forward-looking statements including statements regarding liquidity and expectations from the filing of the Petition.

The words "believe," "may," "estimate," "continue," "anticipate," "intend," "should," "plan," "could," "target," "potential," "is likely," "will," "expect" and similar expressions, as they relate to us, are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. The results anticipated by any or all of these forward-looking statements might not occur. Important factors that could cause actual results to differ from those in the forward-looking statements include the filing of the Petition distracting management and draining our cash. Further information on our risk factors is contained in our filings with the SEC, including our Annual Report on Form 10-K filed on April 15, 2014 and the Prospectus dated May 16, 2014. We undertake no obligation to publicly update or revise any forward-looking statements, whether as the result of new information, future events or otherwise. 31


For more stories on investments and markets, please see HispanicBusiness' Finance Channel



Source: Edgar Glimpses


Story Tools






HispanicBusiness.com Facebook Linkedin Twitter RSS Feed Email Alerts & Newsletters