Washington, D.C. 20549
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act. Yes
¨
No
x
Indicate by check mark if the registrant is required to file
reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes
x
No
¨
Indicate by check mark whether the registrant (1) has filed
all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes
x
No
¨
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§229.405 of this chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes
x
No
¨
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K.
¨
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated
filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
The aggregate market value of the voting and non-voting stock
held by non-affiliates of the Registrant as of June 30, 2013, the last business day of the Registrant’s most recently completed
second fiscal quarter for the year ended December 31, 2013, was approximately $57,605,981
The number of shares outstanding of the Registrant’s common
stock as of April 11, 2014 was 8,842,692.
This Annual Report on Form 10-K contains
forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, or the Securities Act, and Section 21E
of the Securities Exchange Act of 1934, or the Exchange Act. The statements contained in this report that are not purely historical
are forward-looking statements. Our forward-looking statements include, but are not limited to, statements regarding our or our
management’s expectations, hopes, beliefs, intentions or strategies regarding the future. In addition, any statements that
refer to projections, forecasts or other characterizations of future events or circumstances, including any underlying assumptions,
are forward-looking statements. The words “anticipates,” “believe,” “continue,” “could,”
“estimate,” “expect,” “intend,” “may,” “might,” “plan,”
“possible,” “potential,” “predict,” “project,” “should,” “would”
and similar expressions may identify forward-looking statements, but the absence of these words does not mean that a statement
is not forward-looking.
The forward-looking statements contained
in this report are based on our current expectations and beliefs concerning future developments and their potential effects on
us. There can be no assurance that future developments affecting us will be those that we have anticipated. These forward-looking
statements involve a number of risks, uncertainties (some of which are beyond our control) or other assumptions that may cause
actual results or performance to be materially different from those expressed or implied by these forward-looking statements. These
risks and uncertainties include, but are not limited to, those factors described under the heading “Risk Factors,”
which include, among other things:
Should one or more of these risks or uncertainties
materialize, or should any of our assumptions prove incorrect, actual results may vary in material respects from those projected
in these forward-looking statements. We undertake no obligation to update or revise any forward-looking statements, whether as
a result of new information, future events or otherwise, except as may be required under applicable securities laws and/or if and
when management knows or has a reasonable basis on which to conclude that previously disclosed projections are no longer reasonably
attainable.
PART
I
Introduction
Healthcare Corporation of America, a Delaware
corporation (formerly known as Selway Capital Acquisition Corporation ) (the “Company”, “we,” “us,”
or “our”), is a company that was organized under the laws of the State of Delaware on January 12, 2011 to acquire,
through a merger, capital stock exchange, asset acquisition, stock purchase or similar acquisition transaction, one or more operating
businesses. Although we were not limited to a particular geographic region or industry, we focused on acquiring operating businesses
in the United States. Until the acquisition (the “Acquisition”) of Healthcare Corporation of America, a New Jersey
corporation (“HCCA”), on April 10, 2013, we did not operate a business and our activities were limited to locating
a business to acquire.
As a result of the closing of the Acquisition,
we operate our business through our wholly owned subsidiary, HCCA. HCCA is a Pharmacy Benefit Manager, or PBM. HCCA’s mission
is to reduce prescription drug costs for clients while improving the quality of care. HCCA administers prescription drug benefit
programs for employers who contract with HCCA directly in order to provide this component of healthcare benefits to their employees.
HCCA also is the PBM for health benefit companies who partner with HCCA in order to provide prescription drug benefits along with
their core offering, other health benefits like medical insurance, to their clients. HCCA’s growing customer base includes
commercial clients of various sizes and industries, business associations and trade groups, and local government entities, labor
unions and charitable and non-profit organizations. HCCA’s business model is based on proactive benefit cost management.
HCCA’s brand in the marketplace is Prescription Corporation of America, or PCA.
Our principal executive offices are located
at 66 Ford Road, Suite 230, Denville, NJ 07834, and the telephone number at our principal executive office is 973-983-6300. We
maintain a website at www.hca-pca.com. The information contained in, or that can be accessed through, our website is not part of,
and is not incorporated into, this current report on Form 8-K or other filings we make with the SEC. We makes available free of
charge on our website annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments
to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably
practicable after we electronically file such material with, or we furnishes it to, the SEC.
Acquisition of HCCA
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, Prescription Corporation of America (“PCA”),
Gary Sekulski, as the representative of the stockholders of HCCA, and Edmundo Gonzalez, as our representative. On April 10, 2013
(the “Closing Date”), the Acquisition and other transactions contemplated by the Agreement closed.
Pursuant to the Agreement, Merger Sub merged
with and into HCCA (the “Merger”), resulting in HCCA becoming a wholly owned subsidiary of the Company. PCA and PCA
Benefits, Inc., a dormant entity, remain wholly owned subsidiaries of HCCA.
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 our 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 our common stock, if any, (the “Earnout Payment Shares”) issuable upon the our achieving certain
consolidated gross revenue thresholds 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 the HCCA. Effective December 20, 2013, the escrowed portion of the Closing Payment, together with
a portion of the shares issued to Chardan Capital Markets, LLC (an aggregate of 546,002 shares, and promissory notes with an aggregate
face value of $750,000) were released from escrow and cancelled.
The Earnout Payment Shares, if any, will
be issued as follows: (i) 1,400,000 shares if we achieve 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 we achieve consolidated gross revenue of $300,000,000 for the twelve
months ended March 31, 2015 or June 30, 2015. In the event we do not achieve the first earnout threshold, but do achieve the second
earnout threshold, then all of the Earnout Payment Shares shall be issued. If we consolidate, merge or transfer substantially
all of our assets prior to June 30, 2015 at a valuation of at least $15.00 per share, then all of the Earnout Payment Shares not
previously paid out shall be issued immediately prior to such transaction. If, prior to achieving either earnout threshold we acquire
another business in exchange for our equity or debt securities, then any remaining earnout thresholds may be adjusted by the independent
members of our board of directors in its sole discretion.
In connection with the Merger, certain members
of HCCA’s management received promissory notes with an aggregate face value of $2,500,000 (the “Management Incentive
Notes”), which notes are non-interest bearing and subordinated to all our senior debt in the event of a default under such
senior debt. The Management Incentive Notes will be repaid from 6.25% of our free cash-flow (defined as in the notes) in excess
of $2,000,000. We will be obligated to repay such notes if, among other events, there is a transaction that that results in a change
of control.
In addition to the Management Incentive
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 in 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.
In connection with a bridge financing (the
“Bridge Financing”) completed by HCCA in September 2012, HCCA issued 59.25 units, each unit consisting of 10,000 preferred
shares and a promissory note with a face value of $100,000. 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 our Series C common stock and warrants to purchase 296,250 shares
of our 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 $3,159,591.78 (including principal and interest accrued to date) were converted
into 315,959 shares of our Series C common stock and notes in the aggregate principal amount of $3,025,000 were repaid in full.
In connection with transactions contemplated
by the Agreement, we also entered into a registration rights agreement to register all shares included in the Closing Payment,
the Earnout Payment Shares, the shares underlying the Exchange Warrants (as defined below), and the shares issued as compensation
for the Bridge Financing completed by HCCA in September 2012, pursuant to the terms of a Registration Rights Agreement entered
into at the closing of the merger (all such securities issued in connection with the merger, the “Merger Securities”).
The holders of the majority of the Merger Securities are entitled to make up to two demands that we register such securities at
any time commencing six months following the consummation of the merger. In addition, the holders have certain “piggy-back”
registration rights with respect to registration statements filed subsequent to our consummation of an acquisition transaction.
We will bear the expenses incurred in connection with the filing of any such registration statements. In addition, holders who
received shares as compensation for the Bridge Financing are entitled to liquidated damages because the registration statement
was not effective by October 8, 2013, or, after effectiveness, if it ceases to be effective for more than 45 days in a 12-month
period. Such damages are assessed for each 30-day period that the registration statement is not effective, in the amount of 1.0%
of the aggregate purchase price paid by each holder in the Bridge Financing, provided however, that total liquidated damages may
not exceed 10% of the aggregate purchase price. As of December 31, 2013 we had accrued the maximum penalty of $592,000.
In conjunction with the merger of Merger
Sub into HCCA:
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we entered into exchange agreements with 3 beneficial holders of HCCA’s bridge loan who were also beneficial holders
of greater than 5% of our Series A common stock. Pursuant to the exchange agreements, such holders converted an aggregate of 281,554
shares of our Series A common stock to our Series C common stock. In conjunction with the exchange, such holders were repaid bridge
notes in the aggregate principal amount of $3,025,000.
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we entered into exchange agreements with 3 beneficial holders of greater than 5% of our Series A common stock. Pursuant to
the exchange agreements, such holders converted an aggregate of 878,481 shares of our Series A common stock to our Series C common
stock and received $3.53 per share of Series A common stock exchanged, or an aggregate of $3,101,037.93.
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An aggregate of $11,948,360.50 was released from our trust account, reflecting the number of shares of Series A common stock
that were converted into Series C common stock, of which $232,007 was paid to the underwriters from our initial public offering.
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The placement warrants held by our founders were converted into the right to receive: (i) an aggregate of 100,000 shares of
our common stock; and (ii) warrants to purchase an aggregate of 1,000,000 shares of our common stock at an exercise price of $10.00
per share (the “Exchange Warrants”). On November 22, 2013, our Board of Directors approved a change in the terms of
the Exchange Warrants, pursuant to which (a) the term of the warrants was extended for three year, (b) the exercise price was reduced
to $1.50 (the conversion price of the Notes issued on December 31, 2013 as described herein), (c) providing for a cashless exercise
feature for 100% of the warrant shares, and (d) increased to $17.50 the price at which the Exchange Warrants must be exercised
if the closing price for the our common stock exceeds such price per share for 20 trading days in any 30-trading-day period.
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We paid Chardan Capital Markets LLC a cash
fee comprised of five percent of all equity consideration issued in the merger (335,000 shares of common stock), plus promissory
notes having an aggregate principal amount of five percent of all promissory notes issued in connection with the Merger ($500,000),
on the same terms and conditions as the promissory notes issued in the Merger, in consideration of its services in connection with
the Merger. A portion of the shares (26,002 shares) and notes ($50,000 principal amount) issued to Chardan pursuant to the Merger
were cancelled in connection with the cancellation of the escrowed portion of the Merger consideration. We also paid Chardan Capital
Markets LLC a cash fee of $414,750, plus warrants to purchase up to 92,500 shares of common stock, in consideration of its services
in connection with the bridge financing.
Immediately following the transactions described
above, none of our Series A Shares and Units were outstanding and there were 839,965 shares of our Series B Shares issued and outstanding,
8,953,494 shares of our Series C Shares issued and outstanding, 2,296,250 public warrants issued and outstanding, warrants to purchase
1,000,000 shares of our common stock owned by our pre-initial public offering stockholders, and unit purchase options exercisable
for 100,000 shares of our common stock and warrants to purchase 100,000 shares of our common stock.
Tender Offer
As required by our Certificate of Incorporation,
following the Merger, we filed a tender offer to all holders of our outstanding Series B Shares of common stock, par value $0.0001
per share (the “Series B Shares”), at a price of $10.30 per share in cash, without interest.
The Offer expired at 5:00 p.m., United States
Eastern Time on the evening of Tuesday, August 13, 2013. Based on information provided by American Stock Transfer & Trust Company,
LLC (the “Depositary”), pursuant to the terms of the Offer, 839,765 Shares were tendered for an aggregate purchase
price of $8,649,579.50. The Company has accepted for redemption all of the Shares validly tendered and not withdrawn.
As specified in our Certificate of Incorporation,
On August 20, 2013, all outstanding classes of our common stock consolidated into a single class of common stock, designated “common
stock”.
Restatement of Financial Information
On May 9, 2013, we issued a Current Report
on Form 8-K announcing that our Board of Directors, after consultation with, and upon recommendation from, our management, concluded
the previously issued audited financial statements for the years ended December 31, 2011 and 2012 for HCCA, which we recently acquired
and which is currently our wholly owned subsidiary, should no longer be relied upon and that disclosure should be made, and action
should be taken, to prevent future reliance on such financial statements. For a description of the basis for the Board’s
determination, please see our Current Report on Form 8-K dated May 9, 2013, which description is incorporated by reference herein.
Our officers discussed the foregoing matters
with HCCA’s independent registered public accounting firm during the period, Thomas J. Harris, Certified Public Accountant.
The Board of Directors authorized and directed that our officers take the appropriate and necessary actions to amend and restate
the Current Report on Form 8-K (the “Original 8-K”), pursuant to which HCCA’s financial statements were filed
with the SEC on May 16, 2013.
The restated financial statements also include
certain reclassifications related to revenue and cost of sales for the fiscal years ended December 31, 2011 and 2012. We previously
disclosed in our Current Reports on Form 8-K filed on March 25, 2013 and April 16, 2013 HCCA’s practice of recognizing revenue
from rebates as well as from its mail-order pharmacy business. HCCA has reclassified these figures as decreases to cost of sales,
with the exception of co-pays from members who order from its mail-order facility. There is no impact on gross profit, nor is there
an impact on operating expenses related to this reclassification.
On September 16, 2013, the Board of Directors
of the Company, after consultation with, and upon recommendation from, management of the Company, concluded that the previously
issued and restated audited financial statements for the years ended December 31, 2011 and 2012 of HCCA, and the previously issued
unaudited financial statements for the quarter ended March 31, 2013 of HCCA, should no longer be relied upon and that disclosure
should be made, and action should be taken, to prevent future reliance on such financial statements. The Company reported this
information in its Current Report on Form 8-K dated September 16, 2013.
Our officers discussed the foregoing matters
with HCCA’s independent registered public accounting firm during the period, Thomas J. Harris, Certified Public Accountant.
The Board of Directors authorized and directed that our officers take the appropriate and necessary actions to amend and restate
the Original 8-K. As a result we reviewed our financial statements in an attempt to discover all the material errors and misstatements
that were included therein. As part of this review we engaged external consultants to review and investigate our books and records
and other related transactions and activities for 2012 and 2011.
On November 11, 2013, the Company issued
a press release announcing that the Company had discovered additional issues that necessitated an in-depth analysis of the books
and records of HCCA for 2011, 2012 and the three months ended March 31, 2013. As a result of this review our management concluded
that it will be unable to complete our restated 2011 financial statements, due to lack of sufficient source documents and other
information, and that, as a result of the analysis, management had decided to exclude the 2011 income statement from our Transition
Report on Form 10-K, in which it would otherwise be required, and that we would adjust the financial statements for 2012 and the
6 months ended June 30, 2013 to reflect the correction of the errors that were discovered.
The errors requiring a restatement of HCCA’s
financial statements resulted in material weaknesses in internal control over financial reporting which were noted in the amended
filings. In order to help prevent similar accounting errors in the future, the Company has hired a new CFO effective as of June
3, 2013 and instituted new procedures and controls where all material schedules and related journal entries are reviewed by the
CFO on a monthly basis. On January 7, 2014, the Company’s Board of Directors established an Audit Committee consisting of
Mr. Thomas Rebar and Edmundo Gonzalez, with Mr. Rebar as Chairman. In addition, the Company is in the process of locating additional
independent directors eligible to serve on the audit committee.
New Chief Executive Officer
On December 31, 2013, the Company appointed
Natasha Giordano to serve as Chief Executive Officer, President and director of the Company, effective January 1, 2014. Also on
December 31, 2013, Gary Sekulski resigned as Chief Executive Officer of the Company effective upon the appointment of his successor,
Natasha Giordano. He will continue to serve as a director of the Company. In addition, Mr. Sekulski entered into a one year renewable
consulting agreement whereby he will provide sales and marketing consulting services to the Company.
Change in Fiscal Year
On November 7, 2013, the Company determined
to change its fiscal year end from June 30 to December 31. As a result of the change in fiscal year, the Company is filing this
transition report on Form 10-K for the six months ended December 31, 2013.
Debt Modification
On October 15, 2013, the Company received
a notice of events of default (the “Notice”) from Partners For Growth III, L.P. (the “Lender”) pursuant
to that certain Loan and Security Agreement dated as of July 17, 2013 (the “Loan Agreement”) by and among the Company,
Healthcare Corporation of America, a New Jersey corporation and wholly owned subsidiary of the Company (“HCA”), Prescription
Corporation of America, a New Jersey corporation and wholly owned subsidiary of HCA (“PCA”), and PCA Benefits, Inc.,
a New Jersey corporation and wholly owned subsidiary of HCA (“PCAB”; and collectively with the Company, HCA and PCA,
the “Borrowers”). On December 31, 2013, the Company entered into a Forbearance, Waiver and Modification No. 1 to Loan
Agreement with the Lender (the “Modification”) that is described in the Company’s Current Report on Form 8-K
dated December 31, 2013.
Private Placement
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 Chardan 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 common stock at an 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 placements 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
the Company agreed to pay the Agent a fee of $212,625. The fee was paid in the form of additional Notes (with a pro rata number
of warrants), for total principal 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.
Pursuant to a registration rights agreement
entered into in connection with the Private Placement, the Company is required to file a registration statement covering all securities
issued or issuable pursuant to the SPA (the “SPA Securities”) no later than ten business days following the filing
with the Commission of the Company’s annual or quarterly report for the period ending December 31, 2013 (or, if the Company
does not file a report for such period, the report for the period ending closest to December 31, 2013), but in no event later than
April 14, 2014. The holders of SPA Securities are entitled to liquidated damages in the amount of 1% of the face value of the Notes
for each 30 day period the company fails to comply with its obligations under the registration rights agreement. In the event the
Company fails to timely make such liquidated damages payment, the such amounts shall accrue interest at a rate of 1.5% for every
30 day period such failure continues.
Loan Financing
On April 4, 2014, we entered into a Note
Purchase Agreement (the “Purchase Agreement”) with the persons named therein (each a “Lender”, and, collectively,
the “Lenders”) pursuant to which the Lenders loaned us $1,000,000 and we issued $1,000,000 in Secured Convertible Term
Notes (the “Notes”) to the Lenders. Selway Capital Holdings LLC, which loaned us $900,000 as a Lender, is 50% owned
by Edmundo Gonzalez and Yaron Eitan, each of whom is one of our directors. The Notes: (i) bear interest at the annual rate of eight
percent (8%), (ii) will be payable as to principal and interest on demand on April 2, 2015 (the “Maturity Date”), subject
to acceleration upon an event of default, and (iii) may be prepaid by us at any time prior to the maturity date.
Pursuant to the Security Agreement dated
April 4, 2014 (the “Security Agreement”), we granted the Lenders a first priority security interest to all of the and
assets of 340 Basics, Inc., a New Jersey corporation, our wholly-owned subsidiary (“340 Basics”). In addition, we granted
the Lenders a second priority security interest in and to all our other assets, including equity interests in all other subsidiaries.
Such second priority security interest is subordinate only to the security interest of Partners for Growth III, L.P., our senior
lender.
Going Concern
We continue generating
substantial losses and expect to into the foreseeable future, while successfully completing various financings as described
herein during 2012, 2013 and 2014. Nevertheless, as of the date of this report we have not yet established an ongoing source of
revenues sufficient to cover our operating costs to allow us to continue as a going concern. Our ability to continue as a
going concern is dependent on our obtaining additional adequate capital to fund operating losses until we become profitable
and generate cash flows from our operations. If we are unable to obtain adequate capital, we could be forced to cease
operations. We are contemplating conducting additional offering of our debt or equity securities to obtain additional
operating capital. There are no assurances we will be successful and without sufficient financing it would be unlikely for us
to continue as a going concern.
Products and Services
HCCA’s primary products and services
consist of a variety of Pharmacy Benefit Management (PBM) products, in addition to mail-order pharmacy services. HCCA’s suite
of PBM products provides flexible and cost-effective alternatives to traditional PBM offerings typically used by health plans,
government agencies and employers. HCCA provides a broad range of pharmacy benefit management solutions to managed care organizations,
self-insured employer groups, unions, third party healthcare plan administrators, and local government entities. HCCA’s PBM
products include solutions for self-insured entities such as employers, townships, counties and unions, as well as smaller fully-funded
entities that typically require a fixed cost structure. The majority of HCCA’s client base is currently in New Jersey, and
HCCA plans to expand its services out of New Jersey.
HCCA started its business by focusing
on the needs of the local government market in New Jersey. Recently, we have decided to de-emphasize our focus on the fixed
fee local government PBM marketplace due to its lack of profitability. We estimate that this business line which accounted
for approximately 74% of our revenues for the year ended December 31, 2013, and which generated substantial
operating losses, will decline in the months to come as annual renewable contracts may not renew due to our demand for
substantial price increases as a condition for contract renewals.
HCCA believes that our growth to date has
been the result of clients (we refer to employers contracting with HCCA as “clients” while the employees to whom HCCA
provides services are referred to as “members” throughout this document) finding HCCA’s pricing model, and its
resulting savings, more attractive than other options.
HCCA has started to expand its business
geographically and has also added products to address attractive market segments. HCCA’s PBM products include:
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Fully-funded Programs: A fully-funded prescription benefit plan takes the risk of overpayment from the client and passes it
to the PBM in exchange for a higher fixed monthly cost.
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Self-Insured Programs: Larger organizations can take the risk of total drug spending varying, and traditionally provide the
drug benefit to their employees on a self-insured basis. Under self-insurance, HCCA seeks to pass on the cost of drugs, and it
generates revenue via administrative fees and rebates.
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340B Basics: The federal drug-pricing program, 340B, requires drug manufacturers to sell outpatient drugs at a reduced cost
to eligible healthcare centers, clinics and hospitals. The goal is to incentivize healthcare providers to expand medication access
to low-income individuals, families and other vulnerable populations. HCCA’s new 340 Basics product is a compliance management
solution that includes HCCA proprietary software as well as management processes and controls.
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Rx Savings Solutions: These affordable plans marketed under the “Savings Solutions” brand feature generic only
or generic and preferred brand drug formularies, allowing HCCA to provide lower cost alternatives. At this point, this program
is most often employed by smaller businesses that want to provide prescription drug benefits to their employees but cannot afford
a traditional fully-funded or self-funded plan.
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Mail-Order Pharmacy: HCCA offers mail-order pharmacy services to its PBM members. HCCA’s mail-order pharmacy service
gives members flexibility, privacy, and easy access to their maintenance medications while offering plan savings to the client
because we are able to take advantage of lower purchase prices, allowing HCCA to pass along savings to its customers. Unlike other
PBM providers who outsource their mail order pharmacy services, HCCA’s in-house pharmacy team operates its own mail-order
pharmacy directly from HCCA’s headquarters in Denville, New Jersey. HCCA believes this allows it to provide a higher standard
of service and to assert greater control over fulfilling claims for members, as well as lowering costs.
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On January 1, 2012, HCCA entered into a
Management Services Agreement with Argus Health Systems (“Argus”) a provider of claims processing and related services.
Pursuant to this agreement, HCCA engaged Argus as its exclusive claims processing service provider. The parties agreed to comply
with applicable laws, including with respect to maintaining patient information confidential, and have agreed to customary indemnification
obligations. The agreement provides that payment of all services are due within 15 days of invoicing, subject to good faith disputes.
The initial term for the agreement with Argus is from January 1, 2012 through January 1, 2015, which term automatically renews
for additional one year periods unless notice of non-renewal is made prior to a renewal, and can be terminated prior to such date
upon a material uncured breach by the other party.
The Industry
According to IMS Health, or IMS, approximately
4.4 billion pharmacy prescriptions were written and filled in the United States during 2011 — representing a retail value
in excess of $417 billion. Based on the factors described below, HCCA expects drug utilization rates to continue to rise in the
future. HCCA estimates that the current market opportunity for HCCA’s services in its industry is significant and growing
due to the following factors:
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Aging population. According to the U.S. Census Bureau, the U.S. population is expected to age rapidly through 2030, when 19.5%
of the population will be over the age of 65, compared to 12.0% in 2000. Older Americans require more medications than their younger
counterparts — often 20 to 40 prescriptions annually, according to the Centers for Medicare and Medicaid Services (“CMS”).
According to the Kaiser Family Foundation, or Kaiser, the number of prescriptions purchased in the U.S. increased 39% from 1999
to 2009, while the population only grew 9%. The increase in prescriptions due to an aging population is expected to drive demand
for senior-focused clinical programs and benefit plans which will address the prescription drug needs of an aging population.
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Rising drug prices. According to IMS, the U.S. pharmaceutical market is expected to grow at a 3% to 6% annual compound rate.
Retail prescription prices have increased on average 3.6% annually between 2000 and 2009, according to Kaiser, a rate which is
higher than the average inflation rate during that same period of 2.5%.
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Health care reform. The health care reform law enacted in 2010 is estimated to provide drug coverage for an estimated 30-35
million people in the form of expanded Medicaid coverage, and this increases the PBM market by an estimated 20%, or $87.5 billion.
In addition, the law may push more employers towards lower-cost prescription drug providers, which HCCA believes may create demand
for PBM products.
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340B Basics: The federal drug-pricing program, 340B, requires drug manufacturers to sell outpatient drugs at a reduced cost
to eligible healthcare centers, clinics and hospitals. The goal is to incentivize healthcare providers to expand medication access
to low-income individuals, families and other vulnerable populations. HCCA’s new 340 Basics product is a compliance management
solution that includes HCCA proprietary software as well as management processes and controls.
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Generic pipeline. According to IMS, the generic share of the overall prescription drug market has increased from 67% in 2007
to 80% in 2011. Also according to IMS, over the next five years, $64 billion in branded drugs will come off patent in the U.S.,
fueling growth in the availability of generic equivalents. HCCA believes that this presents an opportunity for client cost savings
and margin expansion for us. Generic drugs provide both immediate cost savings to the client and higher percent margins for HCCA’s
business, despite the lower revenue.
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Competition
HCCA competes with numerous companies that
provide the same or similar services. HCCA’s competitors range from large publicly traded companies to several small and
privately-owned companies, which compete for a significant part of the market. The principal competitive factors are quality of
service, scope of available services, and price. The ability to be competitive is influenced by HCCA’s ability to negotiate
prices with pharmacies, drug manufacturers, and third party rebate administrators. Market share for PBM services in the United
States is highly concentrated, with a few national firms, such as recently merged leaders SXC Health Solutions, Inc./Catalyst and
Medco Health Solutions, Inc./Express Scripts, Inc., along with CVS Caremark Corporation, controlling a significant share of prescription
volume. Much of the rest, however, is divided among a combination of small regional PBM’s and so-called “captive”
PBM’s, or subsidiaries of larger healthcare or hospital organizations. All told, HCCA believes there are an estimated 40-50
PBM’s operating in the United States, from the large players down to the small regional ones.
In addition, the recent merger activity
between Express Scripts, Inc. and Medco Health Solutions, Inc., and between SXC Health Solutions, Inc. and Catalyst Health Solutions,
Inc. signals that there may be further consolidation of these larger firms. Most of HCCA’s competitors have been in existence
for longer periods of time and are better established, and some of them also have broader public recognition and substantially
greater financial and marketing resources. However, the constant move towards consolidation may have the effect of encouraging
clients to seek an alternative to their incumbent plan, opening an opportunity for a flexible and client-focused alternative.
HCCA’s ability to attract and retain
customers is substantially dependent on HCCA’s capability to provide competitive pricing, efficient and accurate claims management,
client and member services and related reporting and clinical management services.
Competitive Strengths
We believe that the following competitive
strengths are the keys to our success:
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Customer Service: HCCA places high level of importance on the quality of its customer support organization. We believe based
on customers feedback that our customer support is one of our competitive strengthens compared to our competitors.
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Pharmacy Network: Through HCCA’s partner Argus, HCCA’s network features over 63,000 pharmacies nationwide, representing
over 95% of pharmacies in the country. Argus processes claims on the level of the largest PBMs. Argus’ buying power allows
HCCA to compete with much bigger PBMs, as it eliminates some of the larger PBMs’ price advantage when compared to HCCA. New
clients of HCCA who are switching from larger PBMs experience a seamless transition to HCCA’s plan, as it is accepted at
nearly all pharmacies nationwide. By exploiting its relationship with Argus, HCCA is able to deliver a higher degree of savings
to its customers and gain greater appeal in the contracting process due to the availability of the large network.
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Price: HCCA’s partnership with Argus provides state-of-the-art electronic claims adjudication capabilities. Argus currently
processes an aggregate of over 500 million pharmacy claims a year for a number of PBM providers. Due to this substantial market
presence, it is generally able to negotiate drug prices far below that which PBMs of comparable size to HCCA would otherwise be
able to. Further, there are no fixed costs associated with this network, as all payments are set up on a per-prescription processed
basis. When added to HCCA’s retail mail-order pharmacy, which provides discounts for customers while keeping all revenue
in-house, we believe HCCA’s network stands at a fairly equal footing with the largest PBMs in the market.
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Unique and Innovative Programs:
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Patient Empowerment Program (PEP): This voluntary clinical management program provides members with a cash incentive to try
brand-to-generic substitutions and therapeutic brand alternatives. PEP provides a small but worthwhile cash payment for each switch
from brand to generic.
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Prescription Savings Card: HCCA’s prescription savings card program is a promotional program that enables members and
their families to realize savings of 15% to 75% on prescription drug purchases through Argus’ nationwide network of over
64,000 retail pharmacies and HCCA’s mail-order retail pharmacy.
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Business Strategy
We seek to continue our growth as a lower-cost,
high customer service prescription services provider in the United States. Broadly defined, our basic strategies are to expand
HCCA’s customer base geographically and within the government sector, while at the same time pursuing unique new applications
of HCCA’s knowledge and technology to higher margin businesses that can continue to diversify and expand its overall revenue
stream. HCCA’s primary strategies by product line are:
Existing Programs
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Fully-Funded: Penetrate the private market sector as well as non profits while improving the profitability of our current customer
contacts which are primarily in the government sector. Recently, we have decided to de-emphasize our focus on the fixed fee local
government PBM marketplace due to its lack of profitability. We estimate that this business line which accounted for approximately
74% of our revenues for the six months ending December 31, 2013, and which generated substantial operating losses, will decline
in the months to come as annual renewable contracts may not renew due to our demand for substantial price increases as a condition
for contract renewals.
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Self-Funded: Within the self-funded product line, we intend to follow a similar strategy of expansion within and outside the
region and aggressive growth targeting as with the fully-funded line. In general, self-funded clients are larger and we believe
the role of the benefit consultant is very important. HCCA has established good working relationships with benefits consulting
groups, and will continue to do so as a market strategy. HCCA’s direct sales force also targets clients directly, so that
HCCA can directly participate in the bidding process and receive RFPs from potential clients.
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340B Basics: The federal drug-pricing program, 340B, requires drug manufacturers to sell outpatient drugs at a reduced cost
to eligible healthcare centers, clinics and hospitals. The goal is to incentivize healthcare providers to expand medication access
to low-income individuals, families and other vulnerable populations. HCCA’s new 340 Basics product is a compliance management
solution that includes HCCA proprietary software as well as management processes and controls. It provides multiple channels with
the operational framework to meet administrative and inventory control challenges relating to 340B compliance, maximize potential
pharmacy savings and control costs. Since its launch in August 2013, HCCA signed up 7 new customers that are expected to go live
by mid-2014.
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Partnerships with Healthcare Management Companies: In early 2012, HCCA executed its first agreement with a regional health
benefits provider, for which it created a privately labeled PBM product. HCCA’s private-label product, which does not vary
in terms from HCCA’s other products, is the companion drug benefit program for clients that elect to include a drug benefit
with their health benefits purchase. Since April 2013, the regional health benefits provider no longer offers the private-label
PMB product to new customers, though it does provide the product to customers who have previously selected the private-label product.
HCCA believes it can create privately labeled PBM products for other health benefits providers in the future and it is exploring
other opportunities with firms like these.
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Rx Savings Solutions: The Savings Solutions line offers an opportunity for growth and higher margins as compared to the core
PBM product lines. HCCA will continue to move aggressively to apply the Savings Solutions’ generic-based model to larger
customers.
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Government Regulation
Various aspects of our business are governed
by federal and state laws and regulations. Because sanctions may be imposed for violations of these laws, compliance is a significant
operational requirement. We believe that we are in substantial compliance with all existing legal requirements material to the
operation of our business. There are, however, significant uncertainties involving the application of many of these legal requirements
to its business. In addition, at any given time, there are numerous proposed health care laws and regulations at the federal and
state levels, many of which could harm its business, results of operations, and financial condition. We are unable to predict what
additional federal or state legislation or regulatory initiatives may be enacted in the future relating to its business or the
health care industry in general, or what effect any such legislation or regulations might have on us. We also cannot provide any
assurance that federal or state governments will not impose additional restrictions or adopt interpretations of existing laws or
regulations that could harm our business or financial performance.
Some of the state laws described below may
be preempted in whole or in part by the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), which
provides for comprehensive federal regulation of employee benefit plans. However, the scope of ERISA preemption is uncertain given
the extensive and sometimes conflicting court rulings addressing the topic. We also provide services to certain clients, such as
governmental entities, that are not subject to ERISA.
Federal Laws and Regulations Affecting Us
The following descriptions identify various
federal laws and regulations that affect or may affect aspects of HCCA’s PBM business:
Legislation and Litigation Affecting
Drug Prices
Average wholesale price (“AWP”)
is a standard pricing metric published by third party data sources and currently used throughout the pharmacy benefits industry
as the basis for determining drug pricing under contracts with clients, pharmacies, and pharmaceutical manufacturers. The calculation
and reporting of AWP have been the subject of investigations by federal and state governments and litigation brought against pharmaceutical
manufacturers, as well as data services that report AWP. We are not responsible for calculations, reports or payments of AWP; however,
such investigations or lawsuits could impact our business because many of our customer contracts, pharmaceutical purchase agreements,
retail network contracts and other agreements use AWP as a pricing benchmark. In March 2009, a federal district court gave final
approval to settlement of class action lawsuits brought against First DataBank and Medi-Span, two primary sources of AWP reporting.
Under the terms of the settlement, First DataBank and Medi-Span agreed, among other things, to reduce the reported AWP of certain
prescription drugs by four percent effective September 26, 2009. First DataBank and Medi-Span also announced that they would discontinue
publishing AWP within two years of the settlement. On September 3, 2009, a federal appeals court rejected challenges to the settlements,
clearing the way for the AWP reductions to take effect.
Changes such as these, as well as any changes
proposed by the federal government and the states regarding the reimbursement for drugs by Medicaid and Medicare, could impact
our pricing to customers and other payors and could impact our ability to negotiate discounts with manufacturers, wholesalers,
or retail pharmacies.
Federal Anti-Kickback/Fraud and Abuse
Laws
The federal Anti-Kickback Statute (“AKS”)
is a criminal law that prohibits, among other things, an individual or entity from knowingly or willfully paying or receiving,
subject to certain statutory exceptions and regulatory safe harbors, any remuneration, directly or indirectly, intended to induce:
(1) a referral for the furnishing of any item or service for which payment may be made in whole or in part under a federal health
care program, including Medicare, Medicaid and the Tricare Program, or (2) the purchase, lease, order or the arranging for or recommending
of the purchase, lease, or order of items or services for which payment may be made in whole or in part under federal health care
programs. Penalties for violating the AKS may include imprisonment, criminal and civil fines, and exclusion from participation
in the federally-funded health care programs.
The AKS has been interpreted broadly by
courts, the U.S. Department of Health & Human Services (“HHS”), Office of Inspector General (“OIG”),
the agency charged with the enforcement of the AKS, and other administrative bodies. Because of the statute’s broad scope
and the limited statutory exceptions, the OIG has established certain regulatory safe harbors which, if fully met, should immunize
the parties from liability under the AKS. For example, safe harbors exist for certain properly disclosed and reported discounts
received from vendors, certain investment interests, certain properly disclosed payments made by vendors to group purchasing organizations,
certain personal services arrangements, and certain discount and payment arrangements between PBMs and HMO risk contractors serving
Medicaid and Medicare members. A practice that does not fall within an exception or a safe harbor is not necessarily unlawful,
but may be subject to scrutiny and challenge. Some, though not all, court opinions interpreting the AKS have focused primarily
on the law’s intent requirement and have held that an arrangement will violate the AKS if any one purpose of the arrangement
is to induce referrals or purchases, even if the payments at issue are also intended for a legitimate purpose. Thus, a violation
of the statute may occur even if only one purpose of a payment arrangement is to induce patient referrals or purchases of products
or services that are reimbursed by federal health care programs. Among the practices that have been identified by the OIG as potentially
improper under the statute are certain product conversion programs in which benefits are given by drug manufacturers to pharmacists
or physicians for changing a prescription, or recommending or requesting such a change, from one drug to another. The AKS has been
cited as a partial basis, along with state consumer protection laws discussed below, for investigations and multi-state settlements
relating to financial incentives provided by drug manufacturers to retail pharmacies as well as to PBMs in connection with such
programs.
In April 2003, the OIG published “Final
OIG Compliance Program Guidance for Pharmaceutical Manufacturers” (the “Compliance Guidance”). The Compliance
Guidance, which is directed toward pharmaceutical manufacturers, provides the OIG’s views on the fundamental elements of
pharmaceutical manufacturer compliance programs. The Compliance Guidance also highlights several potentially risky arrangements
for pharmaceutical manufacturers, including the provision of grants, “prebates” and “upfront payments”
to PBMs to support disease management programs and therapeutic interchanges. In addition, the Compliance Guidance indicates that
the provision of rebates or other payments to PBMs by pharmaceutical manufacturers may potentially trigger liability under the
AKS if not properly structured and disclosed.
The Health Care Reform Laws made two important
clarifications that significantly strengthen the government’s ability to enforce the AKS. First, the Health Care Reform Laws
clarified that a person need not have actual knowledge of or specific intent to violate the AKS. Second, the Health Care Reform
Laws made clear that a claim resulting from an AKS violation constitutes a false claim under the federal False Claims Act (“FCA”).
The provision codifies what some federal district courts had already held and significantly heightens the civil penalties HCCA
could face for any alleged AKS violation.
Additionally, it is a crime under the Public
Contract Anti-Kickback Act, for any person to knowingly and willfully offer or provide any remuneration to a prime contractor to
the United States, including a contractor servicing federally funded health programs, in order to obtain favorable treatment in
a subcontract. Violators of this law also may be subject to civil monetary penalties.
We believe that we are in substantial compliance
with the legal requirements imposed by such anti-kickback laws and regulations. However, we cannot assure you that we will not
be subject to scrutiny or challenge under such laws or regulations. Any such challenge could harm HCCA’s business, results
of operations, financial condition or cash flows.
Federal Statutes Prohibiting False
Claims
The FCA imposes liability for knowingly
making or causing to be made false claims to the government, including federal health care programs such as Medicare and Medicaid.
For example, potential false claims include claims for services not rendered, or claims that misrepresent actual services rendered
in order to obtain higher reimbursement. Private individuals may bring qui tam or whistleblower lawsuits against providers under
the FCA, which authorizes the payment of a portion of any recovery to the individual bringing suit. Such actions are initially
required to be filed under seal pending their review by the Department of Justice. Federal district courts have interpreted the
FCA as applying to claims for reimbursement that violate the AKS or federal physician self-referral law (commonly referred to as
the “Stark Law”) under certain circumstances. The Health Care Reform Laws expanded false claims liability by clarifying
that an AKS violation can be a predicate for a false claim under the FCA and by adding a provision that imposes FCA liability on
an individual or entity that fails to make a timely return of any overpayments received from Medicare or Medicaid. The FCA generally
provides for the imposition of civil penalties and for treble damages, resulting in the possibility of substantial financial penalties
for small billing errors that are replicated in a large number of claims, as each individual claim could be deemed to be a separate
violation of the FCA. Criminal provisions that are similar to the FCA provide that a corporation may be fined if it is convicted
of presenting to any federal agency a claim or making a statement that it knows to be false, fictitious or fraudulent to any federal
agency.
ERISA Regulation
ERISA regulates certain aspects of employee
pension and health benefit plans, including self-funded corporate health plans. We have agreements with self-funded corporate health
plans to provide PBM services, and therefore, we are a service provider to ERISA plans. ERISA imposes duties on any person or entity
that is a fiduciary with respect to the ERISA plan. We administer pharmacy benefits for ERISA plans in accordance with plan design
choices made by the ERISA plan sponsors. We do not believe that the general conduct of our business subjects us to the fiduciary
obligations set forth by ERISA, except to the extent we have specifically contracted with an ERISA plan sponsor to accept fiduciary
responsibility for the limited purpose of addressing benefit claims and appeals. However, we cannot assure you that the U.S. Department
of Labor, which is the agency that enforces ERISA, or a private litigant would not assert that the fiduciary obligations imposed
by ERISA apply to certain aspects of our operations.
Numerous lawsuits have been filed against
various PBMs by private litigants, including Plan participants on behalf of an ERISA plan and by ERISA Plan sponsors, alleging
that the PBMs are ERISA fiduciaries and that, in such capacity, they allegedly violated ERISA fiduciary duties in connection with
certain business practices related to their respective contracts with retail pharmacy networks and/or pharmaceutical manufacturers.
ERISA also imposes civil and criminal liability
on service providers to health plans and certain other persons if certain forms of illegal remuneration are made or received. These
provisions of ERISA are similar, but not identical, to the federal healthcare Anti-Kickback Statute discussed above. In particular,
ERISA does not provide the statutory and regulatory safe harbor exceptions incorporated into the federal healthcare Anti-Kickback
Statute. Like the health care anti-kickback laws, the corresponding provisions of ERISA are written broadly and their application
to particular cases is often uncertain. We have implemented policies regarding, among other things, disclosure to health plan sponsors
with respect to any commissions paid by or to us that might fall within the scope of such provisions and, accordingly, believes
that we are in substantial compliance with any applicable provisions of ERISA. However, we cannot assure you that our policies
in this regard would be found by the U.S. Department of Labor and potential private litigants to meet the requirements of ERISA.
In addition, the U.S. Department of Labor
has recently issued several regulations that impose new fee disclosure rules on certain ERISA plans and their service providers.
Those regulations do not currently apply to self-funded corporate health plans and their service providers, but the U.S. Department
of Labor has held hearings to discuss extending them in the future. As a result, we are not yet able to assess the effect the regulations
may have on its business.
FDA Regulation
The U.S. Food and Drug Administration (“FDA”)
generally has authority to regulate drug promotional materials that are disseminated by or on behalf of a drug manufacturer. The
FDA also may inspect facilities in connection with procedures implemented to effect recalls of prescription drugs.
In addition, the FDA has authority to require
the submission and implementation of a risk evaluation and mitigation strategy, or REMS, if the FDA determines that that a REMS
is necessary for the safe and effective marketing of a drug. To the extent we dispense products subject to REMS requirements or
provide REMS services to a pharmaceutical manufacturer, we are subject to audit by the pharmaceutical manufacturer.
Antitrust Regulation
Various federal and state antitrust laws
regulate trade and commerce with the objective of protecting the competitive process. Thus, Section One of the Sherman Act prohibits
agreements that unreasonably restrain competition; Section Two of the Sherman Act prohibits monopolization and attempts to monopolize;
Section Seven of the Clayton Act prohibits mergers and acquisitions which may substantially lessen competition; and the Robinson-Patman
Act prohibits discriminating in price among different customers in certain circumstances. The interpretation of these broadly-worded
statutes is left for the courts, and there is often uncertainty concerning the application of the antitrust laws to specific business
practices. Successful plaintiffs in federal antitrust actions are always entitled to recover treble damages, as well as their attorneys’
fees. (In addition, virtually all states have antitrust statutes analogous to the Sherman Act, often including automatic treble
damages and attorneys’ fees.)
Numerous retail pharmacies in the U.S. have
filed lawsuits against pharmaceutical manufacturers, drug wholesalers, and PBMs challenging certain branded drug pricing practices
under federal and state antitrust laws. The complaints alleged, in part, that the manufacturers gave, and the PBMs accepted, rebates
and discounts on purchases of brand name prescription drugs, in violation of the Robinson-Patman Act, and that the manufacturers,
drug wholesalers, and PBMs conspired in violation of the Sherman Act not to provide similar rebates and discounts to the plaintiff
retail pharmacies. Although the Sherman Act allegations have been resolved, often with substantial settlements, certain Robinson-Patman
Act claims continue to be litigated. The plaintiffs seek unspecified monetary damages, including trebled damages, injunctive relief
against the alleged price discrimination, and attorneys’ fees.
We believe that we are in compliance with
the legal requirements imposed by the antitrust laws. However, we cannot assure you that we will not be subject to scrutiny or
challenge under such laws. Any such challenge could harm our business, results of operations, financial condition, or cash flows.
State Laws and Regulations Affecting Us
The following descriptions identify various
state laws and regulations that affect or may affect aspects of our PBM business:
State Anti-Kickback/False Claims
Laws
Many states have laws and/or regulations
similar to the AKS and the FCA described above, while several others are currently considering passing or strengthening false claims
laws. Such state laws are not necessarily limited to services or items for which government-funded health care program payments
may be made. Such state laws may be broad enough to include improper payments made in connection with services or items that are
paid by commercial payors. Penalties for violating these state anti-kickback and false claims laws may include, but are not limited
to, injunction, imprisonment, criminal and civil fines and exclusion from participation in the state Medicaid programs. Additionally,
under the Deficit Reduction Act of 2005, discussed in greater detail below, states are incentivized to pass broad false claims
legislation similar to the FCA, and there has been activity in several states during the past several years to do so.
We believe that we are in substantial compliance
with the legal requirements imposed by such laws and regulations. However, we cannot assure you that we will not be subject to
scrutiny or challenge under such laws or regulations. Any such challenge could harm our business, results of operations, financial
condition or cash flows.
State Consumer Protection Laws
Most states have enacted consumer protection
and deceptive trade practices laws that generally prohibit payments and other broad categories of conduct deemed harmful to consumers.
These statutes may be enforced by states and/or private litigants. Such laws have been and continue to be the basis for investigations,
prosecutions, and settlements of PBMs, initiated by state prosecutors as well as by private litigants.
We believe that we are in substantial compliance
with the legal requirements imposed by such laws and regulations. However, we cannot assure you that we will not be subject to
scrutiny or challenge under one or more of these laws, or under similar consumer protection theories.
State Comprehensive PBM Regulation
Legislation directly regulating PBM activities
in a comprehensive manner has been introduced in a number of states. In addition, legislation has been proposed in some states
seeking to impose fiduciary obligations or disclosure requirements on PBMs. The District of Columbia has enacted a statute imposing
fiduciary and disclosure obligations on PBMs. Similarly, both North Dakota and South Dakota have relatively comprehensive PBM laws
that, among other things, increase financial transparency and regulate therapeutic interchange programs. Each state that enacts
such legislation requires us to adapt our operations in that state, which could harm us.
Many states have licensure or registration
laws governing certain types of ancillary health care organizations, including preferred provider organizations, third-party administrators,
or TPAs, companies that provide utilization review services, and companies that engage in the practices of a pharmacy. The scope
of these laws differs significantly from state to state, and the application of such laws to the activities of PBMs often is unclear.
In addition, certain quasi-regulatory organizations,
including the National Association of Boards of Pharmacy and the National Association of Insurance Commissioners have issued model
regulations or may propose future regulations concerning PBMs and/or PBM activities, and the National Committee for Quality Assurance,
the Utilization Review Accreditation Commission, or other credentialing organizations may provide voluntary standards regarding
PBM activities. In 2007, for example, the Utilization Review Accreditation Commission finalized PBM accreditation standards for
PBMs serving the commercially insured market. While the actions of these quasi-regulatory organizations do not have the force of
law, they may influence states to adopt their requirements or recommendations as well as influence customer requirements for PBM
services. Moreover, any standards established by these organizations could also impact its health plan customers and/or the services
we provide to them.
Network Access Legislation
A majority of states now have some form
of legislation affecting our ability to limit access to a pharmacy provider network (“any willing provider” legislation),
or removal of a network provider, (“due process” legislation). Such legislation may require us or our clients to admit
any retail pharmacy willing to meet the plan’s price and other terms for network participation, or may provide that a provider
may not be removed from a network except in compliance with certain procedures. These statutes have not materially affected our
business.
State Legislation Affecting Plan
or Benefit Design
Some states have enacted legislation that
prohibits certain types of managed care plan sponsors from implementing certain restrictive design features, and many states have
legislation regulating various aspects of managed care plans, including provisions relating to the pharmacy benefits. For example,
some states, under so-called freedom of choice legislation, provide that members of the plan may not be required to use network
providers, but must instead be provided with benefits even if they choose to use non-network providers. Other states have enacted
legislation purporting to prohibit health plans from offering members financial incentives for use of mail service pharmacies.
Legislation has been introduced in some states to prohibit or restrict therapeutic intervention, to require coverage of all FDA-approved
drugs or to require coverage for off-label uses of drugs where those uses are recognized in peer-reviewed medical journals or reference
compendia. Other states mandate coverage of certain benefits or conditions and require health plan coverage of specific drugs,
if deemed medically necessary by the prescribing physician. Such legislation does not generally apply to us directly, but may apply
to certain of our clients, such as HMOs and health insurers. If legislation were to become widely adopted, it could have the effect
of limiting the economic benefits achievable through PBMs. This development could harm our business, results of operations, financial
condition or cash flows.
State Regulation of Financial Risk
Plans
Fee-for-service prescription drug plans
(“PDPs”) are generally not subject to financial regulation by the states. However, if a PBM offers to provide prescription
drug coverage on a capitated basis or otherwise accepts material financial risk in providing the benefit, laws in various states
may regulate the plan. Such laws may require that the party at risk establish reserves or otherwise demonstrate financial responsibility.
Laws that may apply in such cases include insurance laws, HMO laws or limited prepaid health service plan laws. Currently, we do
not believe that our PBM business incurs financial risk of the type subject to such regulation. However, if we choose to become
a regional PDP for the Medicare outpatient prescription drug benefit at some time in the future, we would need to comply with state
laws governing risk-bearing entities in the states where we operate a PDP.
State Discount Drug Card Regulation
Numerous states have laws and/or regulations
regulating the selling, marketing, promoting, advertising or distributing of commercial discount drug cards for cash purchases.
Such laws and regulations provide, generally, that any person may bring an action for damages or seek an injunction for violations.
We administer a limited commercial discount drug card program that we do not consider material to our business. We believe the
administration of the commercial discount drug card program is in compliance with various state laws. However, we cannot assure
you that the existence of such laws will not materially impact our ability to offer certain new commercial products and/or services
in the future.
Combined Federal and State Laws, Regulations and
Other Standards Affecting Us
Certain aspects of our PBM business are
or may be affected by bodies of law that exist at both the federal and state levels and by other standard setting entities. Among
these are the following:
Pharmacy Licensure and Regulation
We are subject to state and federal statutes
and regulations governing the operation of mail service pharmacies and the dispensing of controlled substances. The practice of
pharmacy is generally regulated at the state level by state boards of pharmacy. Each of our pharmacies must be licensed in the
state in which we are located. Also, many of the states where we deliver pharmaceuticals, including controlled substances, have
laws and regulations that require out-of-state mail service pharmacies, such as us, to register with that state’s board of
pharmacy or similar regulatory body. Federal statutes and regulations govern the labeling, packaging, advertising and adulteration
of prescription drugs and the dispensing of controlled substances. Federal controlled substance laws require us to register our
pharmacies with the United States Drug Enforcement Administration and to comply with security, record keeping, inventory control
and labeling standards in order to dispense controlled substances. We are also subject to certain federal and state laws affecting
Internet-based pharmacies because we dispense prescription drugs pursuant to refill orders received through our Internet websites,
among other methods. Several states have proposed new laws to regulate Internet-based pharmacies, and federal regulation of Internet-based
pharmacies by the FDA or another federal agency has also been proposed. Other statutes and regulations may affect our mail service
operations. For example, the Federal Trade Commission, or FTC, requires mail service sellers of goods generally to engage in truthful
advertising, to stock a reasonable supply of the products to be sold, to fill mail service orders within thirty days and to provide
clients with refunds when appropriate. In addition, the United States Postal Service has statutory authority to restrict the transmission
of drugs and medicines through the mail. Our pharmacists are subject to state regulation of the profession of pharmacy and employees
engaged in a professional practice must satisfy applicable state licensing requirements.
Privacy and Confidentiality Legislation
Our activities involve the receipt, use
and disclosure of confidential health information, including disclosure of the confidential information to a customer’s health
benefit plan, as permitted in accordance with applicable federal and state privacy laws. In addition, we use and discloses data
that was identifying information removed for analytical and other purposes. Many state laws restrict the use and disclosure of
confidential medical information, and similar new legislative and regulatory initiatives are underway at the state and federal
level. To date, no such laws presently have adversely impacted our ability to provide our services, but we cannot assure you that
federal or state governments will not enact such legislation, impose restrictions or adopt interpretations of existing laws that
could harm our business, results of operations, financial condition or cash flows.
The Health Insurance Portability and Accountability
Act of 1996 and the regulations issued thereunder (collectively “HIPAA”) impose extensive requirements on the way in
which health plans, healthcare providers that engage in certain electronic financial and administrative transactions covered by
HIPAA, and healthcare clearinghouses (known as “covered entities”) and the persons or entities that use or disclose
protected health information, or PHI, to provide services to covered entities or to perform functions on their behalf (known as
“business associates”), use, disclose and safeguard PHI, including requirements to protect the integrity, availability
and confidentiality of electronic PHI. Many of these obligations were expanded under the Health Information Technology for Economic
and Clinic Health Act (the “HITECH Act”), passed as part of the American Recovery and Reinvestment Act of 2009.
The final privacy regulations, which is
referred to as the Privacy Rule, issued by the Office for Civil Rights (“OCR”) of HHS pursuant to HIPAA, give individuals
the right to know how their PHI is used and disclosed, as well as the right to access, amend and obtain information concerning
certain disclosures of PHI. Covered entities, such as pharmacies and health plans, are required to provide a written Notice of
Privacy Practices to individuals that describes how the entity uses and discloses PHI, and how individuals may exercise their rights
with respect to their PHI. For most uses and disclosures of PHI other than for treatment, payment, healthcare operations and certain
public policy purposes, HIPAA generally requires that covered entities obtain a valid written individual authorization. In most
cases, use or disclosure of PHI must be limited to the minimum necessary to achieve the purpose of the use or disclosure.
We are a covered entity under HIPAA in connection
with our operation of a mail service pharmacy.
In connection with our other activities
that require access to PHI, we are not considered a covered entity. However, our health plan clients and pharmacy customers are
covered entities, and are required to enter into business associate agreements with vendors, such as PBMs, that perform a function
or activity for the covered entity that involves the use or disclosure of individually identifiable health information. The business
associate agreements mandated by the Privacy Rule create a contractual obligation for the business associate to perform its duties
for the covered entity in compliance with the Privacy Rule. Effective February 17, 2010, the HITECH Act created a statutory obligation
for us, when we acts as a business associate, to satisfy certain aspects of the Privacy Rule and the final HIPAA security regulations.
If we fail to comply with HIPAA or our policies
and procedures are not sufficient to prevent the unauthorized disclosure of PHI, we could be subject to liability, fines and lawsuits
under federal and state privacy laws, consumer protection statutes and other laws. Criminal penalties and civil sanctions may be
imposed for failing to comply with HIPAA standards either as a covered entity or business associate, and these penalties and sanctions
have significantly increased under the HITECH Act. In February 2011, OCR, the agency responsible for enforcing HIPAA and HITECH,
issued the first civil monetary penalty ever imposed for a covered entity’s violation of the HIPAA Privacy Rule. Additionally,
the HITECH Act requires OCR to conduct periodic compliance audits. Continued enforcement actions are likely to occur in the future.
Furthermore, HITECH provides authority to state attorney generals to bring actions in federal court for violations of HIPAA on
behalf of state residents harmed by such violations.
The final transactions and code sets regulation
(the “Transaction Rule”) promulgated under HIPAA requires that all covered entities that engage in certain electronic
transactions use standardized formats and code sets. We, in our role as a business associate of a covered entity, must conduct
such transactions in accordance with the Transaction Rule. HHS promulgated a National Provider Identifiers, or NPI, Final Rule
which requires health plans to utilize NPIs in all Standard Transactions. NPIs replaced National Association of Boards of Pharmacy
numbers for pharmacies, Drug Enforcement Agency numbers for physicians and similar identifiers for other health care providers
for purposes of identifying providers in connection with HIPAA standard transactions. We have undertaken the necessary arrangements
to ensure that our standard transactions remain compliant with the Transaction Rule subsequent to the implementation of the NPI
Final Rule.
The final security regulations (the “Security
Rule”) issued pursuant to HIPAA mandate the use of administrative, physical, and technical safeguards to protect the confidentiality
of electronic PHI. As with the other two rules issued pursuant to HIPAA, the Security Rule applies to covered entities, and certain
aspects of the Security Rule also apply to business associates. We have made the necessary arrangements to ensure compliance with
the Security Rule for all aspects of our business.
We must also comply with the “breach
notification” regulations, which implement provisions of the HITECH Act. Under these regulations, covered entities must promptly
notify affected individuals and the HHS Secretary in the case of a breach of “unsecured PHI,” as well as the media
in cases where a breach affects more than 500 individuals. Breaches affecting fewer than 500 individuals must be reported to the
HHS Secretary on an annual basis. The regulations also require business associates of covered entities to notify the covered entity
of breaches at or by the business associate. We have taken and continue to take reasonable steps to reduce the amount of unsecured
PHI we handle.
In addition, final regulations governing
a covered entity’s obligation to provide are available upon individual request. A recently released proposed rule, if finalized,
would require covered entities to develop systems to monitor which of their employees’ and business associates’ access
an individual’s electronic PHI, at what time and date access occurs, and the action taken during the access session (e.g.,
modification, deletion, viewing). The proposed rule would also require information on access to electronic designated record sets
held by business associates. The proposed regulations could impose significant burdens on covered entities and business associates
that result from having to take reports generated for internal purposes and modify them for disclosure to patients or health plan
enrollees.
While new and future legal interpretations
could alter our assessment of our efforts to comply with provisions of HIPAA, the HITECH Act, and the Health Care Reform Laws that
govern the privacy, security and standardization of health care information and transactions, we currently believe that compliance
with these legal authorities should not harm our business operations.
Pursuant to HIPAA, state laws that are more
protective of PHI are not pre-empted. Therefore, to the extent states continue to enact more protective legislation, we could be
required to make significant changes to our business operations.
Independent of any regulatory restrictions,
individual health plan clients could increase limitations on their use of medical information, which could prevent us from offering
certain services.
The Health Care Reform Laws
On March 23, 2010, the President of the
United States signed into law the most comprehensive change to America’s healthcare system in decades. The Health Care Reform
Laws contain a variety of provisions that could have a significant impact on us and our customers. The Health Care Reform Laws
provide the opportunity for significant expansion of our PBM activities. These potential benefits are the result of an expected
increase in the number of individuals with health insurance and the potential increase in demand for pharmaceutical products and
services.
However, the Health Care Reform Laws also
present great uncertainty for us and potential risks to our operations and financial success. The Health Care Reform Laws contain
many provisions intended to reduce the government’s healthcare costs through reimbursement reductions, alternative payment
methods, and ongoing studies of healthcare reimbursement systems. For example, the Health Care Reform Laws establish the Independent
Payment Advisory Board, or IPAB, which is designed to make proposals as early as 2014 to reduce the per capita rate of growth in
Medicare spending in years when that growth exceeds established targets. Another potential source of reimbursement uncertainty
is the newly established Center for Medicare and Medicaid Innovation, or CMMI, which is designed to test the cost-cutting efficacy
of innovative payment service delivery systems through demonstration projects. These types of provisions could have a significant
impact on our profitability and our customers, particularly because of the unpredictability of the proposals that could be generated
by the IPAB and the CMMI.
The Health Care Reform Laws also require
PBMs to disclose certain information, including discounts and rebates obtained from pharmaceutical manufacturers, to PDP or MA-PD
plan sponsors or qualified health benefits plans offered through an exchange. In addition, the Health Care Reform Laws change the
calculation of Medicaid rebates in a way that could increase or decrease pharmaceutical manufacturers’ incentive to provide
discounts and rebates to PBMs. These changes could have a negative impact on our revenues or business model. Additionally, the
Health Care Reform Laws expand existing fraud and abuse provisions and significantly increase the resources available to the federal
government to pursue fraud and abuse issues, which could expose us to greater scrutiny and possibly significant financial liability.
For example, the Health Care Reform Laws extend the treble damages available for violations of the FCA to violations relating to
the state-based health insurance exchanges created by the Health Care Reform Laws. Moreover, the Health Care Reform Laws establish
new civil monetary penalties: $15,000 daily for failure to grant timely access to the OIG for the purposes of audits or investigations
and $50,000 for each false record or statement knowingly submitted or caused to be submitted for payment of items furnished under
a federal health care program. As a result, we may be forced to expend greater resources on monitoring and compliance programs
and legal fees. Similarly, its customers may be subject to greater scrutiny and financial liability, which could indirectly put
pressure on its financial relationships with those customers.
Aside from particular provisions of the
Health Care Reform Laws, there is significant uncertainty about the implementation of the Health Care Reform Laws, likely through
hundreds of new regulations, guidance documents, and other policy statements that could result in significant changes to our business
model and the healthcare economy as a whole.
Political developments also continue to
contribute to the uncertainty surrounding implementation of the Health Care Reform Laws. The Health Care Reform Laws will likely
play an important role in the November 2012 elections, results of which may affect the timing, manner, and predictability of the
Health Care Reform Laws’ regulatory implementation. The resulting unpredictability creates significant uncertainty for us
and our customers about the structure and regulatory environment of the healthcare market and future revenue sources.
Future Regulation
We are unable to predict accurately what,
if any, additional federal or state legislation or regulatory initiatives may be enacted in the future relating to our businesses
or the health care industry in general, or what effect any such legislation or regulations might have on us. For example, the federal
government and several state governments have considered the Patients’ Bill of Rights and other similar legislation aimed
primarily at improving quality of care provided to individuals in managed care plans. Some of the initiatives would provide greater
access to drugs not included on health plan formularies, giving participants the right to sue their health plan for malpractice,
and mandating an appeals or grievance process. We cannot assure you that federal or state governments will not impose additional
restrictions, via a Patients’ Bill of Rights or otherwise, or adopt interpretations of existing laws that could harm our
business, results of operations, financial condition or cash flows.
Employees
As of December 31, 2013, we had 56
employees, primarily located in Denville, New Jersey, who work full time for us. We have never had a work stoppage. Our
personnel are not represented by any collective bargaining unit and are not unionized. We consider our relations with our
personnel to be good. Our future success will depend, in part, on our ability to continue to attract, retain, and motivate
highly qualified technical and managerial personnel, for whom competition is intense.
Customers
As of December 31, 2013 we had 56 customers.
Approximately 12% of the Company’s 2012 revenues were derived from one customer. Revenues from this customer were 9% of our
revenues for the year ended December 31, 2013. In addition, approximately 13% of the Company’s 2013 revenues were derived
from another customer. No amounts were due from either customer at December 31 2013 or December 31, 2012. In addition, the customers
of one of the Company’s resellers accounted for approximately 25% and 14% of the Company’s revenues for the years ended
December 31, 2013 and December 31, 2012, respectively. Amounts due from these customers represented 76% and 46% of accounts receivable
at December 31, 2013 and December 31, 2012, respectively.
We currently expect our revenues to decline
over the next 12 months, hence it is possible that our dependence on revenues derived from any specific customer or reseller will
increase over the short term.
We have restated our financial statements in the
past and may be required to do so in the future.
We have restated certain financial information
in the past, including by issuing restated financial information for the year ended December 31, 2012 and the quarter ended March
31, 2013. The preparation of financial statements in accordance with U.S. GAAP involves making estimates, judgments, interpretations
and assumptions that affect reported amounts of assets, liabilities, revenues, expenses and income. These estimates, judgments,
interpretations and assumptions are often inherently imprecise or uncertain, and any necessary revisions to prior estimates, judgments,
interpretations or assumptions could lead to further restatements. Any such restatement or correction may be highly time consuming,
may require substantial attention from management and significant accounting costs, may result in adverse regulatory actions by
the SEC and/or stockholder litigation, may cause us to fail to meet our reporting obligations and/or may cause investors to lose
confidence in our reported financial information, leading to a decline in our stock price.
Due to our inability to prepare audited
financial statements for the year ended December 31, 2011 for HCCA, our predecessor, we were previously not compliant with
our SEC filing obligations and our shareholders were therefore not eligible to sell securities pursuant to Rule 144 and
the Company could not file registration statements for the sale of our securities with the SEC.
Due to significant deficiencies
in HCCA’s record keeping in the year ended December 31, 2011, we have been unable to prepare audited financial
statements for HCCA for such year. Therefore, our shareholders were not eligible to sell securities pursuant to Rule 144 and
we could not file registration statements for the sale of our securities with the SEC. The market for our securities will
be extremely limited until our stockholders are able to sell securities pursuant to Rule 144 promulgated under the Securities
Act of 1933, as amended, and we are able to file a registration statement with the SEC relating to the sale of our
securities. In addition, because we were unable to satisfy our obligations to have a registration statement
effective under the terms of certain registration rights agreements, we have accrued estimated liquidated damages
of approximately $864,000.
We have not yet established an ongoing source of
revenues sufficient to cover our operating costs to allow us to continue as a going concern.
We have been able to complete
various financings as described herein during 2012, 2013 and 2014. Nevertheless, as of February 2014 we have not yet established
an ongoing source of revenues sufficient to cover our operating costs to allow us to continue as a going concern. Our ability
to continue as a going concern is dependent on our obtaining additional adequate capital to fund operating losses until
we become profitable and generate cash flows from our operations. We are unable to obtain adequate capital, we could be
forced to cease operations. We are contemplating conducting additional offering of its debt or equity securities to
obtain additional operating capital. There are no assurances we will be successful and without sufficient financing it would
be unlikely for us to continue as a going concern.
Our independent registered public accounting firms
have expressed substantial doubt about our ability to continue as a going concern, which may hinder our ability to obtain future
financing.
Our independent registered public accounting
firms stated that our financial statements for the fiscal years ended December 31, 2013 and December 31, 2012
were prepared assuming that we would continue as a going concern, and that certain matters raise substantial doubt about our ability
to continue as a going concern. Such doubts are based on our recurring net losses, accumulated deficit and deficiency in working
capital. We continue to experience losses. Our ability to continue as a going concern is subject to our ability to generate a profit
and/or obtain necessary funding from outside sources, including by the sale of common stock or other equity securities, or obtaining
loans from financial institutions or other financing arrangements. Our continued losses and “going concern” audit report
increase the difficulty of our meeting such goals and our efforts to continue as a going concern may not prove successful.
Our future growth is dependent on further market
acceptance and increased market penetration of our products.
Our business model depends on our ability
to sell our products and services. Achieving increased market acceptance of our products and services will require substantial
sales and marketing efforts and the expenditure of significant financial and other resources to create awareness and demand by
participants in the pharmaceutical supply chain. Additionally, payors, which may have invested substantial resources in other methods
of conducting business and exchanging information, may be reluctant to purchase our products and services.
Recently, we have decided to
de-emphasize our focus on the fixed fee local government PBM marketplace due to its lack of profitability. We estimate that
this business line which accounted for approximately 74% of our revenues for the year ended December 31, 2013, and which
generated substantial operating losses, will decline in the months to come as annual renewable contracts may not renew due to
our demand for substantial price increases as a condition for contract renewals.
We cannot be assured that payors will purchase
our products and services, or to renew our contracts following our anticipated price increases. If we fail to achieve broad acceptance
of our products and services by payors, and other healthcare industry participants, or if we fail to position our services as a
preferred method for pharmaceutical healthcare delivery, our business, financial condition, and results of operations will be harmed.
Competition in our industry is intense and we compete
against companies with greater resources than we have, which could limit our growth potential.
The PBM industry is very competitive. If
we do not compete effectively, our business, results of operations, financial condition or cash flows could suffer. The industry
is highly consolidated and dominated by a few large companies with significant resources, purchasing power, and other competitive
advantages, which we do not have. A limited number of firms, including national PBM companies, such as SXC Health Solutions, Inc.,
Medco Health Solutions, Inc., Express Scripts, Inc. and CVS Caremark Corporation, control a significant share of prescription volume.
Moreover, the recent merger activity between Express Scripts, Inc. and Medco Health Solutions, Inc., and between SXC Health Solutions,
Inc. and Catalyst Health Solutions, Inc. may further increase the market share of our competitors. Our competitors also include
drug retailers, physician practice management companies, and insurance companies/health maintenance organizations. We may also
experience competition from other sources in the future. PBM companies compete primarily on the basis of price, service, reporting
capabilities and clinical services. In most cases, our competitors are large, profitable, and well-established companies with substantially
greater financial and marketing resources than we have. Our limited resources may make it more difficult for us to compete with
the larger companies in our industry and limit our growth.
Pending litigation could have a material, adverse
effect on our business, financial condition, liquidity, results of operations and cash flows.
From time to time we are engaged in lawsuits
which may require significant management time and attention and legal expense, and may result in an unfavorable outcome, which
could have a material, adverse effect on our business, financial condition, liquidity, results of operations and cash flows. Current
estimates of loss regarding pending litigation are based on information that is then available to us and may not reflect any particular
final outcome. The results of rulings, judgments or settlements of pending litigation may result in financial liability that is
materially higher than what management has estimated at this time. We make no assurances that we will not be subject to liability
with respect to current or future litigation. We maintain various forms of insurance coverage. However, substantial rulings, judgments
or settlements could exceed the amount of insurance coverage or could be excluded under the terms of an existing insurance policy.
During 2012, we filed a lawsuit against
our 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, we have 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 us. In August 2013, we settled the suit
with the claims adjudicator. Under the terms of the settlement we 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. The settlement
was discounted to its present value at settlement date and $1,555,712 is recorded in accounts payable at December 31, 2013.
On August 14, 2012, we entered into an agreement
with a shareholder to buy back 500,000 shares of common stock for $100,000. The agreement also called for the payment of $50,000
in legal fees. As of December 31, 2012, we had not received the 500,000 shares of common stock but had paid the settlement. We
received these shares in February 2013. A stock redemption was recorded on December 31, 2012 in the amount of $100,000.
We are dependent on key customers, the loss of which
could significantly harm our results of operations.
We generate a significant portion of our
revenue from a small number of customers.
As of December 31, 2013 we had 56 customers.
Approximately 12% of the Company’s 2012 revenues were derived from one customer. Revenues from this customer were 9% of our
revenues for the year ended December 31, 2013. In addition, approximately 13% of the Company’s 2013 revenues were derived
from another customer. No amounts were due from either customer at December 31 2013 or December 31, 2012. In addition, the customers
of one of the Company’s resellers accounted for approximately 25% and 14% of the Company’s revenues for the years ended
December 31, 2013 and December 31, 2012, respectively. Amounts due from these customers represented 76% and 46% of accounts receivable
at December 31, 2013 and December 31, 2012, respectively.
Recently, we have decided to
de-emphasize our focus on the fixed fee local government PBM marketplace due to its lack of profitability. We estimate that
this business line which accounted for approximately 74% of our revenues for the year ended December 31, 2013, and which
generated substantial operating losses, will decline in the months to come as annual renewable contracts may not renew due to
our demand for substantial price increases as a condition for contract renewals.
Although we continually seek to diversify
our customer base, we may be unable to offset the effects of an adverse change in one of our key customer relationships. For example,
if our existing customers elect not to renew their contracts with us at the expiry of the current terms of those contracts, or
require that we reduce the level of service offerings we provide, our recurring revenue base will be reduced, which could harm
our results of operations. If the healthcare benefits industry or our customers in the healthcare benefits industry experience
problems, they may curtail spending on our products and services and our business and financial results could be harmed.
Costs and uncertainty associated with competitive
bidding for client contracts could significantly harm our results of operations.
Many of our clients put their contracts
out for competitive bidding prior to expiration. Competitive bidding requires costly and time-consuming efforts on our behalf.
We could lose clients if such clients cancel their agreements, if we fail to win a competitive bid at the time of contract renewal,
if the financial condition of any of our private clients deteriorates or if our clients are acquired by, or acquire, companies
with which we do not have contracts. We often compete against much larger companies or PBMs which are captive, that is, they are
subsidiaries of large medical insurance or other health benefit companies. These may have more substantial buying power and may
lower their prices to win business further than we can afford to.
Due to the term of our contracts with customers,
if we are unable to renew those contracts at the same service levels previously provided, or at all, or replace any lost customers,
our future business and results of operations would be harmed.
Our contracts with customers generally do
not have terms longer than one year and, in some cases, are terminable by the customer on relatively short notice. Our larger customers
generally seek bids from other PBM providers in advance of the expiration of their contracts. There is no guarantee that we will
win contacts as they expire, and we must continue to provide savings and quality service at lower cost in order to retain business.
At some point it may not be profitable for us to retain certain clients if competition undercuts it.
A substantial portion of our previous growth was
due to our creation of a private label product with a healthcare management company. If this product does not increase revenue
in future periods, our growth could be negatively impacted.
We created a private label product a for
a healthcare management company, which resulted in a substantial amount of revenue for us. If business from this private label
product does not generate increased revenue and if we are unable to secure new partnerships, our growth would be limited and our
business, financial condition and results of operations could suffer .
If rebate payments that we receive from pharmaceutical
manufacturers and rebate processing service providers decline, our business, results of operations, financial condition or cash
flows could be negatively impacted.
We receive fees from a rebate clearing house
aggregator based on the use of selected drugs by members of health plans sponsored by its clients, as well as fees for other programs
and services. Because these fees are significant relative to the margins for our PBM business, we believe our business, results
of operations, financial condition or cash flows could suffer if:
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the rebate aggregator loses relationships with one or more key pharmaceutical manufacturers;
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the rebate aggregator is unable to finalize rebate contracts with one or more key pharmaceutical manufacturers in the future,
or is unable to negotiate interim arrangements;
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rebates decline due to failure of the rebate aggregator to meet market share or other thresholds;
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legal restrictions are imposed on the ability of pharmaceutical manufacturers to offer rebates or purchase our programs or
services;
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pharmaceutical manufacturers choose not to offer rebates or purchase our programs or services; or
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rebates decline due to contract branded products losing their patents.
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Government efforts to reduce health care costs and
alter health care financing practices could lead to a decreased demand for our services or to reduced rebates from manufacturers.
The Health Care Reform Laws and other proposals
considered by Congress related to health care, could impact PBMs directly (e.g. requiring disclosure of information about pricing
and product switches), or indirectly (e.g. modifying reimbursement rates for pharmaceutical manufacturers participating in government
programs). The Health Care Reform Laws and other health care related proposals may increase government involvement in healthcare
and regulation of PBM, pharmacy services and managed care plans, or otherwise change the way that we do business. Some of these
initiatives would, among other things, require that health plan members have greater access to drugs not included on a plan’s
formulary and give health plan members the right to sue their health plans for malpractice when they have been denied care. Health
plan sponsors may react to the Health Care Reform Laws or other health care related proposals and the uncertainty surrounding them
by cutting back or delaying the purchase of our PBM services, and manufacturers may react by reducing rebates or reducing supplies
of certain products. These proposals could lead to a decreased demand for our services or to reduced rebates from manufacturers.
We cannot predict what effect, if any, these proposals may have on our businesses. PBMs have recently been subject to enhanced
political scrutiny as certain U.S. Senators have criticized PBMs for entering into agreements with manufacturers to allegedly limit
access to generic products and for allegedly contributing to over-utilization and off-label use of some antipsychotic drugs. This
enhanced scrutiny may result in increased audits or examination of the PBM industry. Further, in the FY 2012 Workplan, the HHS
Office of Inspector General, or OIG, has also indicated intent to focus on PBMs, with plans to review the rebates collected by
Medicare Part D sponsors and PBMs and analyze whether there are any discrepancies between the rebate amounts negotiated between
PBMs and manufacturers and the actual rebates paid. Other legislative or market-driven changes in the healthcare system that we
cannot anticipate could also harm our business, financial condition and results of operations.
Prescription volumes may decline, and our net revenues
and profitability may be negatively impacted, if the safety risk profiles of drugs increase or if drugs are withdrawn from the
market, including as a result of manufacturing issues, or if prescription drugs transition to over-the-counter products.
We dispense significant volumes of brand-name
and generic drugs from our mail-order pharmacy. When increased safety risk profiles or manufacturing issues of specific drugs or
classes of drugs result in utilization decreases, physicians may cease writing or otherwise reduce the numbers of prescriptions
for these drugs. Additionally, negative press regarding drugs with higher safety risk profiles may result in reduced global consumer
demand for such drugs. On occasion, products are withdrawn by their manufacturers or transition to over-the-counter products. In
cases where there are no acceptable prescription drug equivalents or alternatives for these prescription drugs, our volumes, net
revenues, profitability and cash flows may decline.
Our operations are vulnerable to interruption by
damage from a variety of sources, many of which are not within our control.
The success of our business depends in part
on our ability to operate our systems without interruption. Our systems are vulnerable to, among other things, power loss and telecommunications
failures, software and hardware errors, failures or crashes, computer viruses and similar disruptive problems, and fire, flood,
and other natural disasters. Although we take precautions to guard against and minimize damage from these and other potential risks,
including implementing disaster recovery systems and procedures, they are often unpredictable and beyond our control. Any significant
interruptions in our services could damage our reputation in the marketplace and harm our business, financial condition and results
of operations.
We are subject to a number of existing laws, regulations,
and industry initiatives, non-compliance with which could harm our business, financial condition and results of operations.
We could suffer civil and/or criminal penalties,
lose customers, and be required to pay substantial damages or make significant changes to its operations if we fail to comply with
complex and rapidly evolving laws and regulations.
During the past several years, the U.S.
health care industry has been subject to an increase in government regulation at both the federal and state levels. Numerous state
and federal laws and regulations affect our business and operations. The categories include, but are not limited to:
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health care fraud and abuse laws and regulations, including, but not limited to, the federal Anti-kickback Statute, the federal
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Civil False Claims Act, and comparable state law counterparts, which prohibit certain types of payments and referrals as well
as false claims made in connection with health benefit programs;
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privacy and confidentiality laws and regulations, including those under HIPAA and HITECH;
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ERISA and related regulations, which regulate many health care plans;
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potential regulation of the PBM industry by the FDA;
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Medicare prescription drug coverage laws and related regulations promulgated by CMS;
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consumer protection and unfair trade practice laws and regulations;
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various licensure laws, such as state insurance, managed care and third party administrator licensure laws;
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pharmacy laws and regulations;
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antitrust lawsuits challenging PBM pricing practices;
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state legislation regulating PBMs or imposing fiduciary status on PBMs;
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drug pricing legislation, including, but not limited to, “most favored nation” pricing and “unitary pricing”
legislation;
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other Medicare and Medicaid reimbursement regulations promulgated by CMS;
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pending legislation regarding importation of drug products into the U.S.;
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legislation imposing benefit plan design restrictions, which limit how our customers can design their drug benefit plans;
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network pharmacy access laws, including, but not limited to, “any willing provider” and “due process”
legislation, that affect aspects of our pharmacy network contracts; and
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formulary development and disclosure laws.
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We devote significant operational and managerial
resources to comply with these laws and regulations. Although we have not been notified, and are not otherwise aware, of any material
claim of non-compliance, we cannot assure you that we are in compliance with all existing legal requirements material to our business.
Different interpretations and enforcement policies of these laws and regulations could subject our current practices to allegations
of impropriety or illegality, or could require us to make significant changes to our operations. In addition, we cannot predict
the impact of future legislation and regulatory changes on our business or assure you that we will be able to obtain or maintain
the regulatory approvals required to operate our business.
We cannot predict whether or when future
healthcare reform initiatives by U.S. federal or state, Canadian or other foreign regulatory authorities will be proposed, enacted
or implemented or what impact those initiatives may have on our business, financial condition or results of operations. Additionally,
government regulation could alter the clinical workflow of physicians, hospitals, and other healthcare participants, thereby limiting
the utility of our products and services to existing and potential customers and resulting in a negative impact on market acceptance
of our products and services.
Our mail-order pharmacy is dependent on our relationships
with a limited number of suppliers, and the loss of any of these relationships could significantly impact our ability to sustain
and/or improve our financial performance.
We acquire a substantial percentage of our
mail-order pharmacy prescription drug supply from a limited number of suppliers. Our agreements with these suppliers may be short-term
and cancelable by either party without cause with a relatively short time-frame of prior notice. These agreements may limit our
ability to provide services for competing drugs during the term of the agreement and allow the supplier to distribute through channels
other than us. Further, certain of these agreements allow pricing and other terms of these relationships to be periodically adjusted
for changing market conditions or required service levels. A termination or modification to any of these relationships could harm
our business, financial condition and results of operations. If any products we distribute are in short supply for long periods
of time, this could result in harm to our business, financial condition and results of operations.
If our security systems are breached, outsiders
could gain access to information we are required to keep confidential, and we could be subject to liability and customers could
be deterred from using our services.
Our business relies on using the Internet
to transmit confidential information. However, the difficulty of securely transmitting confidential information over the Internet
has been a significant barrier to engaging in sensitive communications over the Internet, and is an important concern of our existing
and prospective customers. Publicized compromise of Internet security, including third-party misappropriation of patient information
or other data, or a perception of any such security breach, may deter people from using the Internet for these purposes, which
would result in an unwillingness to use our systems to conduct transactions that involve transmitting confidential healthcare information.
Further, if we are unable to protect the physical and electronic security and privacy of our databases and transactions, we could
be subject to potential liability and regulatory action, our reputation and customer relationships would be harmed, and our business,
operations, and financial results may be harmed.
We are highly dependent on senior management and
key employees. Competition for our employees is intense, and we may not be able to attract and retain the highly skilled employees
that we need to support our business.
Our success largely depends on the skills,
experience, and continued efforts of our management and other key personnel, and on our ability to continue to attract, motivate,
and retain highly qualified individuals. Competition for senior management and other key personnel is intense, and the pool of
suitable candidates is limited. If we lose the services of one or more of our key employees, we may not be able to find a suitable
replacement and our business, financial condition and results of operations could be harmed.
Our ability to provide high-quality services
to our customers also depends in large part upon the experience and expertise of our employees generally. We must attract and retain
highly qualified personnel with a deep understanding of the healthcare and PBM industries. We compete with a number of companies
for experienced personnel and many of these companies, including customers and competitors, have greater resources than we have
and may be able to offer more attractive terms of employment. In addition, we invest significant time and expense in training our
employees, which increases their value to customers and competitors who may seek to recruit them and increases the cost of replacing
them. If we are unable to attract or retain qualified employees, the quality of our services could diminish and we may be unable
to meet its business and financial goals.
If we fail to maintain an effective system of internal
control over financial reporting, we may not be able to accurately report our financial results or prevent fraud. As a result stockholders
could lose confidence in our financial and other public reporting, which would harm our business and the trading price of our common
stock.
Effective internal controls over financial
reporting are necessary for us to provide reliable financial reports and, together with adequate disclosure controls and procedures,
are designed to prevent fraud. Our Chief Executive Officer and Chief Financial Officer have determined that there are material
weaknesses in internal control over financial reporting. Any failure to implement required new or improved controls, or difficulties
encountered in their implementation, could cause us to fail to meet our reporting obligations. In addition, any testing by us conducted
in connection with Section 404 of the Sarbanes-Oxley Act, or the subsequent testing by our independent registered public accounting
firm, may reveal deficiencies in our internal controls over financials reporting that are deemed to be material weaknesses or that
may require prospective or retroactive changes to our consolidated financial statements or identify other areas for further attention.
Our principal stockholders and management own a
significant percentage of our stock and will be able to exert significant control over matters subject to stockholder approval.
As of April 11, 2013, our executive officers
and directors and their affiliates beneficially own approximately 33.2% of our voting stock. Therefore, our executive officers
and directors and their affiliates will have the ability to influence us through this ownership position with respect to matters
subject to stockholder approval. For example, assuming that there are no other changes to the number of shares outstanding, these
stockholders, acting together, may take actions with respect to such shares that are not consistent with the interests of the other
shareholders, including influencing the election of the directors and other corporate actions of HCCA such as:
|
·
|
its merger with or into another company;
|
|
·
|
a sale of substantially all of its assets; and
|
|
·
|
amendments to its bylaws and certificate of incorporation.
|
In addition, this may prevent or discourage
unsolicited acquisition proposals or offers for our common stock that you may believe are in your best interest as one of our stockholders.
|
ITEM
1B.
|
UNRESOLVED STAFF COMMENTS
|
Not applicable.
Our principal business operations are conducted
from a 15,000 square foot leased office facility located at 66 Ford Road, Suite 230, Denville, NJ, 07834. This lease expires in
February 28, 2017. Our mail-order pharmacy is also located at our headquarters in Denville, New Jersey. We believe these properties
are adequate for our current operations.
|
ITEM 3.
|
LEGAL PROCEEDINGS
|
During 2012, we filed a lawsuit
against our 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, we have 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 us. In August
2013, we settled the suit with the claims adjudicator. Under the terms of the settlement we 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. The settlement was discounted to its present value at settlement date and
$1,555,712
is recorded in accounts payable at December 31, 2013.
On August 14, 2012, we entered into an agreement
with a shareholder to buy back 500,000 shares of common stock for $100,000. The agreement also called for the payment of $50,000
in legal fees. As of December 31, 2012, we had not received the 500,000 shares of common stock but had paid the settlement. We
received these shares in February 2013. A stock redemption was recorded on December 31, 2012 in the amount of $100,000.
|
ITEM 4.
|
MINE SAFETY DISCLOSURES
|
Not Applicable.
The accompanying notes form an integral part of the
consolidated financial statements.
The accompanying notes form an integral part of the
consolidated financial statements
The accompanying notes form an integral part of the
consolidated financial statements
The accompanying notes form an integral part of the
consolidated financial statements
The accompanying notes form an integral part of the
consolidated financial statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2013 and 2012 and for the Years Then Ended
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 December 31, 2013
and 2012, the Company has working capital deficiences of $5,100,047 and $4,564,045, respectively and
stockholders’ deficit of $11,855,641 and $3,951,169, respectively. During the years ended December 31, 2013 and 2012, the Company incurred net losses of $24,544,708 and $7,575,965, respectively, and negative cash flows from
operating activities of $9,606,056 and $7,921,407, 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.
3. The Merger
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 December 31, 2013 and 2012 and for the Years Then Ended
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 (see Note 4), 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.
HEALTHCARE CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
As of December 31, 2013 and 2012 and for the Years Then Ended
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.
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 April 10, 2013 transaction date. 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 in additional paid-in capital and recorded $1,182,327 as additional interest expense.
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, the Company did not file a registration
statement and have it declared effective within the period required and recorded the maximum
damages under the agreement. The Company recorded $592,500 to interest expense for the year ended December 31, 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.
|
HEALTHCARE CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
As of December 31, 2013 and 2012 and for the Years Then Ended
|
·
|
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.
|
|
·
|
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 recorded a charge to interest expense of $561,712 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. 26,002 shares issued to the advisor were
placed in escrow and cancelled in December 2013.
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 December 31, 2013 and 2012 and for the Years Then Ended
4. Restatement
The financial statements for 2012 have
been revised to correct material errors in accounting for the Company’s sales, accounts receivable, cost of sales, accounts
payable, capital leases, accrued rent and accrued taxes. In accordance with applicable Generally Accepted Accounting Principles
(GAAP), the Company calculated and recognized adjustments accordingly.
On March 25, 2013, the Company filed with
the Securities and Exchange Commission (“SEC”) its audited financial statements for the years ended December 31, 2012
and 2011. Following the discovery of various material errors the Company informed the SEC on May 9, 2013 that these financial statements
could not be relied upon, and on May 15, 2013 filed its restated audited financial statements for the above-mentioned periods (First
Restatement Financial Statements).
On September 19, 2013 following the discovery
by management of additional material errors and misstatements in the First Restatement Financial Statements, the Company informed
the SEC that the previously restated financials could not be relied upon and that the Company would review its financial statements
in an attempt to discover all the material errors and misstatements that were included therein.
As part of this review, the Company engaged
external consultants to review and investigate its books and records and other related transactions and activities for 2012 and
2011. As a result of this review, management concluded that it will be unable to complete its restated 2011 financial statements,
due to lack of sufficient source documents and other information. In addition, the Company discovered various additional material
errors and misstatements in the 2012 financial statements which were corrected in these restated financial statements.
HEALTHCARE CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
As of December 31, 2013 and 2012 and for the Years Then Ended
The following table represents the effects
of the subsequent and first restated statements as of December 31, 2012:
|
|
Subsequent
|
|
|
First
|
|
|
|
|
|
|
Restatement
|
|
|
Restated
|
|
|
Original
|
|
|
|
December 31, 2012
|
|
|
December 31, 2012
|
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
1,126,846
|
|
|
$
|
572,637
|
|
|
$
|
1,220,065
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rebates receivable
|
|
$
|
1,323,474
|
|
|
$
|
1,323,474
|
|
|
$
|
1,638,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other receivables
|
|
$
|
40,867
|
|
|
$
|
40,867
|
|
|
$
|
40,867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
4,431,366
|
|
|
$
|
4,520,223
|
|
|
$
|
1,514,857
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued expenses
|
|
$
|
568,528
|
|
|
$
|
453,057
|
|
|
$
|
453,057
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note payable
|
|
$
|
4,192,954
|
|
|
$
|
4,947,613
|
|
|
$
|
4,947,613
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable preferred stock
|
|
$
|
2,362,517
|
|
|
$
|
458,800
|
|
|
$
|
458,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liability
|
|
$
|
121,350
|
|
|
$
|
518,587
|
|
|
$
|
518,587
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
$
|
4,175,856
|
|
|
$
|
3,556,056
|
|
|
$
|
3,556,056
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
APIC
|
|
$
|
150,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
27,305,795
|
|
|
$
|
28,663,284
|
|
|
$
|
38,401,140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
$
|
26,148,118
|
|
|
$
|
24,068,906
|
|
|
$
|
31,650,232
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
$
|
7,603,458
|
|
|
$
|
7,299,603
|
|
|
$
|
7,299,603
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
$
|
(1,130,184
|
)
|
|
$
|
640,286
|
|
|
$
|
640,286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated deficit
|
|
$
|
(10,639,542
|
)
|
|
$
|
(8,937,860
|
)
|
|
$
|
(4,970,540
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share
|
|
$
|
(0.19
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
(0.02
|
)
|
5. 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.
HEALTHCARE CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
As of December 31, 2013 and 2012 and for the Years Then Ended
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 December 31, 2013 and December 31, 2012.
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 revenue. 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.
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 the straight-line method over the estimated useful life of the asst, 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 years ended December 31, 2013
and December 31, 2012, the Company did not record any impairment charges.
HEALTHCARE CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
As of December 31, 2013 and 2012 and for the Years Then Ended
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 related to obtaining long-term debt
financing 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 $1,568,446 and $254,993 for the years ended December 31, 2013 and 2012, respectively. The unamortized balance was $254,252 and $552,380 at December 31, 2013 and 2012, 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.
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 administration expenses on the accompanying consolidated statements of operations.
HEALTHCARE CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
As of December 31, 2013 and 2012 and for the Years Then Ended
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 $75,000 and $143,000 for the years ended December 31, 2013 and 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.
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:
HEALTHCARE CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
As of December 31, 2013 and 2012 and for the Years Then Ended
|
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.
|
At December 31, 2013 the Company had 2,000,000
warrants exercisable into its shares of common stock 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 December 31, 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.
On December 31, 2013, the Company executed a forbearance agreement
with the holders of its senior convertible debt. Among other things, this agreement required the Company to issue 425,000 shares
of common stock to the senior convertible debt holders and permit the redemption of 25,000 shares at the rate of $10 per share
through June 30, 2019 (the “Senior Debt Redemption Feature”). The Company evaluated the redemption terms embedded in
the agreement and determined that such terms should be bifurcated from the common stock and recorded as a liability. The Company
determined the fair value of the Senior Debt Redemption Feature utilizing a black scholes valuation model. The key inputs to the
valuation were the Company’s share price at the date of valuation and the expected volatility. The Company did not become
publicly traded until April 11, 2013 and therefore determined its expected volatility from a selection of similar publicly traded
companies. The valuation is classified as a Level 2 valuation based on the use of volatility calculations from other publicly traded
companies.
On December 31, 2013, the Company issued $2,325,125 of Junior
Convertible Notes convertible into 1,550,083 shares of common stock maturing on December 31, 2015 and Warrants to acquire 1,550,083
shares of common stock at $1.50 that expire on December 31, 2018. The conversion feature in the Junior Convertible Notes and Warrant
agreement contain anti-dilution provisions that cause the related conversion rate and exercise price to decrease and the related
shares increase if the Company is deemed to issue equity at a per share value less than the then conversion rate and exercise price.
The Company evaluated this feature and determined that conversion feature in the Junior Convertible Notes should be bifurcated
from the underlying debt agreement and recorded as a liability and the Warrants to be classified as liabilities (the Junior Convertible
Notes Conversion Feature and Warrants).
The Company utilized a Monte Carlo simulation
model to estimate the value of the Junior Convertible Notes Conversion Feature and Warrants. The Company classified this valuation
as Level 3 valuation as the key inputs to the Monte Carlo include timing of equity raises and the estimated share price at such
dates.
The table below presents the Company’s
fair value hierarchy for those derivative instruments measured at fair value on a recurring basis as of December 31, 2013:
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior debt redemption feature
|
|
$
|
-
|
|
|
$
|
250,000
|
|
|
$
|
-
|
|
|
$
|
250,000
|
|
Warrants and convertible feature junior convertible note
|
|
$
|
-
|
|
|
$
|
|
|
|
$
|
5,087,000
|
|
|
$
|
5,087,000
|
|
Warrants
|
|
$
|
-
|
|
|
$
|
68,889
|
|
|
$
|
-
|
|
|
$
|
68,889
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivative liabilities
|
|
$
|
-
|
|
|
$
|
318,889
|
|
|
$
|
5,087,000
|
|
|
$
|
5,405,889
|
|
The table below presents the Company’s
fair value hierarchy for those derivative instruments measured at fair value on a recurring basis as of December 31, 2013:
|
|
Beginning
of Period
|
|
|
Issuances
|
|
|
Changes in
Fair Value
|
|
|
Balance end
of Period
|
|
Warrants and Convertibles Feature Junior Convertible Notes
|
|
$
|
-
|
|
|
$
|
5,087,000
|
|
|
|
-
|
|
|
$
|
5,087,000
|
|
HEALTHCARE CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
As of December 31, 2013 and 2012 and for the Years Then Ended
The table below presents the Company’s
fair value hierarchy for those derivative instruments measured at fair value on a recurring basis as of December 31, 2012:
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
$
|
-
|
|
|
$
|
121,350
|
|
|
$
|
-
|
|
|
$
|
121,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivative liabilities
|
|
$
|
-
|
|
|
$
|
121,350
|
|
|
$
|
-
|
|
|
$
|
121,350
|
|
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 approximates their carrying value due to the fact that these instruments were
modified or executed at year-end. 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 12% of the Company’s 2012 revenues were
derived from one customer. Revenues from this customer were 9% of our revenues for the year ended December 31, 2013. In addition,
approximately 13% of the Company’s 2013 revenues were derived from another customer. No amounts were due from either customer
at December 31, 2013 or 2012. In addition, the customers of one of the Company’s resellers accounted for approximately
25% and 14% of the Company’s revenue for the years ended December 31, 2013 and 2012, respectively. Amounts due
from these customers represented 76% and 46% of accounts receivable at December 31, 2013 and 2012, 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.
HEALTHCARE CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
As of December 31, 2013 and 2012 and for the Years Then Ended
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31, 2013
|
|
|
December 31, 2012
|
|
Basic and Diluted:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(24,544,708
|
)
|
|
$
|
(7,575,965
|
)
|
Less: Deemed dividend to preferred stockholders
|
|
|
(3,532,858
|
)
|
|
|
-
|
|
Net loss attributable to common stockholders
|
|
$
|
(28,077,566
|
)
|
|
$
|
(7,575,965
|
)
|
Weighted average shares
|
|
|
7,890,470
|
|
|
|
38,939,909
|
|
Basic loss per common share
|
|
$
|
(3.56
|
)
|
|
$
|
(0.19
|
)
|
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:
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31, 2013
|
|
|
December 31, 2012
|
|
Dilutive Potential Common Shares
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
5,596,106
|
|
|
|
1,585,833
|
|
Restricted stock awards
|
|
|
-
|
|
|
|
75,292
|
|
Convertible notes payable
|
|
|
3,750,083
|
|
|
|
2,666,667
|
|
Reclassification
Certain
previously reported amounts have been reclassified to conform to the presentation used in the December 31, 2013 financial statements.
6. Property and Equipment
Property and equipment is as follows:
|
|
December 31, 2013
|
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
Furniture, fixtures and equipment
|
|
$
|
1,662,201
|
|
|
$
|
1,374,126
|
|
Leasehold improvements
|
|
|
50,548
|
|
|
|
10,162
|
|
|
|
|
1,712,749
|
|
|
|
1,384,288
|
|
Accumulated depreciation and amortization
|
|
|
(564,234
|
)
|
|
|
(270,233
|
)
|
|
|
|
|
|
|
|
|
|
Net property and equipment
|
|
$
|
1,148,515
|
|
|
$
|
1,114,055
|
|
Amortization and depreciation was approximately
$294,000 and $206,000 for the years ended December 30, 2013 and 2012, respectively.
HEALTHCARE CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
As of December 31, 2013 and 2012 and for the Years Then Ended
7. Software, net
Software, net is as follows:
|
|
December 31, 2013
|
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
Software costs
|
|
$
|
472,489
|
|
|
$
|
-
|
|
Accumulated amortization
|
|
|
(73,106
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net software costs
|
|
$
|
399,383
|
|
|
$
|
-
|
|
Amortization expense was 73,106 for the year ended December
31, 2013.
8. Investments Held in Trust
Following the initial public offering (“IPO”) of
Selway in November 2011, a total of $20.6 million was placed in a trust account maintained by American Stock Transfer & Trust
Company, as trustee. None of the funds held in the 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 Selway failed to consummate an acquisition by May 14, 2013.
On April 10, 2013, Selway 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 the escrow. As per the
certificate of incorporation of Selway, the remaining balance of 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. Prior to being released from the escrow, the United
States government securities were in an account at Wells Fargo Bank, while the cash amount was in a JP Morgan Chase cash
account. The United States government securities matured and the total trust balance of $8,652,482 was in cash.
The Company classified 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.
9. Deferred Financing Costs
Deferred financing costs are as follows:
Balance January 1, 2013
|
|
$
|
-
|
|
Costs incurred for line of credit, Senior convertible note including forbearance, Waiver and modification to the senior convertible note, and the junior convertible note for the year ended December 31, 2013
|
|
|
1,203,427
|
|
Amortization for the year ended December 31, 2013 *
|
|
|
(949,175
|
)
|
|
|
|
|
|
Balance December 31, 2013
|
|
$
|
254,252
|
|
*Including fully amortizing deferred
costs of $538,637 relating to line of credit terminated in September 2013 (see Note 11) and fully amortizing deferred costs
relating to the senior convertible note of $298,129, which is included in this loss on extinguishment upon entering into a
forbearance, waiver and modification agreement (see Note 13).
HEALTHCARE CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
As of December 31, 2013 and 2012 and for the Years Then Ended
10. Accrued Expenses
Accrued expenses are as follows:
|
|
December 31, 2013
|
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
Accrued severance costs*
|
|
$
|
750,000
|
|
|
$
|
-
|
|
Accrued rebates
|
|
|
596,905
|
|
|
|
77,329
|
|
Accrued registration rights penalties**
|
|
|
864,000
|
|
|
|
-
|
|
Accrued professional fees
|
|
|
67,686
|
|
|
|
50,000
|
|
Accrued franchise tax
|
|
|
263,981
|
|
|
|
-
|
|
Accrued payroll
|
|
|
327,357
|
|
|
|
-
|
|
Accrued expenses other
|
|
|
424,538
|
|
|
|
441,199
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,294,467
|
|
|
$
|
568,528
|
|
|
*
|
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.
|
11. Line of Credit
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.
12. Junior Convertible Note
On December 31, 2013, the Company entered into a securities
purchase agreement with certain investors and an administrative and collateral agent representing the investors. Pursuant to the
securities purchase agreement, the Company issued $2,112,500 of Junior Convertible Notes due on December 31, 2015, which are convertible
into shares of the Company’s common stock at an initial fixed conversion price equal to $1.50 per share, and included the
conversion of $250,000 of accrued legal costs.
In connection with its services related to the
Junior Convertible Notes as well as the forbearance, waiver and modification agreement of the Senior Convertible Note (see
Note 13) the Company agreed to pay the agent a fee in the form of junior convertible notes and warrants and accordingly
Junior Convertible Notes in the amount of $212,625 were issued to the agent.
In connection with Junior Convertible Notes, 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 initial 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 conversion price of the Junior Convertible Notes (initially
$1.50) as well as the exercise price of the related warrants (initially $3) are subject to further down adjustments depending on
the terms of subsequent capital raises.
The Company also agreed to secure the payment of all obligations
under the notes by granting and pledging a continuing security interest in all of the Company’s and its subsidiaries’
property now owned or at any time hereafter acquired by them. The Junior Convertible Notes are subordinated to the Senior Convertible
Notes.
HEALTHCARE CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
As of December 31, 2013 and 2012 and for the Years Then Ended
Additionally, the Company executed a Registration Rights Agreement,
committing it to file a registration statement by April 14, 2014 and have it declared effective within 90 days. Failure to comply
will result in a monthly penalty of 1% of the face value of the outstanding Junior Convertible Notes. No provision has been made
for penalties as of December 31, 2013. If the Company fails to comply, then penalties will be recorded in 2014.
At the time of the transaction, the Company recorded a derivative
liability in the amount of $5,087,000, a loan discount of $2,325,000 and an interest charge of $2,762,000. In addition, the Company
incurred loan costs amounting to $202,035.
13. 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 a 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 addition as of December 31, 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 (received on January 6, 2014), (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 $150,000 in 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 number of shares
issuable under contingently exercisable warrants was increased from 625,000 shares to 2,200,000 and the exercise price reduced
from $8.00 per share to $2.50 per share, (viii) The Company issued 425,000 shares of its common stock to PFG, and (ix) 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.
HEALTHCARE CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
As of December 31, 2013 and 2012 and for the Years Then Ended
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.
The Company recorded the Forbearance, Waiver and Modification
to the loan agreement as an extinguishment of the July 2013 Senior Convertible Note. Accordingly as of December 31, 2013 the Company
fully amortized the remaining balance of the debt costs incurred in connection with the original note in the amount of $298,129
and, wrote off the balance of the loan discount of $1,642,529 to loss on extinguishment. The Company recorded the new note at its
estimated fair value of $1,296,776 which is net of the additional $500,000 received on January 6, 2014. The fair value is based
on the Company’s estimates of similar interest rates for an entity with similar credit characteristics. Additionally, the
Company recorded the value of the modification of warrants of $2,866,566, value of the common stock issued of $637,500, the value
of the redemption feature of $250,000, and the fees due of $150,000 offset by the value of the new debt discount of $3,703,224,
as loss on extinguishment. The resulting decrease from face value will be accreted to interest expense using the effective interest
rate method.
14. Bridge Notes
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.
15. Long-Term Debt
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 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”). On December 31, 2013, promissory notes with a face value of $750,000 were returned to the Company (see Note 3).
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 25% 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. These notes are subordinated to all other debt,
and repayment could be deferred if the terms of other debt instruments then outstanding prohibit repayment.
HEALTHCARE CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
As of December 31, 2013 and 2012 and for the Years Then Ended
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.
|
|
December 31, 2013
|
|
|
|
|
|
Shareholder notes
|
|
$
|
6,750,000
|
|
Placement notes
|
|
|
500,000
|
|
Management incentive notes
|
|
|
2,500,000
|
|
|
|
|
9,750,000
|
|
|
|
|
|
|
Less debt discount
|
|
|
(6,815,703
|
)
|
|
|
|
|
|
|
|
$
|
2,934,297
|
|
Future maturities of the Incentive Notes
based on the Company’s estimates which do not reflect any limitation of repayment that may exist due to the terms of other
debt then outstanding are as follows:
June 30,
|
|
|
|
|
|
|
|
2014
|
|
$
|
-
|
|
2015
|
|
|
-
|
|
2016
|
|
|
399,000
|
|
2017
|
|
|
1,789,000
|
|
2018
|
|
|
3,622,000
|
|
Thereafter
|
|
|
3,940,000
|
|
|
|
|
|
|
|
|
$
|
9,750,000
|
|
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 December 31, 2013 and December 31, 2012 are as follows:
|
|
December 31, 2013
|
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
Furniture and equipment
|
|
$
|
1,050,343
|
|
|
$
|
584,638
|
|
Accumulated depreciation
|
|
|
(370,780
|
)
|
|
|
(153,937
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
679,563
|
|
|
$
|
430,701
|
|
HEALTHCARE CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
As of December 31, 2013 and 2012 and for the Years Then Ended
Amortization of capital leases is included
in depreciation expense.
Minimum future lease payments under capital
lease obligations as of June 30, 2013 are as follows:
Year Ended December 31,
|
|
|
|
|
|
|
|
2014
|
|
$
|
275,746
|
|
2015
|
|
|
244,033
|
|
2016
|
|
|
184,934
|
|
2017
|
|
|
154,875
|
|
2018
|
|
|
48,885
|
|
Thereafter
|
|
|
51,457
|
|
|
|
|
|
|
Total future minimum lease payments
|
|
|
939,930
|
|
Less amount representing interest
|
|
|
(144,140
|
)
|
Present value of net minimum lease payments
|
|
|
795,790
|
|
Less current portion
|
|
|
(216,400
|
)
|
|
|
|
|
|
|
|
$
|
579,390
|
|
16. Redeemable Securities
Redeemable common stockholders are entitled
to redeem all or a portion of such shares in connection with the Company’s initial Business Transaction, 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. These shares were redeemed from the trust account
on August 15, 2013
.
17. Stockholders’ Equity
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 December 31, 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 December 31, 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 December 31, 2013, there are 8,832,492 shares of Series C Common Stock outstanding.
HEALTHCARE CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
As of December 31, 2013 and 2012 and for the Years Then Ended
In August 2013 following the redemption
of the 839,965 shares of the series B common stock, the Series A Common Stock, Series B Common Stock and Series C Common Stock
were consolidated into one series of Common Stock. The consolidation was on a one-for-one basis of the outstanding shares of each
series of common stock. Currently following the automatic consolidation, only one series of Common Stock is authorized, which will
be referred to as “Common Stock.”
On December 31, 2013, 546,002 shares of
common stock were returned to the Company (see Note 3).
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 year ended December 31, 2013, the
Company recorded an expense of $2,920,000 for the shares that vested on the date of the Merger and $851,667 for the shares that
vest through June 30, 2015.
18. Income Taxes
There was no provision (benefit) for income
taxes for the years ended December 31, 2013 and December 31, 2012.
Deferred tax assets are as follows:
|
|
December 31, 2013
|
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
Loss carryforwards
|
|
$
|
10,140,620
|
|
|
$
|
2,064,222
|
|
Intangible assets
|
|
|
66,900
|
|
|
|
44,000
|
|
Accrued expenses
|
|
|
622,069
|
|
|
|
1,060,000
|
|
Stock based compensation
|
|
|
451,706
|
|
|
|
-
|
|
Fixed assets
|
|
|
(50,449
|
)
|
|
|
(14,120
|
)
|
Less valuation allowance
|
|
|
(11,230,846
|
)
|
|
|
(3,154,102
|
)
|
|
|
|
|
|
|
|
|
|
Total net deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
The valuation allowance was
increased by $8,076,744 during the year ended December 31, 2013 and $2,575,828 for the year ended December 31, 2013 and 2012,
respectively. The valuation allowance was increased due to uncertainties as to the Company’s ability to generate
sufficient taxable income to utilize the net operating loss carry forwards and other deferred income tax items.
HEALTHCARE CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
As of December 31, 2013 and 2012 and for the Years Then Ended
A reconciliation of income taxes at the
U.S. federal statutory rate to the income expense is as follows:
|
|
Six Months and Year Ended
|
|
|
|
December 31, 2013
|
|
|
December 31, 2012
|
|
U.S. Federal statutory rate
|
|
|
(34.0
|
)%
|
|
|
(34.0
|
)%
|
State income taxes, net of federal benefit
|
|
|
(5.9
|
)
|
|
|
(5.9
|
)
|
Permanent differences
|
|
|
0.1
|
|
|
|
0.2
|
|
Change in fair value of derivative liabilities
|
|
|
(5.8
|
)
|
|
|
-
|
|
Loss on debt extinguishment
|
|
|
3.5
|
|
|
|
-
|
|
Interest expense
|
|
|
9.1
|
|
|
|
-
|
|
Change in valuation allowance
|
|
|
33.0
|
%
|
|
|
39.7
|
%
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
-
|
%
|
|
|
-
|
%
|
The Company’s ability to utilize
the net operating loss carry forwards in future years may be significantly limited in accordance with the provisions of Section
382 of the Internal Revenue Code, because of the changes in ownership that have occurred. The Company’s NOL may be further
limited should there be any further changes in ownership. As defined in Section 382 of the Internal Revenue Code, the Company who
has undergone, or may undergo in the future, a greater than fifty percent ownership change as a result of financing initiatives.
Consequently, there may be limitations on the amount of the Company’s NOLs which may be utilized to offset future taxable
income in any one year.
At December 31, 2013, the Company had
federal and state net operating loss carry forwards (“NOLs”) of approximately $25,400,000. The federal net
operating loss carry forwards will begin to expire in the year 2035.
In July 2006, the Financial Accounting Standards Board
(“FASB”) issued ASC 740-10,
Uncertainty in Income Taxes
, which defines the threshold for recognizing the
benefits of tax-return positions in the financial statements as “more-likely-than-not” to be sustained by the
taxing authorities. This statement also requires explicit disclosure requirements about a Company’s uncertainties
related to their income tax position, including a detailed roll forward or tax benefits taken that do not qualify for
financial statement recognition. The Company files income tax returns in the U.S. federal jurisdiction and New Jersey. The
Company’s tax years open to examination for federal and state are from 2009. The Company has no amount recorded for any
unrecognized tax benefits as of December 31, 2013 and 2012 nor did the Company record any amount for the implementation of
ASC 740-10-25. The Company’s policy is to record estimated interest and penalty related to the underpayment of income
taxes for unrecognized tax benefits as a component of its income tax provision. During the years ended December 31, 2013
and December 31, 2012, the Company did not recognize any interest or penalties accrued for unrecognized tax benefits.
19. 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 December 31, 2013:
Minimum Rental Payments
|
|
|
|
|
2014
|
|
$
|
212,888
|
|
2015
|
|
|
207,733
|
|
2016
|
|
|
219,270
|
|
2017
|
|
|
36,630
|
|
|
|
|
|
|
|
|
$
|
676,521
|
|
Rent expense for the years ended December
31, 2013 and December 31, 2012 was $193,273 and $186,733, respectively.
HEALTHCARE CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
As of December 31, 2013 and 2012 and for the Years Then Ended
Employment Agreements
As of December 31, 2013, the Company had
entered into employment agreements with senior officers and other members of management. The agreements specify aggregate guaranteed
annual salaries of $1.7 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 through the original term of the contract or pay severance,
typically one year of salary.
As of December 31, 2013, the Company entered into employment
contracts or employment arrangement letters with certain members of management and directors that among other things committed
the Company to issuing approximately 1.9 million stock options. The Company does not currently have a stock option plan and 650,000
of 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. The settlement was discounted to its present value at
settlement date and $1,555,712 is recorded in accounts payable at December 31, 2013.
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.
20. Related Party
Otis Fund, a company controlled by a former
consultant, who owns in excess of 5% of the Company’s outstanding shares, 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 the agreement for
cause in September 2013. The annual fees related to these services were $360,000. In connection with this agreement, the Company recorded $300,000 and $360,000 for the years ended December 31, 2013 and 2012,
respectively.
In September 2012, 2,068,200 shares were issued to two entities
believed to be controlled by this 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 in 2012 equal to the shares of $641,142 as general
and administrative expense.
21. Subsequent Events
On April 4, 2014, the Company entered into
a note purchase agreement with two lenders, one of whom is 50% owned by two members of the board of directors of the Company. Pursuant
to the note purchase agreement the Company issued $1,000,000 par value secured convertible notes under the following terms: (i)
interest rate of eight percent per annum, (ii) Principal and interest are due on April 2, 2015, (iii) the Company may prepay the
notes at any time prior to the maturity date, (iv) the notes’ conversion price will be the lowest price per share offered
for the securities in the next round of financing (v) various other terms and conditions.
The loan would be in default if, (i) as
of May 4, 2014, the Company has failed to secure at least $1,500,000 in a new financing and if, (ii) by June 3 the Company has
failed to secure an additional $2,000,000, for a total of $3,500,000.
In connection with the issuance of the
notes the Company issued five year warrants to purchase an aggregate of 2,000,000 shares of its common stock. The exercise price
of the warrants will be equal to the lowest of the following: (i) the price of common equity sold in the next financing round,
(ii) the conversion price of a convertible note raised after the next financing round, or (iii) the exercise price of warrants
issued in the next financing round. The Warrants may also be exercised on a cashless basis. The Company also agreed to grant the
holders of the warrants registration rights.