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 March 31, 2014 and December 31,
2013 and for the Three Months Ended March 31, 2014 and 2013
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 March 31, 2014 and December 31, 2013,
the Company has working capital deficiencies of $8,140,621 and $5,100,047, respectively and stockholders’ deficit of $14,505,408
and $11,855,641, respectively. During the three months ended March 31, 2014 and the year ended December 31, 2013, the Company incurred
net losses of $3,046,156 and $24,544,708, respectively, and negative cash flows from operating activities of $1,501,968 and $9,606,056,
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 March 31, 2014 and December 31,
2013 and for the Three Months Ended March 31, 2014 and 2013
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.
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 ($592,000).
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 March 31, 2014 and December 31,
2013 and for the Three Months Ended March 31, 2014 and 2013
|
·
|
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.
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HEALTHCARE CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
As of March 31, 2014 and December 31,
2013 and for the Three Months Ended March 31, 2014 and 2013
4. Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial
statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US
GAAP”).
Use of Estimates
The preparation of financial statements
in conformity with accounting principles generally accepted in the United States of America requires management to make estimates
and assumptions that affect the amounts reported in the financial statements including disclosure of contingent assets and liabilities,
at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period and accompanying
notes. The Company’s critical accounting policies are those that are both most important to the Company’s financial
condition and results of operations and require the most difficult, subjective or complex judgments on the part of management in
their application, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Because
of the uncertainty of factors surrounding the estimates or judgments used in the preparation of the financial statements, actual
results could differ from these estimates.
Principles of Consolidation
The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances have been eliminated in consolidation.
Accounts Receivable
Accounts receivable represent amounts owed
to the Company for products sold and services rendered net of an allowance for doubtful accounts. The Company grants unsecured
credit to its customers. The Company continuously monitors the payment performance of its customers to ensure collections and minimize
losses. Management does not believe that significant credit risks exist. An allowance for doubtful accounts is based upon the credit
profiles of specific customers, economic and industry trends and historic payment experience. There is no allowance for doubtful
accounts at March 31, 2014 and December 31, 2013.
Inventory
Inventories consist of finished pharmaceutical
products and are recorded at the lower of cost or market, with the cost determined on a first-in, first-out basis. The Company
periodically reviews the composition of inventory in order to identify obsolete, slow-moving or otherwise non-saleable items. If
non-saleable items are observed and there are no alternate uses for the inventory, the Company will record a write-down to net
realizable value in the period that the decline in values is first recognized.
Rebates
Pharmaceutical manufacturers offer rebates
for selected brand drugs. The Company currently receives these rebates through a third party administrator. The rebates are considered
earned when members (employees of customers) order the drugs. Rebates earned are paid to the Company by the third party administrator
quarterly. Rebates earned are recognized as a reduction to cost of 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.
HEALTHCARE CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
As of March 31, 2014 and December 31,
2013 and for the Three Months Ended March 31, 2014 and 2013
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 assets, which approximates
3 years.
Long-Lived Assets
Long-lived assets are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. The Company assesses
recoverability by determining whether the net book value of the related asset will be recovered through the projected undiscounted
future cash flows of the asset. If the Company determines that the carrying value of the asset may not be recoverable, it measures
any impairment based on the fair value of the asset as compared to its carrying value. During the three months ended March 31,
2014 and March 31, 2013, the Company did not record any impairment charges.
Investments Held in Trust
The Company applies the provisions of ASC
Topic 320-10,
Investment - Debt and Equity
, to account for investments held in trust, which comprise only of held-to maturity
securities. Held-to-maturity securities are those securities, which the Company has the ability and intent to hold until maturity.
Held-to-maturity securities are recorded at amortized cost on the accompanying balance sheets and adjusted for any amortization
or accretion of premiums or discounts.
Deferred Financing Costs
Costs 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 $31,061 and $400,704 for the three months ended March 31, 2014 and 2013,
respectively. The unamortized balance was $246,086 and $254,252 at March 31, 2014 and December 31, 2013, respectively.
Derivative Financial Instruments
The Company applies the provisions of ASC
Topic 815-40,
Contracts in Entity’s Own Equity
(“ASC Topic 815-40”), under which convertible instruments
and warrants, which contain terms that protect holders from declines in the stock price (reset provisions), may not be exempt from
derivative accounting treatment. As a result, such warrants are recorded as a liability and are revalued at fair value at the end
of each reporting period. Furthermore, under derivative accounting, the warrants are initially recorded at their fair value. If
the fair value of the warrants exceeds the face value of the related debt, the excess is recorded as a change in fair value in
the statement of operations on the issuance date.
Debt Discounts
Debt discounts are amortized using the
effective interest rate method over the term of the related debt. The result achieved using the straight-line method is not materially
different than those which would result using the effective interest method.
HEALTHCARE CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
As of March 31, 2014 and December 31,
2013 and for the Three Months Ended March 31, 2014 and 2013
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.
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 $0 and $24,624 for the three months ended March 31, 2014 and 2013, 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.
HEALTHCARE CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
As of March 31, 2014 and December 31,
2013 and for the Three Months Ended March 31, 2014 and 2013
The Company recognizes interest related
to uncertain tax positions in interest expense. The Company recognizes penalties related to uncertain tax positions in income tax
expense.
Fair Value Measurements
The Company applies recurring fair value
measurements to its derivative instruments in accordance with ASC 820,
Fair Value Measurements
. In determining fair value,
the Company uses a market approach and incorporates assumptions that market participants would use in pricing the asset or liability,
including assumptions about risk and/or the risks inherent in the inputs to the valuation techniques. These inputs can be readily
observable, market corroborated or generally unobservable internally-developed inputs. Based upon the observability of the inputs
used in these valuation techniques, the Company’s derivative instruments are classified as follows:
Level 1:
|
The fair value of derivative instruments classified as Level 1 is determined by unadjusted quoted market prices in active markets for identical assets or liabilities that are accessible at the measurement date.
|
Level 2:
|
The fair value of derivative instruments classified as Level 2 is determined by quoted market prices for similar assets or liabilities in active markets, quoted market prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data.
|
Level 3:
|
The fair value of derivative instruments classified as Level 3 is determined by internally-developed models and methodologies utilizing significant inputs that are generally less readily observable from objective sources.
|
At March 31, 2014 and 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 at March 31, 2014 and 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.
HEALTHCARE CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
As of March 31, 2014 and December 31,
2013 and for the Three Months Ended March 31, 2014 and 2013
The table below presents the Company’s
fair value hierarchy for those derivative instruments measured at fair value on a recurring basis as of March 31, 2014:
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior debt redemption feature
|
|
$
|
-
|
|
|
$
|
250,000
|
|
|
$
|
-
|
|
|
$
|
250,000
|
|
Warrants and convertible feature junior convertible note
|
|
$
|
-
|
|
|
$
|
|
|
|
$
|
4,201,000
|
|
|
$
|
4,201,000
|
|
Warrants
|
|
$
|
-
|
|
|
$
|
252,589
|
|
|
$
|
-
|
|
|
$
|
252,589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivative liabilities
|
|
$
|
-
|
|
|
$
|
502,589
|
|
|
$
|
4,201,000
|
|
|
$
|
4,703,589
|
|
The table below presents the activity in the Company’s
derivative instruments measured at fair value on a recurring basis for the three months ended March 31, 2014:
|
|
Beginning of
Period
|
|
|
Issuances
|
|
|
Changes in
Fair Value
|
|
|
Balance at
end of Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants and convertible feature convertible notes
|
|
$
|
5,087,000
|
|
|
$
|
-
|
|
|
$
|
(886,000
|
)
|
|
$
|
4,201,000
|
|
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
|
|
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 25% of the Company’s revenues for the three
months ended March 31, 2014 were derived from one customer. Revenues from this customer were 13% of the Company’s revenues
for the year ended December 31, 2013. No amounts were due from this customer at March 31, 2014 or December 31, 2013. In addition,
the customers of one of the Company’s resellers accounted for approximately 25% of the Company’s revenue for the three
months ended March 31, 2014 and for the year ended December 31, 2013. Amounts due from these customers represented 63% and 76%
of accounts receivable at March 31, 2014 and December 31, 2013, respectively.
HEALTHCARE CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
As of March 31, 2014 and December 31,
2013 and for the Three Months Ended March 31, 2014 and 2013
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.
|
|
Three Months
Ended March
31, 2014
|
|
|
Three Months
Ended March
31, 2013
|
|
Basic and Diluted:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(3,046,156
|
)
|
|
$
|
(3,648,613
|
)
|
Weighted average shares
|
|
|
8,846,103
|
|
|
|
40,250,009
|
|
Basic loss per common share
|
|
$
|
(0.34
|
)
|
|
$
|
(0.09
|
)
|
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:
|
|
Three Months
Ended March
31, 2014
|
|
|
Three Months
Ended March
31, 2013
|
|
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
|
|
5. Property and Equipment
Property and equipment is as follows:
|
|
March 31,
2014
|
|
|
December 31,
2013
|
|
|
|
|
|
|
|
|
Furniture, fixtures and equipment
|
|
$
|
1,662,201
|
|
|
$
|
1,662,201
|
|
Leasehold improvements
|
|
|
60,168
|
|
|
|
50,548
|
|
|
|
|
1,722,369
|
|
|
|
1,712,749
|
|
Accumulated depreciation and amortization
|
|
|
(650,510
|
)
|
|
|
(564,234
|
)
|
|
|
|
|
|
|
|
|
|
Net property and equipment
|
|
$
|
1,071,859
|
|
|
$
|
1,148,515
|
|
Amortization and depreciation was approximately
$88,276 and $74,693 for the three months ended March 31, 2014 and 2013, respectively.
HEALTHCARE CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
As of March 31, 2014 and December 31,
2013 and for the Three Months Ended March 31, 2014 and 2013
6. Software, net
Software, net is as follows:
|
|
March 31,
2014
|
|
|
December 31,
2013
|
|
|
|
|
|
|
|
|
Software costs
|
|
$
|
472,489
|
|
|
$
|
472,489
|
|
Accumulated amortization
|
|
|
(97,496
|
)
|
|
|
(73,106
|
)
|
|
|
|
|
|
|
|
|
|
Net software costs
|
|
$
|
374,993
|
|
|
$
|
399,383
|
|
Amortization expense was $24,390 and $0 for the three months
ended March 31, 2014, and 2013 respectively.
7. 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.
8. Deferred Financing Costs
Deferred financing costs are as follows:
Balance January 1, 2014
|
|
$
|
254,252
|
|
Costs incurred for forbearance, waiver and modification to the senior convertible note for the three months ended March 31, 2014
|
|
|
22,895
|
|
Amortization for the three months ended March 31, 2014
|
|
|
(31,061
|
)
|
|
|
|
|
|
Balance March 31, 2014
|
|
$
|
246,086
|
|
HEALTHCARE CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
As of March 31, 2014 and December 31,
2013 and for the Three Months Ended March 31, 2014 and 2013
9. Accrued Expenses
Accrued expenses are as follows:
|
|
March 31,
2014
|
|
|
December
31, 2013
|
|
|
|
|
|
|
|
|
Accrued severance costs*
|
|
$
|
271,154
|
|
|
$
|
750,000
|
|
Accrued rebates
|
|
|
691,983
|
|
|
|
596,905
|
|
Accrued registration rights penalties**
|
|
|
910,000
|
|
|
|
864,000
|
|
Accrued professional fees
|
|
|
480,000
|
|
|
|
67,686
|
|
Accrued commissions
|
|
|
723,332
|
|
|
|
225,125
|
|
Accrued franchise tax
|
|
|
303,981
|
|
|
|
263,981
|
|
Accrued payroll
|
|
|
285,022
|
|
|
|
327,357
|
|
Accrued expenses other
|
|
|
230,540
|
|
|
|
199,363
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,896,012
|
|
|
$
|
3,294,467
|
|
|
*
|
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.
|
10. 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.
11. 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 12) 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 March 31, 2014 and December 31,
2013 and for the Three Months Ended March 31, 2014 and 2013
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.
In addition, as of March 31 2014 the Company recorded an accrual
of $46,000 and a corresponding interest charge reflecting the estimated penalty relating to late registration of the underlying
shares of common stock.
12. 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 March 31, 2014 and December 31,
2013 and for the Three Months Ended March 31, 2014 and 2013
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. As of December 31, 2013 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.
13. 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.
14. 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 March 31, 2014 and December 31,
2013 and for the Three Months Ended March 31, 2014 and 2013
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.
|
|
March 31, 2014
|
|
|
December 31, 2013
|
|
|
|
|
|
|
|
|
Shareholder notes
|
|
$
|
6,750,000
|
|
|
$
|
6,750,000
|
|
Placement notes
|
|
|
500,000
|
|
|
|
500,000
|
|
Management incentive notes
|
|
|
2,500,000
|
|
|
|
2,500,000
|
|
|
|
|
9,750,000
|
|
|
|
9,750,000
|
|
|
|
|
|
|
|
|
|
|
Less debt discount
|
|
|
(6,616,787
|
)
|
|
|
(6,815,703
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,133,213
|
|
|
$
|
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 March 31, 2014 and December 31, 2013 are as follows:
|
|
March 31,
2014
|
|
|
December 31,
2013
|
|
|
|
|
|
|
|
|
Furniture and equipment
|
|
$
|
1,050,343
|
|
|
$
|
1,050,343
|
|
Accumulated depreciation
|
|
|
(431,014
|
)
|
|
|
(370,780
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
619,329
|
|
|
$
|
679,563
|
|
HEALTHCARE CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
As of March 31, 2014 and December 31,
2013 and for the Three Months Ended March 31, 2014 and 2013
Amortization of capital leases is included
in depreciation expense.
Minimum future lease payments under capital
lease obligations as of March 31, 2014 are as follows:
Year Ended March 31,
|
|
|
|
|
|
|
|
2015
|
|
$
|
264,006
|
|
2016
|
|
|
240,390
|
|
2017
|
|
|
169,297
|
|
2018
|
|
|
137,316
|
|
2019
|
|
|
35,747
|
|
Thereafter
|
|
|
23,831
|
|
|
|
|
|
|
Total future minimum lease payments
|
|
|
870,587
|
|
Less amount representing interest
|
|
|
(125,616
|
)
|
Present value of net minimum lease payments
|
|
|
744,971
|
|
Less current portion
|
|
|
(209,267
|
)
|
|
|
|
|
|
|
|
$
|
535,704
|
|
15. 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 March 31, 2014 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 March 31, 2014 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 March 31, 2014, there are 8,907,492 shares of Series C Common Stock outstanding.
HEALTHCARE CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
As of March 31, 2014 and December 31,
2013 and for the Three Months Ended March 31, 2014 and 2013
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.
During the three months ended March 31, 2014, the Company issued
75,000 shares of common stock as part of the settlement of two disputed claims. The Company recorded a gain of approximately $340,000
in Selling General and Administrative expenses as result of the difference in value of the executed settlement and the Company’s
initial estimate.
16. Commitments and Contingencies
Operating Leases
The Company has certain non-cancelable
operating leases for facilities and equipment that expire over the next three years. Future minimum payments for non-cancelable
operating leases are as follows as of March 31, 2014:
Year ended March 31,
|
|
|
|
|
2015
|
|
$
|
205,510
|
|
2016
|
|
|
216,975
|
|
2017
|
|
|
201,465
|
|
|
|
|
|
|
|
|
$
|
623,950
|
|
Rent expense for the three months ended
March 31, 2014 and 2013 was $48,346 and $48,234, respectively.
HEALTHCARE CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
As of March 31, 2014 and December 31,
2013 and for the Three Months Ended March 31, 2014 and 2013
Employment Agreements
As of March 31, 2014, 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 March 31, 2014, 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 $1,224,140
is recorded in accounts payable at March 31, 2014.
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.
17. 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.
18. Subsequent Events
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 the Company 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.
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., the Company’s senior lender.
We covenanted and agreed that: (a) if, as of May 4, 2014, we
had failed to secure at least $1,500,000 in a new financing (the “Next Financing Round”), such failure would constitute
an event of default; (b) if, as of May 4, 2014, we had secured at least $1,500,000 in a new financing, but less than $3,500,000,
then we would be entitled to an additional 30 days in which to secure an additional amount so that the aggregate amount raised
totals $3,500,000; (c) if, on or before expiration of such second 30 day period, we had failed to secure at least $3,500,000, such
failure will constitute an event of default.
On May 2, 2014, we and the Lenders agreed to extend the time
periods specified in the foregoing covenants by five days from the original maturity date to May 9th, 2014. On May 7, 2014, the
Company and the Lenders agreed to further extend the time periods specified in the foregoing covenants from May 9, 2014 to May
23, 2014, which will allow the Company time to continue exploring its financing options.