As filed with the Securities and Exchange Commission on August 1, 2007
(Registration No. 333-144200)
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2/A
(AMENDMENT NO. 1)
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
HC INNOVATIONS, INC.
(Name of small business issuer in its charter)
DELAWARE 8093 04-3570877
- ------------------------------------ ------------------------------ -------------------------
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
(Name, address and telephone number of Small Business Issuer)
SIX CORPORATE DRIVE, SUITE 420
SHELTON, CT 06484
(203) 925-9600
(Name, address and telephone number of agent for service)
Copy of all communications to:
JAY M. KAPLOWITZ, ESQ.
PETER J. GENNUSO, ESQ.
GERSTEN SAVAGE LLP
600 LEXINGTON AVENUE
NEW YORK, NY 10022
PH. (212) 752-9700
FAX: (212) 980-5192
Approximate Date of Proposed Sale to the Public: As soon as practicable after
the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, check the following box: [X]
-
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act of 1933, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act of 1933, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act of 1933, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. [_]
CALCULATION OF REGISTRATION FEE
PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES TO BE OFFERING PRICE AGGREGATE REGISTRATION
TO BE REGISTERED REGISTERED(1) PER SHARE(1)(2) OFFERING PRICE(2) FEE
- ----------------------------------------------------------------------------------------------------------------------------
Common Stock, $0.001 par value 9,914,467 $3.50 $34,700,635 $1,065.31
Common Stock, $0.001 par value, underlying 300,000 $1.00 $300,000 $9.21
warrants to purchase common stock(3)
Common Stock, $0.001 par value, underlying 2,356,400 $1.25 $2,945,500 $90.43
warrants to purchase common stock(4)
Common Stock, $0.001 par value, underlying 750,000 $3.00 $2,250,000 $69.08
warrants to purchase common stock(5)
Common Stock, $0.001 par value, underlying 833,333 $4.00 $3,333,332 $102.33
warrants to purchase common stock(6)
---------
TOTAL $1,336.36*
- ----------------------------------------------------------------------------------------------------------------------------
* Previously paid.
(1) The shares of our Common Stock being registered hereunder are being
registered for resale by the Selling Securityholders named in the
prospectus. In accordance with Rule 416(a), the registrant is also
registering hereunder an indeterminate number of shares that may be issued
and resold to prevent dilution resulting from stock splits, stock
dividends or similar transactions. For purposes of estimating the number
of shares of our Common Stock to be included in this registration
statement, we calculated a good faith estimate of the number of shares
that we believe may be issuable pursuant to the equity line financing to
account for market fluctuations. Should we have insufficient shares, we
will not rely upon Rule 416, but will file a new registration statement to
cover the resale of such additional shares should that become necessary.
(2) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(c) under the Securities Act of 1933,
based on the closing price of $3.50 on the Over the Counter Bulletin Board
on June 15, 2007.
(3) Represents shares of Common Stock issuable upon exercise of warrants. Each
warrant entitles the holder to purchase shares of Common Stock at an
exercise price of $1.00 per share.
(4) Represents shares of Common Stock issuable upon exercise of warrants. Each
warrant entitles the holder to purchase shares of Common Stock at an
exercise price of $1.25 per share.
(5) Represents shares of Common Stock issuable upon exercise of warrants. Each
warrant entitles the holder to purchase shares of Common Stock at an
exercise price of $3.00 per share.
(6) Represents shares of Common Stock issuable upon exercise of warrants. Each
warrant entitles the holder to purchase shares of Common Stock at an
exercise price of $4.00 per share.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
i
The information in this prospectus is not complete and may be changed. The
Selling Securityholders may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is effective. This
prospectus is not an offer to sell these securities and it is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.
Subject to Completion, Dated August 1, 2007
PRELIMINARY PROSPECTUS
14,154,200 SHARES
HC INNOVATIONS, INC.
COMMON STOCK
This prospectus relates to the resale of up to 14,154,200 shares of our common
stock, par value $0.001 per share issuable to the person and entities named
herein (the "Selling Securityholders") and consists of: (i) 9,914,467 shares of
our common stock; (ii) up to 2,356,400 shares of common stock issuable upon
exercise of warrants at $1.25 per share; (iii) up to 750,000 shares of common
stock issuable upon exercise of warrants at $3.00 per share; (iv) up to 833,333
shares of common stock issuable upon exercise of warrants at $4.00 per share;
and (v) up to 300,000 shares of common stock issuable upon exercise of warrants
at $1.00 per share. The Selling Securityholders may sell their respective common
stock from time to time at prevailing market prices.
Our common stock is registered under Section 12(g) of the Securities Exchange
Act of 1934, as amended, and is quoted on the over-the-counter market and prices
are reported on the OTCBB under the symbol "HCNV." On June 26, 2007 the closing
price as reported was $3.50.
The Selling Securityholders, and any participating broker-dealers, may be deemed
`underwriters' within the meaning of the Securities Act of 1933, as amended, and
any commissions or discounts given to any such broker-dealer may be regarded as
underwriting commissions or discounts under the Securities Act of 1933. The
Selling Securityholders have informed us that they do not have any agreement or
understanding, directly or indirectly, with any person to distribute their
common stock. We agree to pay the expenses of registering the foregoing shares
of our common stock.
INVESTMENT IN THE COMMON STOCK OFFERED BY THIS PROSPECTUS INVOLVES A HIGH DEGREE
OF RISK. YOU MAY LOSE YOUR ENTIRE INVESTMENT. CONSIDER CAREFULLY THE "RISK
FACTORS" BEGINNING ON PAGE 5 OF THIS PROSPECTUS BEFORE INVESTING.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is ___________, 2007
ii
You should rely only on the information contained in or incorporated by
reference in this prospectus. We have not, and the Selling Securityholders have
not, authorized anyone, including any salesperson or broker, to give oral or
written information about this offering, HC Innovations, Inc., or the shares of
common stock offered hereby that is different from the information included in
this prospectus. If anyone provides you with different information, you should
not rely on it. We are not, and the Selling Securityholders are not, making an
offer to sell these securities in any jurisdiction where the offer or sale is
not permitted. You should assume that the information contained in this
prospectus is accurate only as of the date on the front cover of this
prospectus. Our business, financial condition, results of operations and
prospects may have changed since that date.
This prospectus is not an offer to sell any securities other than the shares of
common stock offered hereby. This prospectus is not an offer to sell securities
in any circumstances in which such an offer is unlawful.
iii
TABLE OF CONTENTS
SUMMARY INFORMATION AND RISK FACTORS..............................................................................1
THE COMPANY..............................................................................................1
OFFERING.................................................................................................2
SUMMARY FINANCIAL INFORMATION............................................................................4
RISK FACTORS.............................................................................................5
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS................................................................15
USE OF PROCEEDS..................................................................................................15
SELLING SECURITYHOLDERS..........................................................................................15
PLAN OF DISTRIBUTION.............................................................................................19
LEGAL PROCEEDINGS................................................................................................20
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.....................................................21
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...................................................22
DESCRIPTION OF SECURITIES........................................................................................22
DISCLOSURE OF COMMISSION POSITION OF INDEMNIFICATION FOR SECURITIES
ACT LIABILITIES...............................................................................................23
DESCRIPTION OF BUSINESS..........................................................................................25
OUR BUSINESS............................................................................................25
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION........................................................35
DESCRIPTION OF PROPERTY..........................................................................................44
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................................................................44
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.........................................................45
EXECUTIVE COMPENSATION...........................................................................................46
LEGAL MATTERS...........................................................................................47
EXPERTS.................................................................................................47
WHERE YOU CAN FIND ADDITIONAL INFORMATION...............................................................47
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE...................................................................................47
FINANCIAL STATEMENTS.............................................................................................48
INDEX TO FINANCIAL STATEMENTS...........................................................................48
INDEMNIFICATION OF DIRECTORS AND OFFICERS........................................................................49
OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION......................................................................50
RECENT SALES OF UNREGISTERED SECURITIES..........................................................................50
EXHIBITS.........................................................................................................52
UNDERTAKINGS.....................................................................................................53
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SUMMARY INFORMATION AND RISK FACTORS
This Summary highlights some information from this prospectus, and it may not
contain all of the information that is important you. You should read the entire
prospectus carefully, including the more detailed information regarding our
company, the risks of purchasing our common stock discussed under `risk
factors,' and our financial statements and the accompanying notes.
In this prospectus, `we', `us,' `Company', `our' and `HC Innovations' refer to
HC Innovations, Inc. and its subsidiaries, unless the context provides otherwise
requires. Unless otherwise indicated, the term `year,' `fiscal year' or `fiscal'
refers to our fiscal year ending December 31. Unless we tell you otherwise, the
term `common stock' as used in this prospectus refers to our Common Stock.
THE COMPANY
CORPORATE HISTORY
HC Innovations, Inc. is a holding company incorporated in Delaware in December
2004 that, through its subsidiaries, provides specialty care management products
and services. Our specialty care management approach is predicated on caring for
small populations of medically unstable and frail people.
Our wholly owned subsidiary, Enhanced Care Initiatives, Inc., ("ECI"), was
founded in 2002 by David Chess MD, our President and Chief Executive Officer.
ECI is the management company for all of our operating entities and provides
specialty disease and care management services for small, costly subpopulations.
ECI markets its proprietary specialty care management programs for the medically
frail and other costly sub-populations to Health Maintenance Organizations
("HMOs") and other Managed Care Organizations ("MCOs") as well as state Medicaid
departments.
OVERVIEW
We are a specialty disease and care Management Company focused on caring for
small populations of medically unstable and frail individuals. As a specialty
disease and care Management Company, we attempt to utilize preventative health
care to save money by attempting to keep patients with chronic conditions out of
the hospital, helping patients and states save on health care costs. Our Company
is comprised of separate divisions each with a specific focus and intervention
to service this segment of our population. As a specialty disease and care
Management Company we seek to bring to HMOs, MCOs and state Medicaid departments
the ability to positively impact the health and cost of their sickest, costliest
subsets of patients. To do this, we combine our proprietary information systems
with specially trained nurses and nurse practitioners. Specifically, we
integrate the following services:
(a) Hands-on involvement by seeing patients in their homes and in nursing
homes;
(b) Call center backup consisting of nurses, social workers and case
managers who work specifically with one or two nurses and their
patients via the telephone to assist with coordination of services and
monitoring of health status; and
(c) Biometric monitoring through the use of devices that allow us to
monitor patients in the home such as scales, medication reminder
systems, and blood pressure machines to name a few.
Our services extend to accompanying the patient to the doctor and providing them
with our availability on a twenty-four hour a day, seven days a week basis. In
the event that the patient requires admission to a hospital or nursing home, we
also provide case management.
1
Our principal office is located at Six Corporate Drive, Suite 420, Shelton, CT
06484. Our telephone number is (203) 925-9600. Our website address is
www.hcinnovationsinc.com. Information on our website is not a part of this
prospectus.
OFFERING
SHARES OUTSTANDING PRIOR TO OFFERING
COMMON STOCK,
$0.001 PAR VALUE 38,187,407
COMMON STOCK OFFERED
BY SELLING SECURITYHOLDERS 14,154,200
USE OF PROCEEDS We will not receive any proceeds from the
sale by the Selling Stockholder of shares
in this offering but will receive
proceeds from the exercise of the
warrants described herein. See "Use of
Proceeds."
RISK FACTORS An investment in our common stock
involves a high degree of risk and could
result in a loss of your entire
investment.
OTC SYMBOL HCNV.OB
EXECUTIVE OFFICES Our executive offices are located at Six
Corporate Drive, Suite 420, Shelton, CT
06484. Our telephone number is (203)
925-9600 and our website is:
www.hcinnovationsinc.com. The information
on our website is not part of this
prospectus.
RECENT FINANCINGS
Beginning on May 22, 2007, we sold 1,666,667 shares of our common stock to four
investors at a purchase price of $3.00 per share of common stock ("May 2007
Offering"). In addition to the shares of our common stock, we issued warrants to
purchase 833,333 shares of our common stock at $4.00 per share to these
investors.
In September 2006 through February 2007, we sold 3,256,400 shares of our common
stock for $3,256,400 to 15 investors ("September Offering"). In addition to the
shares of our common stock, we issued warrants to purchase 3,256,400 shares of
our common stock at $1.25 per share to these investors.
In March 2007, in connection with the September Offering, we requested that the
investors exercise their respective 2006 warrants and in return receive an
additional 2007 warrant at an exercise price of $3.00 for every two warrants
exercised from the September 2006 PPM. As of March 2007, we received
approximately $1,187,500 from the exercise of the September Offering warrants
and have issued 2007 warrants for an additional 475,000 shares of our common
stock to 5 September Offering investors.
In June 2006 the Company sold a total of 142,669 shares of restricted common
stock to several of its key managers for aggregate net proceeds of approximately
$107,000 and warrants were exercised by a shareholder with the Company realizing
$500,000 in net proceeds. These proceeds were applied to an outstanding note
payable to the same shareholder in the amount of $500,000.
2
In June 2005 through April 2006, we sold approximately $1,257,985 in principal
amount of convertible debentures to 18 investors ("June Offering"). In addition
to the convertible debentures, we issued 1,257,985 shares of our common stock to
these investors.
In connection with the June Offering, we issued, in March 2007, approximately
1,708,000 shares of our common stock as a result of the conversion of the June
Offering Convertible Debentures. As provided in those Debentures, the holders
were entitled to convert the principal amount of the Debenture in the event that
we became a fully reporting company. As indicated in this Registration
Statement, we became a fully reporting company on February 13, 2007 and,
accordingly, the June Offering investors converted their Debentures.
3
SUMMARY FINANCIAL INFORMATION
The following tables set forth the summary financial information for our Company
as provided in its year end financial statements. You should read this
information together with the financial statements and the notes thereto
appearing elsewhere in this prospectus and the information under "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS DATA
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
2006 2005
- ------------------------------------------------------------------------------------------------------------------------------------
Net Revenues $6,166,092 $2,887,498
Loss from Operations $3,101,221 $1,301,226
Basic and Diluted Loss Per Share $(0.12) $(0.06)
Weighted Average Common Shares Outstanding 27,305,114 21,429,516
- ------------------------------------------------------------------------------------------------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEET DATA
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
2006 2005
- ------------------------------------------------------------------------------------------------------------------------------------
Total Current Assets $624,630 $813,742
Total Assets $2,344,463 $1,828,330
Working Capital Deficiency ($3,276,083) ($622,563)
Total Current Liabilities $3,900,713 $1,436,305
Stockholders' Deficit $2,135,617 $1,357,519
- ------------------------------------------------------------------------------------------------------------------------------------
4
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW BEFORE BUYING SHARES OF
OUR COMMON STOCK IN THIS OFFERING. THE RISKS AND UNCERTAINTIES DESCRIBED BELOW
ARE NOT THE ONLY RISKS WE FACE. ADDITIONAL RISKS AND UNCERTAINTIES NOT CURRENTLY
KNOWN TO US OR THAT WE CURRENTLY DEEM IMMATERIAL MAY IMPAIR OUR BUSINESS
OPERATIONS. IF ANY OF THE ADVERSE EVENTS DESCRIBED IN THIS RISK FACTORS SECTION
ACTUALLY OCCUR, OUR BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION
COULD BE MATERIALLY ADVERSELY AFFECTED, THE TRADING PRICE OF OUR COMMON STOCK
COULD DECLINE AND YOU MIGHT LOSE ALL OR PART OF YOUR INVESTMENT. WE HAVE HAD
OPERATING LOSSES TO DATE AND CANNOT ASSURE THAT WE WILL BE PROFITABLE IN THE
FORESEEABLE FUTURE.
WE HAVE A HISTORY OF OPERATING LOSSES, AND SUCH LOSSES MAY CONTINUE IN THE
FUTURE IF THE COMPANY IS UNABLE TO SECURE SUFFICIENT ENOUGH CONTRACTS TO COVER
ITS OVERHEAD AND OPERATING EXPENSES.
The Company had net losses of $3,250,665, and $1,378,789 for the fiscal years
ended December 31, 2006, and 2005, respectively. As of March 31, 2007, the
Company had a net loss of $1,462,001. The Company had an accumulated deficit of
$5,246,964 and $1,996,299 and a net stockholders' deficit of $2,135,617 and
$1,357,519 as of December 31, 2006 and 2005, respectively, and we may never be
profitable. As of March 31, 2007, the Company had an accumulated deficit of
$6,708,965.
IF WE CANNOT ACHIEVE PROFITABILITY FROM OPERATING ACTIVITIES, WE MAY NOT BE ABLE
TO MEET OUR WORKING CAPITAL NEEDS.
An investment in our securities must be considered in light of the numerous
risks, expenses, delays and difficulties frequently encountered in the
healthcare industry, as well as the risks inherent in the development of new
programs and the commercialization of new services particularly given our
failure to date to operate profitably.
OUR AUDITORS HAVE SUBSTANTIAL DOUBT ABOUT OUR ABILITY TO CONTINUE AS A GOING
CONCERN.
In their report prepared in conjunction with our December 31, 2006 and December
31, 2005 financial statements, our auditors included an explanatory paragraph
stating that, because we have incurred net losses and have a working capital
deficiency as of December 31, 2006 and 2005, there is substantial doubt about
our ability to continue as a going concern.
Management believes that the Company will be successful in its efforts to
adequately meet its capital needs and continue to grow its businesses. In 2006
and 2005, the Company raised $1.758 million dollars through the issuance of
convertible debenture notes to accredited investors. During the first quarter of
2007, $1.708 million worth of these convertible debentures were converted into
common stock at a ratio of 1:1 resulting in the issuance of 1.708 million common
shares. The remaining $50,000 of convertible debt was repaid on April 6, 2007.
WE WILL NEED TO RAISE SIGNIFICANT ADDITIONAL CAPITAL TO CONTINUE OUR BUSINESS
OPERATIONS.
Our cash position on a consolidated basis at December 31, 2006 was $151,534 as
compared to $435,375 at December 31, 2005. At December 31, 2006, our current
total monthly operating expenses were approximately $350,000, for the three
months ended March 31, 2007 our total monthly operating expenses were
approximately $550,000. In order to continue our activities, we will be required
to raise
5
significant capital. We presently estimate that we will require an additional $5
million to $7 million to support operations and growth plans through the
remainder of calendar 2007.
During the first quarter of 2007, and in connection with the September Offering,
the Company requested that 29 investors exercise their respective warrants and
in return the Company offered the investors an additional two-year warrant
("2007 Warrant") at an exercise price of $3.00 for every two warrants exercised
from the September Offering. During the first quarter of 2007, the Company
received $1,187,500 upon the exercise of 950,000 of the September Offering
warrants and has issued warrants for an additional 475,000 shares of the
Company's common stock to five (5) September Offering investors.
During the second quarter of 2007 the Company received an additional $687,500
upon the exercise of 550,000 of the September Offering warrants and has issued
warrants for an additional 275,000 shares of the Company's common stock at an
exercise price of $3.00.
During the second quarter of 2007 the Company received $5,000,000 upon the sale
of 1,666,667 shares of the Company's common stock in a private placement with
four investors; such shares were sold at $3.00 per share of common stock. In
connection with this sale the company also issued warrants to purchase 833,333
shares of the Company's common stock at a price of $4.00 for a period of two
years.
WE COULD ISSUE A SIGNIFICANT AMOUNT OF COMMON STOCK OR A SERIES OF PREFERRED
STOCK THAT MIGHT ADVERSELY AFFECT OUR EXISTING COMMON STOCKHOLDERS.
Our articles of incorporation, as amended, authorize the issuance of 100,000,000
shares of common stock and 5,000,000 shares of preferred stock, with
designations, rights and preferences that may be determined from time to time by
our board of directors which may be superior to those attached to the common
stock. Accordingly, the board of directors is empowered, without further
stockholder approval, to issue additional shares of common stock up to the
authorized amount or to establish a series of preferred stock with dividend,
liquidation, conversion, voting or other rights either of which could adversely
affect the voting power or other rights of the holders of the existing common
stock. Issuance of additional common stock at prices below the fair market value
per share would result in dilution to our existing common stockholders.
Moreover, shares of preferred stock could be convertible into shares of common
stock in amounts that would result in similar dilution. In the event of a
preferred stock issuance, the preferred stock could be used, under certain
circumstances, as a method of discouraging, delaying or preventing a change in
control of our company.
INVESTING IN OUR STOCK IS HIGHLY SPECULATIVE AND YOU COULD LOSE SOME OR ALL OF
YOUR INVESTMENT.
The value of our common stock may decline and may be affected by numerous market
and internal conditions such as future sales by current shareholders which could
result in the loss of some or the entire amount invested in our stock. We could
also issue shares of preferred stock that have rights senior to the common
stock.
6
OUR PRINCIPAL STOCKHOLDERS AND MANAGEMENT OWN A SIGNIFICANT PERCENTAGE OF OUR
OUTSTANDING COMMON STOCK AND WILL BE ABLE TO EXERCISE SIGNIFICANT INFLUENCE OVER
OUR OPERATIONS.
Our executive officers, directors and holders of more than 5% of our outstanding
common stock, together with their respective affiliates, currently own
approximately 71.8% of our voting stock, including shares subject to outstanding
options and warrants. These stockholders are able to determine the composition
of our board of directors, retain the voting power to approve all matters
requiring stockholder approval and will continue to have significant influence
over our operations. This concentration of ownership could have the effect of
delaying or preventing a change in control of the Company, preventing or
frustrating any attempt by our stockholders to replace or remove the current
management, or otherwise discouraging a potential acquirer from attempting to
obtain control of the company, which in turn could limit the market value of our
common stock.
WE ARE HIGHLY DEPENDENT ON OUR MANAGEMENT AND OUR BUSINESS WOULD BE MATERIALLY
ADVERSELY AFFECTED IF ANY OF OUR EXECUTIVES LEAVE.
The operations and financial success of the Company are significantly dependent
on the Chief Executive Officer who is the sole member of the board of directors.
Our Vice President Clinical Operations and Chief Financial & Operating Officer
are also critical members of our management team. We currently do not have
employment agreements with these individuals however we hope to enter into such
agreements with them in the near future. Although we maintain key man life
insurance on Dr. Chess, our President and Chief Executive Officer, in the event
that he or our other key executives, including our Vice President Clinical
Operations or CFO, become unable or unwilling to continue to direct operations,
the Company lacks the funds and financial resources to replace departing
management and we would be materially adversely affected. Operations could be
materially affected and under certain circumstances, shareholders would lose
their entire investment. Further, Dr. Chess is the sole member of several
limited liability companies that perform non-medical administrative and support
services in certain states where we are prohibited from directly owning a
medical operation due to corporate practice of medicine laws in those states.
Accordingly, in the event that Dr. Chess were to leave our Company, it may
impact our day-to-day operations until a replacement can be recruited.
WE ARE A HOLDING COMPANY AND OUR ASSETS CONSIST PRIMARILY OF INVESTMENTS IN OUR
SUBSIDIARIES AND CONSEQUENTLY OUR SHAREHOLDERS MAY NOT RECEIVE ANY DIRECT
BENEFIT WHICH MAY BE DERIVED FROM OUR SUBSDIARIES.
We are a holding company and our assets consist primarily of investments in our
subsidiaries. Other than providing administrative support, the Company engages
in no business directly. The subsidiaries are distinct legal entities and have
no obligation to pay any dividends or make advances or loans to us.
WE FACE SIGNIFICANT COMPETITIVE RISKS.
The healthcare industry is highly competitive. We face competition from many
large and small companies. Many of these companies have financial resources far
greater than ours and have greater leverage in business and personnel. A high
degree of competition is expected to continue and there are no significant
barriers to entry into this business. Our business may be adversely affected by
these factors in a manner that causes our shareholders to lose their entire
investment.
7
IF WE DO NOT MANAGE OUR GROWTH SUCCESSFULLY, OUR GROWTH MAY SLOW, DECLINE OR
STOP, AND WE MAY NEVER BECOME PROFITABLE.
If we do not manage our growth successfully, our growth may slow, decline or
stop, and we may never become profitable. We have expanded our operations
rapidly and plan to continue to expand. This expansion has created significant
demands on our administrative, operational and financial personnel and other
resources. Additional expansion in existing or new markets could strain
resources and increase the need for capital. Our personnel, systems, procedures,
controls and existing space may not be adequate to support further expansion. In
addition, because our business strategy emphasizes growth, the failure to
achieve our stated growth objectives or the growth expectations of investors
could cause our stock price to decline.
OUR PRODUCTS AND SERVICES MAY NOT BE ACCEPTED IN THE MARKETPLACE.
In connection with the commercialization of our health information system, we
are marketing services designed to link patients, health care providers and
payers in order to provide specialized management services for targeted chronic
diseases. However, at this time, services of this type have not gained general
acceptance from our customers. This is still perceived to be a new business
concept in an industry characterized by an increasing number of market entrants
who have introduced or are developing an array of new services. As is typical in
the case of a new business concept, demand and market acceptance for newly
introduced services are subject to a high level of uncertainty, and there can be
no assurance as to the ultimate level of market acceptance for our system,
especially in the health care industry, in which the containment of costs is
emphasized. Because of the subjective nature of patient compliance, we may be
unable, for an extensive period of time, to develop a significant amount of data
to demonstrate to potential customers the effectiveness of our services. Even
after such time, no assurance can be given that our data and results will be
convincing or determinative as to the success of our system. There can be no
assurance that increased marketing efforts and the implementation of our
strategies will result in market acceptance for our services or that a market
for our services will develop or not be limited.
OUR AGREEMENTS WITH OUR CUSTOMERS MAY BE TERMINATED BY OUR CUSTOMERS ON
RELATIVELY SHORT NOTICE.
Our current services agreements with our customers generally automatically renew
but may be terminated by those customers without cause upon short notice. In
general, customer contracts may include significant performance criteria and
implementation schedules for us. Failure to satisfy such criteria or meet such
schedules could also result in termination of the agreements.
THE SUCCESS OF OUR PROGRAMS IS HIGHLY DEPENDENT ON THE ACCURACY OF INFORMATION
PROVIDED BY PATIENTS.
Our ability to monitor and modify patient behavior and to provide information to
health care providers and payers, and consequently the success of our disease
management system, is dependent upon the accuracy of information received from
patients. We have not taken and do not expect to take, specific measures to
determine the accuracy of information provided to us by patients regarding their
medical histories. No assurance can be given that the information our patients
provide us will be accurate. To the extent that patients have chosen not to
comply with prescribed treatments, such patients might provide inaccurate
information to avoid detection. Because of the subjective nature of medical
treatment, it will be difficult for us to validate or confirm any such
information. In the event that patients enrolled in our programs provide
inaccurate information to a significant degree, we would be materially and
adversely affected. Furthermore, there can be no assurance that our patient
interventions will be successful in modifying patient behavior, improving
patient health or reducing costs in any given case. Many potential customers may
seek data from us with respect to the results of its programs prior to retaining
us to
8
develop new disease management or other health information programs. Our ability
to market our system to new customers may be limited if we are unable to
demonstrate successful results for our programs.
OUR OPERATING RESULTS HAVE FLUCTUATED IN THE PAST AND COULD FLUCTUATE IN THE
FUTURE.
Our operating results have varied in the past and may fluctuate significantly in
the future due to a variety of factors, many of which are outside of our
control.
OUR BUSINESS IS DEPENDENT ON DATA PROCESSING AND TRANSMISSION CAPABILITIES.
Our business is dependent upon its ability to store, retrieve, process and
manage data and to maintain and upgrade our data processing capabilities.
Interruption of data processing capabilities for any extended length of time,
loss of stored data, programming errors, other computer problems or
interruptions of telephone service could have a material adverse effect on our
business.
ANY INABILITY TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY COULD HARM OUR
COMPETITIVE POSITION.
We consider our methodologies, processes and know how to be proprietary. We seek
to protect our proprietary information through confidentiality agreements with
our employees. Our policy is to have employees enter into confidentiality
agreements that contain provisions prohibiting the disclosure of confidential
information to anyone outside of the company. There can be no assurance that the
steps we take to protect our intellectual property will be successful. If we do
not adequately protect our intellectual property, competitors may be able to use
our technologies and erode or negate our competitive advantage.
IF OUR ACTUAL FINANCIAL RESULTS VARY FROM ANY PUBLICLY DISCLOSED FORECASTS, OUR
STOCK PRICE COULD DECLINE MATERIALLY.
Our actual financial results might vary from those that we anticipate, and these
variations could be material. Publicly disclosed forecasts reflect numerous
assumptions concerning expected performance, as well as other factors, which are
beyond our control, and which might not turn out to have been correct. Although
we believe that the assumptions underlying the projections are reasonable,
actual results could be materially different, and to the extent actual results
are materially different, our stock price could be materially adversely
impacted.
CHANGES IN MARKET COULD ADVERSELY AFFECT OUR CONTRACTS WHICH COULD HAVE THE
EFFECT OF DECREASING OUR REVENUES
The healthcare industry in which the Company operates currently faces
significant cost reduction pressures as a result of constrained revenues from
governmental and private revenue sources and increasing underlying medical care
costs. We believe that these pressures will continue and possibly intensify.
The Company's services are geared specifically to assist its customers in
controlling the high costs associated with the treatment of chronic diseases;
however, the pressures to reduce costs in the short term may negatively affect
its ability to sign and/or retain contracts. In addition, this focus on cost
reduction may cause its customers to focus on contract restructurings that
reduce the fees for services rendered by the Company. These financial pressures
could have a negative impact on our operations.
9
THE COMPANY'S COMMON STOCK IS TRADED ON AN EXTREMELY ILLIQUID MARKET, MAKING IT
DIFFICULT FOR INVESTORS TO SELL THEIR SHARES.
There is an extremely limited and illiquid public market for the Company's
common stock. The common stock is currently quoted on the Over the Counter
Bulletin Board (HCNV.OB), but trading has historically been minimal. Therefore,
the market for the common stock is limited. The trading price of the Company's
common stock could be subject to wide fluctuations in response to variations in
quarterly results of operations, the gain or loss of significant customers,
announcements of new products by the Company or its competitors, general
conditions in our industry, and large shareholders selling or purchasing shares.
There is no assurance that investors will be able to purchase additional shares
or sell their shares within the time frame or at a price they desire.
OUR FAILURE TO MAINTAIN ADEQUATE PRICE LEVELS COULD HAVE A MATERIAL ADVERSE
EFFECT ON OUR BUSINESS.
In recent years, the healthcare industry has undergone significant change driven
by various efforts to reduce costs, including potential national healthcare
reform, trends toward managed care, cuts in Medicare reimbursements, and
horizontal and vertical consolidation within the healthcare industry. Our
inability to react effectively to these and other changes in the healthcare
industry could adversely affect our operating results. We cannot predict whether
any healthcare reform efforts will be enacted and what effect any such reforms
may have on us or our customers. Our inability to react effectively to changes
in the healthcare industry could result in a material adverse effect on our
business.
THE ESTABLISHED RELATIONS WITH THE KEY NURSING HOME CHAINS MAY BE TERMINATED BY
THEM, WHICH WILL RESULT IN A MATERIAL REDUCTION IN REVENUES.
Our ability to generate revenue from our affiliate, NP Care, LLC is dependent
upon securing and maintaining contracts with both individual and corporately
owned nursing home chains. The nature of our contractual relationships with
these nursing homes or nursing home chains is such that they may be terminated
by either party without cause and with typically a thirty to ninety day written
notice of the intent to terminate.
RECONCILIATIONS UNDER THE COMPANY'S CONTRACT WITH HEALTH PLANS COULD RESULT IN
ADDITIONAL CASH TO BE PAID BY IT OR RESULT IN LESS CASH TO BE PAID TO THE
COMPANY BY HEALTH PLANS THAN ORIGINALLY ESTIMATED.
Our contracts with health plans are based upon a set fee charged by us on a
per-member, per-month (PMPM) basis. These contracts require a minimum enrollment
of the health plan's members who qualify for our programs. We are reimbursed
monthly based upon the actual census of enrolled members. Our estimated future
revenues are based upon achieving high levels of enrollment.
WE ARE SUBJECT TO EXTENSIVE CHANGES IN THE HEALTHCARE INDUSTRY.
The healthcare industry is subject to changing political, economic and
regulatory influences that may affect the procurement practices and operations
of healthcare industry participants. Several lawmakers have announced that they
intend to propose programs to reform the U.S. health care system. These programs
may contain proposals to increase governmental involvement in health care, lower
reimbursement rates and otherwise change our operating environment and our
targeted customers. Healthcare industry participants may react to these
proposals and the uncertainty surrounding such proposals by curtailing or
deferring certain expenditures, including those for our programs. We cannot
predict what impact, if any, such changes in the healthcare industry might have
on our business, financial
10
condition and results of operations. In addition, many healthcare providers are
consolidating to create larger healthcare delivery enterprises with greater
regional market power. As a result, the remaining enterprises could have greater
bargaining power, which may lead to price erosion of our programs.
OUR BUSINESS IS SUBJECT TO EXTENSIVE GOVERNMENT REGULATION.
The healthcare industry, including our current business, is subject to extensive
regulation by both the Federal and State governments. A number of states have
extensive licensing and other regulatory requirements applicable to companies
that provide healthcare services. Additionally, services provided to health
benefit plans in certain cases are subject to the provisions of the Employee
Retirement Income Security Act of 1974 (ERISA), as amended, and may be affected
by other State and Federal statutes. Generally, State laws prohibit the practice
of medicine and nursing without a license. Many states interpret the practice of
nursing to include health teaching, health counseling, the provision of care
supportive to, or restorative of, life and well-being and the execution of
medical regimens prescribed by a physician. Accordingly, to the extent that we
assist providers in improving patient compliance by publishing educational
materials or providing behavior modification training to patients, such
activities could be deemed by a state to be the practice of medicine or nursing.
Although we have not conducted a survey of the applicable law in all 50 states,
we believe that we are not engaged in the practice of medicine or nursing. There
can be no assurance, however, that our operations will not be challenged as
constituting the unlicensed practice of medicine or nursing. If such a challenge
were made successfully in any state, we could be subject to civil and criminal
penalties under such state's law and could be required to restructure its
contractual arrangements in that state. Such results, or the inability to
successfully restructure our contractual arrangements, could have a material
adverse effect on our operations.
We and our customers may also be subject to Federal and state laws and
regulations that govern financial and other arrangements among healthcare
providers. These laws prohibit certain fee splitting arrangements among
healthcare providers, as well as direct and indirect payments, referrals or
other financial arrangements that are designed to induce or encourage the
referral of patients to, or the recommendation of, a particular provider for
medical products and services. Possible sanctions for violation of these
restrictions include civil and criminal penalties. Criminal penalties range from
misdemeanors, which carry fines of not more than $10,000 or imprisonment for not
more than one year, or both, to felonies, which carry fines of not more than
$25,000 or imprisonment for not more than five years, or both. Further, criminal
violations may result in permanent mandatory exclusions and additional
permissive exclusions from participation in Medicare and Medicaid programs.
Regulation in the health care field is constantly evolving. We are unable to
predict what government regulations, if any; affecting our business may be
promulgated in the future. Our business could be materially adversely affected
by the failure to obtain required licenses and governmental approvals, comply
with applicable regulations or comply with existing or future laws, rules or
regulations or their interpretations.
COMPLIANCE WITH NEW FEDERAL AND STATE LEGISLATIVE AND REGULATORY INITIATIVES
COULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS OR MAY REQUIRE US TO SPEND
SUBSTANTIAL AMOUNTS ACQUIRING AND IMPLEMENTING NEW INFORMATION SYSTEMS OR
MODIFYING EXISTING SYSTEMS.
We and our customers are subject to considerable state and Federal government
regulation. Many of these regulations are vaguely written and subject to
differing interpretations that may, in certain cases, result in unintended
consequences that could impact our ability to effectively deliver services. The
current focus on regulatory and legislative efforts to protect the
confidentiality and security of
11
individually identifiable health information, as evidenced by the Health
Insurance Portability and Accountability Act of 1996, (HIPAA), is one such
example.
We believe that federal regulations governing the confidentiality of
individually identifiable health information permit us to obtain individually
identifiable health information for health and care support purposes from a
health plan customer; however, state legislation or regulation could preempt
federal legislation if it is more restrictive. Federal regulations governing the
security of electronic individually identifiable health information became
mandatory for customers in April 2005. We are contractually required to comply
with certain aspects of these confidentiality and security regulations.
Although we continually monitor the extent to which specific state legislation
or regulations may govern our operations, new federal or state legislation or
regulation in this area that restricts our ability to obtain individually
identifiable health information would have a material negative impact on our
operations.
GOVERNMENT REGULATORS MAY INTERPRET CURRENT REGULATIONS GOVERNING OUR OPERATIONS
IN A MANNER THAT NEGATIVELY IMPACTS OUR ABILITY TO PROVIDE SERVICES.
Broadly written Medicare fraud and abuse laws and regulations that are subject
to varying interpretations may expose us to potential civil and criminal
litigation regarding the structure of current and past contracts entered into
with our customers. We believe that our operations have not violated and do not
violate the provisions of the fraud and abuse statutes and regulations; however,
private individuals acting on behalf of the United States government, or
government enforcement agencies themselves, could pursue a claim against us
under a new or differing interpretation of these statutes and regulations.
Our participation in federal programs may result in our being subject directly
to various federal laws and regulations, including provisions related to fraud
and abuse, false claims and billing and reimbursement for services, and the
False Claims Act. Violations of the False Claims Act are punishable by treble
damages and penalties of up to $11,000 per false claim. Actions may be brought
under the False Claims Act by the government as well as by private individuals,
known as `whistleblowers,' who are permitted to share in any settlement or
judgment. Also, federal law contains various prohibitions related to false
statements and false claims, some of which apply to private payers as well as
federal programs.
WE FACE COMPETITION FOR STAFFING, WHICH MAY INCREASE OUR LABOR COSTS AND REDUCE
PROFITABILITY.
We compete with other healthcare and services providers in recruiting qualified
management and staff personnel for the day-to-day operations of our business,
including nurses and other healthcare professionals. In some markets, the
scarcity of nurses and other medical support personnel has become a significant
operating issue to healthcare businesses. This shortage may require us to
enhance wages and benefits to recruit and retain qualified nurses and other
healthcare professionals. A failure to recruit and retain qualified management,
nurses and other healthcare professionals, or to control labor costs, could have
a material adverse effect on our profitability.
WE MAY FACE COSTLY LITIGATION THAT COULD FORCE US TO PAY DAMAGES AND HARM OUR
REPUTATION.
Like other participants in the healthcare market, we are subject to lawsuits
alleging negligence, product liability or other similar legal theories, many of
which involve large claims and significant defense costs. Any of these claims,
whether with or without merit, could result in costly litigation, and divert the
time, attention, and resources of management. Although we currently maintain
liability insurance intended to
12
cover such claims, there can be no assurance that the coverage limits of such
insurance policies will be adequate or that all such claims will be covered by
the insurance. In addition, these insurance policies must be renewed annually.
Although we have been able to obtain liability insurance, such insurance may not
be available in the future on acceptable terms, or at all. A successful claim in
excess of the insurance coverage could have a material adverse effect on our
results of operations or financial condition.
WE COULD SHARE IN POTENTIAL LIABILITY RESULTING FROM ADVERSE MEDICAL
CONSEQUENCES OF PATIENTS.
We provide information to healthcare providers and managed care organizations
upon which determinations affecting medical care are made. As a result, we could
share in potential liabilities for resulting adverse medical consequences to
patients. In addition, we could have potential legal liability in the event we
fail to correctly record or disseminate patient information. Although we do not
believe that we will directly engage in the practice of medicine or direct
delivery of medical services and have not been a party to any such litigation,
we maintain a professional liability policy with coverage of $3 million in the
aggregate and $1 million per occurrence. There can be no assurance that our
procedures for limiting liability have been or will be effective, that we will
not be subject to litigation that may adversely affect our results of
operations, that appropriate insurance will be available to us in the future at
acceptable cost or at all, or that any insurance we maintain will cover, as to
scope or amount, any claims that may be made against us.
AN INABILITY TO ACCESS FINANCIAL MARKETS COULD ADVERSELY AFFECT THE EXECUTION OF
THE COMPANY'S BUSINESS PLAN.
The Company cannot give assurance that additional capital will not be needed,
either through issuing more common stock, other equity securities or debt. Any
additional debt or preferred equity securities would be senior to common equity
holders in bankruptcy. Any additional common stock issued by the Company would
dilute existing shareholder interests. Further, no assurance can be given as to
how much additional working capital will be required or that additional
financing can be obtained on terms that will allow the Company to execute its
business plans or meet its financial obligations as they become due.
The Company relies on access to both short-term money markets and longer-term
capital markets as a significant source of liquidity for capital requirements
not satisfied by cash flow from operations. Management cannot assure that the
Company and its subsidiaries will maintain sufficient access to these financial
markets based upon the Company's current financial position.
Moreover, certain developments outside of the Company's control may increase the
cost of borrowing or restrict its ability to access one or more financial
markets. Such developments could include, but are not limited to, an economic
downturn, an increase in interest rates or a weakening of the Company's
financial position.
THE COST TO THE COMPANY TO COMPLY WITH SEC RULES AND REGULATIONS MAY BE OVERLY
BURDENSOME.
Subsequent to the filing of Form 10-SB, the Company has become subject to the
filing requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"). Pursuant to the Exchange Act, the Company
will be required to file quarterly and annual reports and reports regarding
certain interim current activities. The inability to timely file the necessary
SEC reports could cause the public to lose confidence in the Company and
materially adversely affect the Company's stock price and ability to raise
capital.
13
IF WE ARE UNABLE TO CERTIFY THE EFFECTIVENESS OF OUR INTERNAL CONTROL OVER
FINANCIAL REPORTING, WE COULD SUFFER A LOSS OF PUBLIC CONFIDENCE IN OUR INTERNAL
CONTROLS, WHICH COULD HAVE A NEGATIVE IMPACT ON OUR FINANCIAL PERFORMANCE AND
THE MARKET VALUE OF OUR COMMON STOCK.
Item 308 of SEC Regulation S-K, which was promulgated pursuant to Section 404 of
the Sarbanes-Oxley Act of 2002, will require us to provide an annual report on
our internal control over financial reporting, including an assessment as to
whether or not our internal control over financial reporting is effective
beginning with our Annual Report on Form 10-K or Form 10-KSB for the fiscal year
ended December 31, 2007. We will also be required to have our auditors attest to
our assessment and our CEO and CFO to individually opine on the effectiveness of
our internal controls over financial reporting for the fiscal year ended
December 31, 2008. The timetable for compliance could be accelerated if our
market capitalization, as defined in Section 404 of the Sarbanes Oxley Act,
exceeds $75 million. We have not yet begun efforts to assess the effectiveness
of the design and operation of our internal controls and, when we do perform
this assessment, we may find deficiencies or material weaknesses in our internal
control over financial reporting. Our auditors will then be required to evaluate
our assessment to determine whether our internal control is effective.
Furthermore, if we or our auditors are unable to timely complete an assessment
of our internal control over financial reporting or review of our assessment
efforts, we would be deficient in our reporting obligations under the Exchange
Act, which may restrict our access to capital markets. Under any of these
circumstances, we could be subjected to additional regulatory scrutiny and
suffer a loss of public confidence in our internal control, which could have a
negative impact on our financial performance and the market value of our common
stock.
OUR COMMON STOCK COULD BE CONSIDERED A `PENNY STOCK' WHICH COULD MAKE IT
DIFFICULT FOR INVESTORS TO PURCHASE AND DISPOSE OF OUR SHARES
The Securities Enforcement and Penny Stock Reform Act of 1990 require additional
disclosure related to the market for penny stocks and for trades in any stock
defined as a penny stock. The SEC has adopted regulations under this statute
that defines a penny stock generally to be any non-NASDAQ equity security that
has a market price of less than $5.00 per share. The SEC's definition of a penny
stock is likely to apply to the Company's common stock. As such, the common
stock would be subject to certain risks associated with trading in penny stocks.
These risks include, but are not limited to, difficulty for investors in
purchasing or disposing of shares, obtaining accurate bid and ask quotations,
establishing the market value of the shares, and a lack of securities analyst
coverage.
Unless exempt, for any transaction in a penny stock, the rules require the
delivery, prior to any transaction in a penny stock, of a disclosure schedule
prepared by the SEC explaining important concepts involving the penny stock
market, the nature of such market, terms used in such market, the
broker/dealer's duties to the customer, a toll-free telephone number for
inquiries about the broker/dealer's disciplinary history and the customer's
rights and remedies in case of fraud or abuse in the sale. Disclosure is also
required with respect to commissions payable to both the broker/dealer and the
registered representative and current quotations of securities. Also, monthly
statements must be sent disclosing recent price information for the penny stock
held in the account and information on the limited market in penny stocks.
BECAUSE WE DO NOT INTEND TO PAY ANY DIVIDENDS, STOCKHOLDERS MUST RELY ON STOCK
APPRECIATION FOR ANY RETURN ON THEIR INVESTMENT IN OUR COMMON STOCK.
We have not paid any dividends on our common stock and we do not intend to
declare and pay any dividends on our common stock. Earnings, if any, are
expected to be retained by us to finance and expand our business.
14
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains `forward-looking statements' and information relating
to our business that are based on our beliefs as well as assumptions made by us
or based upon information currently available to us. When used in this
prospectus, the words `anticipate,' `believe,' `estimate,' `expect,' `intend,'
`may,' `plan,' `project', `should' and similar expressions are intended to
identify forward-looking statements. These forward-looking statements include,
but are not limited to, statements relating to our performance in "Business" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operation." These statements reflect our current views and assumptions with
respect to future events and are subject to risks and uncertainties. Actual and
future results and trends could differ materially from those set forth in such
statements due to various factors. Such factors include, among others: general
economic and business conditions; industry capacity; industry trends;
competition; changes in business strategy or development plans; project
performance; the commercial viability of our products and offerings;
availability, terms, and deployment of capital; and availability of qualified
personnel. These forward-looking statements speak only as of the date of this
prospectus. Subject at all times to relevant federal and state securities law
disclosure requirements, we expressly disclaim any obligation or undertaking to
disseminate any update or revisions to any forward-looking statement contained
herein to reflect any change in our expectations with regard thereto or any
changes in events, conditions or circumstances on which any such statement is
based. In addition, we cannot assess the impact of each factor on our business
or the extent to which any factor, or combination of factors, may cause actual
results to differ materially from those contained in any forward-looking
statements.
USE OF PROCEEDS
We will not receive any proceeds from the sale of the shares of our common stock
by the Selling Securityholders; however, we will receive proceeds from any
exercise of the warrants if and to the extent that any of the warrants are
exercised.
SELLING SECURITYHOLDERS
We agreed to register for resale shares of common stock by the Selling
Securityholders listed below. The Selling Securityholders may from time to time
offer and sell any or all of their shares that are registered under this
prospectus. The Selling Securityholders, and any participating broker-dealers
are `underwriters' within the meaning of the Securities Act of 1933, as amended.
All expenses incurred with respect to the registration of the common stock will
be borne by us, but we will not be obligated to pay any underwriting fees,
discounts, commissions or other expenses incurred by the Selling Securityholders
in connection with the sale of such shares.
The following table sets forth information with respect to the maximum number of
shares of common stock beneficially owned by the Selling Securityholders named
below and as adjusted to give effect to the sale of the shares offered hereby.
The shares beneficially owned have been determined in accordance with rules
promulgated by the SEC, and the information is not necessarily indicative of
beneficial ownership for any other purpose. The information in the table below
is current as of the date of this prospectus. All information contained in the
table below is based upon information provided to us by the Selling
Securityholders and we have not independently verified this information. The
Selling Securityholders are not making any representation that any shares
covered by the prospectus will be offered for sale. The Selling Securityholders
may from time to time offer and sell pursuant to this prospectus any or all of
the common stock being registered.
15
Except as indicated below, none of the Selling Securityholders have held any
position or office with us, nor are any of the Selling Securityholders
associates or affiliates of any of our officers or directors. Except as
indicated below, no selling stockholder is the beneficial owner of any
additional shares of common stock or other equity securities issued by us or any
securities convertible into, or exercisable or exchangeable for, our equity
securities. No selling stockholder is a registered broker-dealer or an affiliate
of a broker-dealer.
For purposes of this table, beneficial ownership is determined in accordance
with SEC rules, and includes voting power and investment power with respect to
shares and shares owned pursuant to warrants exercisable within 60 days. The
"Number of Shares Beneficially Owned after the Offering" column assumes the sale
of all shares offered.
As explained below under "Plan of Distribution," we have agreed with the Selling
Securityholders to bear certain expenses (other than broker discounts and
commissions, if any) in connection with the registration statement, which
includes this prospectus.
NUMBER OF SHARES NUMBER OF SHARES
NAME AND ADDRESS OF BENEFICIALLY OWNED NUMBER OF BENEFICIALLY OWNED
SELLING SECURITYHOLDER PRIOR TO OFFERING SHARES OFFERED AFTER THE OFFERING
- ------------------------------------------------------------------------------------------------------------------------------------
Roger W. Miller 250,000(1) 250,000 -
1220 Park Avenue, #14C
New York, NY 10128
Peter T. Michaelis 500,000(2) 500,000 -
91 Katonahs Wood Rd
Katonah, NY 10536
Polaris Partners, LP 800,000(3) 800,000 -
530 Fifth Avenue, 25th Floor
NY, NY 10036
Quicken Inc. 500,000(4) 500,000 -
52 East 76th Street
New York, NY 10021
Charles H. Brunie 1,375,000(5) 1,375,000 -
21 Elm Rock Road
Bronxville, NY 10708
Carmine Urciuoli 212,800(6) 212,800 -
1934 Hendrickson Street
Brooklyn, NY 11234
Scinet Development & Holdings 112,500(7) 112,500 -
2500 US Bank Building
5th & Walnut Street
Cincinnati, Ohio 45202
Rodney D. Baber 500,000(8) 500,000 -
6050 Blakely Drive
Memphis, TN 38120
Jonathan Brit Stephens 250,000(9) 250,000 -
680 W. Suggs Drive
Memphis, TN 38120
Pegasus Capital II, LP 900,000(10) 900,000 -
54 Welland Road, Suite 800
Brookline, MA 02445
16
NUMBER OF SHARES NUMBER OF SHARES
NAME AND ADDRESS OF BENEFICIALLY OWNED NUMBER OF BENEFICIALLY OWNED
SELLING SECURITYHOLDER PRIOR TO OFFERING SHARES OFFERED AFTER THE OFFERING
- ------------------------------------------------------------------------------------------------------------------------------------
Investment Corporate Group, LLC 112,500(11) 112,500 -
54 Welland Road, Suite 800
Brookline, MA 02445
Pleiades Investment Partners R LP 760,200(12)(13) 760,200 -
c/o Potomac Capital Management
825 Third Avenue, 33rd Floor
New York, NY 10022
Potomac Capital International Ltd. 740,400(12)(14) 740,400 -
c/o Potomac Capital Management
825 Third Avenue, 33rd Floor
New York, NY 10022
Potomac Capital Partners LP 1,099,400(12)(15) 1,099,400 -
c/o Potomac Capital Management
825 Third Avenue, 33rd Floor
New York, NY 10022
David Nahmias 50,000(16) 50,000 -
14 Lynnfield Road
Memphis, TN 38120
Jeffrey Raff 100,000(17) 100,000 -
401 East 80th Street Apt. 18G
New York, NY 10021
F. Norfleet Boston 50,000(18) 50,000 -
61 Pinehurst
Memphis, TN 38117
Jerome Adler IRA 30,000 30,000 -
1199 Oxford Court
Highland Park, IL 60035
James L. Webster IRA 136,000 136,000 -
320 W. Ohio Street
Chicago, IL 60610-4116
Ronald Perrella Family 200,000 200,000 -
Trust dtd 11/6/02
29632 Seriana
Laguna Niguel, CA 92677
Paul LeFebvre 100,000 100,000 -
180 Sheridan Rd
Winnetka, IL 60093
Marjorie Michaelson 50,000 50,000 -
135 East 71st Street
New York, NY 10021
Ryan LeFebvre 30,000 30,000 -
180 Sheridan Rd
Winnetka, IL 60093
Adam LeFebvre 50,000 50,000 -
2025 Washington Ave
Wilmette, IL 60091
Dustin LeFebvre 20,000 20,000 -
939 W. Hurton St., #202
Chicago, IL 60622
17
NUMBER OF SHARES NUMBER OF SHARES
NAME AND ADDRESS OF BENEFICIALLY OWNED NUMBER OF BENEFICIALLY OWNED
SELLING SECURITYHOLDER PRIOR TO OFFERING SHARES OFFERED AFTER THE OFFERING
- ------------------------------------------------------------------------------------------------------------------------------------
Bruce Drucker SEP IRA 100,000 100,000 -
22 Cranberry Lane
Plainview, NY 11803
Raymond Markman 125,400 125,400 -
666 Dundee Road
Northbrrok, IL 60062
Vi Tiliak 50,000 50,000 -
6424 Cedar Road
Oak Forest, IL 60452
Diane L. Juergens Trust 20,000 20,000 -
415 W. Euggnig Street
Chicago, IL 60614
Charles M. Cohen Rev Trust 30,000 30,000 -
3230 Temple Lane
Wilmette, IL 60091-2900
Robin Smith 50,000 50,000 -
930 5th Avenue
New York, NY 10021
Hebrides LP 2,550,000(19)(20) 2,550,000 -
600 Third Avenue
New York, NY 10016
Hebrides Offshore Fund Limited 1,250,000(19)(21) 1,250,000 -
600 Third Avenue
New York, NY 10016
Strategic Growth International 900,000(22) 900,000 -
150 East 52nd Street, 22nd Floor
New York, NY 10022
Donald Wohl Revocable Trust DTD 6-0805 150,000(23) 150,000 -
1800 Avenue of the Stars, Suite 310
Los Angeles, CA 90087
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Consists of 100,000 shares of common stock and warrants to purchase
150,000 shares of common stock at $3.00 per share.
(2) Consists of 200,000 shares of common stock and warrants to purchase
300,000 shares of common stock at $3.00 per share.
(3) Consists of 350,000 shares of common stock and warrants to purchase
350,000 shares of common stock. Mr. Peter Malhado, the General Partner of
Polaris Partners, LP has the voting and dispositive power over the shares
of common stock at $3.00 per share.
(4) Consists of 200,000 shares of common stock and warrants to purchase
300,000 shares of common stock. Mr. Jose Soriano has the voting and
dispositive power over the shares of common stock at $3.00 per share.
(5) Consists of 816,667 shares of common stock and warrants to purchase
558,333 shares of common stock; 125,000 shares may be purchased at $1.25
per share and 183,333 shares may be purchased at $4.00 per share.
(6) Consists of 106,400 shares of common stock and warrants to purchase
106,400 shares of common stock at $1.25 per share.
(7) Consists of 50,000 shares of common stock and warrants to purchase 62,500
shares of common stock; 25,000 shares may be purchased for $1.25 per share
and 12,500 may be purchased for $3.00 per share. Mr. John Lanier,
President of Scinet Holdings & Development, Inc., has the voting and
dispositive power over the shares of common stock.
(8) Consists of 400,000 shares of common stock and warrants to purchase
100,000 shares of common stock at $3.00 per share.
(9) Consists of 200,000 shares of common stock and warrants to purchase 50,000
shares of common stock at $3.00 per share.
(10) Consists of 600,000 shares of common stock and warrants to purchase
300,000 shares of common stock; 200,000 shares may be purchased at $1.25
per share and 100,000 shares may be purchased at $3.00 per share. Mr. Mark
Lanier, general partner of the Pegasus, has the voting and dispositive
power over the shares of common stock.
18
(11) Consists of 50,000 shares of common stock and warrants to purchase 62,500
shares of common stock; 25,000 share may be purchased at $1.25 per share
and 12,500 shares may be purchased at $3.00 per share. Mr. Mark Lanier,
the general manager, has the voting and dispositive power over the shares
of common stock.
(12) Pleiades Investment Partners R LP, Potomac Capital International, Ltd and
Potomac Partners, LP are affiliated entities controlled by Potomac Capital
Management LLC. Mr. PJ Solit is the managing member of Potomac Capital
Management and has the voting and dispositive power over such shares owned
by these entities.
(13) Consists of 380,100 shares of common stock and warrants to purchase
380,100 shares of common stock at $1.25 per share.
(14) Consists of 370,200 shares of common stock and warrants to purchase
370,200 shares of common stock at $1.25 per share.
(15) Consists of 549,700 shares of common stock and warrants to purchase
549,700 shares of common stock at $1.25 per share.
(16) Consists of 25,000 shares of common stock and warrants to purchase 25,000
shares of common stock at $1.25 per share.
(17) Consists of 50,000 shares of common stock and warrants to purchase 50,000
shares of common stock at $1.25 per share.
(18) Consists of 25,000 shares of common stock and warrants to purchase 25,000
shares of common stock at $1.25 per share.
(19) Hebrides LP and Hebridges Offshore Fund Limited are affiliated entities
controlled by Hebrides Capital LLC. Mr. Anthony Bune is the managing
general partner of Hebrides Capital LLC and has the voting and dispositive
power over such shares owned by these entities.
(20) Consists of 2,300,000 shares of common stock and warrants to purchase
250,000 shares of common stock at $4.00 per share.
(21) Consists of 900,000 shares of common stock and warrants to purchase
350,000 shares of common stock at $4.00 per share.
(22) Represents shares of common stock underlying warrants of which 600,000
shares may be purchased for $1.25 per share and 300,000 may be purchased
for $1.00 per share. Messrs. Richard Cooper and Stanley Altschuler,
executive officers of Strategic Growth International, have the voting and
dispositive power over the shares.
(23) Consists of 100,000 shares of common stock and warrants to purchase 50,000
shares of common stock at $4.00 per share.
PLAN OF DISTRIBUTION
The Selling Securityholders and any of their respective pledges, donees,
assignees and other successors-in-interest may, from time to time, sell any or
all of their shares of common stock on any stock exchange, market or trading
facility on which the shares are traded or in private transactions. These sales
may be at fixed or negotiated prices. The Selling Securityholders may use any
one or more of the following methods when selling shares:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
o block trades in which the broker-dealer will attempt to sell the shares
as agent, but may position and resell a portion of the block as
principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
o an exchange distribution in accordance with the rules of the applicable
exchange;
o privately negotiated transactions;
o short sales after this registration statement becomes effective;
o broker-dealers may agree with the Selling Securityholders to sell a
specified number of such shares at a stipulated price per share;
o through the writing of options on the shares;
o a combination of any such methods of sale; and
o any other method permitted pursuant to applicable law.
The Selling Securityholders or its respective pledgees, donees, transferees or
other successors in interest, may also sell the shares directly to market makers
acting as principals and/or broker-dealers acting as agents for themselves or
their customers. Such broker-dealers may receive compensation in the form of
discounts, concessions or commissions from the Selling Securityholders and/or
the purchasers of shares
19
for whom such broker-dealers may act as agents or to whom they sell as principal
or both, which compensation as to a particular broker-dealer might be in excess
of customary commissions. Market makers and block purchasers purchasing the
shares will do so for their own account and at their own risk. It is possible
that a selling stockholder will attempt to sell shares of common stock in block
transactions to market makers or other purchasers at a price per share which may
be below the then market price. The Selling Securityholders cannot assure that
all or any of the shares offered in this prospectus will be issued to, or sold
by, the Selling Securityholders. The Selling Securityholders and any brokers,
dealers or agents, upon effecting the sale of any of the shares offered in this
prospectus, are `underwriters' as that term is defined under the Securities Act
of 1933, as amended, or the Securities Exchange Act of 1934, as amended, or the
rules and regulations under such acts. In such event, any commissions received
by such broker-dealers or agents and any profit on the resale of the shares
purchased by them may be deemed to be underwriting commissions or discounts
under the Securities Act.
Discounts, concessions, commissions and similar selling expenses, if any,
attributable to the sale of shares will be borne by a selling stockholder. The
Selling Securityholders may agree to indemnify any agent, dealer or
broker-dealer that participates in transactions involving sales of the shares if
liabilities are imposed on that person under the Securities Act of 1933.
The Selling Securityholders may from time to time pledge or grant a security
interest in some or all of the shares of common stock owned by them and, if they
default in the performance of their secured obligations, the pledgee or secured
parties may offer and sell the shares of common stock from time to time under
this prospectus after we have filed an amendment to this prospectus under Rule
424(b)(3) or any other applicable provision of the Securities Act of 1933
amending the list of Selling Securityholders to include the pledgee, transferee
or other successors in interest as Selling Securityholders under this
prospectus.
The Selling Securityholders also may transfer the shares of common stock in
other circumstances, in which case the transferees, pledgees or other successors
in interest will be the selling beneficial owners for purposes of this
prospectus and may sell the shares of common stock from time to time under this
prospectus after we have filed an amendment to this prospectus under Rule
424(b)(3) or other applicable provision of the Securities Act of 1933 amending
the list of Selling Securityholders to include the pledgee, transferee or other
successors in interest as Selling Securityholders under this prospectus.
We are required to pay all fees and expenses incident to the registration of the
shares of common stock. We have agreed to indemnify the Selling Securityholders
against certain losses, claims, damages and liabilities, including liabilities
under the Securities Act of 1933.
The Selling Securityholders acquired the securities offered hereby in the
ordinary course of business and have advised us that they have not entered into
any agreements, understandings or arrangements with any underwriters or
broker-dealers regarding the sale of their shares of common stock, nor is there
an underwriter or coordinating broker acting in connection with a proposed sale
of shares of common stock by any selling stockholder. If we are notified by any
selling stockholder that any material arrangement has been entered into with a
broker-dealer for the sale of shares of common stock, if required, we will file
a supplement to this prospectus. If the Selling Securityholders use this
prospectus for any sale of the shares of common stock, they will be subject to
the prospectus delivery requirements of the Securities Act of 1933.
LEGAL PROCEEDINGS
We are not a party to any legal proceedings, nor are we aware of any
contemplated or pending legal proceedings against us.
20
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The following table sets forth the name, age and position of each of the members
of our board of directors, executive officers and promoters as of June 22, 2007:
Our Board of Directors consists of only one class. All of the directors will
serve until the next annual meeting of stockholders and until their successors
are elected and qualified, or until their earlier death, retirement, resignation
or removal. There are no family relationships among directors and executive
officers. We also have provided a brief description of the business experience
of each director and executive officer during the past five years and an
indication of directorships held by each director in other companies subject to
the reporting requirements under the Federal securities laws.
NAME AGE POSITION
- --------------------------------------------------------------------------------
David Chess, M.D. 55 President, Chief Executive Officer, Chief
Medical Officer, Chairman of the Board and
Director
Jeffrey L. Zwicker 64 Chief Financial Officer and Chief Operating
Officer
- --------------------------------------------------------------------------------
DAVID CHESS, M.D. is our President, Chief Executive Officer, Chief Medical
Officer, Chairman of the Board and Director. Dr. Chess is a Geriatrician,
Internist and Entrepreneur with over 20 years' experience. Dr. Chess has been
practicing medicine as a Physician with PriMed - Internal Medicine and
Geriatrics since 1985 till present. He also served as Vice President Medical
Affaires in the Hewitt Organization from 1998 to 2002. David also serves as
President of Project Patient Care (PPC), a non-profit 501(c) 3 patient advocacy
organization he founded in January 2000. David has recently co-authored a paper
with David Nash and his team at Department of Health Policy, Jefferson Medical
College entitled, "Pharmacy Utilization and the Medicare Modernization Act `A
Review of the Literature'," published in the MILBANK QUARTERLY in spring 2005.
During the period from 2001 to 2003, Dr. Chess also consulted for Kidd and
Company. He received his Medical Degree from Creighton University School of
Medicine, performed his Internal Medicine Internship and Residency at Albert
Einstein School of Medicine, and was Chief Resident in Internal Medicine at
Bridgeport Hospital. He is an Alpha Omega Alpha recipient. David is an Associate
Clinical Professor of Medicine at Yale University School of Medicine.
JEFFREY L. ZWICKER is our Chief Financial and Operating Officer. Mr. Zwicker
joined the company in May 2005. He has over 35 years of business management
experience. From September 2001 until joining the Company, Mr. Zwicker was an
independent consultant. Mr. Zwicker served as CFO/COO and ultimately President &
CEO and a Director of DeLuca, Inc. (Subsidiary of Perdue Farms, Inc) from April
1993 to August 2001. Prior to his positions with DeLuca, Inc. he served as
President/COO and CFO of several early to middle stage, micro and small cap
health care, manufacturing, retailing and distribution companies. He holds a
Bachelor of Science in Accounting from Quinnipiac University.
21
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information, as of June 25, 2007, with respect to
the beneficial ownership of the Company's common stock by each person known by
the Company to be the beneficial owner of more than 5% of the outstanding common
stock by each of the Company's officers and directors, and by the officers and
directors of the Company as a group. Information is also provided regarding
beneficial ownership of common stock if all outstanding options, warrants,
rights and conversion privileges (to which the applicable officers and directors
and 5% shareholders have the right to exercise in the next 60 days) are
exercised and additional shares of common stock are issued.
SHARES PERCENTAGE
NAME AND ADDRESS OF SHAREHOLDER* BENEFICIALLY OWNED(1) OWNERSHIP(1)
- --------------------------------------------------------------------------------------------------
David Chess, MD 10,245,822 26.7%
Jeffrey L. Zwicker 1,000,130 2.6
Mary Krentzman, MS, RN 542,643 1.4
Rubin Family Irrevocable Stock Trust 7,915,590 20.7
D. Vincent Penry, APRN 2,636,022 6.9
Stephen Urciuoli, MD 1,889,015 5.0
Officers and directors as a group of (2 persons) 11,788,595 29.3
- --------------------------------------------------------------------------------------------------
* Each shareholder's address is c/o HC Innovations, Inc., Six Corporate
Drive, Suite 420, Shelton, Connecticut, 06484.
(1) Based on an aggregate of 38,187,407 shares (on a fully diluted basis)
outstanding as of June 25, 2007.
OPTIONS AND COMMON SHARES GRANTED IN THE YEAR ENDED DECEMBER 31, 2006
No options or common shares were granted to executives during the year ended
December 31, 2006.
DESCRIPTION OF SECURITIES
We are authorized to issue 105,000,000 shares of capital stock, consisting of
100,000,000 shares of common stock, $.001 par value and 5,000,000 shares of
Preferred Stock, $.001 par value. There are 38,187,407 shares (on a fully
diluted basis) of our common stock outstanding and no shares of preferred stock
issued and outstanding. The holders of shares of our common stock are entitled
to elect all of the directors and to one vote per share on all matters submitted
to shareholder vote. Holders of shares of our common stock do not have
preemptive or preferential rights to acquire any shares of our capital stock,
and any or all of such shares, wherever authorized, may be issued, or may be
reissued and transferred if such shares have been reacquired and have treasury
status, to any person, firm, corporation, trust, partnership, association or
other entity for consideration and on such terms as our board of directors
determines in its discretion without first offering the shares to any
shareholder of record. Holders of our common stock are entitled to receive
ratably dividends, subject to the rights of the holders of Preferred Stock (if
any), as may be declared by our Board of Directors out of funds legally
available therefore.
All of the shares of our authorized capital stock, when issued for such
consideration as our board of directors may determine, shall be fully paid and
non-assessable. Our board of directors has the discretion and may, by adoption
of a resolution, designate one or more series of preferred stock and has the
power to determine the conversion and/or redemption rights, preferences and
privileges of each such series of preferred stock provided that such conversion
and/or redemption rights, preferences and privileges of any series of preferred
stock does not subordinate or otherwise limit the conversion and/or redemption
rights, preferences and/or privileges of any previously issued series of
preferred stock.
22
WARRANTS
There are currently warrants to purchase 4,239,733 shares of our common stock
issued and outstanding.
SHARES ELIGIBLE FOR RESALE
Future sales of a substantial number of shares of our common stock in the public
market could adversely affect market prices prevailing from time to time. Under
the terms of this offering, the shares of common stock offered may be resold
without restriction or further registration under the Securities Act of 1933,
except that any shares purchased by our `affiliates,' as that term is defined
under the Securities Act of 1933, may generally only be sold in compliance with
Rule 144 under the Securities Act of 1933.
SALE OF RESTRICTED SHARES. Certain shares of our outstanding common stock were
issued and sold by us in private transactions in reliance upon exemptions from
registration under the Securities Act of 1933 and have not been registered for
resale. Additional shares may be issued pursuant to outstanding warrants and
options. There are 199,121 shares of our common stock that are not restricted by
Rule 144 because they are in the public float. Resale of the remainder of our
issued and outstanding shares of common stock is restricted under Rule 144.
There are 37,988,286 shares of our common stock that are restricted, including
shares subject to outstanding warrants to purchase, or notes convertible into,
common stock (excluding any conversions of notes to date). Such shares may be
sold only pursuant to an effective registration statement filed by us or an
applicable exemption, including the exemption contained in Rule 144 promulgated
under the Securities Act of 1933.
In general, under Rule 144 as currently in effect, a shareholder, including one
of our affiliates, may sell shares of common stock after at least one year has
elapsed since such shares were acquired from us or our affiliate. The number of
shares of common stock which may be sold within any three-month period is
limited to the greater of: (i) one percent of our then outstanding common stock,
or (ii) the average weekly trading volume in our common stock during the four
calendar weeks preceding the date on which notice of such sale was filed under
Rule 144. Certain other requirements of Rule 144 concerning availability of
public information, manner of sale and notice of sale must also be satisfied. In
addition, a shareholder who is not our affiliate, who has not been our affiliate
for 90 days prior to the sale, and who has beneficially owned shares acquired
from us or our affiliate for over two years may resell the shares of common
stock without compliance with many of the foregoing requirements under Rule 144.
DISCLOSURE OF COMMISSION POSITION OF INDEMNIFICATION FOR SECURITIES
ACT LIABILITIES
We have adopted provisions in its articles of incorporation and bylaws that
limit the liability of its directors and provide for indemnification of its
directors and officers to the full extent permitted under the Delaware General
Corporation Law. Under our articles of incorporation, and as permitted under the
Delaware General Corporation Law, directors are not liable to us or its
stockholders for monetary damages arising from a breach of their fiduciary duty
of care as directors. Such provisions do not, however, relieve liability for
breach of a director's duty of loyalty to us or its stockholders, liability for
acts or omissions not in good faith or involving intentional misconduct or
knowing violations of law, liability for transactions in which the director
derived as improper personal benefit or liability for the payment of a dividend
in violation of Delaware law. Further, the provisions do not relieve a
director's liability for violation of, or otherwise relieve us or our directors
from the necessity of complying with, federal or state securities laws or affect
the availability of equitable remedies such as injunctive relief or rescission.
23
Insofar as indemnification for liabilities arising under the Securities Act of
1933 (the "Act") may be permitted to directors, officers and controlling persons
of the small business issuer pursuant to the foregoing provisions, or otherwise,
we have been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable.
24
DESCRIPTION OF BUSINESS
CORPORATE HISTORY
HC Innovations, Inc. (the terms "Company," "us," and/or "we" and other similar
terms as used herein refer collectively to the Company together with its
principal operating subsidiaries) is a holding company incorporated in Delaware
in December 2004 that, through its subsidiaries, provides specialty care
management products and services. Our specialty care management approach is
predicated on caring for small populations of medically unstable and frail
people.
Our wholly owned subsidiary, Enhanced Care Initiatives, Inc.,("ECI"), was
founded in 2002 by David Chess MD, our President and Chief Executive Officer.
ECI is the management company for all of our operating entities and provides
specialty disease and care management services for small, costly subpopulations.
ECI markets its proprietary specialty care management programs for the medically
frail and other costly sub-populations to Health Maintenance Organizations
("HMOs") and other Managed Care Organizations ("MCOs") as well as state Medicaid
departments.
REVERSE MERGER TRANSACTION
Pursuant to a Stock Acquisition Agreement dated May 11, 2006, Ayre Holdings,
Inc., a Delaware corporation ("Ayre"), acquired 100% of the issued and
outstanding shares of HCI, in exchange for 24,368,323 shares of common stock of
Ayre, representing approximately 99% of the total issued and outstanding shares
of Ayre at the time. Prior to the consummation of the acquisition, Ayre, a
non-reporting pink sheet company and public shell, effectuated a reverse stock
split whereby the then current 793,000 issued and outstanding shares of common
stock were reverse split into 328,637 shares of common stock at the rate of
..41442:1.
The post-acquisition entity is accounted for as a recapitalization of HCI using
accounting principles applicable to reverse acquisitions with HCI, being treated
as the accounting parent (acquirer) and Ayre, the legal parent, being treated as
the accounting subsidiary (acquiree). HCI is regarded as the predecessor entity.
In accordance with the provisions governing the accounting for reverse
acquisitions, the historical figures presented are those of HCI. Upon
consummation of the acquisition on June 9, 2006, Ayre changed its name to HC
Innovations, Inc. The Company's common stock is quoted on the OTC Bulletin Board
under the symbol "HCNV."
On February 13, 2007, the Company's Form 10-SB was declared effective by the
United States Securities and Exchange Commission. As a result, the Company
became a fully reporting company pursuant to the Securities Exchange Act of
1933, as amended.
OUR BUSINESS
We are a specialty disease and care Management Company focused on caring for
small populations of medically unstable and frail individuals. As a specialty
disease and care Management Company, we attempt to utilize preventative health
care to save money by attempting to keep patients with chronic conditions out of
the hospital, helping patients and states save on health care costs. Our Company
is comprised of separate divisions each with a specific focus and intervention
to service this segment of our population. As a specialty disease and care
Management Company we seek to bring to HMOs, MCOs and state Medicaid departments
the ability to positively impact the health and cost of their sickest,
25
costliest subsets of patients. To do this, we combine our proprietary
information systems with specially trained nurses and nurse practitioners.
Specifically, we integrate the following services:
(a) Hands-on involvement by seeing patients in their homes and in nursing
homes;
(b) Call center backup consisting of nurses, social workers and case
managers who work specifically with one or two nurses and their
patients via the telephone to assist with coordination of services
and monitoring of health status; and
(c) Biometric monitoring through the use of devices that allow us to
monitor patients in the home such as scales, medication reminder
systems, and blood pressure machines to name a few.
Our services extend to accompanying the patient to the doctor and providing them
with our availability on a twenty-four hour a day, seven days a week basis. In
the event that the patient requires admission to a hospital or nursing home, we
also provide case management.
Our principal office is located at Six Corporate Drive, Suite 420, Shelton, CT
06484. Our telephone number is (203) 925-9600. Our website address is
www.hcinnovationsinc.com.
CORPORATE STRATEGY
We are a specialty disease and care Management Company. As such, our corporate
strategy is to care for the most costly and needy patients in an effort to try
to have them avoid hospitalizations and, at the same time, create cost savings.
We also seek to be able to facilitate care delivery support services in the
community, in nursing homes, and throughout the United States and its
territories. We seek to sell our products and services directly to HMOs, MCOs
and State Medicaid departments, as well as to subcontract with other disease
management companies.
To implement our corporate strategy, we have created software algorithms that
help us define the most needy and costly populations. We have connected this to
a nurse-patient centric electronic health record (ehr), all to assist our staff
in the management of our enrollees.
Our clinical strategy is to identify subgroups of people with common needs and
create programs to fill the gaps in care, stabilizing the health of the
individual. These are highly complex populations consisting of patients with
over seven (7) active diagnosis, average of three (3) hospitalizations per year
that require complex solutions.
PRODUCTS AND SERVICES
We offer our products and services through three channels: Easy Care, NP Care
and Stratification, Analysis and Management electronic health record (SAM ehr).
EASY CARE: THE SOLUTION FOR THE COMMUNITY DWELLING MEDICALLY COMPLEX AND FRAIL
The Easy Care program focuses on the medically complex and fragile costly
community-based patients. Easy Care is a program built to support the medically
complex frail patient, creating a safety net that is woven from a combination of
services which together seeks to support the patient and improve their health,
while lowering their cost of care by preventing avoidable hospitalizations.
Under the Easy Care Program each patient is individually evaluated to determine
which approaches should be implemented for that specific patient. A feature of
the Easy Care Program is that we work closely with the patient, their family and
their physician. The Easy Care tools and approach include:
26
o Hands-on nurse and nurse practitioner care in the home. The nurse
does a comprehensive evaluation which includes physical, cognitive
and social situation evaluation. We review medications, diet and
exercise. We put in place disease specific exercises, review advance
directives and connect patient to community resources to assure that
the patient is getting what they need to stay well.
o Physician integration. Our nurses accompany the patient on physician
visits.
o Call center support. Each patient has a support person in the call
center who works with their nurse to help coordinate the patient's
care. This support person calls the patient periodically and at the
direction of their nurse partner assists in the follow up of medical
issues. The support person also assists in setting up appointments
and transportation.
o Community-based weekly meetings to monitor, exercise and address
depression and isolation in our patients. These weekly meetings are
attended by our nurses, recreation aide, athletic trainers, dietician
and pharmacist (on a rotating basis).
o 24/7 Caregiver Support Program: this consists of a survey at the
initiation of the program to assess caregiver needs and stress and
then to help the caregiver create a sustainable support solution for
the patient. This includes a 24/7 emotional support hotline, referral
services, and legal hotline, to name a few.
o Pharmacist, medical director, nutritionist and athletic trainer
monitoring.
o Biometrics, such as scales, medication monitoring devices, blood
pressure machines wirelessly connected to phone lines are channeled
directly to our computer system, oxymeters, glucosometers, cell
phones and video phones.
o Pharmaceutical management. Web-based medication monitoring by our
pharmacist with direct feedback to our nurses' tablet PCs.
o Case management. Our nurses continue to monitor the patient if
hospitalized or in a nursing home.
o IT infrastructure. All of our nurses are equipped with tablet PC,
point, click and handwriting recognition. This allows us to
efficiently gather and maintain large amounts of actionable data; it
also prompts the nurse to consider specific interventions driving
best practices.
o The computer as the communication channel. Our Web-based IT system
allows for faxing, e-mailing and integrated report generation.
EASY CARE PRICING
Easy Care pricing is based on a per enrolled member, per month (PMPM) basis. We
can enroll up to 1,000 patients per four months per market. We are currently
able to implement two markets per 120 days. Our program works best in population
centers of 50,000 or more. However, with use of our biometric monitoring system
and two-way video conferencing we can extend our reach to more rural patients.
The Company and its founders have successfully completed pilot programs with two
major Connecticut hospitals, Bridgeport Hospital and Hartford Hospital, followed
by a successful contract with a national HMO, HealthNet NE. Quantifiable cost
savings in the range of 25%-50% have been demonstrated.
HEALTHCARE SAVINGS-ILLUSTRATIVE EXAMPLE OF HOW OUR PROGRAM CAN WORK FOR 1,000
MEDICARE ENROLLEES BASED ON THE RESULTS OF OUR PILOT PROGRAM WITH HEALTHNET NE:
27
o ECI delivers 16% net cost savings on patients with average costs of
$40,000/year
o For 1,000 enrollees a $40,000 cost per year, or $40,000,000:
TOTAL SAVINGS at 25% $10,000,000
COST OF PROGRAM: $3,600,000
----------
NET YEARLY SAVINGS: $6,400,000
ROI = 180%
ECI has secured contracts with:
1. Health Spring: a regional Medicare HMO in Tennessee. This contract
began in October 2005 with 300 enrollees with a current census of
approximately 500 enrollees. The term of the contract is 5 years
although there are provisions for cancellation prior to the end of the
term.
2. AmeriGroup: a national Managed Care Organization (MCO), to care for a
minimum of 300 of its Medicare/Medicaid enrollees in Houston, Texas.
The initial term of this contract runs from June 1, 2006 through
November 30, 2007.
3. Alere Medical, Inc.: in October 2006, we entered into a Disease
Management Services Agreement with Alere Medical, Inc. ("Alere"). Alere
provides disease management tools, services and systems to payers which
are designed to assist with and improve management of health care
outcomes for patients. Alere has contracted with Tufts Health Plan
("Tufts") to provide disease management services in Massachusetts.
Tufts provides various commercial and Medicare Health Plans to members.
We are providing care management services to Tufts program participants
in Massachusetts and Alere is paying us $295 per enrolled member per
month commencing February 1, 2007.
THE MARKET FOR EASY CARE
According to the U.S. Department of Health & Human Services, three percent (3%)
of the Medicare population and one percent (1%) of the Medicaid population will
meet the EASY CARE profile of the medically complex and fragile costly
community-based patients. With over 40 million Medicare recipients
(3%=1,200,000) and over 40 million on Medicaid (1%=400,000), the market is large
and growing. Currently, over five million seniors are enrolled in Managed
Medicare and with the recently enacted Medicare Modernization Act; this number
is expected to triple over the next two years. We have primarily focused on the
Medicare and Medicaid populations because of the increased density of patients
who need our services. As managed care organizations assume increasing risk in
the Medicare and Medicaid market, EASY CARE(SM) is positioned to be an important
tool to control the cost of this more labile population. Our primary strategy is
to sell directly to these organizations, as well as to subcontract with other
disease management companies allowing them to expand their offerings and fill
this gap in care. (SOURCE OF ABOVE DATA: HTTP://WWW.CMS.HHS.GOV/ CENTERS FOR
MEDICARE & MEDICAID SERVICES (CMS), U.S. DEPARTMENT OF HEALTH & HUMAN SERVICES)
SALES AND MARKETING FOR EASY CARE
As indicated, we will market Easy Care to MCOs, HMOs, state medical departments,
and disease management companies. Our sales strategy establishes a process and
generally reaches a "yes" or "no" response within 3 to 4 months.
28
The process:
o Initial presentations to key leadership;
o If there is a high level of interest we enter into a Non-Binding
Discovery Process which takes 4 to 6 weeks. During this time period,
we do an in depth analysis of the Strategic Goals of the
organization, the barriers to delivery and the processes in place to
manage the outcome. We meet with, and interview people at all levels
of the organization, developing a deep understanding of their needs,
internal politics while we develop relationships;
o Presentation of findings and delivery of proposal specific to the
company's needs and their particular gaps;
o Negotiation and discussion period (3 weeks); and
o "Yes" or "No" decision.
NP CARE PROGRAM - NURSING HOME MEDICAL MANAGEMENT SYSTEMS
NP Care's core business is a physician directed nursing home medical management
service that integrates the patient care team. Although our NP Care program is a
fee for service program, there is no charge to the nursing home for our services
and approximately 61% of our reimbursement is from Medicare/Medicaid with the
balance from insurance companies.
NP Care's fundamental tools and processes include:
o Problem-oriented nurse documentation tools that guide the nurse
through appropriate, efficient patient evaluation and interventions.
o On-site nurse practitioner providing support and care.
o Integration with the physician, staff and family.
o Electronic health record (ehr) system serving as the company's
backbone as it allows nurse practitioners to be thorough, efficient
and checks to ensure that documentation matches with charges.
Technology driven patient risk assessments of adverse events, such as falls,
fractures, dehydration, etc. Our Risk Avoidance Program allows the nursing home
to put in place safeguards to reduce these events, while allowing us to notify
the family of the risks involved, thereby mitigating potential lawsuits.
MEDICARE ADVANTAGE SPECIAL NEEDS PLANS (SNPs) MODEL is an important new
innovation in the healthcare marketplace. CMS (Centers for Medicare and Medicaid
Services) in an attempt to make sicker patients more attractive to managed care
companies have created this designation. With it comes enhanced patient
complexity based reimbursement (paying more for patients who are sicker and use
more resources). There are 3 types of SNPs. NP Care specializes in the
Institutional SNP (#1).
1. The Institutionalized (~3.5 million): Medicare beneficiaries who reside or
are expected to reside for 90 days or longer in a long-term care facility.
2. Dually Eligible (~7.5 million): Medicare beneficiaries who are also in
Medicaid for full Medicaid benefits (~6.2 million) and low-income Medicare
beneficiaries who receive subsidies from their state Medicaid program for
their Medicare cost sharing (~1.3 million).
29
3. Medicare Beneficiaries with Chronic, Severe Conditions: Medicare
beneficiaries with cardiovascular disease, diabetes, heart failure,
osteoarthritis, mental disorders, end-stage renal disease and/or HIV/AIDS.
(SOURCE OF ABOVE DATA: HTTP://WWW.CMS.HHS.GOV/ CENTERS FOR MEDICARE & MEDICAID
SERVICES (CMS), U.S. DEPARTMENT OF HEALTH & HUMAN
SERVICES)
According to the US Department of Health & Human Services, these populations
have a disproportionate share of severe chronic health conditions and
disabilities. About one third of the dually eligible population lives in
long-term care facilities. They commonly have multiple morbidities (5-8) and
some 45% have severe mental illness.
The Medicare Advantage Institutional SNP model has very significant financial
implications. CMS is reimbursing the insurance companies almost $20,000 annually
per patient for their healthcare costs. This is in contrast to reimbursement of
$8,000 per year for community dwelling seniors. NP Care charges approximately
10% of the reimbursement plus is able to share in the profit margin of the
service. Working in close collaboration with the health plan and the nursing
home the program has the potential to create a 20% profit margin (about $4,000
per patient per year). Each nursing home has on average 50 enrollees and our
plan is to contract with 30 nursing homes per year in each location or market.
This equates to approximately 1,500 enrollees per year.
NP Care offers a medical infrastructure to nursing homes that is important to
controlling costs and care. With this in mind, we have begun the process of
partnering with long-term care organizations and Medicare Advantage Specialty
Needs Plans (SNP). Our first such partnership is with HealthSpring of Tennessee.
According to the Pearson Report (2005), there are over 16,000 nursing homes in
the United States. The table below indicates the number of facilities per region
and the relative percentage of those facilities by region:
NUMBER OF PERCENTAGE
REGION FACILITIES OF TOTAL
- --------------------------------------------------------------------------
New England 1,096 6.6%
Mid Atlantic 1,791 10.9%
East North Central 3,225 19.6%
West North Central 2,228 13.5%
South Atlantic 2,379 14.5%
East South Central 1,076 6.5%
West South Central 2,080 12.6%
Mountain 797 4.8%
Pacific 1,819 11.0%
-----------------------------------------------
TOTAL 16,491 100.0%
- --------------------------------------------------------------------------
We believe our planned growth will track with population patterns, as defined by
beds by county, occupancy rates, nurse practitioner scope of practice, physician
collaboration, recruitment of NPs, our competitive advantage, payer mix, major
nursing home chain presence, and Medicare Advantage programs.
30
SALES AND MARKETING FOR NP CARE
Our strategy with NP Care is to be positioned to become a national healthcare
company delivering primary care and improving the quality of life for the
elderly living in nursing homes.
We will accomplish this strategy by:
o Establishing a partnership with long-term care organizations and
Medicare Advantage SNPs that support and see the value in utilizing
Nurse Practitioners for primary care.
o Working closely with both long-term care organizations and health
plans to develop and implement systems of care that meet the needs of
this special population. This includes computer driven risk
assessments on patients to allow for a shift to proactive care,
implementing programs that assist nursing home nurses in providing
consistent patient care evaluations, implementing programs which
address frequent falls, urinary incontinence, wound care to name a
few.
o Design an infrastructure that aligns incentives while accomplishing
financial and health outcomes. Paying nursing homes for improved
medical infrastructure and allowing them to also benefit from health
care savings.
OHIO NURSE PRACTITIONERS, INC.
Effective November 6, 2006, NP Care of Ohio, LLC ("NP Ohio") entered into an
agreement with Ohio Nurse Practitioners, Inc. ("ONP"). ONP is in the business of
providing advance practice registered nursing services to residents of nursing
homes. ONP has agreed to terminate its existing service agreements with its
customers and NP Ohio has agreed to hire the shareholders of ONP as employees.
In addition, ONP has agreed to provide consulting services commencing on the
effective date and ending on September 30, 2009. In consideration of ONP's
consulting services NP Ohio has agreed to pay ONP a maximum consulting fee of
$225,000 with payments due as earned in accordance with the terms of the
agreement. The Company has recognized consulting expenses in the amount of
$125,000 for the year ended December 31, 2006 in connection with the services
provided under the agreement.
SAM EHR - SAM EHR SOFTWARE
SAM ehr-SAM ehr (Stratification, Analysis and Management electronic health
record) is our proprietary software which allows us to stratify patients' health
risk, analyzes their data and patterns of care, and drive the data out to our
nurses, pharmacists and doctors to best manage the patient. SAM ehr was designed
for internal use not as a marketable product. Currently we will be licensing the
software to companies with whom we are doing business as a value added feature
of the relationship. We anticipate doing a formal analysis of opportunities
relating to SAM ehr.
FUTURE MARKETS AND OPPORTUNITIES
We believe that SAM ehr represents an important growth opportunity. As we
develop these software opportunities, our main focus will remain on our core
businesses, NP Care and Easy Care(SM). However, we intend to do a formal
analysis of this opportunity. If in fact there is a strong business case for
further deployment we will create a separate division and seek unique dollars to
support this division.
COMPETITION
There are few hands on, community-based programs in the disease management, care
management space. After a detailed search, we have found no other company that
provides the similar depth of community
31
based hands on care and care coordination for this subset of medically complex
and frail patients. Our proprietary programs and systems, the increasing
recognition that small populations are the cost drivers that care for people
with multiple conditions is critical, the maturity and experience of our senior
staff, and our demonstrated outcomes are all instrumental in our gaining
traction in the markets where we compete. Nevertheless, the healthcare industry
and the market for healthcare information products are highly competitive and
subject to continual change in the manner in which services are provided. Other
entities, whose financial, research, staff, and marketing resources may exceed
our resources, are marketing care management and disease management services or
have announced an intention to offer such services. These entities include
disease management companies, special healthcare companies, major pharmaceutical
companies, healthcare organizations, independent care management organizations,
provider groups, pharmacy benefit management companies, healthcare information
system and software vendors, and other entities that provide services to health
plans and self-insured employers. Many of these competitors have substantial
installed customer bases in the health care industry and the ability to fund
significant product development and acquisition efforts. We also compete against
other companies that provide statistical and data management services, including
clinical trial services to pharmaceutical companies. In addition, many payer
organizations, including health plans, have internal network development and
medical case management staff that provide services similar to those provided by
us. Many of our competitors have significantly greater financial resources, and
these companies also compete with us in recruiting and retaining qualified
personnel. Our failure to compete effectively could have a material adverse
affect on our business.
Our competition for the NP Care division may include, but is not limited to, the
following: Evercare, a Medicare Advantage program (a division of United Health
Group), Alpha Physician Services (physician groups specializing in nursing home
care), primary care physicians who employ nurse practitioners for their nursing
home practice, and managed care programs Evercare, Fidelis, and CareOne provide
direct financial incentives to these nursing homes. Our challenge is to
articulate clearly our superior financial and clinical model.
Because some of their programs overlap and move into the complex care space,
there are three companies that are our major competitors in the Easy Care
division:
PARADIGM HEALTH [www.paradigmhealth.com] has for a number of years provided
catastrophic care which is usually focused on hospitalized patients. They use a
panel of expert physicians and nurses who provide hands on care, primarily in
the hospital. More recently they have developed a complex care program which
helps health plans identify the most costly and sickest patients. They focus on
the sickest 1% who utilize up to 30% of the resources, usually within the
commercial population. Their program addresses late-stage cancer, end-stage
chronic conditions, and patients with multiple co-morbidities. They deal with
the lack of coordination of care, the isolation and fear the patients'
experience, and the inadequacy of social, financial, and emotional support. Most
of their care coordination is telephonic although they also do hands on care
using community resources such as visiting nurse (outsourced).
CAREGUIDE@HOME [www.careguideathome.com] a service of CareGuide
[www.careguide.com] which is the successor organization of Coordinated Care
Solutions [CCS] and now has merged with Patient InfoSystems [www.ptisys.com].
They claim to provide interactive, personalized services to members with complex
health care needs who require post-acute and continuous care and work with
families and caregivers. Most of this is telephonic but the CareGuide@Home
services encompass a national network of field care managers who provide
home-based assessments and other onsite services for the elderly and their
families.
SPECIALTY DISEASE MANAGEMENT - SDM [www.specialitydisease.com] this is a company
that provides care for a broad scope of chronic diseases and emphasizes
coordination and working with the
32
practitioner. They use a primary care nursing model and also do in home
assessments and coordination of care in the community. They emphasize as their
core service highly trained community based nurse care managers'.
COMPETITIVE STRATEGY AND METHODS OF COMPETITION
o Enhanced Care Initiatives (ECI) TARGETS SPECIFIC SUBPOPULATIONS.
Unlike other disease management companies, we are not DISEASE
focused. Our services are designed for people who experience the
health care system in a predictable fashion with predictable
outcomes. We define subgroups of people who experience the health
care system similarly, study the gaps in care and create programs to
keep them well. This is a paradigm shift which requires an entirely
unique culture and tool set to achieve success.
o THE ECI PROGRAMS ARE COMPLICATED INTERVENTIONS combining intense
hands-on, community-based programs involving many layers of care and
intervention including RNs, nurse practitioners, athletic trainers,
physical therapists, dieticians, social workers, informatics
specialists, pharmacists, and physicians in a variety of roles.
Caring for the medically complex, frail patient requires a complex
infrastructure. Our infrastructure seamlessly connects and drives:
o Patient stratification
o Assessment tools - physical exams, standardized testing, Activities
of Daily Living (ADL), Instrumental ADLs, cognitive testing,
depression, Quality of Life Standardized Testing (SF 12), etc.
o True integration with the Physician
o Interventions in the home and via call center
o Biometrics
o Community based nursing staff
o Pharmacists
o Athletic trainers
o Nutritionist
o Report writing
o Community centers
THE EASY CARE PROGRAM, A SCALABLE COMPLEX INTERVENTION WILL BE DIFFICULT TO
REPRODUCE
o THE CLINICAL EXPERTISE to both understand the populations cared for
and create cost-effective, rapidly integrateable, scalable models
requires a team with diverse expertise
o SCALING - We believe are now able to operationalize our
community-based program, enrolling 1,000 complex members per market
in multiple markets over a period of four to six months. This
requires systems which can coordinate multiple complex interventions
o IT INFRASTRUCTURE - THIS DIVERSE PLATFORM IS MANAGED AND INTEGRATED
WITHIN OUR PROPRIETARY SOFTWARE. Our web-based information system is
proprietary and operates as both patient chart and communication
port, effectively
33
connecting all parts of our patient's health care team. Additionally,
patient care algorithms are embedded in our software and drive
standards of care resulting in a reminder system that drives best
practices of care from the level of the patient and family to the
physician. Our patient chart also is an activity tracker, logging all
patient care activity as well as nurse interactions.
DEPENDENCE ON A LIMITED CUSTOMER BASE
For the calendar years ending December 31, 2005 and 2006 our revenue was
concentrated in a small number of customers, the loss of any or all of these
customers will have a severe and negative impact on our future results of
operations.
PERCENTAGE OF SERVICE REVENUE
PROVIDER 12/31/2005 12/31/2006
- ----------------------------------------------------------------------------
Medicare / Medicaid 68.7% 60.9%
Healthspring - 19.8%
-----------------------------------------------
68.7% 80.7%
- ----------------------------------------------------------------------------
PATENTS PENDING
ECI has four Applications for Letters Patents pending:
1) Application for Letters Patent No. 10/745,786 entitled - Method And
Criterion For Selecting Patients For Participation In A Care Management
Program - filed December 27, 2003; Docket No. 2003KP343PA
The `786 Application's Abstract reads:
THE METHOD AND CRITERION OF THE PRESENT INVENTION ARE USED TO SELECT
HIGH RISK OR CO-MORBID PATIENTS FOR PARTICIPATION IN A CARE MANAGEMENT
PROGRAM. AN ACUITY SCORE IS DETERMINED WHICH STRATIFIES PATIENTS BY
COST, DIAGNOSIS AND DISABILITY. THIS ALLOWS US TO IDENTIFY THOSE
PATIENTS WHICH WILL BENEFIT MOST FROM OUR EASY CARE PROGRAM. FINDING
THE RIGHT PATIENT FOR THE RIGHT PROGRAM IS CRITICAL TO OUR SUCCESS.
2) Application for Letters Patent No. 10/745,787 entitled - Care
Management Method For Managing The Treatments Of High Risk Medically
Unstable Patients - filed December 27, 2003; Docket No. 2003KP351PA.
The `787 Application's Abstract reads:
THE PRESENT INVENTION IS RELATED TO METHODS OF MANAGING THE CARE OF
HIGH RISK OR CO-MORBID PATIENTS WHO HAVE BEEN PRE-SELECTED FOR CARE
MANAGEMENT USING THE PATENT IDENTIFIED ABOVE. IN ACCORDANCE WITH THE
CARE MANAGEMENT ENTITY'S SYSTEM, CARE MANAGERS AND OTHER SPECIALISTS
COORDINATE AND SUPPLEMENT TREATMENT PLANS FOR THE HIGH-RISK PATIENTS.
AFTER ACCEPTANCE INTO THE CARE MANAGEMENT PROGRAMS, THE CO-MORBID
PATIENTS ARE GATHERED TOGETHER FOR GROUP SESSIONS AT A COMMUNITY
CENTER. THIS PATENT DESCRIBES OUR ROAD MAP FOR CARING FOR THE MEDICALLY
COMPLEX, UNSTABLE PATIENT. THE COMPLEX INTERPLAY OF SERVICES AND HOW
THEY ARE APPLIED IS ORIGINAL AND ALLOWS US TO FURTHER DIFFERENTIATE
OURSELVES IN THE MANAGED CARE MARKET.
34
3) Application for Letters Patent No. 11/016,058 entitled - Care
Management method For Managing Treatments Of High Risk Mentally
Unstable Patients - filed December 18, 2004; Docket no. 2004KP392PA
The `058 Application's Abstract reads:
THE PRESENT INVENTION IS RELATED TO METHODS OF MANAGING THE CARE OF
HIGH-RISK MENTALLY UNSTABLE PATIENTS WHO HAVE BEEN PRE-SELECTED FOR
CARE MANAGEMENT. IN ACCORDANCE WITH THE CARE MANAGEMENT ENTITY'S
SYSTEM, CARE MANAGERS AND OTHER SPECIALISTS COORDINATE AND SUPPLEMENT
TREATMENT PLANS FOR THE HIGH-RISK PATIENTS. AFTER ACCEPTANCE INTO THE
CARE MANAGEMENT PROGRAMS, THE HIGH-RISK MENTALLY UNSTABLE PATIENTS ARE
GATHERED TOGETHER FOR GROUP SESSIONS AT A COMMUNITY CENTER. PATIENTS
ARE EQUIPPED WITH CELLULAR TELEPHONES AND ELECTRONIC MONITORING DEVICES
FOR MONITORING THE MENTAL AND PHYSICAL CAPACITIES OF THE HIGH-RISK
MENTALLY UNSTABLE PATIENTS. THIS PATENT CODIFIES OUR PROCESSES FOR
MANAGING THIS VERY MOBILE, UNSTABLE POPULATION. IT DESCRIBES THE
COMBINATIONS OF INTERVENTIONS WE APPLY AND HOW WE APPLY THEM TO MANAGE
THE MENTALLY UNSTABLE, COSTLY PATIENT. THE VALUE OF THIS PATENT IS TO
GUIDE OUR INTERVENTIONS AND CLEARLY DEFINE OUR TOOLS AND PROCESSES,
DIFFERENTIATING US IN THE MARKETPLACE.
4) Application For Letters Patent Entitled - METHOD OF GENERATING A
HEALTHCARE PLAN OR WELLNESS PLAN FOR A MEMBER OF A GROUP -; Serial No.
11/504211; Filing Date August 15, 2006; Chess, D.; Docket No.
2006KP472PA
A group representative utilizes an administrative entity to generate
plans of care or wellness plans for group beneficiaries or members. The
administrative entity's computer system propounds virtual
questionnaires to group beneficiaries and calculates acuity scores for
each group member's response. Combinations of cumulative acuity scores
and standards established by the group representative are used to
stratify group members according to diagnosis burden, projected cost of
care burden and disability burden. Plans of care are customized and
automatically generated for group members. This tool is important to us
when health plans enroll new patients and have limited clinical
information on patients. This allows us to identify patients who need
our program. This also allows health plans to easily segregate their
members into different levels of intervention.
EMPLOYEES
As of December 31, 2006, we had 48 full time employees, of which two (2) are
executive officers. Further, NP care employs 47 full time employees.
EMPLOYMENT AGREEMENTS
We currently do not have employment agreements with our executive officers, but
anticipate entering into such agreements in the near future.
CORPORATE OFFICES
Our executive office is located at Six Corporate Drive, Suite 420, Shelton, CT
06484. Our telephone number is (203) 925-9600.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
This management's discussion and analysis of results of operations and financial
condition contains forward-looking statements that involve risks and
uncertainties. In some cases, you can identify these
35
statements by forward-looking words such as "may," "might," "will," "should,"
"expect(s)," "plan(s)," "anticipate(s)," "believe(s)," "estimate(s),"
"predict(s)," "intend(s)," "potential" and similar expressions. All of the
forward-looking statements contained in this registration statement are based on
estimates and assumptions made by our management. These estimates and
assumptions reflect our best judgment based on currently known market and other
factors. Although we believe such estimates and assumptions are reasonable, they
are inherently uncertain and involve risks and uncertainties. In addition,
management's assumptions about future events may prove to be inaccurate. We
caution you that the forward-looking statements contained in this registration
statement are not guarantees of future performance and we cannot assure you that
such statements will be realized. In all likelihood, actual results will differ
from those contemplated by such forward-looking statements as a result of a
variety of factors, including, but not limited to, those factors discussed in
our Form 10-KSB (File No. 0-52197), which was filed on April 2, 2007. Except as
required by law, we undertake no obligation to update any of these
forward-looking statements.
The discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United States
of America ("GAAP"). The following discussion of our financial condition and
results of operations should be read in conjunction with (1) our audited
consolidated financial statements for the years ended December 31, 2006 and
2005, together with notes thereto included on Form 10-KSB as filed on April 2,
2007 and (2) our Registration Statement Form 10-SB (File No. 0-52197), as such
Registration Statement became effective on February 13, 2007.
OVERVIEW
HC Innovations, Inc. ("HCI") is a holding company incorporated in Delaware that,
through its subsidiaries, provides specialty care management products and
services.
Our wholly owned subsidiary and operating company is Enhanced Care Initiatives,
Inc. (ECI). ECI is a specialty disease and care management company comprised of
several divisions each with a specific focus and intervention. Our mission is to
identify subgroups of people with high costs and disability and to create and
implement systems that improve their health, resulting in dramatic reductions in
the cost of their care. As a specialty disease and care management company, we
bring to our clients the ability to impact the health and cost of their sickest,
costliest subsets of patients. We combine our proprietary state of the art
information systems with highly trained nurses and nurse practitioners. We
provide intense, hands-on involvement with call center backup and biometric
monitoring. We connect care around the patient and around the clock providing
case management if the patient requires hospitalization or rehabilitation in a
nursing home - always working to bring the patient safely home. We connect
directly with the patient's physician by going with the patient to the doctor
visit. The applications for our unique systems are numerous.
CLINICAL STRATEGY
Identify subgroups of people with common needs and create programs to fill the
gaps in care, stabilizing the health of the individual. These are highly complex
populations that require complex solutions. We combine best practices, state of
the art electronic health record (EHR), communication tools, calls center
support and biometrics, with community-based, hands-on, high-touch care.
CORPORATE STRATEGY
Create scalable interventions which result in significant healthcare cost
savings which drive our growth visibility and profitability.
36
Management has retained an investment advisory firm for the purpose of
developing a strategy to secure additional capital for working capital,
continued investment in information systems and the ongoing execution of its
growth plans. As is typical with early stage, growth companies, 2006 and 2007
losses are largely a result of business development expenses as well as
significant investment in building infrastructure for growing the Company's
divisions, business and clinical systems and programs. During 2006, the Company
was successful in securing new contracts with Aetna Health, Inc. (to manage its
members in New Jersey long-term care facilities); Amerigroup Corporation (a
contract for an initial 300 patients beginning in June, 2006 in Houston, Texas
with estimated first year revenue of approximately $1 million); and the Company
also entered into a Partnership Agreement with MCKESSON (MCK) to jointly market
and respond to requests for proposals (particularly state Medicaid
opportunities) and will be integrating the Company's high intensity programs
with their call center support services.
In addition, the Company's contract with HealthSpring USA, LLC has been expanded
from the initial 300 members in Tennessee to approximately 500 members,
representing an increase in annualized contract revenue of approximately $0.7
million.
RESULTS OF OPERATIONS
The Company's focus for fiscal years 2003 through the first quarter of 2007 was
to invest in the areas of IT/Systems building, clinical protocol training and
development, human resource recruiting, training and development as well as
marketing and business development expense. The Company has invested heavily in
the development of its proprietary software systems for fully integrated
electronic health records for its principal divisions: Easy Care and NP Care.
During the second half of 2005, 2006 and 2007 to date, the Company has also
invested in additions to its management and systems infrastructure in
anticipation of rapid growth of its programs.
Management believes that these investments in building the management
infrastructure and systems is critical, both to ensure effective execution of
its business model(s) in each market area, and to sustain high levels of revenue
growth and margin enhancement over time. Management believes its models are
highly scalable however there are significant start-up costs associated with
scaling to new markets and there can be no assurance that the Company will be
successful in securing new contracts and growing these new markets profitably.
THREE-MONTHS ENDED MARCH 31, 2007 AND 2006
REVENUES
For the three months ended March 31, 2007, net revenue was $2,197,971,
representing an increase of $881,136 (67%) as compared to the net revenue of
$1,316,835 for the three months ended March 31, 2006. The increase is a result
of growth from existing operations in the amount of $387,774 or 29% as compared
to the first quarter of 2006 as well as $493,392 of revenue from new operations
in the first quarter of 2007. During the first quarter of 2007, new NP Care
operations generated $180,252 in revenue and new Easy Care operations generated
$313,110 in revenue.
COST OF NET REVENUE AND GROSS PROFIT
For the three months ended March 31, 2007, cost of net revenue was $1,738,709,
representing an increase of $845,710 (94.7%) as compared to the cost of net
revenue of $892,999 for the three months ended March 31, 2006. The increase is a
result of growth from existing operations in the amount of $324,224 or (36.3%)
as compared to the first quarter of 2006 as well as $521,486 of cost of net
revenue from new operations in the first quarter of 2007. During the first
quarter of 2007, new NP Care operations
37
generated $275,990 in net cost of revenue and new Easy Care operations generated
$245,496 in net cost of revenue.
For the three months ended March 31, 2007, gross margin was $459,262 (20.9%)
representing an increase of $35,426 (8.4%) as compared to the gross margin of
$423,836 (32.2%) for the three months ended March 31, 2006. The increase is a
result of growth from existing operations in the amount of $63,550 or (15.0%) as
compared to the first quarter of 2006 as well as $(28,214) of gross margin from
new operations in the first quarter of 2007. During the first quarter of 2007,
new NP Care operations generated ($95,738) in gross margin and new Easy Care
operations generated $67,614 in gross margin.
MARCH 31, 2007 MARCH 31, 2006 CHANGE % CHANGE
- ----------------------------------------------------------------------------------------------------------------------
Net Revenue 2,197,971 1,316,835 881,136 66.9%
Total Cost of Revenue 1,738,709 892,999 845,710 94.7%
Gross profit 459,262 423,836 35,426 8.4%
Gross profit % 20.9% 32.2% 4.0%
- ----------------------------------------------------------------------------------------------------------------------
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE ("SG&A EXPENSES")
SG&A expenses include the wages and salaries of administrative and business
development personnel, as well as other general and corporate overhead costs not
directly related to generation of net revenue. For the three months ended March
31, 2007, total SG&A Expenses were $1,757,134, representing an increase of
$906,566 (107%) as compared to the total SG&A Expenses of $850,568 for the three
months ended March 31, 2006.
Depreciation and amortization expense are calculated using the straight-line
method over the estimated useful lives of the assets, or, in the case of
leasehold improvements over the remaining term of the related lease, whichever
is shorter. For the three months ended March 31, 2007, depreciation and
amortization expense included in Operating expenses was $122,884, representing
an increase of $67,520 (122%), as compared to the total depreciation and
amortization expense of $55,364 for the three months ended March 31, 2006.
INCOME (LOSS) FROM OPERATIONS
For the three months ended March 31, 2007, we incurred a loss from operations of
($1,297,872) representing an increase of $871,140 (204%) compared to ($426,732)
for the three months ended March 31, 2006. We expect ongoing improvement to our
results of operations as revenues increase and we begin to absorb the
incremental fixed costs associated with our expansion. Revenues and operating
results are expected to fluctuate from period to period as a result of the
timing of new contracts and additional start-up costs associated with additional
planned new markets.
INCOME TAX EXPENSE
The Company has incurred net operating losses (NOLs) since inception. At March
31, 2007, the Company had net operating loss carry forwards for federal income
tax purposes of approximately $5,400,000, which is available to offset future
federal taxable income, if any, ratably through 2027. These net operating losses
are subject to review by federal and state tax authorities.
38
PLAN OF OPERATIONS - EASY-CARE
PRIMARY STRATEGY
Our primary strategy consists of the following:
1. MANAGED MEDICARE MARKET - Currently over five million enrolled -
150,000 Easy Care(SM) eligible. We are focusing on small to medium
sized Medicare Advantage programs with Medicare enrollment between
10,000 and 60,000. These plans are independent and not part of large
networks; they are growing their Medicare membership, and are less
likely to have their own disease management programs. Most of these
plans are well established, though some are relatively new to Medicare.
We believe we are well positioned to grow with the enrollment of these
companies.
(SOURCE OF ABOVE DATA: http://www.cms.hhs.gov/ CENTERS FOR MEDICARE &
MEDICAID SERVICES (CMS), U.S. DEPARTMENT OF HEALTH & HUMAN SERVICES)
2. SUBCONTRACTING WITH POPULATION BASED-SINGLE DISEASE ORIENTED DISEASE
MANAGEMENT COMPANIES - many of these companies either have large
Medicare populations, are partnering with an HMO in a CCI (Medicare
demonstration project), or seeking contracts with the states for
Medicaid populations which include the disabled. In these cases we
subcontracting with the company and enabling them to provide a complete
spectrum of care which includes hands-on and presence in the community
for the medically complex and frail; a capability which none of these
companies has developed: Alere, Health Dialog, Health Management
Corp/Wellpoint and McKesson.
3. DUAL ELIGIBLE MEDICARE/MEDICAID PLANS - these are relatively new
entities but a number of companies who are already in the Medicaid
market are seeking to enroll Medicare members who have both insurances
since the reimbursement incentives are favorable. Most of these
companies do not have experience with the medically complex and frail
patients and are seeking partners to help them.
4. MEDICAID CONTRACTS - although this is a population which could benefit
from our programs, the sales cycle is very long (up to two years) and
the RFP (Request for Proposal) process too distracting for EASY
CARE(SM) at this time. Our approach in this context is to partner with
other Disease Management and Managed Care Organizations as part of
their Request for Proposal responses.
5. MCKESSON - we have a partnership agreement in place and are working
with their Disease Management Division on specific opportunities. A
Contract has been signed in March 2007 for State of Illinois Medicaid
patients in long-term care facilities.
PLAN OF OPERATIONS - NP CARE
We hope to achieve the growth at a rate of nine facilities per quarter over a
period of four years in targeted markets. We anticipate growth will then slow
down secondary to saturation of prime facilities, decreased availability of
nurse practitioners and potential competition.
We have established relationships with the key nursing home chains (for example
Harborside, Genoa, Sava, CareOne, THI, NHC), and have aggressively and
successfully competed with Evercare in the Connecticut and New Jersey markets.
We are confident that our continued focus on excellence in customer service and
delivering health outcomes will continue to position NP Care as the provider of
choice.
NP Care's revenue streams include three channels:
39
o Fee-for-Service - our nurse practitioners are paid on an event
basis in all of our current nursing homes.
o Special Services - Resident Risk Assessments, Employee Physicals,
and Nursing Home-based Educational programs are available on a
service-based fee schedule.
o Medicare Advantage SNPs - we have entered into a relationship with
Aetna to be the nurse practitioner source of care for their
managed care nursing home patients in select homes in New Jersey.
We are now entering into contractual relations with HealthSpring
in Nashville, Tennessee.
LIQUIDITY AND CAPITAL RESOURCES
We have historically financed our liquidity needs through a variety of sources
including proceeds from the sale of common stock, borrowing from banks, loans
from our stockholders, issuance of convertible debentures and cash flows from
operations. At March 31, 2007 and 2006, we had $948,084 and $176,452,
respectively, in cash and cash equivalents. Operating activities for the three
months ended March 31, 2007 used $1,120,460, representing an increase of
$727,452 (185%) when compared to the cash used in operating activities of
$393,008 for the three months ended March 31, 2006. This change is primarily due
to the increased start-up costs associated new contracts and increased spending
with respect to business development.
During the first quarter of 2007, $1,707,985 of the outstanding $1,757,985
convertible debentures were converted into common stock at a ratio of one share
per one dollar of debt resulting in a total issuance of common stock of
1,707,985 shares during the quarter. The remaining $50,000 of convertible debt
was repaid on April 6, 2007.
During the first quarter of 2007, and in connection with the September Offering,
the Company requested that 29 investors exercise their respective warrants and
in return the Company offered the investors an additional two-year warrant
("2007 Warrant") at an exercise price of $3.00 for every two warrants exercised
from the September Offering. During the first quarter of 2007, the Company
received $1,187,500 upon the exercise of 950,000 of the September Offering
warrants and has issued warrants for an additional 475,000 shares of the
Company's common stock to five (5) September Offering investors. The investors
represented in writing that they were accredited investors and acquired the
securities for their own accounts. A legend was placed on the securities stating
that such securities have not been registered under the Securities Act and
cannot be sold or otherwise transferred without an effective registration
statement covering such shares or an the availability of an exemption from the
registration requirements of the Securities Act.
On September 25, 2006, HCI conducted a Private Placement Offering Memorandum
("PPM") for the sale of up to 3,200,000 shares of common stock at $1.00 per
share and warrants to purchase 3,200,000 shares of common stock in the future.
The offer to purchase common stock was scheduled to expire on the earlier of
when the entire aggregate amount of common stock and the entire amount of
warrants are subscribed and accepted or November 30, 2006. The Company extended
the offering period to February 28, 2007. As of December 31, 2006, the Company
raised $1,956,400 under the PPM. During the first quarter of 2007 the Company
completed the Offering by raising an additional $1,350,000.
The Company has incurred significant costs for the development of software for
internal use. For the three month period ended March 31, 2007 and for the year
ended December 31, 2006, the Company incurred $262,588 and $752,987
respectively, in capitalized software costs. The Company used one vendor to
develop this software. On December 31, 2005, the Company entered into a note
payable agreement with the vendor for the outstanding balance
40
greater than 90 days on account. At March 31, 2007 and December 31, 2006, the
amounts outstanding to this vendor were $825,655 and $682,315, respectively.
ACCOUNTS RECEIVABLE
As of March 31, 2007 and 2006, the Company's accounts receivable aging by major
payers was as follows:
MARCH 31, 2007
0-30 31-60 61-90 > 90 TOTAL
- ---------------------------------------------------------------------------------------------------------
Medicare 428,937 106,423 16,128 18,898 570,386
Medicaid 21,813 2,514 144 420 24,891
Healthnet 41,418 25,376 1,744 5,154 73,692
Blue Cross 8,693 3,979 598 872 14,142
Other Private 78,295 16,668 3,608 5,655 54,226
-----------------------------------------------------------------------------
529,156 154,960 22,222 30,999 737,337
=============================================================================
MARCH 31, 2006
0-30 31-60 61-90 > 90 TOTAL
- ------------------------------------------------------------------------------------------------------------
Medicare 289,679 62,820 16,730 16,409 385,638
Medicaid 10,258 948 447 518 12,171
Healthnet 11,091 816 280 542 12,729
Blue Cross 7,839 671 109 383 9,002
Other Private 27,663 19,057 14,538 5,414 66,672
-----------------------------------------------------------------------------
346,530 84,312 32,104 23,266 486,212
=============================================================================
Receivables recorded at March 31, 2007 and 2006 consists primarily of fees for
services to be reimbursed by Medicare, Medicaid and other private insurance
payers. Self-pay accounts are not material. These accounts are actively
monitored by a third party billing company responsible for collecting amounts
due.
A significant portion of the Company's fee for service revenues have been
reimbursed by federal Medicare and, to a lesser extent, state Medicaid programs.
Payments for services rendered to patients covered by these programs are
generally less than billed charges. The Company monitors its revenues and
receivables from these reimbursement sources, as well as other third-party
insurance payers, and records an estimated contractual allowance for certain
service revenues and receivable balances in the month of revenue recognition, to
properly account for anticipated differences between billed and reimbursed
amounts. Reimbursement is determined based on historical payment trends as well
as current contract terms. Accordingly, a substantial portion of the total net
revenues and receivables reported in the Company's consolidated financial
statements for three month's ended March 31, 2007 and the year ended December
31, 2006 are recorded at the amount ultimately expected to be received from
these payers. For the three month's ended March 31, 2007 and the year ended
December 31, 2006, there were $575,792 and $1,701,268, respectively, recorded as
contractual allowances.
Management has provided for uncollectible accounts receivable through direct
write-offs and such write-offs have been within management's expectations.
Historical experience indicates that after such write-offs have been made,
potential collection losses are considered minimal and, therefore, no allowance
for doubtful accounts is considered necessary by management. On a monthly basis,
management reviews the
41
accounts receivable aging by payer and rejected claims to determine which
receivables, if any, are to be written off. For the three months ended March 31,
2007 and 2006, there were no bad debt direct write-offs recorded in the
Company's results of operations.
Based on our current financial resources, we will require additional working
capital to fund our ongoing business, business strategy including acquisitions
and further development of our proprietary software systems. There can be no
assurance that additional financing will be available, or if available, that
such financing will be on favorable terms. Any such failure to secure additional
financing could impair our ability to achieve our business strategy. There can
be no assurance that we will have sufficient funds or successfully achieve our
plans to a level that will have a positive effect on our results of operations
or financial condition. Our ability to execute our growth strategy is contingent
upon sufficient capital as well as other factors, including, but not limited to,
our ability to further increase awareness of our programs, our ability to
consummate acquisitions of complimentary businesses, general economic and
industry conditions, our ability to recruit, train and retain a qualified sales
and nursing staff, and other factors, many of which are beyond our control. Even
if our revenues and earnings grow rapidly, such growth may significantly strain
our management and our operational and technical resources. If we are successful
in obtaining greater market penetration with our programs, we will be required
to deliver increasing outcomes to our customers on a timely basis at a
reasonable cost to us. No assurance can be given that we can meet increased
program demand or that we will be able to execute our programs on a timely and
cost-effective basis.
COMMITMENTS, CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS
There are no guarantees, commitments, lease and debt agreements or other
agreements that would trigger adverse changes in our credit rating, earnings, or
cash flows, including requirements to perform under stand-by agreements.
The Company is obligated under various operating leases for the rental of office
space and office equipment. Future minimum rental commitments with a remaining
term in excess of one year as of March 31, 2007 are as follows:
PERIODS ENDING
DECEMBER 31,
- -------------------------------------------------------------------------
2007 $ 211,295
2008 254,199
2009 226,772
2010 35,597
2011 23,753
--------
Total minimum lease payments $751,616
========
CRITICAL ACCOUNTING POLICIES AND 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 reported amounts of assets and
liabilities and 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. Actual results could differ from those estimates.
We believe that the following critical policies affect our more significant
judgments and estimates used in preparation of our financial statements.
42
REVENUE RECOGNITION
A significant portion of the Company's fee for service revenues have been
reimbursed by federal Medicare and, to a lesser extent, state Medicaid programs.
Payments for services rendered to patients covered by these programs are
generally less than billed charges. The Company monitors its revenues and
receivables from these reimbursement sources, as well as other third-party
insurance payers, and records an estimated contractual allowance for certain
service revenues and receivable balances in the month of revenue recognition, to
properly account for anticipated differences between billed and reimbursed
amounts. Accordingly, a substantial portion of the total net revenues and
receivables reported in the Company's consolidated financial statements are
recorded at the amount ultimately expected to be received from these payers.
The Company evaluates several criteria in developing the estimated contractual
allowances for unbilled and/or initially rejected claims on a monthly basis,
including historical trends based on actual claims paid, current contract and
reimbursement terms, and changes in patient base and payer/service mix.
Contractual allowance estimates are adjusted to actual amounts as cash is
received and claims are settled. Further, the Company does not expect the
reasonably possible effects of a change in estimate related to unsettled
contractual allowance amounts from Medicaid and third party payers to be
significant to its future operating results and consolidated financial position.
CAPITALIZED SOFTWARE DEVELOPMENT COSTS
The Company has capitalized costs related to the development of software for
internal use. Capitalized costs include external costs of materials and services
and consulting fees devoted to the specific software development. These costs
have been capitalized based upon Statement of Position (SOP) 98-1, "ACCOUNTING
FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE." In
accordance with SOP 98-1, internal-use software development costs are
capitalized once (i) the preliminary project stage is completed, (ii) management
authorizes and commits to funding a computer software project, and (iii) it is
probable that the project will be completed, and the software will be used to
perform the function intended. Costs incurred prior to meeting these
qualifications are expensed as incurred. Capitalization of costs ceases when the
project is substantially complete and ready for its intended use. Internal-use
software development costs are amortized using the straight-line method over
estimated useful lives approximating five years.
The capitalization and ongoing assessment of recoverability of development costs
requires considerable judgment by the Company with respect to certain external
factors, including, but not limited to, technological and economic feasibility,
and estimated economic life.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments include cash, accounts payable and notes
payable. The carrying amounts of these financial instruments approximate their
fair value, due to the short-term nature of these items. The carrying amount of
the notes payable approximates their fair value due to the use of market rates
of interest.
FIXED ASSETS
Fixed assets are stated at cost, less accumulated depreciation and amortization.
Major improvements and betterments to the fixed assets are capitalized.
Expenditures for maintenance and repairs which do not extend the estimated
useful lives of the applicable assets are charged to expense as incurred. When
fixed
43
assets are retired or otherwise disposed of, the assets and the related
accumulated depreciation are removed from the accounts and any resulting profit
or loss is recognized in operations.
The Company provides for depreciation and amortization using the straight-line
method over the estimated useful lives of the assets, or, in the case of
leasehold improvements, over the remaining term of the related lease, whichever
is shorter.
IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In February 2007, the FASB issued Statement of Financial Accounting Standards
No. 159, "The Fair Value Option for Financial Assets and Financial
Liabilities-Including an Amendment of SFAS 115" ("SFAS 159"). SFAS 159 allows
entities to choose to measure many financial instruments and certain other items
at fair value. In addition, SFAS 159 includes an amendment to SFAS 115,
"Accounting for Certain Investments in Debt and Equity Securities, and applies
to all entities with available-for-sale and trading securities. We are in the
process of evaluating the impact that SFAS 159 will have on our financial
statements.
DESCRIPTION OF PROPERTY
We lease our corporate offices under a five-year lease which expires on October
31, 2009. Our corporate offices consist of 4,167 square feet with a gross annual
rental of approximately $93,600.
We believe that the condition of our leased facilities is excellent and that the
provided space is sufficient for our use and operation at the present time. In
the opinion of management, these properties are adequately insured and suitable
for our anticipated future use.
Our property is not leased from an affiliate.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company consolidates all controlled subsidiaries, which control is
effectuated through ownership of voting common stock or by other means. In
states where ECI is not permitted to directly own a medical operation due to
corporate practice of medicine laws in those states, it performs only
non-medical administrative and support services, does not represent to the
public or its clients that it offers medical services and does not exercise
influence or control over the practice of medicine. In those states, ECI
conducts business through LLCs that it controls through Dr. Chess, our Chief
Executive Officer, as the sole member, and it is these affiliated LLCs that
employ Advanced Practice Nurse Practitioners (APRNs) who practice medicine. In
such states, ECI generally enters into exclusive long-term management services
agreements with the LLCs that operate the medical operations that restricts the
member(s) of the affiliated LLCs from transferring their ownership interests in
the affiliated LLCs and otherwise provides ECI or its designee with a
controlling voting or financial interest in the affiliated LLCs and their
operations. The underlying entities (LLCs), which are required to be
consolidated under Financial Accounting Standards Board ("FASB") Interpretation
No. 46, as revised ("FIN 46R"), "Consolidation of Variable Interest Entities,"
would also be consolidated under the provisions of Emerging Issues Task Force
("EITF") No. 97-2, "Application of FASB Statement No. 94 and APB Opinion No. 16
to Physician Practice Management Entities and Certain Other Entities with
Contractual Management Arrangements." The LLCs have been determined to be
variable interest entities due to the existence of a call option under which ECI
has the ability to require the member(s) of all of the voting equity interests
of the underlying LLCs to transfer their equity interests at any time to any
person specified by ECI and vote the member(s) interests as ECI instructs. This
call option agreement represents rights provided through a variable
44
interest other than the equity interest itself that caps the returns that could
be earned by the equity holders. In addition, the Company has an exclusive
long-term management services agreement with each of the LLCs and the member(s)
of the LLCs which allows the Company to direct all of the non-clinical
activities of the LLCs, retain all of the economic benefits, and assume all of
the risks associated with ownership of the LLCs. In this manner, the Company has
all of the economic benefits and risks associated with the LLCs, but have
disproportionately few voting rights.
In August, September and November 2006, Dr. Chess, our President and Chief
Executive Officer and his son, loaned NP Care, LLC an aggregate of $345,000 as
evidenced by five demand promissory notes. The interest rate for each note is
ten percent (10%) per annum and each matured at varying dates between September
and January 2007. On November 3, 2006, the Company paid Dr. Chess $51,276 in
satisfaction of principal and accrued interest on one of the notes and has made
payments of $10,000 towards another of the loans. The other notes continue to
accrue interest until paid in full.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock was initially traded on the Pink Sheets in March 2005 under the
symbol "AYHG.PK" In June 2005, as a result of our reverse merger transaction, we
changed our symbol to "HCNV.PK" On April 11, 2007, the Company received
clearance from the NASD to enter quotations on the OTC Bulletin Board and,
accordingly, our stock symbol was changed to "HCNV.OB." There is an extremely
limited and illiquid public market for the Company's common stock.
Other than approximately 328,637 shares of common stock, all of our issued and
outstanding shares of common stock are deemed to be restricted stock for
purposes of Rule 144 under the Securities Act and, accordingly, may not be sold
absent their registration under the Securities Act or pursuant to Rule 144
following their being held for the applicable holding periods set forth in Rule
144.
We became a reporting company under the Securities Exchange Act of 1934, as
amended, upon the effectiveness of Form 10-SB registration statement. The
effective date for Form 10-SB was February 13, 2007. Until such date as shall be
ninety (90) days from the date of the effectiveness, our stockholders will not
be able to avail themselves of Rule 144.
In general, under Rule 144 as currently in effect, a person or group of persons
whose shares are aggregated, who has beneficially owned restricted shares for at
least one year, including the holding period of any prior owner except an
affiliate of ours, would be entitled to sell, within any three month period, a
number of shares that does not exceed 1% of the number of then outstanding
shares of our Common Stock; provided, that public information about us as
required by Rule 144 is available and the seller complies with manner of sale
provisions and notice requirements.
HOLDERS OF COMMON STOCK
As of June 15, 2007, 38,187,407 shares of our common stock are issued and
outstanding and approximately 129 shareholders of record.
DIVIDEND POLICY
The Company has not paid dividends during the years ended December 31, 2004,
December 31, 2005, or December 31, 2006 and does not expect to pay dividends for
the foreseeable future.
45
TRANSFER AGENT
Our transfer agent is American Stock Transfer & Trust Company. The address is
6201 15th Avenue, Brooklyn, NY 11219.
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth the aggregate cash compensation paid by the
Company for services rendered during the last two (2) years to the Company by
its Chief Executive Officer and to each of the Company's other executive
officers whose annual salary, bonus and other compensation exceeded $100,000 in
2006.
NAME AND FISCAL OTHER ANNUAL RESTRICTED UNDERLYING
PRINCIPAL POSITION YEAR SALARY COMPENSATION STOCK AWARD OPTIONS
- ------------------------------------------------------------------------------------------------------------------------------------
David Chess 2006 $ 200,000 - - -
President, CEO, Chairman of the Board of Directors 2005 30,769 - - -
Jeffrey L. Zwicker 2006 $ 163,230 - - -
Chief Financial Officer, Chief Operating Officer 2005 81,446 - - -
- ------------------------------------------------------------------------------------------------------------------------------------
COMPENSATION OF DIRECTORS
Currently, Dr. Chess is our sole director. He did not receive any compensation
for serving on our Board.
STOCK OPTION PLAN
WE DO NOT CURRENTLY HAVE A STOCK OPTION PLAN.
CORPORATE GOVERNANCE - BOARD OF DIRECTORS
ELECTION OF OFFICERS
Each director is elected at the Company's annual meeting of shareholders and
holds office until the next annual meeting of stockholders or until the
successors are qualified and elected. The Company's bylaws provide for not less
than one (1) director. Currently there is one (1) director in the Company: Dr.
David Chess, our Chief Executive Officer. The bylaws permit the Board of
Directors to fill any vacancy and such director may serve until the next annual
meeting of shareholders or until his or her successor is elected and qualified.
The Company currently does not have any committees of the Board of Directors
although it plans to establish one or more committees in the near future,
including an audit committee.
46
LEGAL MATTERS
The validity of the issuance of the common stock offered hereby will be passed
upon for us by Gersten Savage LLP, New York, New York.
EXPERTS
Our financial statements for the years ended December 31, 2005 and 2006 included
in this prospectus have been audited by Carlin, Charron & Rosen, LLP independent
registered public accountants, to the extent set forth in their report, and set
forth in this prospectus in reliance upon such report given upon the authority
of them as experts in auditing and accounting.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the SEC under the Securities Act of 1933 a registration
statement on Form SB-2 with respect to the shares being offered in this
offering. This prospectus does not contain all of the information set forth in
the registration statement, certain items of which are omitted in accordance
with the rules and regulations of the SEC. The omitted information may be
inspected and copied at the Public Reference Room maintained by the SEC at Room
1580, 100 F Street N.E., Washington, D.C. 20549. You can obtain information
about operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. The SEC also maintains an Internet site that contains reports,
proxy and information statements, and other information regarding issuers that
file electronically with the SEC at http://www.sec.gov. Copies of such material
can be obtained from the public reference section of the SEC at prescribed
rates. Statements contained in this prospectus as to the contents of any
contract or other document filed as an exhibit to the registration statement are
not necessarily complete and in each instance reference is made to the copy of
the document filed as an exhibit to the registration statement, each statement
made in this prospectus relating to such documents being qualified in all
respect by such reference.
For further information with respect to us and the securities being offered
hereby, reference is hereby made to the registration statement, including the
exhibits thereto and the financial statements, notes, and schedules filed as a
part thereof.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Prior to the acquisition of Ayre Holdings, Inc., the financial statements of
Ayre Holdings were audited by Nicholas La PIER CPA PC. Subsequent to the
acquisition, our consolidated financial statements will continue to be audited
by Carlin, Charron & Rosen LLP and we will not use the services of Nicholas
LaPIER CPA PC.
47
FINANCIAL STATEMENTS
HC INNOVATIONS, INC.
(FORMERLY AYRE HOLDINGS, INC.)
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2006
Independent Auditor's Report.....................................................................................F-1
Consolidated Balance Sheet.......................................................................................F-2
Consolidated Statement of Operations.............................................................................F-3
Consolidated Statements of Changes in Stockholders' Equity (Deficit).............................................F-4
Consolidated Statements of Cash Flows............................................................................F-5
Notes to the Consolidated Financial Statements ..................................................................F-7
FOR THE QUARTER ENDED MARCH 31, 2007
Consolidated Balance Sheet as of March 31, 2007 (unaudited)......................................................F-38
Condensed Consolidated Statements of Operations for the three-months ended
March 31, 2007 and 2006 (unaudited).........................................................................F-39
Condensed Consolidated Statement of Changes in Stockholders' Equity (Deficit) for the
three-months ended March 31, 2007 (unaudited)...............................................................F-40
Condensed Consolidated Statements of Cash Flows for the three-months ended
March 31, 2007 and 2006 (unaudited).........................................................................F-41
Notes to Condensed Consolidated Financial Statements.............................................................F-42
48
HC INNOVATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
TOGETHER WITH
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
[PG NUMBER]
HC INNOVATIONS, INC. AND SUBSIDIARIES
Table of Contents
- --------------------------------------------------------------------------------
Page
Number
Report of Independent Registered Public Accounting Firm F-1
Consolidated Financial Statements:
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-3
Consolidated Statements of Changes in Stockholders' Equity (Deficit) F-4
Consolidated Statements of Cash Flows F-5
Notes to Consolidated Financial Statements F-7
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of
HC Innovations, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of HC
Innovations, Inc. and Subsidiaries (the "Company") as of December 31, 2006 and
2005, and the related consolidated statements of operations, changes in
stockholders' equity (deficit), and cash flows for each of the years in the
two-year period ended December 31, 2006. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements, assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
HC Innovations, Inc. and Subsidiaries at December 31, 2006 and 2005, and the
results of their operations and their cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States of
America.
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. As shown in the
accompanying consolidated financial statements, the Company has a working
capital deficiency of $3,276,083 as of December 31, 2006, has sustained net
losses of $3,250,665 and $1,378,789 for the years ended December 31, 2006 and
2005, respectively, and has an accumulated deficit of $5,246,964 as of December
31, 2006. These factors raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans regarding these matters are
described in Note 1. The consolidated financial statements do not include
adjustments that might result from the outcome of this uncertainty.
/s/ Carlin, Charron & Rosen, LLP
Glastonbury, Connecticut
April 2, 2007
F-1
HC INNOVATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2006 AND 2005
Assets 2006 2005
Current assets
Cash and cash equivalents $ 151,534 $ 435,375
Accounts receivable 330,822 220,311
Prepaid expenses 142,274 158,056
----------- -----------
Total current assets 624,630 813,742
Fixed assets, net 292,435 234,729
Capitalized software development costs, net 1,310,727 686,798
Deferred issuance costs, net 51,405 59,779
Security deposits and other, net 65,266 33,282
----------- -----------
Total assets $ 2,344,463 $ 1,828,330
=========== ===========
Liabilities and Stockholders' Equity (Deficit)
Current liabilities
Lines of credit $ 200,000 $ 210,122
Current portion of notes payable 441,139 30,224
Current portion of capital lease obligations 93,942 55,334
Notes payable to vendors 44,841 274,615
Current portion of convertible debentures, net of discount 1,222,556 --
Accounts payable 1,498,216 456,184
Accrued liabilities 368,919 159,826
Deferred revenue 31,100 --
Deposit -- 250,000
----------- -----------
Total current liabilities 3,900,713 1,436,305
Notes payable, net of current portion 29,449 60,564
Capital lease obligations, net of current portion 151,533 101,542
Convertible debentures, net of discount and current portion 398,385 1,087,438
Note payable - related party -- 500,000
----------- -----------
Total liabilities 4,480,080 3,185,849
----------- -----------
Commitments and contingencies (Note 18) -- --
Stockholders' equity (deficit)
Preferred stock, $.001 par value, 5,000,000 shares authorized -- --
Common stock, $.001 par value in 2006, $.01 par value in 2005,
100,000,000 shares authorized 30,956 238,684
Stock subscriptions receivable (21,671) (21,671)
Additional paid in capital 3,102,062 421,767
Deficit (5,246,964) (1,996,299)
----------- -----------
Total stockholders' deficit (2,135,617) (1,357,519)
----------- -----------
Total liabilities and stockholders' deficit $ 2,344,463 $ 1,828,330
=========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS
F-2
HC INNOVATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
2006 2005
Net revenues $ 6,166,092 $ 2,887,498
------------ ------------
Cost of services 5,033,136 2,583,656
Selling, general and administrative expenses 3,964,537 1,501,817
Depreciation and amortization 269,640 103,251
------------ ------------
9,267,313 4,188,724
------------ ------------
Loss from operations (3,101,221) (1,301,226)
------------ ------------
Other income/(expense)
Other income 130,493 673
Interest income 2,356 6,235
Interest expense (282,293) (84,471)
------------ ------------
(149,444) (77,563)
------------ ------------
Loss before provision for income taxes (3,250,665) (1,378,789)
Provision for income taxes -- --
------------ ------------
Net loss $ (3,250,665) $ (1,378,789)
============ ============
Basic loss per share $ (.12) $ (.06)
============ ============
Diluted loss per share $ (.12) $ (.06)
============ ============
Weighted average common shares outstanding 27,305,114 21,429,516
============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS
F-3
HC INNOVATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
Common Stock
------------------------------- Paid-In Subscriptions
Shares Issued Amount Capital Receivable
---------------------------------------------- -----------------
Balance, January 1, 2005 20,257,332 $ 202,573 $ 109,088 $(22,115)
Issuance of common stock 511,082 5,111 (4,160) (951)
Purchase and retirement of common stock (984,007) (9,840) 8,009 1,395
Shares issued as compensation - consulting services 2,601,090 26,011 35,489 --
Shares issued as compensation - consulting services 49,441 495 (403) --
Shares issued as compensation - advisory services 100,000 1,000 39,000 --
Shares issued as compensation - legal services 50,000 500 19,500 --
Common stock issued in connection
with convertible debenture and issuance costs 1,283,385 12,834 215,244 --
Net loss -- -- -- --
----------- --------- ---------- --------
Balance - December 31, 2005 23,868,323 $ 238,684 $ 421,767 $(21,671)
Common stock issued in connection with
convertible debenture - April 17, 2006 (Note 12) 500,000 5,000 136,348 --
Reverse acquisition recapitalization adjustment (Note 2) 328,637 (218,988) 218,988 --
Issuance of common stock - June 23, 2006 (Note 15) 142,669 143 106,859 --
Common stock issued in connection with
exercise of warrants - June 28, 2006 (Note 12) 5,166,711 5,167 494,833 --
Common stock (106,400 shares) to be issued in satisfaction -- -- 106,400 --
of note payable and accrued interest
October 25, 2006 (Note 12) -- -- --
Common stock issued in connection with private 950,000 950 829,821 --
placement, net of issuance costs (Note 15)
Common stock (900,000 shares)to be issued
in connection with private placement, net of
issuance costs (Note 15) -- -- 787,046 --
Net loss -- -- -- --
----------- --------- ---------- --------
Balance, December 31, 2006 30,956,340 $ 30,956 $3,102,062 $(21,671)
=========== ========= ========== ========
Total
Stockholders'
Deficit Deficit
-------------------------------------
Balance, January 1, 2005 $ (617,510) $ (327,964)
Issuance of common stock -- --
Purchase and retirement of common stock -- (436)
Shares issued as compensation - consulting services -- 61,500
Shares issued as compensation - consulting services -- 92
Shares issued as compensation - advisory services -- 40,000
Shares issued as compensation - legal services -- 20,000
Common stock issued in connection
with convertible debenture and issuance costs -- 228,078
Net loss (1,378,789) (1,378,789)
----------- -----------
Balance - December 31, 2005 $(1,996,299) $(1,357,519)
Common stock issued in connection with
convertible debenture - April 17, 2006 (Note 12) -- 141,348
Reverse acquisition recapitalization adjustment (Note 2) -- --
Issuance of common stock - June 23, 2006 (Note 15) -- 107,002
Common stock issued in connection with
exercise of warrants - June 28, 2006 (Note 12) -- 500,000
Common stock (106,400 shares) to be issued in satisfacti -- 106,400
of note payable and accrued interest
October 25, 2006 (Note 12) --
Common stock issued in connection with private -- 830,771
placement, net of issuance costs (Note 15)
Common stock (900,000 shares)to be issued
in connection with private placement, net of
issuance costs (Note 15) -- 787,046
Net loss (3,250,665) (3,250,665)
----------- -----------
Balance, December 31, 2006 $(5,246,964) $(2,135,617)
=========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS
F-4
HC INNOVATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
2006 2005
Cash flows from operating activities:
Net loss $(3,250,665) $(1,378,789)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 269,640 103,251
Shares issued as compensation - consulting services -- 61,592
Shares issued as compensation - advisory services -- 40,000
Shares issued as compensation - legal services -- 20,000
Amortization of discount - convertible debentures 174,851 32,131
Changes in operating assets and liabilities:
(Increase) Decrease in:
Accounts receivable (110,511) 80,708
Prepaid expenses 15,782 (130,517)
Security deposits and other 33,643 21,884
Increase (Decrease) in:
Accounts payable 1,042,032 139,959
Accrued liabilities 215,493 42,640
Deferred revenue 31,100 --
Notes payable to vendors (229,774) 274,615
Deposit (250,000) 250,000
----------- -----------
Net cash used in operating activities (2,125,695) (442,526)
----------- -----------
Cash flow from investing activities:
Purchases of fixed assets, net (68,375) (133,536)
Expenditures for capitalized software development costs (638,270) (596,096)
----------- -----------
Net cash used in investing activities (706,645) (729,632)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock 1,724,819 --
Proceeds from notes payable 560,000 --
Proceeds from issuance of convertible debentures 500,000 1,257,985
Proceeds from notes payable - related party -- 450,000
Retirement of common stock -- (436)
Payments on lines of credit, net (10,122) --
Deferred issuance costs paid (60,045) (47,749)
Payments on notes payable (80,200) (28,351)
Payments on capital lease obligations (85,953) (69,005)
----------- -----------
Net cash provided by financing activities 2,548,499 1,562,444
----------- -----------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS
F-5
HC INNOVATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
Net (decrease) increase in cash and cash equivalents (283,841) 390,286
Cash and cash equivalents - beginning of year 435,375 45,089
--------- ---------
Cash and cash equivalents - end of year $ 151,534 $ 435,375
========= =========
2006 2005
Supplemental cash flow information:
Cash paid during the year for:
Interest $ 263,261 $ 84,335
========= =========
Noncash investing and financing activities:
Common stock issued in connection with exercise of
warrants and satisfaction of note payable - related party $ 500,000 $ --
========= =========
Discount on convertible debentures $ 141,348 $ 202,678
========= =========
Deferred issuance costs paid with common stock $ -- $ 25,400
========= =========
Computer equipment acquired through capital lease $ 59,834 $ 20,000
========= =========
Capitalized software acquired through capital lease $ 114,718 $ --
========= =========
Common stock issued through stock subscriptions
receivable $ -- $ 951
========= =========
Common stock to be issued in satisfaction of note
payable and accrued interest $ 106,400 $ --
========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS
F-6
HC INNOVATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2006 and 2005
- --------------------------------------------------------------------------------
1. NATURE OF OPERATIONS
By Stock Acquisition Agreement dated May 11, 2006, Ayre Holdings, Inc.
("Ayre" or "the Company"), a Delaware corporation, acquired 100% of the
issued and outstanding shares of HC Innovations, Inc., in exchange for
24,368,323 shares of common stock of the Company representing approximately
99% of the total issued and outstanding shares of the Company at the time.
Prior to the consummation of the acquisition, Ayre, a non-reporting pink
sheet company and public shell, effectuated a reverse stock split whereby
the then current 793,000 issued and outstanding shares of common stock were
reverse split into 328,637 shares of common stock at the rate of .41442.
The post-acquisition entity is accounted for as a recapitalization of HC
Innovations, Inc. using accounting principles applicable to reverse
acquisitions with HC Innovations, Inc. being treated as the accounting
parent (acquirer) and Ayre Holdings, Inc., the legal parent, being treated
as the accounting subsidiary (acquiree). HC Innovations, Inc. is regarded
as the predecessor entity. In accordance with the provisions governing the
accounting for reverse acquisitions (Note 2), the historical figures
presented are those of HC Innovations, Inc. Upon consummation of the
acquisition on June 9, 2006, Ayre changed its name to HC Innovations, Inc.
("HCI"). The Company, through its subsidiaries, provides specialty care
management products and services and is quoted on the pink sheets under the
symbol "HCNV.PK".
HCI and subsidiaries (the "Company") is a specialty care management company
comprised of separate divisions each with a specific focus and
intervention. The Company's mission is to identify subgroups of people with
high costs and disability and create and implement programs and
interventions that improve their health, resulting in dramatic reductions
in the cost of their care. The Company also develops and implements medical
management systems for the long term care industry.
Enhanced Care Initiatives, Inc. ("ECI"), a wholly owned subsidiary of HCI
was founded in 2002 and is the management company for all HCI entities. ECI
has three wholly owned subsidiaries operating in Tennessee, Texas and
Massachusetts. ECI markets its proprietary specialty care management
programs for the medically frail and other costly sub-populations to Health
Maintenance Organizations ("HMOs") and other managed care organizations
("MCOs") as well as state Medicaid departments.
F-7
HC INNOVATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2006 and 2005
- --------------------------------------------------------------------------------
1. NATURE OF OPERATIONS (CONTINUED)
NP Care, LLCs ("LLCs") are nursing home medical management systems. The
LLCs nurse practitioner program provides onsite medical care by an Advanced
Practice Registered Nurse ("APRN") under the oversight of the patient's
individual physician to residents in nursing homes and assisted living
facilities. The LLCs operate in the states of Connecticut, Florida, New
Jersey, Ohio and Tennessee and are managed exclusively by ECI.
GOING CONCERN/MANAGEMENT'S PLAN
As shown in the accompanying consolidated financial statements, as is
typical of a company going through early-stage development of its services
and strategic initiatives, the Company has sustained consolidated net
losses for the years ended December 31, 2006 and 2005 of $3,250,665 and
$1,378,789, respectively. At December 31, 2006 and 2005, the Company had a
working capital deficiency of $3,276,083 and $622,563, respectively and
accumulated deficits of $5,246,964 and $1,996,299, respectively. These
factors raise substantial doubt about the Company's ability to continue as
a going concern. The consolidated financial statements do not include
adjustments that might result from the outcome of this uncertainty.
Management believes that the Company will be successful in its efforts to
adequately meet its capital needs and continue to grow its businesses. In
2005, the Company raised $1.258 million through the issuance of convertible
debenture notes to accredited investors. In 2006, the Company raised
$500,000 through the issuance of convertible debenture notes to accredited
investors, $560,000 through the issuance of notes payable and raised an
additional $1.725 million through the issuance of common stock during the
first quarter of 2007. $1.708 million of the debenture notes were converted
into common stock at a ratio of 1:1 resulting in the issuance of an
additional 1.708 million shares of common stock.
The 2006 and 2005 losses are largely a result of business development
expenses as well as significant investment in building infrastructure for
growing the Company's divisions, business and clinical systems and
programs. During 2006, the Company was successful in securing new contracts
with AETNA, (to manage its members in New Jersey long-term care
facilities); AMERIGROUP, (a contract for an initial 300 patients which
began in
F-8
HC INNOVATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2006 and 2005
- --------------------------------------------------------------------------------
1. NATURE OF OPERATIONS (CONTINUED)
GOING CONCERN/MANAGEMENT'S PLAN (CONTINUED)
June, 2006 in Houston, Texas generating revenue of approximately $1 million
in 2006); and the Company also entered into a Partnership Agreement with
MCKESSON to jointly market and respond to requests for proposals
(particularly state Medicaid opportunities) and will be integrating the
Company's high intensity programs with their call center support services.
In addition, the Company's contract with HealthSpring USA, LLC has been
expanded from the initial 300 members in Tennessee to approximately 500
members, representing an increase in annualized contract revenue potential
of approximately $.7 million. In October 2006, HCI entered into a Disease
Management Services Agreement with Alere Medical, Inc. ("Alere"). Alere
provides disease management tools, services and systems to payers which are
designed to assist with and improve management of health care outcomes for
patients. Alere has contracted with Tufts Health Plan ("Tufts") to provide
disease management services in Massachusetts. Tufts provides various
commercial and medicare health plans to members. ECI will provide care
management services to Tufts program participants in Massachusetts and
Alere will pay to ECI $295 per enrolled member per month commencing
February 1, 2007 with an annual contract revenue potential of approximately
$2.8 million.
2. RECAPITALIZATION
By Stock Acquisition Agreement dated May 11, 2006, Ayre Holdings, Inc.
("Ayre" or "the Company"), a Delaware corporation, acquired 100% of the
issued and outstanding shares of HC Innovations, Inc., in exchange for
24,368,323 shares of common stock of the Company representing approximately
99% of the total issued and outstanding shares of the Company at the time
which resulted in a change in control of the Company. Simultaneously, with
this exchange of shares, HC Innovations, Inc. paid $175,000 in cash to the
Ayre shareholders, which has been included in selling, general and
administrative expenses in the consolidated statements of operations for
the year ended December 31, 2006. Prior to the consummation of the
acquisition, Ayre, a non-reporting pink sheet company, effectuated a
reverse stock split whereby the then current 793,000 issued and outstanding
shares of common stock were reverse split into 328,637 shares of common
stock at the rate of .41442.
F-9
HC INNOVATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2006 and 2005
- --------------------------------------------------------------------------------
2. RECAPITALIZATION (CONTINUED)
The post-acquisition entity is accounted for as a recapitalization of HC
Innovations, Inc. using accounting principles applicable to reverse
acquisitions with HC Innovations, Inc. being treated as the accounting
parent (acquirer) and Ayre Holdings, Inc., the legal parent, being treated
as the accounting subsidiary (acquiree). Ayre Holdings, Inc. was an
inactive public shell with no net assets prior to the transaction.
Therefore, the value assigned to the common shares based on the fair value
of the net assets of Ayre Holdings, Inc. at the recapitalization date was
$-0- and the revenue, net loss and loss per share, assuming the transaction
had been completed on January 1, 2006, would be the same as reported.
HC Innovations, Inc. is regarded as the predecessor entity. In accordance
with the provisions governing the accounting for reverse acquisitions, the
historical figures presented are those of HC Innovations, Inc.
Prior to the consummation of the acquisition on June 9, 2006, Ayre
Holdings, Inc. had 328,637 shares of common stock outstanding. At the date
of the reverse acquisition merger, Ayre Holdings, Inc. was a public shell
and had no assets, no liabilities, and no net stockholders' equity.
Therefore, this was the only recapitalization adjustment that was recorded.
The key components of the reverse acquisition recapitalization adjustment
were as follows:
Common Stock
----------------------------------------------
Shares issued and Paid -in
Outstanding Amount Capital
----------- ------ -------
Public company shares already
outstanding on date of merger
(June 9, 2006), par value $0.001 328,637 $ 328 $ (328)
Public company shares issued in a
1:1 exchange for private company
Shares, par value $0.001 24,368,323 24,368 (24,368)
Private company shares exchanged,
par value $0.01 (24,368,323) (243,684) 243,684
----------- ----------- -----------
Reverse acquisition recapitalization
adjustment, net 328,637 $ (218,988) $ 218,988
=========== =========== ===========
F-10
HC INNOVATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2006 and 2005
- --------------------------------------------------------------------------------
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America
(GAAP) and include the accounts of HC Innovations, Inc. and its
wholly-owned, majority-owned and controlled subsidiaries (which are
referred to as the Company, unless the context otherwise requires), as well
as certain affiliated limited liability companies, which are variable
interest entities required to be consolidated. The company consolidates all
controlled subsidiaries, in which control is effectuated through ownership
of voting common stock or by other means. All significant intercompany
transactions have been eliminated in consolidation.
In states where ECI is not permitted to directly own a medical operation
due to corporate practice of medicine laws in those states, it performs
only non-medical administrative and support services, does not represent to
the public or its clients that it offers medical services and does not
exercise influence or control over the practice of medicine. In those
states, ECI conducts business through Limited Liability Companies (LLCs)
that it controls, and it is these affiliated LLCs that employ Advanced
Practice Nurse Practitioners ("APNPs") who practice medicine. In such
states, ECI generally enters into exclusive long-term management services
agreements with the LLCs that operate the medical operations that restricts
the member(s) of the affiliated LLCs from transferring their ownership
interests in the affiliated LLCs and otherwise provides ECI or its designee
with a controlling voting or financial interest in the affiliated LLCs and
their operations.
The LLCs, which are required to be consolidated under Financial Accounting
Standards Board ("FASB") Interpretation No. 46, as revised ("FIN 46(R)"),
"CONSOLIDATION OF VARIABLE INTEREST ENTITIES", would also be consolidated
under the provisions of Emerging Issues Task Force ("EITF") No. 97-2,
"APPLICATION OF FASB STATEMENT NO. 94 AND APB OPINION NO. 16 TO PHYSICIAN
PRACTICE MANAGEMENT ENTITIES AND CERTAIN OTHER ENTITIES WITH CONTRACTUAL
MANAGEMENT ARRANGEMENTS." The LLCs have been determined to be variable
interest entities due to the existence of a call option under which ECI has
the ability to require the member(s) holding all of the voting equity
interests of the underlying LLCs to transfer their equity interests at any
time to any person specified by ECI and vote the member(s) interests as ECI
instructs. This call option agreement represents rights provided through a
variable interest other than the equity interest itself that caps the
returns that could be earned
F-11
HC INNOVATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2006 and 2005
- --------------------------------------------------------------------------------
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
BASIS OF PRESENTATION (CONTINUED)
by the equity holders.
In addition the Company has an exclusive long-term management services
agreement with each of the LLC's and the member(s) of the LLCs which allows
the Company to direct all of the non-clinical activities of the LLCs,
retain all of the economic benefits, and assume all of the risks associated
with ownership of the LLCs. Due to these agreements, the Company has all of
the economic benefits and risks associated with the LLCs and the Company is
considered to be the primary beneficiary of the activities of the LLCs and
is required to consolidate the LLCs under FIN 46(R).
USE OF ESTIMATES
The preparation of consolidated 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
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the consolidated financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash balances on hand and short-term,
highly liquid investments with original maturities of three months or less.
REVENUE RECOGNITION
The Company's revenue includes fees for service revenue and revenue from
capitated contracts.
Revenue from capitated contracts is recorded monthly based on the number of
members covered under each capitated contract per month. Capitated revenue
totaled approximately $1,738,355 and $270,000 for the years ended December
31, 2006 and 2005, respectively.
A significant portion of the Company's fee for service revenues have been
reimbursed by federal Medicare and, to a lesser extent, state Medicaid
programs.
F-12
HC INNOVATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2006 and 2005
- --------------------------------------------------------------------------------
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION (CONTINUED)
Payments for services rendered to patients covered by these programs are
generally less than billed charges. The Company monitors its revenues and
receivables from these reimbursement sources, as well as other third-party
insurance payors, and records an estimated contractual allowance for
certain service revenues and receivable balances in the month of revenue
recognition, to properly account for anticipated differences between billed
and reimbursed amounts. Accordingly, a substantial portion of the Company's
total net revenues and receivables reported in the accompanying
consolidated financial statements are recorded at the amount ultimately
expected to be received from these payors. Net revenues from fee for
service patients is recorded on the day the service is provided to
patients.
The Company evaluates several criteria in developing the estimated
contractual allowances for unbilled and/or initially rejected claims on a
monthly basis, including historical trends based on actual claims paid,
current contract and reimbursement terms, and changes in patient base and
payor/service mix. Contractual allowance estimates are adjusted to actual
amounts as cash is received and claims are settled, and the aggregate
impact of these resulting adjustments were not significant to the Company's
operations for the years ended December 31, 2006 and 2005. Further, the
Company does not expect the reasonably possible effects of a change in
estimate related to unsettled December 31, 2006 contractual allowance
amounts from Medicaid and third-party payors to be significant to its
future operating results and consolidated financial position (Note 13).
FIXED ASSETS
Fixed assets are stated at cost, less accumulated depreciation and
amortization. Major improvements and betterments to the fixed assets are
capitalized. Expenditures for maintenance and repairs which do not extend
the estimated useful lives of the applicable assets are charged to expense
as incurred. When fixed assets are retired or otherwise disposed of, the
assets and the related accumulated depreciation are removed from the
accounts and any resulting gain or loss is recognized in operations.
The Company provides for depreciation and amortization using the
straight-line method over the estimated useful lives of the assets, or, in
the case of leasehold improvements, over the remaining term of the related
lease, whichever is shorter.
F-13
HC INNOVATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2006 and 2005
- --------------------------------------------------------------------------------
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CAPITALIZED SOFTWARE DEVELOPMENT COSTS
The Company has capitalized costs related to the development of software
for internal use. Capitalized costs include external costs of materials and
services and consulting fees devoted to the specific software development.
These costs have been capitalized based upon Statement of Position (SOP)
98-1, "ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED
FOR INTERNAL USE." In accordance with SOP 98-1, internal-use software
development costs are capitalized once (i) the preliminary project stage is
completed, (ii) management authorizes and commits to funding a computer
software project, and (iii) it is probable that the project will be
completed, and the software will be used to perform the function intended.
Costs incurred prior to meeting these qualifications are expensed as
incurred. Capitalization of costs ceases when the project is substantially
complete and ready for its intended use. Internal-use software development
costs are amortized using the straight-line method over estimated useful
lives approximating five years.
The capitalization and ongoing assessment of recoverability of development
costs requires considerable judgment by the Company with respect to certain
external factors, including, but not limited to, technological and economic
feasibility, and estimated economic life.
ADVERTISING
Advertising costs are expensed as incurred. Advertising expense was $85,500
and $16,179 for 2006 and 2005, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments include cash, accounts payable and
notes payable. The carrying amounts of these financial instruments
approximate their fair value, due to the short-term nature of these items.
The carrying amount of the notes payable approximates their fair value due
to the use of market rates of interest.
F-14
HC INNOVATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2006 and 2005
- --------------------------------------------------------------------------------
STOCK BASED TRANSACTIONS
In connection with the valuation of equity transactions that occurred from
January 1, 2005 to December 31, 2006, the Company considered Statement of
Financial Accounting Standards No. 123 (revised 2004); Share Based Payments
(SFAS 123R), specifically paragraph 7, and also considered the American
Institute of Certified Public Accountants ("AICPA") Task Force's Audit and
Accounting Practice Aid-- Valuation of Privately-Held-Company Equity
Securities Issued as Compensation (the "AICPA Practice Aid"). As a company
without significant resources, management concluded that the expenditure of
limited available funds to engage an outside valuation specialist to
perform contemporaneous and comprehensive valuations in 2006 and 2005 was
not an appropriate use of financial resources. We instead derived relevant
valuations internally considering SFAS 123R and the AICPA Practice Aid and
evaluated those figures in light of Generally Accepted Accounting
Principles to establish fair values for accounting purposes.
INCOME TAXES
The Company accounts for income taxes following the asset and liability
method in accordance with Statement of Financial Accounting Standards
(SFAS) No. 109, "ACCOUNTING FOR INCOME TAXES." Under such method, deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to difference between the financial statement carrying amounts
of existing assets and liabilities and their respective tax bases. The
Company's income tax returns are prepared on the tax basis of accounting.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years that the asset is expected
to be recovered or the liability settled.
EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share ("EPS") is computed dividing the net income
(loss) attributable to the common stockholders (the numerator) by the
weighted average number of shares of common stock outstanding (the
denominator) during the reporting periods. Diluted income (loss) per share
is computed by increasing the denominator by the weighted average number of
additional shares that could have been outstanding from securities
convertible into common stock, such as stock
F-15
HC INNOVATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2006 and 2005
- --------------------------------------------------------------------------------
EARNINGS (LOSS) PER SHARE (CONTINUED)
options and warrants (using the "treasury stock" method), and convertible
preferred stock and debt (using the "if-converted" method), unless their
effect on net income (loss) per share is antidilutive. Under the
"if-converted" method, convertible instruments are assumed to have been
converted as of the beginning of the period or when issued, if later. The
effect of computing the diluted income (loss) per share is antidilutive
and, as such, basic and diluted earnings (loss) per share are the same for
the years ended December 31, 2006 and 2005.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2006, the FASB issued FASB Interpretation No. 48 "Accounting for
Uncertainty in Income Taxes (an interpretation of FASB Statement No. 109)"
which is effective for fiscal years beginning after December 15, 2006 with
earlier adoption encouraged. This interpretation was issued to clarify the
accounting for uncertainty in income taxes recognized in the financial
statements by prescribing a recognition threshold and measurement attribute
for the financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return. We are currently evaluating
the potential impact of this interpretation.
In September 2006, the FASB issued Statement of Financial Accounting
Standards No. 157, "Fair Value Measurements" which is effective for fiscal
years beginning after November 15, 2007 and for interim periods within
those years. This statement defines fair value, established a framework for
measuring fair value and expands the related disclosure requirements. We
are currently evaluating the potential impact of this statement.
In September 2006, the FASB issued FASB Staff Position AUG AIR-1,
"Accounting for Planned Major Maintenance Activities" which is effective
for fiscal years
F-16
HC INNOVATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2006 and 2005
- --------------------------------------------------------------------------------
RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
beginning after December 15, 2006. This position statement eliminates the
accrue-in-advance method of accounting for planned major maintenance
activities. We do not expect this pronouncement to have a material impact
on the determination of reporting of our financial results.
4. CONCENTRATIONS OF CREDIT RISK
CASH
The Company has cash balances in certain financial institutions in amounts
which occasionally exceed current federal deposit insurance limits. The
financial stability of these institutions is continually reviewed by senior
management.
ACCOUNTS RECEIVABLE
The Company grants credits without collateral to its fee for service
patients, most of whom are insured under third-party payor agreements as
well as its corporate customers. The mix of receivables from patients and
third-party payors as of December 31, 2006 and 2005 is as follows:
2006 2005
---- ----
Medicare $212,674 $145,341
Medicaid 22,308 6,895
Private 95,840 68,075
-------- --------
$330,822 $220,311
======== ========
Management has provided for uncollectible accounts receivable through
direct write- offs and such write-offs have been within management's
expectations. Historical experience indicates that after such write-offs
have been made, potential collection losses are considered minimal and,
therefore, no allowance for doubtful accounts is considered necessary by
management.
F-17
HC INNOVATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2006 and 2005
- --------------------------------------------------------------------------------
ACCOUNTS RECEIVABLE (CONTINUED)
On a monthly basis, management reviews the accounts receivable aging by
payer and rejected claims to determine which receivables, if any are to be
written off. For the years ended December 31, 2006 and 2005 the bad debt
direct write-off's totaled $47,818 and $54,000, respectively.
Management has provided for uncollectible accounts receivable through
direct write- offs and such write-offs have been within management's
expectations. Historical experience indicates that after such write-offs
have been made, potential collection losses are considered minimal and,
therefore, no allowance for doubtful accounts is considered necessary by
management.
5. FIXED ASSETS
At December 31, 2006 and 2005, fixed assets consist of:
2006 2005
---- ----
Medical and office equipment $ 71,866 $ 29,011
Furniture and fixtures 46,296 19,110
Computer equipment 313,890 259,848
Leasehold improvements 21,617 17,491
--------- ---------
453,669 325,460
Less: accumulated depreciation and
amortization (161,234) (90,731)
--------- ---------
$ 292,435 $ 234,729
========= =========
Depreciation and amortization expense related to fixed assets totaled
$70,503 and $49,467 for the years ended December 31, 2006 and 2005,
respectively.
F-18
HC INNOVATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2006 and 2005
- --------------------------------------------------------------------------------
6. CAPITALIZED SOFTWARE DEVELOPMENT COSTS
Capitalized software development costs as of December 31, 2006 and 2005 are
summarized as follows:
2006 2005
---- ----
Capitalized software development costs $ 1,486,584 $ 733,596
Less: accumulated amortization (175,857) (46,798)
----------- -----------
$ 1,310,727 $ 686,798
=========== ===========
Amortization expense related to capitalized software development costs for
the years ended December 31, 2006 and 2005 totaled $129,059 and $35,048,
respectively.
7. DEFERRED REVENUE
In February 2006, the Company entered into a provider group agreement with
Aetna Health, Inc. ("Aetna"). Aetna offers, issues and administers plans
that provide access to health care services to members and contracts with
certain health care providers and facilities to provide access to the
services. NP Care of New Jersey provides covered services to members
utilizing APRN's. NP Care of New Jersey charges $350 per program
participant per month. For the year ended December 31, 2006, $18,900 of
revenues have been recognized from Aetna and $31,100 remains in deferred
revenue, which is expected to be earned in 2007.
F-19
HC INNOVATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2006 and 2005
- --------------------------------------------------------------------------------
8. LINES OF CREDIT
At December 31, 2006 and 2005, the Company had the following line-of-credit
facilities outstanding:
2006 2005
---- ----
Revolving line-of-credit dated January 29, 2003
with interest at the rate of prime plus
1% (9.25% at December 31, 2006). The
amount outstanding is due on demand and is
collateralized by the assets of ECI. $ 50,000 $ 50,000
Revolving line-of-credit dated February 23, 2004 with interest at
prime plus 1.75% (10% at December 31, 2006). The amount
outstanding is due on demand and expires on February 23, 2009. The
line-of-credit is secured by the personal assets of the
managing member of NP Care, LLC. $150,000 $150,000
Revolving line-of-credit-other -- $ 10,122
-------- --------
$200,000 $210,122
======== ========
F-20
HC INNOVATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2006 and 2005
- --------------------------------------------------------------------------------
9. NOTES PAYABLE TO VENDORS
Notes Payable to vendors Consists of the following at December 31, 2006 and 2005
2006 2005
On December 31, 2005, the Company entered into a note payable agreement with a
vendor for the outstanding balance greater than 90 days. Payments commenced on
January 31, 2006 and were due in 12 monthly installments of $16,673 including
interest at a fixed rate of 11%. $ - $ 200,077
Note payable to finance workers compensation insurance effective December 20,
2005. The note was payable in monthly installments of $4,343 including interest
at a fixed rate of 7.75%, through September 4, 2006. - 34,745
Note payable to finance insurance premiums effective August 15, 2005. The note
was payable in monthly installments of $4,453 including interest at a fixed rate
of 7.25%, through May 1, 2006. - 22,265
Note payable to finance workers compensation insurance effective September 13,
2005. The note was payable in monthly installments of $1,789 including interest
at a fixed rate of 7.5%, through May 1, 2006. - 8,946
Note payable to finance liability insurance premiums effective September 30,
2005. The note was payable in monthly installments of $1,430 including interest
at a fixed rate of 7.5%, through June 12, 2006. - 8,582
Note payable to finance insurance premiums effective August 11, 2006. The note
is payable in monthly installments of $4,857 including interest at a fixed rate
of 7.67%, through July 2007. 28,500 -
Note payable to finance workers compensation insurance effective September 13,
2006. The note is payable in monthly installments of $1,670 including interest
at a fixed rate of 8.67%, through October 2007. 8,185 -
Note payable to finance liability insurance premiums effective September 30,
2006. The note is payable in monthly installments of $1,299 including interest
at a fixed rate of 9.25%, through September 2007. 8,156 -
------- ---------
$ 44,841 $ 274,615
======== =========
F-21
HC INNOVATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2006 and 2005
- --------------------------------------------------------------------------------
10. DEPOSIT - MEMORANDUM OF UNDERSTANDING
During December 2005, the Company entered into a Memorandum of Understanding
("MOU") with BioScrip, Inc. ("BioScrip"). BioScrip provided a $250,000
refundable advance towards the purchase of $1,500,000 worth of HCI common stock.
BioScrip did not purchase the common stock and the MOU was terminated due to
disputes arising between the Company and BioScrip regarding the return of the
advance. Under the terms of a settlement agreement dated October 11, 2006,
BioScrip and HCI agreed to settle the amount owed to BioScrip for a single
payment of $125,000 in full and final settlement and the Company made this
payment on November 15, 2006.
11. CAPITAL LEASE OBLIGATIONS
The Company leases certain fixed assets in accordance with the terms of
capitalized lease obligations. The leases require monthly interest and principal
payments ranging from $546 to $2,522, expiring on various dates through June
2011. The net book value of the capitalized equipment at December 31, 2006 and
2005 was $288,056 and $203,798; respectively. The future minimum lease payments
and the present value of the payments at December 31, 2006 are as follows:
YEARS ENDING DECEMBER 31,
-------------------------
2007 $ 123,178
2008 110,700
2009 53,189
2010 6,421
2011 1,023
---------
Total minimum lease payments 294,511
Less: amount representing interest (49,036)
---------
Present value of net minimum
lease payments 245,475
Less: current portion of principal (93,942)
---------
$ 151,533
=========
F-22
HC INNOVATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2006 and 2005
- --------------------------------------------------------------------------------
12. DEBT
NOTE PAYABLE
The Company has a Small Business Administration loan dated September 4,
2003. The original principal balance of the loan was $150,000 and it is
intended to be used to fund general operations. The loan agreement provides
for sixty monthly principal and interest installments of $2,924 and bears
interest at 6.25% per annum. The loan matures on October 1, 2008 and is
secured by the personal residence of the Company's President. At December
31, 2006 and 2005, the principal balance due on the loan was $60,588 and
$90,788, respectively. The maturities of this note at December 31, 2006 are
as follows:
YEARS ENDING DECEMBER 31,
-------------------------
2007 $ 31,139
2008 29,449
--------
60,588
Less: current portion (31,139)
--------
$ 29,449
========
NOTES PAYABLE - STOCKHOLDER
The Company entered into two promissory notes payable with a stockholder.
The first promissory note, dated February 20, 2006 has an original
principal balance of $125,000 and is intended as a bridge loan until
further financing is secured by the Company. Interest accrues on the note
at 10% and was originally payable on demand or before May 20, 2006. The
term was extended through December 31, 2007. The remaining balance and
accrued interest on this note as of December 31, 2006 is $125,000 and
$11,182, respectively.
The second promissory note dated March 15, 2006 had an original principal
balance of $100,000 and was intended as a bridge loan until further
financing was secured by the Company. Interest accrued on the note at 10%
and was originally payable on demand or before June 15, 2006. On October
25, 2006 this note and its related accrued interest totaling $6,400 were
satisfied in full by issuing 106,400 shares of common stock and warrants
under the terms of the Company's private placement offering (Note 15).
F-23
HC INNOVATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2006 and 2005
- --------------------------------------------------------------------------------
12. DEBT (CONTINUED)
NOTE PAYABLE - RELATED PARTY
The Company entered into a loan agreement with The Rubin Family Irrevocable
Stock Trust ("Lender"), a shareholder of HCI, on December 27, 2004,
whereby, among other provisions, the Lender extended a line of credit
facility to the Company for general company purposes. The Lender also
received warrants to purchase 5,166,711 shares of common stock of the
Company. The line of credit was in the original principal amount not to
exceed $500,000. The line of credit was to begin accruing interest on
December 25, 2007 at the then prime rate and interest in arrears only was
to be payable monthly effective December 25, 2007. On December 31, 2005,
there was $500,000 outstanding on the line of credit. In June 2006, the
warrants for 5,166,711 shares (Note 15) of the Company's common stock were
exercised by the Lender realizing $500,000. This $500,000 was applied to
the outstanding note payable due to the Lender in the amount of $500,000 in
a non-cash transaction.
F-24
HC INNOVATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2006 and 2005
- --------------------------------------------------------------------------------
12. DEBT (CONTINUED)
NOTES PAYABLE - CHAIRMAN
During 2006, the Company entered into four promissory notes payable with
the Company's Chairman and his son which are intended as bridge loans until
HCI financing is secured.
On August 31, 2006, the Company entered into a promissory note with
an original due date of September 30, 2006. The original due date
was extended through December 31, 2007. Interest accrues at the rate
of 10% per annum. $ 90,000
On September 9, 2006, the Company entered into a promissory note
with an original due date of October 7, 2006. The original due date
was extended through December 31, 2007. Interest accrues at the rate
of 10% per annum. 50,000
On September 28, 2006, the Company entered into a promissory note
with an original due date of October 27, 2006. The original due date
was extended through December 31, 2007. Interest accrues at the rate
of 10% per annum. 95,000
On November 27, 2006, the Company entered into a promissory note
with the Chairman's son with an original due date of January 31,
2007. The original due date was extended through April 30, 2007.
Interest accrues at the rate of 10% per annum. 50,000
--------
$285,000
========
Accrued interest on the notes payable to the Chairman and his son as of
December 31, 2006 was $7,434.
F-25
HC INNOVATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2006 and 2005
- --------------------------------------------------------------------------------
12. DEBT (CONTINUED)
NOTES PAYABLE - CHAIRMAN (CONTINUED)
The maturities of the Company's notes payable at December 31, 2006 are as
follows:
CALENDAR YEARS ENDING DECEMBER 31,
----------------------------------
2007 $ 441,139
2008 29,449
---------
470,588
Less current portion (441,139)
---------
$ 29,449
=========
CONVERTIBLE DEBENTURES
During 2005, the Company issued convertible debentures to private
accredited investors. The total principal amount of the debentures was
$1,257,985 convertible into 1,257,985 shares of the Company's common stock.
The conversion price of the debentures is equal to 50% of the market price
of the HCI's common stock on the day prior to conversion. In no
circumstances will the conversion price be less than $.40 per share.
The term of the debentures is 18 months from the date of issuance. They do
not bear interest. In lieu of interest, the Company issued 1,257,985 shares
of its common stock to the holders of the convertible debentures which was
treated as a discount on the debentures to be amortized as interest expense
over the life of the debentures. The discount was established as the fair
value of the common stock of $202,678, which was determined using fair
value interest rates for similar types of underlying instruments. The
unamortized balance of the discount at December 31, 2006 and 2005 was
$35,429 and $170,547, respectively. Amortization of the discount for the
years ended December 31, 2006 and 2005 was $135,118 and $32,131,
respectively and is included in interest expense in the accompanying
statements of operations.
HCI incurred $76,858 in legal, financing and other costs in issuing these
debentures. The costs have been deferred and are being amortized over 18
months. The unamortized balance of deferred issuance costs at December 31,
2006 and 2005 was $8,541 and $59,779, respectively. Amortization expense
relating to deferred issuance costs totaled $51,238 and $17,079 for the
years ended December 31, 2006 and 2005, respectively.
F-26
HC INNOVATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2006 and 2005
- --------------------------------------------------------------------------------
12. DEBT (CONTINUED)
CONVERTIBLE DEBENTURES (CONTINUED)
On April 17, 2006, the Company closed on a new convertible debenture note
in the amount of $500,000. The terms of this note, with an existing
stockholder, are identical to the 2005 convertible debentures. The total
principal amount of the debentures of $500,000 is convertible into 500,000
shares of the Company's common stock. The conversion price of the
debentures is equal to 50% of the market price of HCI's common stock on the
day prior to conversion. In no circumstances will the conversion price be
less than $.40 per share. The term of the debentures is 18 months from the
date of issuance. They do not bear interest. In lieu of interest, the
Company issued 500,000 shares of its common stock to the holders of the
convertible debentures which were treated as a discount on the debentures
to be amortized as interest expense over the life of the debentures. The
discount was established as the fair value of the common stock of $141,348,
which was determined using fair value interest rates for similar types of
underlying instruments. The unamortized balance of the discount at December
31, 2006 was $101,615. Amortization of the discount for the year ended
December 31, 2006 was $39,733 and is included in interest expense in the
accompanying statements of operations.
HCI incurred $60,045 in legal, financing and other costs issuing these
debentures. The costs have been deferred and are being amortized over 18
months. The unamortized balance of deferred issuance costs at December 31,
2006 was $42,864. Amortization expense relating to the deferred issuance
costs totaled $17,181 for the year ended December 31, 2006.
F-27
HC INNOVATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2006 and 2005
- --------------------------------------------------------------------------------
13. NET PATIENT SERVICE REVENUE AND BILLING FEES
Revenue from nurse practitioner services is substantially collected through
billings to a patient's respective insurance carrier, health maintenance
organization, Medicare and Medicaid. Payments from these sources are
generally based on prospectively determined rates that vary according to a
classification system based on clinical, diagnostic and other factors and
are substantially below established rates.
Net patient service revenue consists of the following components for the
years ended December 31, 2006 and 2005:
2006 2005
---- ----
Gross patient service revenue $ 7,867,360 $ 4,824,558
Less: provision for contractual allowances (1,701,268) (1,937,060)
------------ -----------
Net patient service revenue $ 6,166,092 $ 2,887,498
============ ===========
14. INCOME TAXES
As of December 31, 2006 and 2005, the Company had net operating loss
carryforwards for federal and state income tax purposes of approximately
$4,000,000 and $1,400,000, respectively, which is available to offset
future taxable income, if any, through 2026. The available net operating
loss carryforwards resulted in a deferred tax asset of approximately
$1,600,000 and $560,000 at December 31, 2006 and 2005, respectively.
Management has established a 100% valuation allowance against the deferred
tax asset created by the available net operating loss carryforwards at
December 31, 2006 and 2005. In assessing the need for a valuation
allowance, the Company estimates future taxable income, considering the
feasibility of ongoing tax planning strategies and the realizability of tax
loss carryforwards. Valuation allowances related to deferred tax assets can
be impacted by changes to tax laws, changes to statutory tax rates and
future taxable income levels. In the event the Company were to determine
that it would be able to realize its deferred tax assets in the future it
would decrease the recorded valuation allowance through an increase to
income in the period in which that determination is made. The valuation
allowance increased approximately $1,040,000 and $400,000 during the years
ended December 31, 2006 and 2005, respectively.
F-28
HC INNOVATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2006 and 2005
- --------------------------------------------------------------------------------
14. INCOME TAXES (CONTINUED)
The provision for (benefit from) income taxes reconciles to the statutory
federal rate as follows:
DECEMBER 31,
----------------
2006 2005
----------------
Statutory federal tax rate (34.00)% (34.00)%
State income tax, net of federal benefit (4.26) (4.72)
Permanent differences 18.78 0.15
Deferred tax state rate change (4.98) 8.96
Deferred tax asset valuation allowance 24.46 29.61
----- -----
Effective federal tax rate - % - %
===== =====
15. STOCKHOLDERS' EQUITY (DEFICIT)
STOCK SPLIT
During 2005, the Company's Board of Directors ("Board") approved an
increase in the authorized shares of voting common stock from 100,000
shares to 70,000,000 shares and approved a 537.41528-to-1 stock split. The
effect of the stock split has been recognized in the stockholders' equity
(deficit) section of the consolidated balance sheet and in all share data
in the accompanying consolidated financial statements and notes to
consolidated financial statements.
PRIVATE PLACEMENT OFFERING
On September 25, 2006, HCI issued a Private Placement Offering Memorandum
("PPM") for 2,000,000 shares of common stock at $1.00 per share and
warrants to purchase 2,000,000 shares of common stock in the future. The
offer to purchase common stock expires on February 28, 2007 (Note 20). In
December, 2006 the Company increased the total offering to 3,200,000 shares
of common stock at $1.00 per share and warrants to purchase 3,200,000
shares of common stock in the future. The warrants have a term of two
years. The exercise price is $1.25 per share. The warrants shall be
redeemable at $.05 per warrant share contingent upon HCI's common stock
trading at a closing price of at least $3.50 per share for twenty
consecutive days.
As of December 31, 2006, 1,956,400 shares of common stock and 1,956,400
warrants of HCI common stock have been issued through this PPM.
F-29
HC INNOVATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2006 and 2005
- --------------------------------------------------------------------------------
15. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
RESTRICTED STOCK SALE TO COMPANY EMPLOYEES
In June, 2006, the Company sold a total of 142,669 shares of restricted
common stock to several of its key managers for aggregate net proceeds of
$107,002.
WARRANTS
A summary of warrant activity, with the effect of the 537.41528-to-1 stock
split retroactively stated to January 1, 2005 is as follows:
Weighted Weighted
Exercise Average Average
Price per Exercise Remaining Life
Warrants Warrant Price (Years)
-------- ------- ----- -------
Outstanding at 5,166,711 $ .09677 $ .09677 8.0
January 1, 2005
Issued -- -- -- --
Exercised -- -- -- --
Expired -- -- -- --
--------------------------------------------
Outstanding at 5,166,711 $ .09677 $ .09677 7.0
December 31, 2005
Issued 1,956,400 $1.25000 $1.25000 2.0
Exercised (5,166,711) $ .09677 -- --
Expired -- -- -- --
--------------------------------------------
Outstanding at
December 31, 2006 1,956,400 $1.25000 $1.25000 2.0
============================================
As disclosed in Note 12, warrants for 5,166,711 shares of the Company's
common stock were exercised by a shareholder with the Company.
F-30
HC INNOVATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2006 and 2005
- --------------------------------------------------------------------------------
16. BENEFIT PLANS
The Company established a 401(k) retirement plan on February 1, 2005.
Employees 21 years or older are eligible the first day of the quarter upon
completing three months of employment. The maximum deferral under the plan
is 100% of total pay, not to exceed the elective annual deferral limits of
the Internal Revenue Code. At the Company's discretion, there may be an
employer matching contribution which is not to exceed the employee's
deferral amount. Employer contributions are generally vested after 1 year
of service with the Company. During 2006 and 2005, 2% of employees'
compensation was matched for a total employer retirement plan contribution
of $44,084 and $25,263, respectively.
17. BUSINESS SEGMENTS
The Company's operations by business segment for the years ended December
31, 2006 and 2005 were as follows:
Professional Disease
2006 Services Management Total
- ---- -------- ---------- -----
Net Sales $4,386,357 $ 1,779,735 $ 6,166,092
Operating Profit/(Loss) 186,998 (3,288,219) (3,101,221)
Identifiable Assets 423,092 1,921,371 2,344,463
Professional Disease
2005 Services Management Total
- ---- -------- ---------- -----
Net Sales $2,617,498 $ 270,000 $ 2,887,498
Operating Profit/(Loss) 18,813 (1,320,039) (1,301,226)
Identifiable Assets 336,380 1,491,950 1,828,330
F-31
HC INNOVATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2006 and 2005
- --------------------------------------------------------------------------------
18. COMMITMENTS
CONSULTING AGREEMENTS
During July 2005, the Company entered into a Consulting Agreement with
Strategic Growth International, Inc. ("SGI"), whereby SGI advised and
assisted HCI in its efforts to raise capital and secure a public shell.
During September 2006, the Company amended and restated the Consulting
Agreement with SGI. Under the new Consulting Agreement, SGI will assist HCI
in determining a strategy to raise funds in the aggregate amount of
$1,000,000 through a private placement of debt, equity or convertible
securities. HCI has agreed to pay an initial retainer of $50,000 for these
services from the future gross proceeds of any offering raised. The Company
also agrees to pay SGI a total consulting fee of 10% of the future gross
proceeds raised for the offering excluding the initial $50,000 retainer.
The term of this agreement is for six months and it expires March 25, 2007.
Through December 31, 2006, the Company raised $1,850,000 through this
arrangement. A consulting fee of $185,000 was charged to equity for the
year ended December 31, 2006 and $50,000 was charged to deferred financing
charges for the year ended December 31, 2006. Subsequent to year end, the
Company raised an additional $1,300,000 and incurred fees payable to SGI in
the amount of $130,000 in consulting fees.
F-32
HC INNOVATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2006 and 2005
- --------------------------------------------------------------------------------
18. COMMITMENTS (CONTINUED)
BUSINESS ADVISOR AGREEMENT
In September 2005, the Company entered into an agreement ("Advisor
Agreement") with an outside advisor whereby the advisor has been engaged to
provide advice to the Company as the Chairperson of its Business Advisory
Board, assist in the development of the Business Advisory Board, and
provide other services on behalf of the Company.
The Advisor was issued 100,000 shares of the Company's common stock in
connection with the Advisor Agreement. The fair value of the shares on the
date of issuance was $40,000 or $.40 per share.
The Advisor can also be issued contingent warrants to purchase up to
360,000 common shares of the Company at an exercise price of $1.25 per
share upon the attainment of specified growth goals of the Business
Advisory Board. Beginning in calendar year 2006 and through calendar year
2008, 120,000 contingent warrants may be earned each year commensurate with
achieving company growth in gross revenues to $18,000,000 in 2007 and
$28,000,000 in 2008.
OPERATING LEASES
The Company is obligated under various operating leases for the rental of
office space and office equipment. Future minimum rental commitments with a
remaining term in excess of one year as of December 31, 2006 are as
follows:
YEARS ENDING DECEMBER 31,
-------------------------
2007 $255,785
2008 243,449
2009 226,772
2010 35,597
2011 23,753
----------
Total minimum lease payments $785,356
==========
Rent expense for the years ended December 31, 2006 and 2005 was $155,133
and $85,027, respectively.
F-33
HC INNOVATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2006 and 2005
- --------------------------------------------------------------------------------
18. COMMITMENTS (CONTINUED)
ALERE MEDICAL AGREEMENT
In October 2006, HCI entered into a Disease Management Services Agreement
with Alere Medical, Inc. ("Alere"). Alere provides disease management
tools, services and systems to Payers which are designed to assist with and
improve management of health care outcomes for patients. Alere has
contracted with Tufts Health Plan ("Tufts") to provide disease management
services in Massachusetts. Tufts provides various commercial and Medicare
Health Plans to members. ECI will provide care management services to Tufts
program participants in Massachusetts and Alere will pay to ECI $295 per
enrolled member per month commencing February 1, 2007.
OHIO NURSE PRACTITIONERS, INC.
Effective November 6, 2006, NP Care of Ohio, LLC ("NP Ohio") entered into
an agreement with Ohio Nurse Practitioners, Inc. ("ONP"). ONP is in the
business of providing advance practice registered nursing services to
residents of nursing homes. ONP has agreed to terminate its existing
service agreements with its customers and NP Ohio has agreed to hire the
shareholders of ONP as employees. In addition, ONP has agreed to provide
consulting services commencing on the effective date and ending on
September 30, 2009. In consideration of ONP's consulting services NP Ohio
has agreed to pay ONP a maximum consulting fee of $225,000 with payments
due as earned in accordance with the terms of the agreement. The Company
has recognized consulting expenses in the amount of $125,000 for the year
ended December 31, 2006 in connection with the services provided under the
agreement.
F-34
HC INNOVATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2006 and 2005
- --------------------------------------------------------------------------------
19. RISKS AND UNCERTAINTIES
PATIENT SERVICE REVENUE
Approximately 61% and 80% of net patient services revenue in 2006 and 2005,
respectively, was derived under federal (Medicare) and state (Medicaid)
third-party reimbursement programs. These revenues are based, in part, on
cost reimbursement principles and are subject to audit and retroactive
adjustment by the respective third-party fiscal intermediaries. The general
trend in the healthcare industry is lower private pay utilization due to
liberal asset transfer rules and the degree of financial planning that
takes place by the general public. The Company's ability to maintain the
current level of private pay utilization and thereby reduce reliance on
third-party reimbursement is uncertain due to the economic and regulatory
environment in which the Company operates.
MALPRACTICE INSURANCE
The Company maintains malpractice insurance coverage on an occurrence
basis. It is the intention of the Company to maintain such coverage on the
occurrence basis in ensuing years. During the years ended December 31, 2006
and 2005, no known malpractice claims have been asserted against the
Company which, either individually or in the aggregate, are in excess of
insurance coverage.
F-35
HC INNOVATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2006 and 2005
- --------------------------------------------------------------------------------
20. SUBSEQUENT EVENTS
DEBT CONVERSION DURING THE FIRST QUARTER OF 2007
During the first quarter of 2007, $1,707,985 of the outstanding $1,757,985
convertible debentures - (Note 12) were converted into common stock at a
ratio of one share per $1 dollar of debt resulting in a total issuance of
common stock of 1,707,985 shares during the quarter. The remaining $50,000
of convertible debt will mature on April 6, 2007.
WARRANTS
During the first quarter of 2007 and in connection with the September 2006
PPM (Note 15), the Company requested that 29 investors exercise their
respective warrants and in return shall receive an additional two year
warrant ("2007 Warrant") at an exercise price of $3.00 for every two
warrants exercised from the September 2006 PPM. As of March 29, 2007, the
Company received $1,187,500 upon the exercise of 950,000 of the September
PPM warrants and have issued warrants for an additional 475,000 shares of
the Company's common stock to five (5) September Offering investors. The
investors represented in writing that they were accredited investors and
acquired the securities for their own accounts. A legend was placed on the
securities stating that such securities have not been registered under the
Securities Act and cannot be sold or otherwise transferred without an
effective registration statement covering such shares or an the
availability of an exemption from the registration requirements of the
Securities Act.
CONTRACT FOR THE STATE OF ILLINOIS DEPT. OF HEALTHCARE AND FAMILY SERVICES
On March 6, 2007, the Company entered into a three year contract with
McKesson Corporation ("McKesson") to provide care management to over 8,000
Medicaid recipients living in nursing homes in Illinois. Care will be
provided through the Company's subsidiary, Enhanced Care Initiatives, Inc.
(ECI) and its affiliate, NP Care of Illinois, LLC under a Sub-Contract
pursuant to the requirements of McKesson's agreement for a disease
management program with the Illinois Department of Healthcare and Family
Services. Services include providing programs and systems for assisting
physicians in the management of patients who are frail or who face
medically complex conditions or mental impairment. Nurse practitioners will
be on site to provide hands-on care management coordination and discharge
F-36
HC INNOVATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2006 and 2005
- --------------------------------------------------------------------------------
20. SUBSEQUENT EVENTS (CONTINUED)
CONTRACT FOR THE STATE OF ILLINOIS DEPT. OF HEALTHCARE AND FAMILY SERVICES
(CONTINUED)
planning in collaboration with patients' physicians and nursing home
medical directors.
COMPLETION OF THE SEPTEMBER PRIVATE PLACEMENT
During the first quarter of 2007, the Company completed the PPM (Note 15)
initiated in September of 2006 by raising an additional $1,300,000.
F-37
HC INNOVATIONS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheet
- ------------------------------------------------------------------------------------------------------------------------------------
MARCH 31, 2007 DECEMBER 31, 2006
(UNAUDITED) (AUDITED)
Assets
Current assets:
Cash and cash equivalents $ 948,084 $ 151,534
Accounts receivable, net of contractual allowances 737,337 330,822
Prepaid expenses 310,782 142,274
----------- -----------
Total current assets 1,996,203 624,630
Fixed assets, net 343,925 292,435
Capitalized software development costs, net 1,525,914 1,310,727
Deferred issuance costs, net -- 51,405
Security deposits and other, net 69,509 65,266
----------- -----------
Total assets $ 3,935,551 $ 2,344,463
=========== ===========
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Lines of credit $ 200,000 $ 200,000
Current portion of notes payable 462,723 441,139
Current portion of capital lease obligations 105,584 93,942
Notes payable to vendors 21,530 44,841
Convertible debentures, net of discount 50,000 1,222,556
Accounts payable 1,806,921 1,498,216
Accrued liabilities 511,178 368,919
Deferred revenue 115,870 31,100
----------- -----------
Total current liabilities 3,273,806 3,900,713
Notes payable, net of current portion -- 29,449
Capital lease obligations, net of current portion 167,425 151,533
Convertible debentures, net of discount and current portion -- 398,385
----------- -----------
Total liabilities 3,441,231 4,480,080
----------- -----------
Stockholders' equity (deficit):
Common stock, $.001 par value, 100,000,000 shares authorized 35,971 30,956
Preferred stock, $.001 par value, 5,000,000 shares authorized -- --
Stock subscriptions receivable (21,671) (21,671)
Additional paid-in capital 7,188,985 3,102,062
Deficit (6,708,965) (5,246,964)
----------- -----------
Total stockholders' equity (deficit) 494,320 (2,135,617)
----------- -----------
Total liabilities and stockholders' equity (deficit) $ 3,935,551 $ 2,344,463
=========== ===========
The accompanying notes are an integral part of these
Consolidated Financial Statements
F-38
HC INNOVATIONS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
- --------------------------------------------------------------------------------------
THREE MONTHS ENDED
March 31, 2007 MARCH 31, 2006
(UNAUDITED) (UNAUDITED)
Net revenues $ 2,197,971 $ 1,316,835
------------ ------------
Cost of services 1,738,709 892,999
Selling, general and administrative expenses 1,634,250 795,204
Depreciation and amortization 122,884 55,364
------------ ------------
3,495,843 1,743,567
------------ ------------
Loss from operations (1,297,872) (426,732)
------------ ------------
Other income (expense)
Interest income 3,223 787
Other expense (506) -
Interest expense (166,846) (54,745)
------------ ------------
(164,129) (53,958)
------------ ------------
Loss before provision for income taxes (1,462,001) (480,690)
Provision for income taxes - -
------------ ------------
Net loss $ (1,462,001) $ (480,690)
============ ============
Basic and diluted net loss per share $ (0.04) $ (0.02)
============ ============
Weighted average common shares outstanding 33,919,840 23,868,323
============ ============
The accompanying notes are an integral part of these
Consolidated Financial Statements
F-39
HC INNOVATIONS, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Changes in Stockholders' Equity (Deficit)
(Unaudited)
- -----------------------------------------------------------------------------------------------------------------------------------
Common Stock Total
-------------------- Stockholders'
Shares Paid-In Subscriptions Equity
Issued Amount Capital Receivable Deficit (Deficit)
---------------------------------------------------------------------------
Balance, January 1, 2006 23,868,323 $ 238,684 $ 421,767 $(21,671) $(1,996,299) $(1,357,519)
Common stock issued in connection with
convertible debenture - April 17, 2006 500,000 5,000 136,348 - - 141,348
Reverse acquisition recapitalization adjustment 328,637 (218,988) 218,988 - - -
Issuance of common stock - June 23, 2006 142,669 143 106,859 - - 107,002
Common stock issued in connection with
exercise of warrants - June 28, 2006 5,166,711 5,167 494,833 - - 500,000
Common stock (106,400 shares) to be issued and
warrants issued in satisfaction of note payable
and accrued interest - October 25, 2006 - - 106,400 - - 106,400
Common stock and warrants issued in connection
with private placement net of issuance costs 950,000 950 829,821 - - 830,771
Common stock (900,000 shares) to be issued and
warrants issued in connection with private
placement, net of issuance costs - - 787,046 - - 787,046
Net loss - - - - (3,250,665) (3,250,665)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2006 30,956,340 $ 30,956 $3,102,062 $(21,671) $(5,246,964) $(2,135,617)
Common stock and warrants issued in connection with
private placement, net of issuance costs (Note 9) 1,350,000 1,350 1,168,650 - - 1,170,000
Common stock and warrants issued in connection with
exercise of warrants, net of issuance costs (Note 9) 950,000 950 1,056,643 - - 1,057,593
Common stock issued in connection with
conversion of debentures (Note 7) 1,708,000 1,708 1,706,277 - - 1,707,985
Issuance of common stock (Note 9) 1,006,400 1,007 (1,007) -
Issuance of warrants in connection with
consulting services (Note 11) - - 156,360 - - 156,360
Net loss - - - - (1,462,001) (1,462,001)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 2007 35,970,740 $ 35,971 $7,188,985 $(21,671) $(6,708,965) $ 494,320
===================================================================================================================================
The accompanying notes are an integral part of these
Consolidated Financial Statements
F-40
HC INNOVATIONS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
- --------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31, 2007 MARCH 31, 2006
-------------- --------------
Cash flows from operating activities:
Net loss $(1,462,001) $ (480,690)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 122,884 55,364
Amortization of discount - convertible debentures 137,044 33,779
Consulting services expense - warrants (Notes 9 & 11) 52,120 -
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable (406,515) (265,901)
Prepaid expenses (64,268) 8,331
Security deposits and other (4,647) (18,419)
Increase (decrease) in:
Notes payable to vendors 59,317 (74,668)
Accounts payable 226,077 240,749
Accrued liabilities 142,259 108,447
Deferred revenue 84,770 -
----------- -----------
Deposits - -
----------- -----------
Net cash used in operating activities (1,112,960) (393,008)
----------- -----------
Cash flow from investing activities:
Purchases of fixed assets, net (19,357) (19,775)
Expenditures for capitalized software development costs (262,588) (34,415)
----------- -----------
Net cash used in investing activities (281,945) (54,190)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of convertible debentures - -
Proceeds from issuance of common stock, net 2,227,593 -
Proceeds from notes payable - 225,000
Retirement of common stock - -
Deferred issuance costs paid - (10,046)
Payments on lines of credit, net - -
Payments on notes payable (7,865) (7,389)
Payments on capital lease obligations (28,273) (19,290)
----------- -----------
Net cash provided by financing activities 2,191,455 188,275
----------- -----------
Net increase (decrease) in cash and cash equivalents 796,550 (258,923)
Cash and cash equivalents - beginning of period 151,534 435,375
----------- -----------
Cash and cash equivalents - end of period $ 948,084 $ 176,452
=========== ===========
Supplemental cash flow information:
Cash paid during the year for:
Interest $ 37,831 $ -
=========== ===========
Noncash investing and financing activities:
Common stock issued through 537.41528-to-1 stock split $ - $ -
=========== ===========
Common stock issued in connection with exercise of warrants
and satisfaction of note payable - related party $ - $ -
=========== ===========
Discount on convertible debentures $ - $ -
=========== ===========
Deferred issuance costs paid with common stock $ - $ -
=========== ===========
Computer equipment acquired through capital lease $ 55,807 $ -
=========== ===========
Issuance of warrants as prepaid consulting fees (Notes 9 & 11) $ 156,360 $ -
=========== ===========
Issuance of warrants as noncash paid-in capital (Note 9) $ 195,900 $ -
=========== ===========
Common stock issued in connection with capital raising (Note 9) $ 65,000 $ -
=========== ===========
Capitalized software acquired through capital lease $ - $ 114,718
=========== ===========
Common stock issued in connection with conversion
of convertible debentures $ 1,707,985 $ -
=========== ===========
The accompanying notes are an integral part of these
Consolidated Financial Statements
F-41
HC INNOVATIONS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
- --------------------------------------------------------------------------------
1. NATURE OF OPERATIONS
By Stock Acquisition Agreement dated May 11, 2006, Ayre Holdings, Inc.
("Ayre" or "the Company"), a Delaware corporation, acquired 100% of the
issued and outstanding shares of HC Innovations, Inc., in exchange for
24,368,323 shares of common stock of the Company representing approximately
99% of the total issued and outstanding shares of the Company at the time.
Prior to the consummation of the acquisition, Ayre, a non-reporting pink
sheet company and public shell, effectuated a reverse stock split whereby
the then current 793,000 issued and outstanding shares of common stock were
reverse split into 328,637 shares of common stock at the rate of .41442.
The post-acquisition entity is accounted for as a recapitalization of HC
Innovations, Inc. using accounting principles applicable to reverse
acquisitions with HC Innovations, Inc. being treated as the accounting
parent (acquirer) and Ayre Holdings, Inc., the legal parent, being treated
as the accounting subsidiary (acquiree). HC Innovations, Inc. is regarded
as the predecessor entity. In accordance with the provisions governing the
accounting for reverse acquisitions (Note 2), the historical figures
presented are those of HC Innovations, Inc. Upon consummation of the
acquisition on June 9, 2006, Ayre changed its name to HC Innovations, Inc.
("HCI").
HCI and subsidiaries (the "Company") is a specialty care management company
comprised of separate divisions each with a specific focus and
intervention. The Company's mission is to identify subgroups of people with
high costs and disability and create and implement programs and
interventions that improve their health, resulting in dramatic reductions
in the cost of their care. The Company also develops and implements medical
management systems for the long term care industry.
Enhanced Care Initiatives, Inc. ("ECI"), a wholly owned subsidiary of HCI
was founded in 2002 and is the management company for all HCI entities. ECI
has three wholly owned subsidiaries operating in Tennessee, Texas and
Massachusetts. ECI markets its proprietary specialty care management
programs for the medically frail and other costly sub-populations to Health
Maintenance Organizations ("HMOs") and other managed care organizations
("MCOs") as well as state Medicaid departments.
F-42
HC INNOVATIONS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
- --------------------------------------------------------------------------------
1. NATURE OF OPERATIONS (CONTINUED)
NP Care, LLCs ("LLCs") are nursing home medical management systems. The
LLCs nurse practitioner program provides onsite medical care by an Advanced
Practice Registered Nurse ("APRN") under the oversight of the patient's
individual physician to residents in nursing homes and assisted living
facilities. The LLCs operate in the states of Connecticut, Florida, New
Jersey, Ohio and Tennessee and are managed exclusively by ECI.
GOING CONCERN / MANAGEMENT'S PLAN
As shown in the accompanying condensed consolidated financial statements,
the Company has sustained consolidated net losses for the quarters ended
March 31, 2007 and 2006 of approximately $1,462,000 and $481,000,
respectively. At March 31, 2007 and December 31, 2006, the Company had a
working capital deficiency of approximately $1,257,000 and $3,276,000,
respectively and accumulated deficits of approximately $6,709,000 and
$5,247,000, respectively. These factors raise substantial doubt about the
Company's ability to continue as a going concern. The condensed
consolidated financial statements do not include adjustments that might
result from the outcome of this uncertainty.
Management believes that the Company will be successful in its efforts to
adequately meet its capital needs and continue to grow its businesses. In
2005, the Company raised $1.258 million through the issuance of convertible
debenture notes to accredited investors. In 2006, the Company raised an
additional $500,000 through the issuance of convertible debenture notes to
accredited investors, $560,000 through the issuance of notes payable and
$1.617 million through the issuance of common stock issued in connection
with the Company's private placement offering. During the first quarter of
2007, the Company raised an additional $2.228 million through the issuance
of common stock and $1.708 million of the convertible debenture notes were
converted into common stock at a ratio of 1:1 resulting in the issuance of
an additional 1.708 million shares of common stock.
The 2007 and 2006 losses are largely a result of business development
expenses as well as significant investment in building infrastructure for
growing the Company's divisions, business and clinical systems and
programs. During 2006, the Company was successful in securing new contracts
with AETNA, (to manage its members in New Jersey long-term care
facilities); AMERIGROUP, (a contract for an initial 300 patients which
began in
F-43
HC INNOVATIONS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
- --------------------------------------------------------------------------------
1. NATURE OF OPERATIONS (CONTINUED)
GOING CONCERN / MANAGEMENT'S PLAN (CONTINUED)
June, 2006 in Houston, Texas generating revenue of approximately $1 million
in 2006); and the Company also entered into a Partnership Agreement with
MCKESSON to jointly market and respond to requests for proposals
(particularly state Medicaid opportunities) and will be integrating the
Company's high intensity programs with their call center support services.
In addition, the Company's contract with HealthSpring USA, LLC has been
expanded from the initial 300 members in Tennessee to approximately 500
members, representing an increase in annualized contract revenue potential
of approximately $.7 million. In October 2006, HCI entered into a Disease
Management Services Agreement with Alere Medical, Inc. ("Alere"). Alere
provides disease management tools, services and systems to payers which are
designed to assist with and improve management of health care outcomes for
patients. Alere has contracted with Tufts Health Plan ("Tufts") to provide
disease management services in Massachusetts. Tufts provides various
commercial and medicare health plans to members. ECI will provide care
management services to Tufts program participants in Massachusetts and
Alere will pay to ECI $295 per enrolled member per month commencing
February 1, 2007 with an annual contract revenue potential of approximately
$2.8 million.
2. RECAPITALIZATION
By Stock Acquisition Agreement dated May 11, 2006, Ayre Holdings, Inc.
("Ayre" or "the Company"), a Delaware corporation, acquired 100% of the
issued and outstanding shares of HC Innovations, Inc., in exchange for
24,368,323 shares of common stock of the Company representing approximately
99% of the total issued and outstanding shares of the Company at the time
which resulted in a change in control of the Company. Simultaneously, with
this exchange of shares, HC Innovations, Inc. paid $175,000 in cash to the
Ayre shareholders, which has been included in selling, general and
administrative expenses in the consolidated statements of operations for
the year ended December 31, 2006. Prior to the consummation of the
acquisition, Ayre, a non-reporting pink sheet company, effectuated a
reverse stock split whereby the then current 793,000 issued and outstanding
shares of common stock were reverse split into 328,637 shares of common
stock at the rate of .41442.
F-44
HC INNOVATIONS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
- --------------------------------------------------------------------------------
2. RECAPITALIZATION (CONTINUED)
The post-acquisition entity is accounted for as a recapitalization of HC
Innovations, Inc. using accounting principles applicable to reverse
acquisitions with HC Innovations, Inc. being treated as the accounting
parent (acquirer) and Ayre Holdings, Inc., the legal parent, being treated
as the accounting subsidiary (acquiree). Ayre Holdings, Inc. was an
inactive public shell with no net assets prior to the transaction.
Therefore, the value assigned to the common shares based on the fair value
of the net assets of Ayre Holdings, Inc. at the recapitalization date was
$-0- and the revenue, net loss and loss per share, assuming the transaction
had been completed on January 1, 2006, would be the same as reported.
HC Innovations, Inc. is regarded as the predecessor entity. In accordance
with the provisions governing the accounting for reverse acquisitions, the
historical figures presented are those of HC Innovations, Inc.
Prior to the consummation of the acquisition on June 9, 2006, Ayre
Holdings, Inc. had 328,637 shares of common stock outstanding. At the date
of the reverse acquisition merger, Ayre Holdings, Inc. was a public shell
and had no assets, no liabilities, and no net stockholders' equity.
Therefore, this was the only recapitalization adjustment that was recorded.
The key components of the reverse acquisition recapitalization adjustment
were as follows:
Common Stock
------------------------------------
Shares issued and Paid-in
Outstanding Amount Capital
--------------- ---------- ---------
Public company shares already
outstanding on date of merger
(June 9, 2006), par value $0.001 328,637 $ 328 $ (328)
Public company shares issued in a
1:1 exchange for private company
Shares, par value $0.001 24,368,323 24,368 (24,368)
Private company shares exchanged,
par value $0.01 (24,368,323) (243,684) 243,684
----------- --------- --------
Reverse acquisition recapitalization
adjustment, net 328,637 $(218,988) $218,988
=========== ========= ========
F-45
HC INNOVATIONS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
- --------------------------------------------------------------------------------
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
for interim financial information and in accordance with the instructions
to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals and
adjustments to previously established loss provisions) considered necessary
for a fair presentation have been included. Operating results for the three
months ended March 31, 2007 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2007. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's annual report on Form 10-KSB for the
fiscal year ended December 31, 2006.
The condensed consolidated financial statements include the accounts of HC
Innovations, Inc. and its wholly-owned, majority-owned and controlled
subsidiaries (which are referred to as the Company, unless the context
otherwise requires), as well as certain affiliated limited liability
companies, which are variable interest entities required to be
consolidated. The company consolidates all controlled subsidiaries, in
which control is effectuated through ownership of voting common stock or by
other means. All significant intercompany transactions have been eliminated
in consolidation.
In states where ECI is not permitted to directly own a medical operation
due to corporate practice of medicine laws in those states, it performs
only non-medical administrative and support services, does not represent to
the public or its clients that it offers medical services and does not
exercise influence or control over the practice of medicine. In those
states, ECI conducts business through Limited Liability Companies (LLCs)
that it controls, and it is these affiliated LLCs that employ Advanced
Practice Nurse Practitioners ("APNPs") who practice medicine. In such
states, ECI generally enters into exclusive long-term management services
agreements with the LLCs that operate the medical operations that restricts
the member(s) of the affiliated LLCs from transferring their ownership
interests in the affiliated LLCs and otherwise provides ECI or its designee
with a controlling voting or financial interest in the affiliated LLCs and
their operations.
F-46
HC INNOVATIONS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
- --------------------------------------------------------------------------------
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
BASIS OF PRESENTATION (CONTINUED)
The LLCs, which are required to be consolidated under Financial Accounting
Standards Board ("FASB") Interpretation No. 46, as revised ("FIN 46(R)"),
"CONSOLIDATION OF VARIABLE INTEREST ENTITIES", would also be consolidated
under the provisions of Emerging Issues Task Force ("EITF") No. 97-2,
"APPLICATION OF FASB STATEMENT NO. 94 AND APB OPINION NO. 16 TO PHYSICIAN
PRACTICE MANAGEMENT ENTITIES AND CERTAIN OTHER ENTITIES WITH CONTRACTUAL
MANAGEMENT ARRANGEMENTS." The LLCs have been determined to be variable
interest entities due to the existence of a call option under which ECI has
the ability to require the member(s) holding all of the voting equity
interests of the underlying LLCs to transfer their equity interests at any
time to any person specified by ECI and vote the member(s) interests as ECI
instructs. This call option agreement represents rights provided through a
variable interest other than the equity interest itself that caps the
returns that could be earned by the equity holders.
In addition the Company has an exclusive long-term management services
agreement with each of the LLC's and the member(s) of the LLCs which allows
the Company to direct all of the non-clinical activities of the LLCs,
retain all of the economic benefits, and assume all of the risks associated
with ownership of the LLCs. Due to these agreements, the Company has all of
the economic benefits and risks associated with the LLCs and the Company is
considered to be the primary beneficiary of the activities of the LLCs and
is required to consolidate the LLCs under FIN 46(R).
F-47
HC INNOVATIONS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
- --------------------------------------------------------------------------------
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
The Company's revenue includes fees for service revenue and revenue from
capitated contracts.
Revenue from capitated contracts is recorded monthly based on the number of
members covered under each capitated contract per month. Capitated revenue
totaled approximately $773,000 and $266,400 for the three month's ended
March 31, 2007 and 2006, respectively.
A significant portion of the Company's fee for service revenues have been
reimbursed by federal Medicare and, to a lesser extent, state Medicaid
programs.
Payments for services rendered to patients covered by these programs are
generally less than billed charges. The Company monitors its revenues and
receivables from these reimbursement sources, as well as other third-party
insurance payors, and records an estimated contractual allowance for
certain service revenues and receivable balances in the month of revenue
recognition, to properly account for anticipated differences between billed
and reimbursed amounts. Accordingly, a substantial portion of the Company's
total net revenues and receivables reported in the accompanying condensed
consolidated financial statements are recorded at the amount ultimately
expected to be received from these payors. Net revenues from fee for
service patients are recorded on the day the service is provided to
patients.
The Company evaluates several criteria in developing the estimated
contractual allowances for unbilled and/or initially rejected claims on a
monthly basis, including historical trends based on actual claims paid,
current contract and reimbursement terms, and changes in patient base and
payor/service mix. Contractual allowance estimates are adjusted to actual
amounts as cash is received and claims are settled, and the aggregate
impact of these resulting adjustments were not significant to the Company's
operations for the three months ended March 31, 2007 and 2006. Further, the
Company does not expect the reasonably possible effects of a change in
estimate related to unsettled March 31, 2007 contractual allowance amounts
from Medicaid and third-party payors to be significant to its future
operating results and consolidated financial position.
F-48
HC INNOVATIONS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
- --------------------------------------------------------------------------------
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Company accounts for income taxes following the asset and liability
method in accordance with Statement of Financial Accounting Standards
(SFAS) No. 109, "ACCOUNTING FOR INCOME TAXES." Under such method, deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to difference between the financial statement carrying amounts
of existing assets and liabilities and their respective tax bases. The
Company's income tax returns are prepared on the tax basis of accounting.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years that the asset is expected
to be recovered or the liability settled.
The Company adopted the provisions of FASB Interpretation No. 48,
"Accounting for Uncertainty in Income Taxes - an interpretation of FASB
Statement No. 9" ("FIN No. 48"), on January 1, 2007. FIN No. 48 requires
that the impact of tax positions be recognized in the financial statements
if they are more likely than not of being sustained upon examination, based
on the technical merits of the position. As discussed in the consolidated
financial statements in the 2006 Form 10-KSB, the Company has a valuation
allowance against the full amount of its net deferred tax assets. The
Company currently provides a valuation allowance against deferred tax
assets when it is more likely than not that some portion, or all of its
deferred tax assets, will not be realized. There was no impact to the
Company as a result of implementing FIN No. 48.
The Company is subject to U.S. federal income tax as well as income tax of
certain state jurisdictions. The Company has not been audited by the I.R.S.
or any states in connection with income taxes. The periods from 1999-2006
remain open to examination by the I.R.S. and state authorities.
The Company recognizes interest accrued related to unrecognized tax
benefits in interest expense. Penalties, if incurred, are recognized as a
component of income tax expense.
F-49
HC INNOVATIONS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
- --------------------------------------------------------------------------------
EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share ("EPS") is computed dividing the net income
(loss) attributable to the common stockholders (the numerator) by the
weighted average number of shares of common stock outstanding (the
denominator) during the reporting periods. Diluted income (loss) per share
is computed by increasing the denominator by the weighted average number of
additional shares that could have been outstanding from securities
convertible into common stock, such as stock options and warrants (using
the "treasury stock" method), and convertible preferred stock and debt
(using the "if-converted" method), unless their effect on net income (loss)
per share is antidilutive. Under the "if-converted" method, convertible
instruments are assumed to have been converted as of the beginning of the
period or when issued, if later. The effect of computing the diluted income
(loss) per share is antidilutive and, as such, basic and diluted earnings
(loss) per share are the same for the three months ended March 31, 2007 and
2006.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 2007, the FASB issued Statement of Financial Accounting
Standards No. 159, "The Fair Value Option for Financial Assets and
Financial Liabilities--Including an Amendment of SFAS 115" ("SFAS 159").
SFAS 159 allows entities to choose to measure many financial instruments
and certain other items at fair value. In addition, SFAS 159 includes an
amendment to SFAS 115, "Accounting for Certain Investments in Debt and
Equity Securities, and applies to all entities with available-for-sale and
trading securities. The Company is in the process of evaluating the impact
that SFAS 159 will have on its consolidated financial statements.
F-50
HC INNOVATIONS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
- --------------------------------------------------------------------------------
4. CAPITALIZED SOFTWARE DEVELOPMENT COSTS
Capitalized software development costs as of March 31, 2007 and December
31, 2006 are summarized as follows:
2007 2006
---- ----
Capitalized software development costs $1,749,172 $1,486,584
Less: accumulated amortization (223,258) (175,857)
-------------------------
$1,525,914 $1,310,727
=========================
Amortization expense related to capitalized software development costs for
the three months ended March 31, 2007 and 2006 totaled approximately
$47,400 and $25,300, respectively.
5. LINES OF CREDIT
At March 31, 2007 and December 31, 2006, the Company had the following
line-of-credit facilities outstanding:
Revolving line-of-credit dated January 29, 2003 2007 2006
with interest at the rate of prime plus 1% ---- ----
(9.25% at March 31, 2007). The amount
outstanding is due on demand and is
collateralized by the assets of ECI. $ 50,000 $ 50,000
Revolving line-of-credit dated February 23, 2004
with interest at prime plus 1.75% (9.25% at
March 31, 2007). The amount outstanding is
due on demand and expires on February 23,
2009. The line-of-credit is secured by the
personal assets of the managing member of
NP Care, LLC. 150,000 150,000
------------------
$200,000 $200,000
==================
F-51
HC INNOVATIONS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
- --------------------------------------------------------------------------------
6. NOTES PAYABLE TO VENDORS
Notes Payable to vendors consists of the following at March 31, 2007 and
December 31, 2006
2007 2006
---- ----
Note payable to finance insurance premiums effective
August 11, 2006. The note is payable in monthly
installments of $4,857 including interest at a fixed
rate of 7.67%, through July 2007. $14,386 $28,500
Note payable to finance workers compensation insurance
effective September 13, 2006. The note is payable in
monthly installments of $1,670 including interest at a
fixed rate of 8.67%, through October 2007. 3,307 8,185
Note payable to finance liability insurance premiums
effective September 30, 2006. The note is payable in
monthly installments of $1,299 including interest at a
fixed rate of 9.25%, through September 2007. 3,837 8,156
------- -------
$21,530 $44,841
======= =======
F-52
HC INNOVATIONS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
- --------------------------------------------------------------------------------
7. DEBT
NOTE PAYABLE
The Company has a Small Business Administration loan dated September 4,
2003. The original principal balance of the loan was $150,000 and it is
intended to be used to fund general operations. The loan agreement
provides for sixty monthly principal and interest installments of
$2,924 and bears interest at 6.25% per annum. The loan matures on
October 1, 2008 and is secured by the personal residence of the
Company's President. At March 31, 2007 and December 31, 2006, the
principal balance due on the loan was $52,723 and $60,588,
respectively.
NOTES PAYABLE - STOCKHOLDER
The Company entered into two promissory notes payable with a
stockholder. The first promissory note, dated February 20, 2006 has an
original principal balance of $125,000 and is intended as a bridge loan
until further financing is secured by the Company. Interest accrues on
the note at 10% and was originally payable on demand or before May 20,
2006. The term was extended through December 31, 2007. The remaining
balance and accrued interest on this note as of March 31, 2007 and 2006
is $139,567 and $136,185, respectively.
The second promissory note dated March 15, 2006 had an original
principal balance of $100,000 and was intended as a bridge loan until
further financing was secured by the Company. Interest accrued on the
note at 10% and was originally payable on demand or before June 15,
2006. On October 25, 2006 this note and its related accrued interest
totaling $6,400 were satisfied in full by issuing 106,400 shares of
common stock and warrants under the terms of the Company's private
placement offering (Note 9).
F-53
HC INNOVATIONS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
- --------------------------------------------------------------------------------
7. DEBT (CONTINUED)
NOTE PAYABLE - RELATED PARTY
The Company entered into a loan agreement with The Rubin Family
Irrevocable Stock Trust ("Lender"), a shareholder of HCI, on December
27, 2004, whereby, among other provisions, the Lender extended a line
of credit facility to the Company for general company purposes. The
Lender also received warrants to purchase 5,166,711 shares of common
stock of the Company. The line of credit was in the original principal
amount not to exceed $500,000. The line of credit was to begin accruing
interest on December 25, 2007 at the then prime rate and interest in
arrears only was to be payable monthly effective December 25, 2007. On
December 31, 2005, there was $500,000 outstanding on the line of
credit. In June 2006, the warrants for 5,166,711 shares (Note 9) of the
Company's common stock were exercised by the Lender realizing $500,000.
This $500,000 was applied to the outstanding note payable due to the
Lender in the amount of $500,000 in a non-cash transaction.
F-54
HC INNOVATIONS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
- --------------------------------------------------------------------------------
7. DEBT (CONTINUED)
NOTES PAYABLE - CHAIRMAN
During 2006, the Company entered into four promissory notes payable
with the Company's Chairman and his brother which are intended as
bridge loans until HCI financing is secured. The balances of these
notes at March 31, 2007 and December 31, 2006 were:
On August 31, 2006, the Company entered
into a promissory note with an original
due date of September 30, 2006. The
original due date was extended through
December 31, 2007. Interest accrues at
the rate of 10% per annum. $90,000
On September 9, 2006, the Company
entered into a promissory note with an
original due date of October 7, 2006.
The original due date was extended
through December 31, 2007. Interest
accrues at the rate of 10% per annum. 50,000
On September 28, 2006, the Company
entered into a promissory note with an
original due date of October 27, 2006.
The original due date was extended
through December 31, 2007. Interest
accrues at the rate of 10% per annum. 95,000
On November 27, 2006, the Company
entered into a promissory note with the
Chairman's brother with an original due
date of January 31, 2007. The original
due date was extended through April 30,
2007. Interest accrues at the rate of
10% per annum. 50,000
--------
$285,000
========
Accrued interest on the notes payable to the Chairman and his brother
as of March 31, 2007 and December 31, 2006 was $15,467 and $7,434
respectively.
F-55
HC INNOVATIONS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
- --------------------------------------------------------------------------------
7. DEBT (CONTINUED)
NOTES PAYABLE - CHAIRMAN (CONTINUED)
The maturities of the Company's notes payable are as follows:
MARCH 31, 2007 DECEMBER 31, 2006
-------------- -----------------
2007 $ 462,723 $ 441,139
2008 - 29,449
--------- ---------
462,723 470,588
Less Current Portion (462,723) (441,139)
--------- ---------
$ - $ 29,449
========= =========
CONVERTIBLE DEBENTURES
During 2005, the Company issued convertible debentures to private
accredited investors. The total principal amount of the debentures was
$1,257,985 convertible into 1,257,985 shares of the Company's common
stock. The conversion price of the debentures was equal to 50% of the
market price of the HCI's common stock on the day prior to conversion.
In no circumstances will the conversion price be less than $.40 per
share.
The term of the debentures was 18 months from the date of issuance. In
lieu of interest, the Company issued 1,257,985 shares of its common
stock to the holders of the convertible debentures which was treated as
a discount on the debentures to be amortized as interest expense over
the life of the debentures. The discount was established as the fair
value of the common stock of $202,678, which was determined using fair
value interest rates for similar types of underlying instruments. The
unamortized balance of the discount at March 31, 2007 and December 31,
2006 was $-0- and $35,429, respectively. Amortization of the discount
for the three months ended March 31, 2007 and 2006 was $35,429 and
$33,780, respectively and is included in interest expense in the
accompanying condensed consolidated statements of operations.
HCI incurred $76,858 in legal, financing and other costs in issuing
these debentures. The costs were deferred and were being amortized over
18 months. The unamortized balance of deferred issuance costs at March
31, 2007 and December 31, 2006 was $-0- and $8,541, respectively.
Amortization expense relating to deferred issuance costs totaled $8,541
and $12,810 for the three months ended March 31, 2007 and 2006,
respectively.
F-56
HC INNOVATIONS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
- --------------------------------------------------------------------------------
7. DEBT (CONTINUED)
CONVERTIBLE DEBENTURES (CONTINUED)
On April 17, 2006, the Company closed on an additional convertible
debenture note in the amount of $500,000. The terms of this note, with
an existing stockholder, were identical to the 2005 convertible
debentures. The total principal amount of the debentures of $500,000
was convertible into 500,000 shares of the Company's common stock. The
conversion price of the debentures was equal to 50% of the market price
of HCI's common stock on the day prior to conversion. In no
circumstances could the conversion price be less than $.40 per share.
The term of the debentures was 18 months from the date of issuance. In
lieu of interest, the Company issued 500,000 shares of its common stock
to the holders of the convertible debentures which were treated as a
discount on the debentures to be amortized as interest expense over the
life of the debentures. The discount was established as the fair value
of the common stock of $141,348, which was determined using fair value
interest rates for similar types of underlying instruments. The
unamortized balance of the discount at March 31, 2007 and December 31,
2006 was $-0- and $101,615, respectively. Amortization of the discount
for the three months' ended March 31, 2007 and 2006 was $101,615 and
$-0-, respectively, and is included in interest expense in the
accompanying condensed consolidated statements of operations.
HCI incurred $60,045 in legal, financing and other costs issuing these
debentures. The costs have been deferred and are being amortized over
18 months. The unamortized balance of deferred issuance costs at March
31, 2007 and December 31, 2006 was $-0- and $42,864, respectively.
Amortization expense relating to the deferred issuance costs totaled
$42,864 and $-0- for the three month's ended March 31, 2007 and 2006,
respectively and is included in the accompanying condensed consolidated
statements of operations.
During the first quarter of 2007, $1,707,985 of the convertible
debentures were converted to common stock in a non-cash transaction at
a ratio of 1:1 resulting in the issuance of an additional 1.708 million
shares of common stock. The remaining $50,000 was paid to the holder of
the convertible debenture on April 7, 2007.
F-57
HC INNOVATIONS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
- --------------------------------------------------------------------------------
8. NET PATIENT SERVICE REVENUE AND BILLING FEES
Revenue from nurse practitioner services is substantially collected through
billings to a patient's respective insurance carrier, health maintenance
organization, Medicare and Medicaid. Payments from these sources are
generally based on prospectively determined rates that vary according to a
classification system based on clinical, diagnostic and other factors and
are substantially below established rates.
Net patient service revenue consists of the following components for the
three months ended March 31, 2007 and 2006:
2007 2006
---- ----
Gross patient service revenue $2,773,763 $1,737,957
Less: provision for contractual allowances (575,792) (421,122)
---------- ----------
Net patient service revenue $2,197,971 $1,316,835
========== ==========
9. STOCKHOLDERS' EQUITY (DEFICIT)
PRIVATE PLACEMENT OFFERING
On September 25, 2006, HCI issued a Private Placement Offering Memorandum
("PPM") for 2,000,000 shares of common stock at $1.00 per share and
warrants to purchase 2,000,000 shares of common stock in the future. The
offer to purchase common stock expired on February 28, 2007. In December,
2006 the Company increased the total offering to 3,200,000 shares of common
stock at $1.00 per share and warrants to purchase 3,200,000 shares of
common stock in the future. The warrants have a term of two years. The
exercise price is $1.25 per share. The warrants shall be redeemable at $.05
per warrant share contingent upon HCI's common stock trading at a closing
price of at least $3.50 per share for twenty consecutive days.
During 2006, 1,956,400 shares of common stock and 1,956,400 warrants were
sold through this PPM. During 2006, 950,000 shares were issued and the
remaining 1,006,400 shares were issued during the three months ended March
31, 2007.
During the first quarter of 2007, 1,350,000 shares of common stock and
1,300,000 warrants were issued through the PPM. The Company received
$1,300,000 in cash for 1,300,000 shares, incurred cash issuance costs of
$130,000, issued 50,000 shares of common stock, at $1.30 per share and
300,000 warrants to purchase share at $1.25 per share for noncash issuance
costs.
F-58
HC INNOVATIONS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
- --------------------------------------------------------------------------------
9. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
PRIVATE PLACEMENT OFFERING (CONTINUED)
During the first quarter of 2007, and in connection with the September 2006
PPM, the Company requested that 29 investors exercise their respective
warrants and in return the Company offered the investors an additional two
year warrant ("2007 Warrant") at an exercise price of $3.00 for every two
warrants exercised from the September 2006 PPM. During the three months
ended March 31, 2007, the Company received $1,187,500 upon the exercise of
950,000 of the September PPM warrants and issued warrants for an additional
475,000 shares of the Company's common stock to five (5) investors. The
Company incurred cash issuance costs of $129,907 and noncash issuance costs
consisting of 300,000 warrants to purchase shares of the Company's common
stock at $1.25. The investors represented in writing that they were
accredited investors and acquired the securities for their own accounts. A
legend was placed on the securities stating that such securities have not
been registered under the Securities Act and cannot be sold or otherwise
transferred without an effective registration statement covering such
shares or an the availability of an exemption from the registration
requirements of the Securities Act.
RESTRICTED STOCK SALE TO COMPANY EMPLOYEES
In June, 2006, the Company sold a total of 142,669 shares of restricted
common stock to several of its key managers for aggregate net proceeds of
$107,002.
COMMON STOCK ISSUED TO VENDOR
During the first quarter of 2007, the Company issued 50,000 shares of
common stock, valued at $65,000 or $1.30 on the date of issuance, in
exchange for legal services incurred with capital raising efforts. As a
result of this transaction $65,000 was charged to capital as a non cash
event.
F-59
HC INNOVATIONS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
- --------------------------------------------------------------------------------
9. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
WARRANTS
A summary of warrant activity is as follows:
WEIGHTED
AVERAGE WEIGHTED AVE
WARRANTS PRICE PRICE LIFE (YEARS)
-------- ----- ----- ------------
Balance January 1, 2006 5,166,711 0.0967 0.0967 7.0
Issued 1,956,400 1.2500 1.2500 2.0
Exercised (5,166,711) (0.0967) (0.0967) (7.0)
Expired - - - -
--------- ------ ----
Balance December 31, 2006 1,956,400 1.25 2.0
========= ====== ====
Issued 300,000 1.0000 1.0000 5.0
Issued 1,300,000 1.2500 1.2500 2.0
Issued 600,000 1.2500 1.2500 5.0
Issued 475,000 3.0000 3.0000 2.0
Exercised (950,000) 1.2500 1.2500 2.0
--------- ------ ----
Balance March 31, 2007 3,681,400 1.46 2.24
========= ====== ====
F-60
HC INNOVATIONS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
- --------------------------------------------------------------------------------
10. BUSINESS SEGMENTS
The Company's operations by business segment for the three months ended
March 31, 2007 and 2006 were as follows:
PROFESSIONAL DISEASE
2007 SERVICES MANAGEMENT TOTAL
- ---------------------- ------------ ------------ ------------
Net Revenues $1,424,961 $ 773,010 $ 2,197,971
Operating Profit/(Loss) (254,067) (1,043,805) (1,297,872)
Identifiable Assets 972,287 2,963,264 3,935,551
PROFESSIONAL DISEASE
2006 SERVICES MANAGEMENT TOTAL
- ---------------------- ------------ ------------ ------------
Net Revenues $1,050,435 $ 266,400 $ 1,316,835
Operating Profit/(Loss) 218,369 (645,101) (426,732)
Identifiable Assets 670,470 1,298,512 1,968,982
F-61
HC INNOVATIONS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
- --------------------------------------------------------------------------------
11. COMMITMENTS
CONSULTING AGREEMENTS
During July 2005, the Company entered into a Consulting Agreement with
Strategic Growth International, Inc. ("SGI"), whereby SGI advised and
assisted HCI in its efforts to raise capital and secure a public shell.
During September 2006, the Company amended and restated the Consulting
Agreement with SGI. Under the new Consulting Agreement, SGI assisted HCI in
determining a strategy to raise funds in the aggregate amount of $1,000,000
through a private placement of debt, equity or convertible securities. HCI
agreed to pay an initial retainer of $50,000 for these services from the
gross proceeds of offering. The Company also agreed to pay SGI a total
consulting fee of 10% of the gross proceeds raised for the offering
excluding the initial $50,000 retainer. The term of this agreement was for
six months and expired March 25, 2007. During December of 2006, the Company
amended and restated the Consulting Agreement with SGI. Under the new
Consulting Agreement, SGI assisted HCI in determining a strategy to raise
funds in the aggregate amount of approximately $3,200,000 through a private
placement of debt, equity or convertible securities. This amended agreement
expires on May 31, 2007. Through March 31, 2007, the Company raised
approximately $3,150,000 through this arrangement. A consulting fee of
approximately $185,000 was charged to equity for the year ended December
31, 2006 and $50,000 was charged to deferred financing charges for the year
ended December 31, 2006. During the first quarter of 2007, the Company
raised approximately $1,300,000 additionally and incurred fees payable to
SGI in the amount of approximately $130,000 in consulting fees which was
charged to equity for the three month period ended March 31, 2007.
On February 1, 2007, the Company entered into a non-exclusive investor
relations agreement with SGI, whereby SGI will provide investor relation
services to the Company. The Company has agreed to pay SGI a monthly
retainer in the amount of $9,000 during the period the agreement is in
effect. The agreement may be cancelled by either party, without cause, upon
providing written notice within 180 days of the intent to cancel.
Additionally, upon successful completion of the current equity offering the
Company agreed to issue and has issued to SGI warrants to purchase 300,000
shares of the Company's common stock at an exercise price of $1.00 per
share, the term of the warrant is five years. The warrants were valued by
the Company using the Black Scholes model at $156,360. Consulting fee
expense is recognized monthly over the six month agreement period.
F-62
HC INNOVATIONS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
- --------------------------------------------------------------------------------
11. COMMITMENTS (CONTINUED)
BUSINESS ADVISOR AGREEMENT
In September 2005, the Company entered into an agreement ("Advisor
Agreement") with an outside advisor whereby the advisor has been engaged to
provide advice to the Company as the Chairperson of its Business Advisory
Board, assist in the development of the Business Advisory Board, and
provide other services on behalf of the Company.
The Advisor can be issued contingent warrants to purchase up to 360,000
common shares of the Company at an exercise price of $1.25 per share upon
the attainment of specified growth goals of the Business Advisory Board.
Beginning in calendar year 2006 and through calendar year 2008, 120,000
contingent warrants may be earned each year commensurate with achieving
company growth in gross revenues to $18,000,000 in 2007 and $28,000,000 in
2008. As of March 31, 2007 no warrants have been earned in connection with
the Advisor Agreement.
OPERATING LEASES
The Company is obligated under various operating leases for the rental of
office space and office equipment. Future minimum rental commitments with a
remaining term in excess of one year as of March 31, 2007 are as follows:
2007 $211,295
2008 254,199
2009 226,772
2010 35,597
2011 23,753
--------
Total minimum lease payments $751,616
========
Rent expense for the three months ended March 31, 2007 and 2006 was $76,398
and $27,681, respectively.
F-63
HC INNOVATIONS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
- --------------------------------------------------------------------------------
11. COMMITMENTS (CONTINUED)
CONTRACT FOR THE STATE OF ILLINOIS DEPT. OF HEALTHCARE AND FAMILY SERVICES
On March 6, 2007, the Company entered into a three year contract with
McKesson Corporation ("McKesson") to provide care management to over 8,000
Medicaid recipients living in nursing homes in Illinois. Care will be
provided through the Company's subsidiary, Enhanced Care Initiatives, Inc.
(ECI) and its affiliate, NP Care of Illinois, LLC under a Sub-Contract
pursuant to the requirements of McKesson's agreement for a disease
management program with the Illinois Department of Healthcare and Family
Services. Services include providing programs and systems for assisting
physicians in the management of patients who are frail or who face
medically complex conditions or mental impairment. Nurse practitioners will
be on site to provide hands-on care management coordination and discharge
planning in collaboration with patients' physicians and nursing home
medical directors.
F-64
HC INNOVATIONS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
- --------------------------------------------------------------------------------
12. RISKS AND UNCERTAINTIES
PATIENT SERVICE REVENUE
Approximately 58% and 70% of net patient services revenue in the three
months ended March 31, 2007 and 2006 respectively, was derived under
federal (Medicare) and state (Medicaid) third-party reimbursement programs.
These revenues are based, in part, on cost reimbursement principles and are
subject to audit and retroactive adjustment by the respective third-party
fiscal intermediaries. The general trend in the healthcare industry is
lower private pay utilization due to liberal asset transfer rules and the
degree of financial planning that takes place by the general public. The
Company's ability to maintain the current level of private pay utilization
and thereby reduce reliance on third-party reimbursement is uncertain due
to the economic and regulatory environment in which the Company operates.
MALPRACTICE INSURANCE
The Company maintains malpractice insurance coverage on an occurrence
basis. It is the intention of the Company to maintain such coverage on the
occurrence basis in ensuing years. During the three month periods ended
March 31, 2007 and 2006, no known malpractice claims have been asserted
against the Company which, either individually or in the aggregate, are in
excess of insurance coverage.
F-65
HC INNOVATIONS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
- --------------------------------------------------------------------------------
13. SUBSEQUENT EVENTS
CONTRACT WITH HEALTH INSURANCE PLAN OF GREATER NEW YORK
On May 8, 2007, the Company, through its subsidiary, Enhanced Care
Initiatives, Inc. (ECI) entered into a three year contract with Health
Insurance Plan of Greater New York (HIP) to provide Care Management
Services to HIP and Enrollees who become Program Participants in ECI's
Oncology and Easy Care programs. Under the terms of the contract, ECI is to
begin providing Care Management Services to Program Participants as early
as June 1, 2007 (the "Service Commencement Date"). The contract specifies
enrollment objectives for each of the ECI programs commencing with the
Service Commencement Date and it is anticipated that approximately 10,000
HIP members will ultimately be enrolled in ECI care management programs. A
condition of the contract is that ECI will update its Easy Care and
Oncology programs to be compliant with NCQA (The National Committee for
Quality Assurance) QI7 Standard within 90 days of execution of this
contract. Additionally, ECI shall maintain its programs to meet such
requirements as updated by NCQA on an annual basis.
F-66
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING MADE BY THIS PROSPECTUS, AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR THE SELLING STOCKHOLDERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITIES OTHER THAN THOSE SPECIFICALLY OFFERED HEREBY OR AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THESE SECURITIES IN ANY
JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION. EXCEPT WHERE OTHERWISE INDICATED, THIS PROSPECTUS SPEAKS AS OF THE
EFFECTIVE DATE OF THE REGISTRATION STATEMENT. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE PROSPECTUS DATE HEREOF.
UNTIL [_______] 2007 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS) ALL DEALERS
THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOR PARTICIPATING IN
THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO
THE DEALER'S OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND
WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
48
PART II
Information not Required in Prospectus
INDEMNIFICATION OF DIRECTORS AND OFFICERS
We have adopted provisions in its articles of incorporation and bylaws that
limit the liability of its directors and provide for indemnification of its
directors and officers to the full extent permitted under the Delaware General
Corporation Law. Under our articles of incorporation, and as permitted under the
Delaware General Corporation Law, directors are not liable to us or its
stockholders for monetary damages arising from a breach of their fiduciary duty
of care as directors. Such provisions do not, however, relieve liability for
breach of a director's duty of loyalty to us or its stockholders, liability for
acts or omissions not in good faith or involving intentional misconduct or
knowing violations of law, liability for transactions in which the director
derived as improper personal benefit or liability for the payment of a dividend
in violation of Delaware law. Further, the provisions do not relieve a
director's liability for violation of, or otherwise relieve us or our directors
from the necessity of complying with, federal or state securities laws or affect
the availability of equitable remedies such as injunctive relief or recission.
At present, there is no pending litigation or proceeding involving a director,
officer, employee or agent of us where indemnification will be required or
permitted. We are not aware of any threatened litigation or proceeding that may
result in a claim for indemnification by any director or officer.
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OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth an estimate of the costs and expenses, other than
the underwriting discounts and commissions, payable by the registrant in
connection with the issuance and distribution of the common stock being
registered.
- ------------------------------------------------------
SEC registration fee $1,336.36
Legal fees and expenses 25,000.00
Accountants' fees and expenses 7,500.00
Printing expenses 3,000.00
----------
Total $36,836.36
- ------------------------------------------------------
All amounts except the SEC registration fee are estimated. All of the expenses
set forth above are being paid by us.
RECENT SALES OF UNREGISTERED SECURITIES
The following is a list of our securities that have been sold or issued by us
during the past three years. These securities were sold without registration
under the Securities Act in reliance on Section 4(2) of the Securities Act.
There were no underwriting discounts or commissions paid in connection with the
sale of these securities.
Beginning on May 22, 2007, we sold 1,666,667 shares of our common stock to four
investors at a purchase price of $3.00 per share of common stock ("May 2007
Offering"). In addition to the shares of our common stock, we issued warrants to
purchase 833,333 shares of our common stock at $4.00 per share to these
investors. The investors represented in writing that they were accredited
investors and acquired the securities for their own accounts. A legend was
placed on the securities stating that such securities have not been registered
under the Securities Act and cannot be sold or otherwise transferred without an
effective registration statement covering such shares or an the availability of
an exemption from the registration requirements of the Securities Act.
In September 2006 through February 2007, we sold 3,256,400 shares of our common
stock for $3,256,400 to 15 investors ("September Offering"). In addition to the
shares of our common stock, we issued warrants to purchase 3,256,400 shares of
our common stock at $1.25 per share to these investors. The investors
represented in writing that they were accredited investors and acquired the
securities for their own accounts. A legend was placed on the securities stating
that such securities have not been registered under the Securities Act and
cannot be sold or otherwise transferred without an effective registration
statement covering such shares or an the availability of an exemption from the
registration requirements of the Securities Act.
In March 2007, in connection with the September Offering, we requested that the
investors exercise their respective 2006 warrants and in return receive an
additional 2007 warrant at an exercise price of $3.00 for every two warrants
exercised from the September 2006 PPM. As of March 2007, we received
approximately $1,187,500 from the exercise of the September Offering warrants
and have issued 2007 warrants for an additional 475,000 shares of our common
stock to 5 September Offering investors. The investors represented in writing
that they were accredited investors and acquired the securities for their own
accounts. A legend was placed on the securities stating that such securities
have not been registered under the Securities Act and cannot be sold or
otherwise transferred without an effective registration statement covering such
shares or an the availability of an exemption from the registration requirements
of the Securities Act.
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On July 11, 2006, we issued a convertible promissory note to the Rubin Family
Irrevocable Stock Trust in the principal face amount of $200,000, to be funded
$100,000 upon issuance of the note and $100,000 on August 11, 2006. The
convertible debentures are convertible only if the amount owing thereunder are
not repaid. The holders of such note represented in writing that it was an
accredited investor and acquired the securities for its own account. On October
10, 2006, the Company paid the Rubin Family Irrevocable Stock Trust $203,812 in
full satisfaction of the principal and accrued interest on the note. A legend
was placed on the securities stating that such securities have not been
registered under the Securities Act and cannot be sold or otherwise transferred
without an effective registration statement covering such shares or an the
availability of an exemption from the registration requirements of the
Securities Act.
In June 2006 the Company sold a total of 142,669 shares of restricted common
stock to several of its key managers for aggregate net proceeds of approximately
$107,000 and warrants were exercised by a shareholder with the Company realizing
$500,000 in net proceeds. These proceeds were applied to an outstanding note
payable to the same shareholder in the amount of $500,000.
In June 2005 through April 2006, we sold approximately $1,257,985 in principal
amount of convertible debentures to 18 investors ("June Offering"). In addition
to the convertible debentures, we issued 1,257,985 shares of our common stock to
these investors. The holders of such notes and common stock represented in
writing that they were accredited investors and acquired the securities for
their own accounts. A legend was placed on the securities stating that such
securities have not been registered under the Securities Act and cannot be sold
or otherwise transferred without an effective registration statement covering
such shares or an the availability of an exemption from the registration
requirements of the Securities Act.
In connection with the June Offering, we issued, in March 2007, approximately
1,708,000 shares of our common stock as a result of the conversion of the June
Offering Convertible Debentures. As provided in those Debentures, the holders
were entitled to convert the principal amount of the Debenture in the event that
we became a fully reporting company. As indicated in this Registration
Statement, we became a fully reporting company on February 13, 2007 and,
accordingly, the June Offering investors converted their Debentures. A legend
was placed on the securities stating that such securities have not been
registered under the Securities Act and cannot be sold or otherwise transferred
without an effective registration statement covering such shares or an the
availability of an exemption from the registration requirements of the
Securities Act.
51
EXHIBITS
2.1 Stock Acquisition Agreement by and between Ayre Holdings, Inc., HC
Innovations, Inc., and the shareholders stated therein, dated May 11,
2006.(1)
3.1 Certificate of Incorporation, dated November 7, 2001.(1)
3.1.1 Certificate of Amendment to Certificate of Incorporation, dated May 17,
2006.(1)
3.1.2 Certificate of Amendment to Certificate of Incorporation, dated June 5,
2006.(1)
3.2 By-laws.(1)
4.1 Specimen of Common Stock certificate.(1)
5.1 Opinion of Gersten Savage LLP
10.1 Form of Promissory Note issued to Rubin Family Irrevocable Stock
Trust.(1)
10.2 Form of Convertible Debenture issued to certain investors.(1)
10.3 Sublease Agreement between American Skandia Information and Technology
Corporation and the Company, dates as of September 2004.(1)
10.4 Form of Registration Right Agreement signed with certain investors.(1)
10.5 Form of Subscription Agreement.(1)
10.6 Form of Warrants to Purchase Common Stock(1)
10.7 Disease Case Management Services Agreement and State of Work for Care
Management Services between Alere Medical, Inc. and Enhanced Care
Initiatives, Inc. dated October 16, 2006.(1)
10.8 Amended and Restated Consulting Agreement between HC Innovations, Inc.
and Strategic Growth International, Inc., dated September 22, 2006.(1)
10.9 Memorandum of Understanding by and between NP Care of Ohio, LLC and Ohio
Nurse Practitioners, Inc., Kayleen Berger and Kathryn Maxwell, dated
October 20, 2006.(1)
10.10 Form of Subscription Agreement for the Purchase of Securities and Certain
Accredited Investors, dated May 22, 2007.(2)
10.11 Form of Warrant.(2)
10.12 Form of Registration Rights Agreements between the Company and Certain
Accredited Investors, dated May 22, 2007.(2)
21 List of Subsidiaries.(1)
23.1 Consent of Gersten Savage LLP (included in Exhibit 5.1 hereto)
23.2 Consent of Carlin, Charron & Rosen
(1) These documents are rendered as previously filed and incorporated by
reference to the Company's Form 10-SB, as amended, filed on December 13,
2006.
(2) These documents are rendered as previously filed and incorporated by
reference to the Company's Current Report on Form 8-K filed May 31, 2007.
52
UNDERTAKINGS
The undersigned registrant hereby undertakes to:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act:
(ii) Reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the registration
statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b)(ss.230.424(b) of this chapter)
if, in the aggregate, the changes in volume and price represent no more than a
20% change in the maximum aggregate offering price set forth in the "Calculation
of Registration Fee" table in the effective registration statement; and(2) For
determining liability under the Securities Act, treat each post-effective
amendment as a new registration statement of the securities offered, and the
offering of the securities at that time to be the initial bona fide offering.
(2) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
(3) For determining liability of the undersigned small business issuer under the
Securities Act to any purchaser in the initial distribution of the securities,
the undersigned small business issuer undertakes that in a primary offering of
securities of the undersigned small business issuer pursuant to this
registration statement, regardless of the underwriting method used to sell the
securities to the purchaser, if the securities are offered or sold to such
purchaser by means of any of the following communication, the undersigned small
business issuer will be a seller to the purchaser and will be considered to
offer or sell such securities to such purchaser:
(i) Any preliminary prospectus or prospectus of the undersigned small
business issuer relating to the offering required to be filed pursuant to Rule
424 (ss.230.424 of this chapter)
(ii) Any free writing prospectus relating to the offering prepared by or on
behalf of the undersigned small business issuer or used or referred to by the
undersigned small business issuer;
(iii) The portion of any other free writing prospectus relating to the
offering containing material information about the undersigned small business
issuer or its securities provided by or on behalf of the undersigned small
business issuer; and
(iv) Any other communication that is an offer in the offering made by the
undersigned small business issuer to the purchaser.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the small business issuer pursuant to the foregoing provisions, or
otherwise, the small business issuer has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
and as expressed in the Act and is, therefore, unenforceable.
53
In the event that a claim for indemnification against such liabilities
(other than the payment by the small business issuer of expenses incurred or
paid by a director, officer or controlling person of the small business issuer
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the small business issuer will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
(4) That for the purpose of determining any liability under the Securities Act
to any purchaser:
(i) Each prospectus filed by the undersigned small business issuer pursuant
to Rule 424(b)(3)(ss.230.424(b)(3) of this chapter) shall be deemed to be part
of the registration statement as of the date the filed prospectus was deemed
part of and included in the registration statement; and
(ii) Each prospectus required to be filed pursuant to Rule 424(b)(2),
(b)(5), or (b)(7) (ss.230.424(b)(2), (b)(5), or (b)(7) of this chapter) as part
of a registration statement in reliance on Rule 430B relating to an offering
made pursuant to Rule 415(a)(1)(i), (vii), or (x)(ss.230.415(a)(1)(i), (vii), or
(x) of this chapter) for the purpose of providing the information required by
section 10(a) of the Securities Act shall be deemed to be part of and included
in the registration statement as of the earlier of the date such form of
prospectus is first used after effectiveness or the date of the first contract
of sale of securities in the offering described in the prospectus. As provided
in Rule 430B, for liability purposes of the issuer and any person that is at
that date an underwriter, such date shall be deemed to be a new effective date
of the registration statement relating to the securities in the registration
statement to which that prospectus relates, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
Provided, however, that no statement made in a registration statement or
prospectus that is part of the registration statement will, as to a purchaser
with a time of contract of sale prior to such effective date, supersede or
modify any statement that was made in the registration statement or prospectus
that was part of the registration statement or made in any such document
immediately prior to such effective date.
54
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as amended,
the registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form SB-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned, in Shelton, Connecticut
on this 1st, day of August 2007.
HC INNOVATIONS, INC.
By: /S/ DAVID CHESS
-----------------------------------------------
David Chess
President, Chief Executive Officer and Director
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By: /S/ DAVID CHESS
------------------------------------------------
David Chess
President, Chief Executive Officer and Director
August 1, 2007
By: /S/ JEFFREY L. ZWICKER
------------------------------------------------
Jeffrey L. Zwicker
Chief Financial Officer (Principal Accounting Officer)
and Chief Operating Officer
August 1, 2007
55