The accompanying notes are an integral part of these condensed
financial statements.
The accompanying notes are an integral part of these condensed
financial statements.
The accompanying notes are an integral part
of these condensed financial statements.
The accompanying notes are an integral part of these condensed
financial statements.
The accompanying notes are an integral part of these condensed
financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of September 30, 2013 and June 30,
2013 and for the Three Months Ended September 30, 2013 and September 30, 2012
|
1.
|
Description of Business
|
Selway Capital Acquisition Corporation
(“SCAC” or “Selway”) was originally incorporated under the laws of Delaware on January 12, 2011 for the
purpose of acquiring one or more operating businesses through merger or capital stock exchange. On January 25, 2013, an agreement
and plan of merger (the “Merger”) was entered into between SCAC and Healthcare Corporation of America (“HCCA”).
The Merger closed on April 10, 2013 with SCAC being the surviving entity upon the consummation of the Merger (see Note 3).
HCCA and its wholly-owned subsidiaries,
Prescription Corporation of America Benefits (“PCA Benefits”) and Prescription Corporation of America (“PCA”),
are engaged in providing benefits management and mail order pharmaceutical fulfillment services to companies primarily in the northeast
United States.
On June 3, 2013, SCAC amended its articles
of incorporation to change its name to Healthcare Corporation of America (collectively with its subsidiaries, the “Company”).
On April 22, 2013, the Company’s
board of directors approved the change of its fiscal year end from December 31 to June 30.
On November 7, 2013, the board of directors
approved the change of its fiscal year end back to December 31.
The accompanying historical consolidated
financial statements represent the financial position and results of operations of HCCA through April 10, 2013 and the financial
position and results of operations of the Company thereafter (See Note 3).
|
2.
|
Liquidity and Financial Condition
|
The Company has
a working capital deficit and a history of recurring losses and negative cash flows from operating activities. As of September
30, 2013 and June 30, 2013, the Company has a working capital deficit of $5,855,898 and $3,640,546, respectively and stockholders’
deficit of $10,655,707 and $8,281,522, respectively. During the three months ended September 30, 2013 and the six months ended
June 30, 2013, the Company incurred net losses of $4,703,100 and $14,066,292, respectively, and negative cash flows from operating
activities of $2,344,942 and $4,784,185, respectively.
Collectively, these factors raise substantial
doubt about the Company’s ability to continue as a going concern.
The Company is currently making efforts
to raise capital in the form of debt and/or equity. No assurance can be given that the debt and/or equity can be raised and if
available it will be on terms acceptable to the Company.
The accompanying consolidated financial
statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount
and classification of liabilities that might result should the Company be unable to continue as a going concern. The ability of
the Company to continue as a going concern is dependent upon adequate capital to fund operating losses until it becomes profitable.
If the Company is unable to obtain adequate capital, it could be forced to cease operations.
On January 25, 2013, an Agreement and Plan
of Merger (the “Agreement”) was entered into by and among the Company, Selway Merger Sub, Inc., a New Jersey corporation
and wholly owned subsidiary of the Company (“Merger Sub”), HCCA, PCA, and representatives of HCCA and the Company.
On April 10, 2013 (the “Closing Date”), the Merger and other transactions contemplated by the Agreement closed.
Pursuant to the Agreement, Merger Sub merged
with and into HCCA, resulting in HCCA becoming a wholly owned subsidiary of the Company. PCA and PCA Benefits, a dormant entity,
remain wholly owned subsidiaries of HCCA.
HEALTHCARE CORPORATION OF AMERICA
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
As of September 30, 2013 and June 30,
2013 and for the Three Months Ended September 30, 2013 and September 30, 2012
3. The Merger (Continued)
Holders of all of the issued and outstanding
shares of common stock of HCCA immediately prior to the time of the Merger had each of their shares of common stock of HCCA converted
into the right to receive: (i) a proportional amount of 5,200,000 shares of the Company’s Series C common stock and promissory
notes with an aggregate face value of $7,500,000 (collectively, the “Closing Payment”); plus (ii) a proportional amount
of up to 2,800,000 shares of the Company’s common stock, if any, (the “Earn-out Payment Shares”) issuable upon
the Company achieving certain consolidated gross revenue thresholds as more fully described below; plus (iii) the right to receive
a proportional amount of the proceeds from the exercise of certain warrants being issued to Selway Capital Holdings, LLC, Selway’s
sponsor, as more fully described below. A portion of the Closing Payment (520,000 shares and promissory notes with an aggregate
face value of $750,000) was being held in escrow for a period of 12 months following the Merger to satisfy indemnification obligations
of HCCA. Effective December 20, 2013, the escrowed portion of the Closing Payment, together with a portion of the shares issued
to HCCA’s investment banking advisor (an aggregate of 546,002 shares, and promissory notes with an aggregate face value of
$750,000) were released from escrow and cancelled.
The promissory notes included in the Closing
Payment are non-interest bearing and subordinated to all senior debt of the combined company in the event of a default under such
senior debt. The notes will be repaid from 18.5% of the Company’s free cash-flow (as defined) in excess of $2,000,000. The
Company will be obligated to repay such notes if, among other events, there is a transaction that results in a change of control
of the Company. The Company valued the notes at $1,977,570, which represented the present value of the estimated future cash flows
to be generated by the combined companies discounted using an interest rate reflective of the uncertainty and credit risk of the
notes.
Certain members of HCCA’s management
received an aggregate of 1,500,000 shares of our common stock (the
“Management Incentive Shares”),
which shares were placed in escrow and subject to release in three installments through June 30, 2015. Subsequently, certain members
of HCCA management agreed to cancel an aggregate of 750,000 shares pursuant to rescission agreements entered into June 2013. Of
the remaining Management Incentive Shares outstanding, 400,000 shares have vested but remain in escrow until June 30, 2014 and
350,000 shares will vest on June 30, 2015 and will remain in escrow until June 30, 2015.
As part of the Merger, Selway’s net
liabilities, consisting primarily of warrant liabilities, were assumed. As part of its Initial Public Offering, Selway issued 2,000,000
warrants, with an exercise price of $7.50 and an expiration date of November 6, 2016 (“Selway IPO Warrants”). These
warrants are classified as liabilities based on certain anti-dilution features. The Selway IPO Warrants were recorded at $4,018,000
based on the closing price of the warrants on the date of Merger.
The Earn-out Payment Shares, if any, will
be issued as follows: (i) 1,400,000 shares if the Company achieves consolidated gross revenue of $150,000,000 for the twelve months
ended March 31, 2014 or June 30, 2014; and (ii) 1,400,000 shares if the Company achieves consolidated gross revenue of $300,000,000
for the twelve months ended March 31, 2015 or June 30, 2015. In the event the Company does not achieve the first earn-out threshold,
but does achieve the second earn-out threshold, then all of the Earn-out Payment Shares shall be issued. If the Company consolidates,
merges or transfers substantially all of its assets prior to June 30, 2015 at a valuation of at least $15.00 per share, then all
of the Earn-out Payment Shares not previously paid out shall be issued immediately prior to such transaction. If, prior to achieving
either earn-out threshold the Company acquires another business in exchange for its equity or debt securities, then any remaining
earn-out thresholds may be adjusted by the independent members of the Company’s board of directors at their sole discretion.
The Company estimates that it will not achieve any of the abovementioned revenue targets and therefore no provision has been made
for the Earn-out Payment Shares.
The Agreement required 10% of the consideration,
or 520,000 shares of the Company’s Series C common stock and promissory notes with a face value of $750,000 to be held in
escrow for a period of one year. As a result of the investigation and subsequent restatement, in December 2013 these shares of
stock and promissory notes were returned to the Company. Also in December 2013, the rights to additional proceeds from the exercise
of certain warrants issued to Selway Capital Holdings, LLC as part of the merger were cancelled.
In connection with a bridge financing (the
“Bridge Financing”) completed by HCCA in September 2012, HCCA issued 59.25 units, each unit consisted of 10,000 Convertible
Preferred Shares, a warrant for 5,000 shares of common stock that, upon a merger with Selway, converted to warrants with the same
terms as Selway IPO warrants and a Promissory Note with a face value of $100,000 (“Promissory Notes”). At the time
of the Merger, holders of all of the issued and outstanding shares of preferred stock of HCCA, by virtue of the Merger, had each
of their shares of Preferred Stock of HCCA converted into the right to receive a proportional amount of 592,500 shares of the Company’s
Series C common stock and warrants to purchase 296,250 shares of the Company’s Series C common stock. If a Merger with Selway
or equivalent, as defined in the Preferred Stockholder agreement, occurred before the maturity date of the promissory notes, the
preferred stock converted on a 1 to 1 basis into Series C Common Stock of Selway. If such Merger did not occur, then at the maturity
of the Promissory Notes, the Preferred Stock converted into 3.7% of common stock of HCCA on a fully diluted basis. Upon issuing
the preferred stock, HCCA determined the contingent beneficial conversion feature to the holders of the Preferred Stock if the
Merger with Selway occurred to be $3,532,858 and recorded that as a deemed dividend to the Preferred Stockholders upon the closing
of the Merger.
HEALTHCARE CORPORATION OF AMERICA
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
As of September 30, 2013 and June 30,
2013 and for the Three Months Ended September 30, 2013 and September
The warrants issued in connection with
the bridge loan were initially exercisable at $7.50 into shares of common stock of HCCA and expired on November 7, 2016. The warrants
contained certain anti-dilution that caused them to be classified as liabilities. Upon completion of the Merger with Selway, the
warrants became exercisable in Series C shares of Common Stock of Selway. The exercise price and expiration date remained the same.
The Promissory Notes bore interest at 8%,
were convertible into 10,000 shares of Series C Common Stock if a transaction with Selway occurred and matured on the earlier of
a transaction with Selway or September 12, 2013. HCCA allocated the value received from the sale of the units first to the estimated
fair value of warrants. The residual value was then allocated to the preferred stock and promissory note based on their relative
fair values. As a result of the allocation, HCCA recorded a debt discount of $2,445,242. The debt discount was amortized to interest
expense over the term of the Promissory Note. HCCA recorded interest expense of $1,732,047, including $1,018,851 to recognize the
unamortized debt discount at the transaction date in the period ending June 30, 2013. HCCA recorded interest expense of $713,196
related amortization of the debt discount in the year ended December 31, 2012. Upon issuing the promissory notes, HCCA determined
the contingent beneficial conversion feature to the holders of the Promissory Notes, if they converted into shares of Selway and
recorded additionally $1,182,327, as additional interest expense upon the conversion of the promissory notes. In accordance with
the terms of the promissory notes issued in the Bridge Financing, at the time of the Merger, notes in the aggregate amount of $3,159,624
(including principal and interest accrued to date) were converted into 315,959 shares of the Company’s Series C common stock
and notes in the aggregate principal amount of $3,025,000 were repaid in full. The promissory note included in the Bridge Financing
was only convertible into shares of common stock if the transaction with Selway closed before the maturity of the note. At the
issuance of the Bridge Financing, the Company determined that a contingent beneficial conversion feature existed representing the
difference in the value of the underlying shares and the allocated value to the promissory note. Upon closing of the transaction,
the Company recognized the contingent beneficial conversion feature and recorded $1,182,327 as additional interest expense in the
period ended June 30, 2013.
In connection with the Bridge Financing,
HCCA executed a registration rights agreement that required it to register the shares underlying the Bridge Financing if the transaction
was completed. The agreement required HCCA to file a registration statement within 60 days of the completion of the transaction
with Selway and have the registration statement declared effective within 120 days. The agreement requires damages of 1% per month
of the Bridge Financing, capped at 10%, for each month the Company does not comply with the requirement. As a result of the restatements
and investigation (see the Company’s financial statements for the six month period ending June 30, 2013), the Company concludes
that it is probable it will not file a registration statement and have declared within the period required and estimates that it
will incur the maximum damages under the agreement. The Company recorded $592,500 to interest expense for the period ended June
30, 2013. This amount is included in accrued expenses as of September 30, 2013.
In conjunction with the merger of Merger
Sub into HCCA:
|
·
|
The Company entered into exchange agreements with three beneficial holders of HCCA’s bridge
loan who were also beneficial holders of greater than 5% of the Company’s Series A common stock. Pursuant to the exchange
agreements, such holders converted an aggregate of 281,554 shares of the Company’s Series A common stock to the Company’s
Series C common stock. In conjunction with the exchange, such holders were repaid bridge notes in the aggregate principal amount
of $3,025,000.
|
|
·
|
The Company entered into exchange agreements with three beneficial holders of greater than 5% of
the Company’s Series A common stock. Pursuant to the exchange agreements, such holders converted an aggregate of 878,481
shares of the Company’s Series A common stock to the Company’s Series C common stock and received $3.53 per share of
Series A common stock exchanged, or an aggregate of $3,101,038.
|
HEALTHCARE CORPORATION OF AMERICA
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
As
of September 30, 2013 and June 30, 2013 and for the Three Months Ended September 30, 2013 and September
|
·
|
An aggregate of $11,948,361 was released from the Company’s
trust account, reflecting the number of shares of the Company’s Series A common stock that were converted into the Company’s
Series C common stock, of which $237,007 was paid to the underwriters from the Company’s initial public offering. The Company
incurred other costs related to the transaction totaling $577,069 and recorded both these costs and the costs paid to the underwriters
as a reduction to Additional Paid In Capital.
|
|
·
|
The placement warrants held by the Company’s founders
were converted into the right to receive: (i) an aggregate of 100,000 shares of common stock; and (ii) warrants to purchase an
aggregate of 1,000,000 shares of common stock at an exercise price of $10.00 per share. The proceeds from the exercise of the
exchange warrants will be paid: (i) 75% to the holders of all of the issued and outstanding shares of common stock of HCCA immediately
prior to the time of the merger; and (ii) 25% to certain members of HCCA management. The exchange warrants are only exercisable
for cash, may not be exercised on a cashless basis, and must be exercised if the closing price for the combined company’s
common stock exceeds $12.00 per share for 20 trading days in any 30-trading-day period. On November 22, 2013, the Company cancelled
these warrants and issued a new warrant to purchase 1 million shares of common stock. The replacement warrant was recorded to
additional paid in capital. Per the terms of the warrant agreement, the warrant’s initial exercise price was $7.50 per share,
subject to adjustment upon the first subsequent financing of the Company. This financing occurred on December 31, 2013 upon which
the exercise price of this warrant was adjusted from $7.50 to $1.50. The new warrants do not include the provision to share the
exercise proceeds with former shareholders of HCCA or management. The Company will record a charge in the quarter ended December
31, 2013 reflecting the value of the modification to the warrant.
|
Pursuant to an engagement letter
entered into by HCCA with its investment banking adviser, 5% of all consideration received was owed to the adviser. Accordingly
the Company issued 335,000 shares of common stock representing 5% of the common stock and incentive stock, as adjusted, received
by HCCA and issued an incentive note of $500,000 representing 5% of the incentive notes issued to HCCA. The present value of the
incentive note was recorded to additional paid in capital and is included in liabilities assumed.
The business combination of
the Company and HCCA was accounted for as a reverse recapitalization of HCCA, since prior to the merger the Company was a shell
corporation as defined under Rule 12b-2 of the Exchange Act. HCCA was treated as the accounting acquirer in this transaction due
to the following factors:
|
1)
|
HCCA’s management pre-closing remained as the management of the Company post-closing;
|
|
2)
|
The members of the board of directors of HCCA pre-closing represent the majority of directors of
the Company post- closing; and
|
|
3)
|
The majority of shares of the Company post-closing were
still owned by HCCA shareholders, who represented 60% of the Company’s shares outstanding immediately after closing, if
all shares subject to conversion in our post-closing tender offer actually convert to Series C (non-redeemable) common shares,
and 65% of the Company’s shares outstanding if all shares subject to conversion do not convert to Series C shares and opt
to receive their pro rata cash in trust at the time of the post-closing tender offer. Estimates of HCCA’s ownership do not
include shares underlying warrants held by public investors and the Company’s sponsors restricted incentive shares held
by management. However, HCCA shareholders would still have 51% of the Company’s shares post-closing when including shares
underlying warrants and restricted shares and assuming all redeemable shares convert to Series C shares, and 54% of the Company’s
shares post-closing if all shares subject to conversion do not convert to Series C shares and opt to receive their pro rata cash
in trust at the time of the post-closing tender offer.
|
HEALTHCARE CORPORATION OF AMERICA
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
As of September 30, 2013 and June 30, 2013 and for the Three
Months Ended September 30, 2013 and September
|
4.
|
Significant Accounting Policies
|
Basis of Presentation
The accompanying consolidated financial
statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US
GAAP”).
Use of Estimates
The preparation of financial statements
in conformity with accounting principles generally accepted in the United States of America requires management to make estimates
and assumptions that affect the amounts reported in the financial statements including disclosure of contingent assets and liabilities,
at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period and accompanying
notes. The Company’s critical accounting policies are those that are both most important to the Company’s financial
condition and results of operations and require the most difficult, subjective or complex judgments on the part of management in
their application, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Because
of the uncertainty of factors surrounding the estimates or judgments used in the preparation of the financial statements, actual
results could differ from these estimates.
Principles of Consolidation
The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances have been eliminated in consolidation.
Accounts Receivable
Accounts receivable represent amounts owed
to the Company for products sold and services rendered net of an allowance for doubtful accounts. The Company grants unsecured
credit to its customers. The Company continuously monitors the payment performance of its customers to ensure collections and minimize
losses. Management does not believe that significant credit risks exist. An allowance for doubtful accounts is based upon the credit
profiles of specific customers, economic and industry trends and historic payment experience. There is no allowance for doubtful
accounts at September 30, 2013 and June 30, 2013.
Inventory
Inventories consist of finished pharmaceutical
products and are recorded at the lower of cost or market, with the cost determined on a first-in, first-out basis. The Company
periodically reviews the composition of inventory in order to identify obsolete, slow-moving or otherwise non-saleable items. If
non-saleable items are observed and there are no alternate uses for the inventory, the Company will record a write-down to net
realizable value in the period that the decline in values is first recognized.
Rebates
Pharmaceutical manufacturers offer rebates
for selected brand drugs. The Company currently receives these rebates through a third party administrator. The rebates are considered
earned when members (employees of customers) order the drugs. Rebates earned are paid to the Company by the third party administrator
quarterly. Rebates earned are recognized as a reduction to cost of sales. The portion of the rebate payable to customers is simultaneously
recognized as a reduction of revenue. Management evaluates rebates receivable at the end of every reporting period and adjusts
the amount reflected on the accompanying balance sheet to net realizable value. An adjustment is also made to the rebate payable
to customers to correspond with any adjustment that applies to rebates receivable.
Property and Equipment
Property and equipment are stated at cost
less accumulated amortization and depreciation. Leasehold improvements are amortized using the straight-line method over the shorter
of the term of the lease or the estimated useful lives of the assets. Furniture and fixtures are depreciated using the straight-line
method over the estimated useful lives of the assets of 5 years. Computer equipment and software are depreciated using the straight-line
method over the estimated useful lives of the assets, which range from 3 to 5 years.
HEALTHCARE CORPORATION OF AMERICA
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
As of September 30, 2013 and June 30,
2013 and for the Three Months Ended September 30, 2013 and September
4. Significant Accounting Policies
(Continued)
Internal-Use Software Development Costs
The Company capitalizes certain costs associated
with the purchase and/or development of internal-use software, including its website. Generally, external and internal costs incurred
during the application development stage of a project are capitalized. The application development stage of a project generally
includes software design and configuration, coding, testing and installation activities. Training and maintenance costs are expensed
as incurred. Upgrades and enhancements are capitalized if it is probable that such expenditures will result in additional functionality.
Capitalized software costs are amortized using straight-line method over the estimated useful life of the asset, which approximates
3 years.
Long-Lived Assets
Long-lived assets are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. The Company assesses
recoverability by determining whether the net book value of the related asset will be recovered through the projected undiscounted
future cash flows of the asset. If the Company determines that the carrying value of the asset may not be recoverable, it measures
any impairment based on the fair value of the asset as compared to its carrying value. During the three months ended September
30, 2013 and September 30, 2012, the Company did not record any impairment charges.
Investments Held in Trust
The Company applies the provisions of ASC
Topic 320-10,
Investment – Debt and Equity
, to account for investments held in trust, which comprise only of held-to
maturity securities. Held-to-maturity securities are those securities, which the Company has the ability and intent to hold until
maturity. Held-to-maturity securities are recorded at amortized cost on the accompanying balance sheets and adjusted for any amortization
or accretion of premiums or discounts.
Deferred Financing Costs
Costs relating to obtaining debt have been capitalized and amortized
over the term of the related debt using the straight line method. Amortization of deferred financing costs charged to interest
expense was $562,415 and $12,749 in the three months ended September 30, 2013 and September 30, 2012, respectively. The unamortized
balance was $314,691 and $548,394 at September 30, 2013 and June 30, 2013, respectively.
Derivative Financial Instruments
The Company applies the provisions of ASC
Topic 815-40,
Contracts in Entity’s Own Equity
(“ASC Topic 815-40”), under which convertible instruments
and warrants, which contain terms that protect holders from declines in the stock price (reset provisions), may not be exempt from
derivative accounting treatment. As a result, such warrants are recorded as a liability and are revalued at fair value at the end
of each reporting period. Furthermore, under derivative accounting, the warrants are initially recorded at their fair value. If
the fair value of the warrants exceeds the face value of the related debt, the excess is recorded as a change in fair value in
the statement of operations on the issuance date.
Debt Discounts
Debt discounts are amortized using the
effective interest rate method over the term of the related debt. The result achieved using the straight-line method is not materially
different than those which would result using the effective interest method.
HEALTHCARE CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of September 30, 2013 and June 30,
2013 and for the Three Months Ended September 30, 2013 and September 30, 2012
|
4.
|
Significant Accounting Policies (Continued)
|
Share-Based Payments
Share-based payments to employees are measured
at the fair value of the award on the date of grant based on the estimated number of awards that are ultimately expected to vest.
The compensation expense resulting from such awards is recorded over the vesting period of the award in selling, general and administrative
expenses on the accompanying consolidated statements of operations.
Share-based payments to non-employees for
services rendered are recorded at either the fair value of the services rendered, or the fair value of the awards, whichever is
more readily determinable. The expense resulting from such awards is marked to market over the vesting period of the award in selling
general and administrating expenses on the accompanying consolidated statements of operations.
Revenue Recognition
The Company typically enters into annual
renewable agreements with its customers to provide pharmacy benefit management on a fixed price or self-insured basis. The Company
records revenues from all its current contracts with customers gross as the Company acts as principal based on the following factors:
1) the Company has a separate contractual relationship with its customers and with its claims adjudicator to whom the Company pays
the costs of the prescription drugs consumed by its customers (the claims), 2) the Company through its claim adjudicator is responsible
to validate and manage the claims, and 3) the Company bears the credit risk for the amount due from the customers. Revenues are
recorded monthly as earned. The Company also operates a mail order pharmacy that services plan members. All revenues and associated
costs from dispensing drugs by the mail order pharmacy to our plan members, excluding the members’ co-pay are eliminated
as inter-company revenues. Some of the contracts contain terms whereby the Company makes certain financial guarantees regarding
prescription costs. Actual performance is compared to the guaranteed measure throughout the period and accruals are recorded as
an offset to revenue if the Company fails to meet a financial guarantee.
Cost of Sales
Cost of sales includes claim payments for
both fixed- price and self-insured programs, administrative fees paid for processing the claims to the claims adjudicator and,
the cost of prescription drugs of the mail order pharmacy.
Advertising Expenses
Advertising expenses are expensed as incurred
and included in selling, general and administrative expenses on the accompanying statements of operations. Advertising expenses
were approximately $36,787 and $16,951 for the three months ended September 30, 2013 and September 30, 2012 respectively.
Income Taxes
The Company accounts for income taxes using
the liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable
to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in the period that includes the enactment date. A valuation allowance is established when
realization of net deferred tax assets is not considered more likely than not.
HEALTHCARE CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of September 30, 2013 and June 30,
2013 and for the Three Months Ended September 30, 2013 and September 30, 2012
|
4.
|
Significant Accounting Policies (Continued)
|
Income Taxes
(Continued)
Uncertain income tax positions are determined
based upon the likelihood of the positions being sustained upon examination by taxing authorities. The benefit of a tax position
is recognized in the consolidated financial statements in the period during which management believes it is more likely than not
that the position will not be sustained. Income tax positions taken are not offset or aggregated with other positions. Income tax
positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of income tax benefit that
is more than 50 percent likely of being realized if challenged by the applicable taxing authority. The portion of the benefits
associated with income tax positions taken that exceeds the amount measured is reflected as income taxes payable.
The Company recognizes interest related
to uncertain tax positions in interest expense. The Company recognizes penalties related to uncertain tax positions in income tax
expense.
Fair Value Measurements
The Company applies recurring fair value
measurements to its derivative instruments in accordance with ASC 820,
Fair Value Measurements
. In determining fair value,
the Company uses a market approach and incorporates assumptions that market participants would use in pricing the asset or liability,
including assumptions about risk and/or the risks inherent in the inputs to the valuation techniques. These inputs can be readily
observable, market corroborated or generally unobservable internally-developed inputs. Based upon the observability of the inputs
used in these valuation techniques, the Company’s derivative instruments are classified as follows:
Level
1: The fair value of derivative instruments classified as Level 1 is determined by unadjusted quoted market prices in active
markets for identical assets or liabilities that are accessible at the measurement date.
Level
2: The fair value of derivative instruments classified as Level 2 is determined by quoted market prices for similar assets or
liabilities in active markets, quoted market prices in markets that are not active or other inputs that are observable or can be
corroborated by observable market data.
Level
3: The fair value of derivative instruments classified as Level 3 is determined by internally-developed models and methodologies
utilizing significant inputs that are generally less readily observable from objective sources.
The Company’s valuation methodology
for warrants classified as derivative liabilities qualifies as a level 2 fair value measurement since it is determined using internally
developed models and analysis.
At September 30, 2013 the Company had 2,000,000
warrants exercisable into its Class C shares that were issued in connection with Selway’s initial public offering (“Selway
IPO Warrants”). These warrants are publicly traded and are classified as liabilities. Additionally, HCCA issued 296,250 warrants
in connection with the Bridge Financing with identical terms as the Selway IPO Warrants. The Company has valued all of these warrants
as September 30, 2013 based on the closing price of the Selway IPO Warrants. Because the market for the Selway IPO Warrants is
not active, the valuation is classified as a Level 2 measurement. These warrants are exercisable at $7.50 a share and expire on
November 7, 2016.
The table below presents the Company’s
fair value hierarchy for those derivative instruments measured at fair value on a recurring basis as of September, 2013:
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
$
|
-
|
|
|
$
|
3,444,376
|
|
|
$
|
-
|
|
|
$
|
3,444,376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivative liabilities
|
|
$
|
-
|
|
|
$
|
3,444,376
|
|
|
$
|
-
|
|
|
$
|
3,444,376
|
|
HEALTHCARE CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of September 30, 2013 and June 30,
2013 and for the Three Months Ended September 30, 2013 and September 30, 2012
|
4.
|
Significant Accounting Policies (Continued)
|
The table below presents the Company’s
fair value hierarchy for those derivative instruments measured at fair value on a recurring basis as of June 30, 2013:
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
$
|
-
|
|
|
$
|
3,559,188
|
|
|
$
|
|
|
|
$
|
3,559,188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivative liabilities
|
|
$
|
-
|
|
|
$
|
3,559,188
|
|
|
$
|
|
|
|
$
|
3,559,188
|
|
Fair Value of Financial Instruments
The fair values of cash and cash equivalents,
accounts receivable, rebates receivable and accounts payable approximate their carrying values due to the short-term nature of
the instruments. The fair values of long-term debt and revolving loans approximates their carrying value due to their variable
interest rates. The fair value of investments held in trust is not materially different than its carrying value because of the
short-term nature of the investments.
Risks and Concentrations
The Company utilizes the services of a single claims adjudicator.
If there is an adverse situation in this relationship, the Company’s mail order pharmaceutical fulfillment services would
be ineffective until a replacement claims adjudicator was obtained.
Approximately 22% of the Company’s revenues for the three
months ended September 30, 2013 were derived from one customer. Revenues from a different customer accounted for 15% of the Company’s
revenues for the three months ended September 30, 2012. No amounts were due from these customers at September 30, 2103 and June
30, 2013, respectively. In addition, one reseller’s customers accounted for approximately 19% and 14% of the Company’s
revenue for the three months ended September 30, 2013 and September 30, 2012, respectively. Amounts due from the customers represented
61% and 32% of the Company’s accounts receivable at September 30, 2013 and June 30, 2013, respectively.
Cash and Cash Equivalents
The Company considers all cash in bank,
money market funds and certificates of deposit with an original maturity of less than three months to be cash equivalents. The
Company maintains its cash and cash equivalents in one financial institution. Cash balances on hand at this financial institution
may exceed the insurance coverage provided to the Company by the Federal Deposit Insurance Corporation at various times during
the year.
Earnings (Loss) Per Share
Basic earnings (loss) per share is computed
by dividing net income (loss) available to common stockholders by the weighted average number of shares of common stock outstanding
during the period. Diluted earnings (loss) per share are determined in the same manner as basic earnings (loss) per share, except
that the number of shares is increased to include potentially dilutive securities using the treasury stock method. Because the
Company incurred a net loss in all periods presented, all potentially dilutive securities were excluded from the computation of
diluted loss per share because the effect of including them is anti-dilutive.
Basic and Diluted:
|
|
Three Months Ended
September 30, 2013
|
|
|
Three Months Ended
September 30, 2012
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(4,703,100
|
)
|
|
$
|
(2,005,856
|
)
|
Weighted average shares
|
|
|
8,953,494
|
|
|
|
40,000,009
|
|
Basic (loss) per common share
|
|
$
|
(0.53
|
)
|
|
$
|
(0.05
|
)
|
The following table summarizes the number
of shares of common stock attributable to potentially dilutive securities outstanding for each of the periods which are excluded
in the calculation of diluted loss per share:
HEALTHCARE CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of September 30, 2013 and June 30,
2013 and for the Three Months Ended September 30, 2013 and September 30, 2012
Dilutive Potential Common Shares
|
|
Three Months Ended
September 30, 2013
|
|
|
Three Months Ended
September 30, 2012
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
3,534,023
|
|
|
|
1,585,833
|
|
Restricted stock awards
|
|
|
-
|
|
|
|
75,292
|
|
Senior convertible notes
|
|
|
625,000
|
|
|
|
2,666,667
|
|
|
5.
|
Property and Equipment
|
Property and equipment is as follows:
|
|
September 30, 2013
|
|
|
June 30, 2013
|
|
|
|
|
|
|
|
|
Furniture and fixtures
|
|
$
|
1,661,051
|
|
|
$
|
1,606,404
|
|
Leasehold improvements
|
|
|
35,010
|
|
|
|
25,260
|
|
Capitalized software
|
|
|
|
|
|
|
-
|
|
|
|
|
1,696,061
|
|
|
|
1,631,664
|
|
Accumulated depreciation and amortization
|
|
|
(478,590
|
)
|
|
|
(394,930
|
)
|
|
|
|
|
|
|
|
|
|
Net property and equipment
|
|
$
|
1,217,471
|
|
|
$
|
1,236,734
|
|
Depreciation and amortization expenses
were $83,660 and $52,000 for the three months ended September 30, 2013 and September 30, 2012, respectively.
Software, net is as follows:
|
|
September 30, 2013
|
|
|
June 30, 2013
|
|
|
|
|
|
|
|
|
Software costs
|
|
$
|
376,834
|
|
|
$
|
294,109
|
|
Accumulated amortization
|
|
|
(49,906
|
)
|
|
|
(31,967
|
)
|
|
|
|
|
|
|
|
|
|
Net software costs
|
|
$
|
326,928
|
|
|
$
|
262,142
|
|
Amortization expense was $17,939 and $0 for the three month
period ended September 30, 2013 and September 30, 2012, respectively.
|
7.
|
Investments Held in Trust
|
Following the initial public offering (“IPO”)
of the Company in November 2011, a total of $20.6 million was placed in a trust account maintained by American Stock Transfer as
a trustee. None of the funds held in trust were to be released from the trust account, other than interest income, net of taxes,
until the earlier of (i) consummation of an acquisition and (ii) redemption of 100% of the public shares sold in the IPO if the
Company fails to consummate an acquisition prior to May 14, 2013.
HEALTHCARE CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of September 30, 2013 and June 30,
2013 and for the Three Months Ended September 30, 2013 and September 30, 2012
On April 10, 2013, the Company closed the
acquisition of HCCA through the Merger (see Notes 1 and 3). At the time of the merger, holders of 1,160,035 shares of redeemable
common stock decided not to redeem their shares and accordingly, approximately $11,948,000 was released from escrow. As per the
articles of incorporation of the Company, the remaining balance in the trust account of approximately $8,652,000 was used to redeem
the remaining 839,965 redeemable common shares through a tender offer which closed on August 15, 2013.
The amount in trust can be invested only
in United States “government securities” within the meaning of Section 2(a)(16) of the Investment Company Act of 1940
having a maturity of 180 days or less. As of June 30, 2013 the total trust balance of $8,652,482 was in cash.
The Company classifies its United States
Treasury and equivalent securities as held-to-maturity in accordance with FASB ASC 320, “Investments – Debt and Equity
Securities.” Held-to-maturity treasury securities are recorded at amortized cost on the accompanying balance sheet and adjusted
for the amortization or accretion of premiums or discounts.
|
8.
|
Deferred Financing Costs
|
Deferred financing costs are as follows:
Balance July 1, 2013
|
|
$
|
548,394
|
|
Cost incurred for the senior convertible note for the three months ended September 30, 2013
|
|
|
328,712
|
|
Amortization for the three months ended September 30, 2013 *
|
|
|
(562,415
|
)
|
|
|
|
|
|
Balance June 30, 2013
|
|
$
|
314,691
|
|
* Including fully amortizing deferred costs of $538,637 relating
to the line of credit terminated in September 2013 (see Note 10).
Accrued expenses are as follows:
|
|
September 30, 2013
|
|
|
June 30, 2013
|
|
|
|
|
|
|
|
|
Accrued severence costs*
|
|
$
|
750,000
|
|
|
$
|
750,000
|
|
Accrued rebates
|
|
|
512,665
|
|
|
|
364,196
|
|
Accrued registration rights penalties**
|
|
|
864,000
|
|
|
|
592,000
|
|
Accrued professional fees
|
|
|
111,738
|
|
|
|
290,777
|
|
Accrued payroll
|
|
|
332,000
|
|
|
|
-
|
|
Accrued expenses other
|
|
|
491,359
|
|
|
|
431,060
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,061,762
|
|
|
$
|
2,428,033
|
|
*Payable to a former executive of the Company.
**Estimated penalties relating to late registration of shares
of common stock in connection with the Bridge Notes and Senior Convertible Note.
HEALTHCARE CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of September 30, 2013 and June 30,
2013 and for the Three Months Ended September 30, 2013 and September 30, 2012
On April 11, 2013, the wholly-owned subsidiaries
of HCCA, entered into a credit and security agreement for a secured revolving credit facility with an initial aggregate credit
limit of $5,000,000. The facility has a term of 3 years, through April 11, 2016, during which the loan proceeds are to be used
solely for working capital. The facility was terminated in September 2013 due to the Company’s inability to meet certain
financial covenants and all outstanding balances under the line were repaid, and the carrying value of the related financing costs
of $538,637 were written off to interest expense.
|
11.
|
Senior Convertible Note
|
On July 17, 2013, the Company entered into a loan and security
agreement with Partners for Growth III, LP (“PFG”) for a one-time convertible secured loan of $5,000,000 with a maturity
date of July 17, 2018. Pursuant to the terms of the Loan Agreement, the loan is convertible at $8 per share and interest on the
PFG Loan is payable on a monthly basis at an annual rate of prime plus 5.25% per annum, subject to certain reductions if certain
financial targets are met.
If the Company fails to achieve certain revenue and earnings
targets, PFG may elect to accelerate the repayment of the loan portion of the PFG Loan over the shorter of the 24-month period
from the date of the election or the remaining term of the loan. Upon acceleration of repayment, the Company must make monthly
payments of principal and interest, such that 60% of the outstanding principal is repaid in the first year and 40% is paid in the
second year.
The Loan Agreement contains certain financial covenants as well
as customary negative covenants and events of default
As part of consideration for the PFG Loan, the Company issued
to Lender and its designees warrants to purchase an aggregate of 220,000 shares of Series C common stock, for $7.50 per share,
at any time on or prior to July 17, 2018 (the “PFG Warrants”).
At the time of the transaction, the Company recorded a beneficial
conversion feature in the amount $654,144, the warrants were recorded as equity warrants in the amount of $1,154,144 and the notes
were recorded at the residual value of $3,191,711 reflecting a loan discount of $1,808,289. In addition, the Company incurred loan
costs amounting to $328,712. In the three months period ending September 30, 2013 the Company recorded interest expense associated
with the amortization of the loan discount and the capitalized loan costs amounting to $89,365.
In addition as of September 30, 2013 the Company recorded an
accrual of $272,000 and a corresponding interest charge reflecting the estimated penalty relating to the late registration of the
underlying shares of common stock.
On October 15, 2013, the Company received a notice of events
of default from PFG.
On December 31, 2013, the Company entered into a Forbearance,
Waiver and Modification to the loan agreement. Pursuant to the terms of the modification PFG (i) lent an additional $500,000 to
the Company, (ii) The conversion price of the promissory notes issued under the original loan agreement and the modification was
reduced to $2.50 per share from $7.50 per share, (iii) PFG’s right to accelerate repayment of the loan if certain conditions
were not met was eliminated, (iv) The Company agreed to pay certain fees, (v) Certain financial covenants were revised, (vi) The
number of shares issuable upon exercise of warrants issued to PFG was increased from 220,000 to 555,000 and the exercise price
of the warrants was reduced to $3.00 per share from $8.00 per share, (VII) The Company issued 425,000 shares of its common stock
to PFG, and (viii) PFG has the option, until June 30, 2019, to require the Company to purchase from it, at PFG’s option,
up to 25,000 shares (of the 425,000) of common stock for a purchase price of $250,000.
The revised financial covenants of the Senior Convertible Note,
beginning July 1, 2014, require the Company to maintain a specified ratio of cash and accounts receivable to the outstanding Senior
Convertible Note. The Company is currently not in compliance with this covenant and needs additional equity investments to meet
this requirement. There is no guarantee that such equity investments would be available to the Company in order to comply with
this covenant, and accordingly the Senior Convertible Note is presented as current in the accompanying consolidated balance sheet.
HEALTHCARE CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of September 30, 2013 and June 30,
2013 and for the Three Months Ended September 30, 2013 and September 30, 2012
On September 12, 2012, the Company completed
a bridge financing (the “Bridge Financing”) consisting of 59.25 units, each unit consisting of 10,000 preferred shares,
5,000 warrants and a promissory note with a face value of $100,000. At the time of the transaction, the value of the units was
allocated as follows: Preferred Stock was recorded at a value of $2,362,517, the warrants were recorded as a warrant liability
of $82,726 and the notes were recorded at a value of $3,479,757, reflecting a loan discount of $2,445,242. In addition, the Company
incurred loan fees amounting to $673,229. The Company recorded interest expense associated with the amortization of the loan discount
and the loan fees through the Merger date.
At the time of the Merger, holders of all
of the issued and outstanding shares of preferred stock of HCCA, by virtue of the Merger, had each of their shares of preferred
stock of HCCA converted into the right to receive a proportional amount of 592,500 shares of the Company’s Series C common
stock and warrants to purchase 296,250 shares of the Company’s Series C common stock. In accordance with the terms of the
promissory notes issued in the Bridge Financing, at the time of the Merger, notes in the aggregate amount of $3,159,592 (including
principal and interest accrued to date) were converted into 315,959 shares of the Company’s Series C common stock and notes
in the aggregate principal amount of $3,025,000 were repaid in full.
Incentive Notes
Upon consummation of the merger (see Note
3), Holders of all of the issued and outstanding shares of common stock of HCCA immediately prior to the time of the Merger had
each of their shares of common stock of HCCA converted into the right to receive: (i) a proportional amount of 5,200,000 shares
of the Company’s Series C common stock and promissory notes with an aggregate face value of $7,500,000 (collectively, the
“Closing Payment”).
In addition, the Company issued to its
management $2,500,000 of Management Incentive Notes and paid fees in connection with the transaction by issuing promissory notes
having an aggregate principal amount of $500,000, which reflects five percent of all promissory notes issued in the transaction.
The above described notes with an aggregate
face value of $10,500,000 have identical terms and conditions, are non-interest bearing and are subordinated to all senior debt
of the Company in the event of a default under such senior debt. The notes will be repaid from 18.5% of the Company’s free
cash-flow (defined as in the notes) in excess of $2,000,000. The Company will be obligated to repay such notes if, among other
events, there is a transaction that results in a change of control of the Company.
The notes were recorded at their estimated
present value, based on the estimated time of repayment discounted to the balance sheet date. The Company will continue to re-evaluate
its estimates on a periodic basis and adjust the present value of the notes accordingly. Of the Management Incentive Notes, $222,477,
net of discount vested immediately and $395,514 is being recognized as management incentive compensation over the estimated payment
periods.
HEALTHCARE CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of September 30, 2013 and June 30,
2013 and for the Three Months Ended September 30, 2013 and September 30, 2012
|
|
September 30, 2013
|
|
|
June 30, 2013
|
|
|
|
|
|
|
|
|
Shareholder notes
|
|
$
|
7,500,000
|
|
|
$
|
7,500,000
|
|
Placement notes
|
|
|
500,000
|
|
|
|
500,000
|
|
Management incentive notes
|
|
|
2,500,000
|
|
|
|
2,500,000
|
|
|
|
|
10,500,000
|
|
|
|
10,500,000
|
|
|
|
|
|
|
|
|
|
|
Less debt discount
|
|
|
(7,540,605
|
)
|
|
|
(7,728,486
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,959,395
|
|
|
$
|
2,771,514
|
|
Future maturities of the Incentive Notes
based on the Company’s estimates are as follows:
June 30,
|
|
|
|
|
|
|
|
|
2014
|
|
$
|
-
|
|
2015
|
|
|
-
|
|
2016
|
|
|
399,000
|
|
2017
|
|
|
1,789,000
|
|
2018
|
|
|
3,622,000
|
|
Thereafter
|
|
|
4,690,000
|
|
|
|
|
|
|
|
|
$
|
10,500,000
|
|
Capital Leases
The Company has entered into capital lease
agreements for equipment, which expire at various dates through November 2019. The assets capitalized under these leases and associated
accumulated depreciation at September 30, 2013 and June 30, 2013 are as follows:
Equipment under Capital Leases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2013
|
|
|
June 30, 2013
|
|
|
|
|
|
|
|
|
Furniture and equipment
|
|
$
|
1,050,343
|
|
|
$
|
1,007,735
|
|
Accumulated depreciation
|
|
|
(310,547
|
)
|
|
|
(250,821
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
739,796
|
|
|
$
|
756,914
|
|
HEALTHCARE CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of September 30, 2013 and June 30,
2013 and for the Three Months Ended September 30, 2013 and September 30, 2012
Amortization of capital leases is included
in depreciation expense.
Minimum future lease payments under capital
lease obligations as of September 30, 2013 are as follows:
Future payments:
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
|
|
|
|
2014
|
|
$
|
278,338
|
|
2015
|
|
|
251,395
|
|
2016
|
|
|
202,281
|
|
2017
|
|
|
157,978
|
|
2018
|
|
|
75,920
|
|
Thereafter
|
|
|
41,704
|
|
|
|
|
|
|
Total future minimum lease payments
|
|
|
1,007,616
|
|
Less amount representing interest
|
|
|
(163,113
|
)
|
Present value of net minimum lease payments
|
|
|
844,503
|
|
Less current portion
|
|
|
(214,242
|
)
|
|
|
|
|
|
|
|
$
|
630,261
|
|
|
14.
|
Redeemable Securities
|
Redeemable common stockholders are entitled to redeem all or
a portion of such shares in connection with the Company’s initial public offering, as defined in the Company’s Certificate
of Incorporation, and are entitled to share ratably in the trust account, including the deferred underwriting discounts and commissions
and accrued but undistributed interest, net of (i) taxes payable, (ii) interest income earned on the trust account (approximately
$10.30 per share) and (iii) a pro rata share of the trust account released to the Company for each Share converted to a Series
C Share upon completion of a Business Transaction. 839,965 shares of Series B common stock were redeemed from the trust account
on August 15, 2013.
The Company is authorized 30,000,000 shares
of common stock, par value $.0001, which shares may, but are not required to, be designated as part of one of three series, callable
Series A, callable Series B and Series C shares. The holders of all common shares shall possess all voting power and each share
shall have one vote.
Series A – Holders of shares of Series
A Common Stock are entitled to cause the Corporation to redeem all or a portion of their shares in connection with an acquisition
transaction. If the holders of Series A Common Stock do not elect to have their shares redeemed, then they will automatically be
converted to Series B Common Stock. As of September 30, 2013 there are no outstanding Series A Common Stock.
Series B – Holders of shares of Series
B Common Stock have the same rights as Series A Common Stock, except Series B Common Stock cannot be issued until such time as
all outstanding shares of Series A Common Stock are converted to Series B Common Stock. The holders of Series B Common Stock have
the right to participate in a Post-Acquisition Tender Offer or Post-Acquisition Automatic Trust Liquidation. 839,965 shares of
Series B common shares were redeemed from the trust account on August 15, 2013. As of September 30, 2013 there were no outstanding
redeemable shares.
Series C – Holders of shares of Series
C Common Stock have the same rights as Series A Common Stock, except holders of Series C Common Stock are not entitled to (1) cause
the Corporation to redeem all or a portion of such Series C Common Stock in connection with the Acquisition Transaction, (2) share
ratably in the Trust Account or (3) participate in a Post-Acquisition Tender Offer or Post-Acquisition Automatic Trust Liquidation.
As of September 30, 2013, there are 8,953,494 shares of Series C Common Stock outstanding.
HEALTHCARE CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of September 30, 2013 and June 30,
2013 and for the Three Months Ended September 30, 2013 and September 30, 2012
The Series A Common Stock, Series B Common
Stock and Series C Common Stock will be automatically consolidated into one series of Common Stock after the consummation of the
Post-Acquisition Tender Offer or Post-Acquisition Automatic Trust Liquidation. The consolidation shall be on a one-for-one basis
of the then outstanding shares of each series of common stock. Following the automatic consolidation, only one series of Common
Stock will be authorized, which will be referred to as “Common Stock”, which occurred after June 30, 2013.
Prior to the merger the Company’s
operations were conducted under the HCCA corporate entity (See Note 1). HCCA had authorized 50,000,000 shares of common stock,
no par value. Upon the merger, every 7.6923 HCCA shares of common stock were exchanged into 1 share of the Company’s common
stock.
During 2012, the Company issued 2,120,200
shares of common stock with a fair value range of $0.01 to $0.31. These shares are freely tradable.
During 2012, the Company settled a suit
with a shareholder to repurchase 500,000 shares of its common stock. These shares were recorded as a stock redemption for $100,000
and the shares were received in February 2013. In February 2013, these shares were issued to employees in recognition of service
performed and an expense of $480,000 was recorded representing the estimate fair value of the shares issued.
As part of the Merger, 750,000 restricted
shares of stock were issued to certain members of management. The shares were valued at $7.30, the share price at the date of the
merger. 400,000 shares vested immediately and the remaining vest through June 30, 2015. In the period ending September 30, 2013,
the Company recorded an expense of $283,889 for the shares that vest through June 30, 2015.
|
16.
|
Commitments and Contingencies
|
Operating Leases
The Company has certain non-cancelable
operating leases for facilities and equipment that expire over the next four years. Future minimum payments for non-cancelable
operating leases are as follows as of September 30, 2013:
Minimum Rental Payments
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2014
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$
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210,578
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2015
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206,992
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2016
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218,505
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2017
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91,575
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$
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727,650
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Rent expense was 48,346 for the three
months ended September 30, 2013 and for the three months ended September 30, 2012.
Employment Agreements
As of September 30, 2013, the Company had
entered into employment agreements with senior officers and other members of management. The agreements specify aggregate guaranteed
annual salaries of $2.4 million for each year of employment and extended through May 2017. The agreements allowed the Company to
terminate these individuals for cause and not for cause. Depending on the terms of the individual contract upon termination without
cause the Company would either be required to continue to pay salary throughout the original term of the contract or pay severance,
typically one year of salary.
HEALTHCARE CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of September 30, 2013 and June 30,
2013 and for the Three Months Ended September 30, 2013 and September 30, 2012
From September 2013
to January 2014, the Company terminated agreements representing $1 million in annual compensation. The Company made severance payments
of $120,000 and in one case replaced an existing agreement with an annual consulting agreement that renews annually and permits
the Company to terminate at any time with 90 days notice.
As of September 30, 2013, the Company entered
into employment contracts or employment arrangement letters with certain members of management that among other things committed
the Company to issuing approximately 650,000 stock options. Subsequent to September 30, 2013, the Company entered into additional
arrangements committing to issue an additional 841,000 of stock options. The Company does not currently have a stock option plan
and these stock options will be granted at the time the stock option plan is appropriately established.
Litigation
During 2012, the Company filed a lawsuit
against its past adjudicator of claims for overcharges, over payment on claims, errors and misclassifications, and rebates owed
from drug manufacturers claiming damages of over $5 million. Additionally, the Company has recorded an expense for the amount owed
for claims payable. The adjudicator of claims filed a counterclaim for amounts it claims are owed to it by the Company.
In August 2013, the Company settled the
suit with the claims adjudicator. Under the terms of the settlement the Company agreed to pay the claims adjudicator $2.7 million
over 15 months commencing in September 2013. This amount was recorded as a liability as of December 31, 2012, in accounts payable.
On August 14, 2012, the Company entered
into an agreement with a shareholder to buy back 500,000 shares of common stock for $100,000. The order also called upon the payment
of $50,000 in legal fees. As of December 31, 2012, the Company had not received the 500,000 shares of common stock but had paid
the settlement. The Company received these shares in February 2013. A stock redemption was recorded on December 31, 2012 in the
amount of $100,000.
Otis Fund, a company controlled by a former
consultant to the Company who owned in excess of 5% of the common stock of the Company, had a consulting agreement to provide marketing
and sales services to HCCA. The contract was due to expire on January 2, 2017; however, the Company terminated this agreement for
cause in September 2013.The annual fees related to these services were $360,000.
In September 2012, 2,068,200 shares were
issued to two entities believed to be controlled by a former consultant of the Company. The Company is currently investigating
the circumstances under which these shares were issued to the two entities. The Company recorded a charge equal to the estimated
market value of the shares of $641,142 as selling, general and administrative expense.
On October 15, 2013, Partners For Growth iii LP (“PFG”),
the holder of the senior convertible note, notified the Company of events of Default. On December 31, 2013 the Company and PFG
entered into a forbearance waiver and modification agreement to the Loan agreement (see Note 12).
The Company issued a total of 555,000 warrants to PFG in connection
with the loan agreement and the forbearance waiver and modification agreement.
On November 7, 2013, the Company’s Board of Directors
decided to change the Company’s fiscal year end from June 30 to December 31.
HEALTHCARE CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of September 30, 2013 and June 30,
2013 and for the Three Months Ended September 30, 2013 and September 30, 2012
On December 31, 2013, the Company entered into a securities
purchase agreement (the “SPA”) with certain purchasers (each a “Purchaser” and collectively, the “Purchasers”)
named therein and Charden Capital Markets, LLC (“Agent”) as administrative and collateral agent. Pursuant to the SPA,
the Company issued $2,112,500 of Junior Secured Convertible Term Notes (the “Notes”), which Notes are convertible into
shares of the Company’s stock at the initial fixed conversion price equal to $1.50 per share. The Purchasers of Notes also
received warrants (“the Warrants”) to purchase one share for every $1.50 of Notes purchased by such Purchaser. The
Company completed the initial closing of a private placement of Notes and Warrants under the SPA on December 31, 2013, and may
continue to make subsequent placement under the SPA until it has placed an aggregate of $6,000,000 in Notes under the SPA or the
date that is 30 days after the date of such initial closing (the private placements under the SPA are collectively referred to
as the “Private Placement”).
In connection with the Private Placement at the Company agreed
to pay the Agent a fee representing 9% of the principle amount of the Notes plus the $500,000 additional loan from the Lender,
less $250,000, or $2,362,500. The fee was paid in the form of additional Notes (with a pro rata number of warrants) in the amount
of $212,625 (for the total principle amount of Notes equal to $2,325,125).
In connection with the issuance of the Notes under the SPA,
the Company issued warrants to purchase an aggregate of 1,550,083 shares of common stock (including warrants to purchase 141,750
shares issued to the Agent for its fees), at an exercise price of $3.00 per share (the “Exercise Price”), at any time
on or prior to December 31, 2018 (the “Warrants”). The Warrants may also be exercised on a cashless basis.
The Company and its subsidiaries entered into a Master Security
Agreement with the Agent pursuant to which the Company and its subsidiaries agreed to secure the payment of all obligations under
the Notes by granting and pledging to the Agent a continuing security interest in all of the Company’s and its subsidiaries’
property now owned or at any time hereafter acquired by them.