UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended: March 31, 2017

 

or

 

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from __________ to __________

 

Commission File Number: 000-53012

 

FIRST CHOICE HEALTHCARE SOLUTIONS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   90-0687379
(State or other jurisdiction of incorporation)   (IRS Employer Identification No.)

 

709 S. Harbor City Boulevard, Melbourne, Florida 32901

(Address of principal executive offices)

 

(321) 725-0090

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files. Yes x No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o   Accelerated filer o
Non-accelerated filer o   Smaller reporting company x
Emerging growth company o      

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

 

As of May 12, 2017, there were 26,803,994 shares outstanding of the registrant’s Common Stock.

 

 

PART I. FINANCIAL INFORMATION   3
         
  ITEM 1 Financial Statements   3
         
    Condensed consolidated balance sheets as of March 31, 2017 (unaudited) and December 31, 2016   3
         
    Condensed consolidated statements of income for the three months ended March 31, 2017 and 2016 (unaudited)   4
         
    Condensed consolidated statement of stockholders’ equity for the three months ended March 31, 2017 (unaudited)   5
         
    Condensed consolidated statements of cash flows for the three months ended March 31, 2017 and 2016 (unaudited)   6
         
    Notes to condensed consolidated financial statements (unaudited)   7
         
  ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations   19
         
  ITEM 3. Quantitative and Qualitative Disclosures about Market Risk   25
         
  ITEM 4. Controls and Procedures   25
         
PART II. OTHER INFORMATION   26
         
  ITEM 1. Legal Proceedings   26
  ITEM 1A. Risk Factors   26
  ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds   26
  ITEM 3. Defaults Upon Senior Securities   26
  ITEM 4. Mine Safety Disclosures   26
  ITEM 5. Other Information   26
  ITEM 6. Exhibits   26
         
  SIGNATURES   27

2

 

PART I

 

ITEM 1. FINANCIAL STATEMENTS

 

FIRST CHOICE HEALTHCARE SOLUTIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS

 

   March 31,   December 31, 
   2017   2016 
   (unaudited)     
ASSETS          
Current assets:          
Cash and cash equivalents (amounts related to VIE of $908,141 and $708,858)  $3,901,489   $4,593,638 
Accounts receivable, net (amounts related to VIE of $6,112,966 and $6,010,961)   10,390,140    9,536,830 
Employee loans (amounts related to VIE of $491,550 and $491,850)   953,132    820,341 
Prepaid and other current assets (amounts related to VIE of $392,961 and $329,427)   651,770    422,512 
Total current assets   15,896,531    15,373,321 
           
Property, plant and equipment, net of accumulated depreciation of $1,264,271 and $1,165,219 (amounts related to VIE of $678,018 and $693,629)   2,619,493    2,544,816 
           
Other assets (amounts related to VIE of $921,470)   4,137,521    4,227,957 
           
Total assets  $22,653,545   $22,146,094 
           
           
LIABILITIES AND EQUITY          
Current liabilities:          
Accounts payable and accrued expenses (amounts related to VIE of $1,638,148 and $1,366,143)  $2,437,080   $2,083,231 
Accounts payable, related party (amount related to VIE of $251,588)   251,588    251,588 
AMT tax payable   181,029    181,029 
Line of credit, short term (amount related to VIE of $439,524)   1,539,524    1,539,524 
Notes payable, current portion   402,372    519,452 
Unearned revenue   43,854    26,936 
Deferred rent, short term portion (amount related to VIE of $237,923)   237,923    237,923 
Total current liabilities   5,093,370    4,839,683 
           
Long term debt:          
Deposits held   41,930    41,930 
Notes payable, long term portion   23,599    14,531 
Deferred rent, long term portion (amount related to VIE of $2,240,552 and $2,214,909)   2,345,465    2,293,594 
Total long term debt   2,410,994    2,350,055 
           
Total liabilities   7,504,364    7,189,738 
           
Equity:          
Preferred stock, $0.01 par value; 1,000,000 shares authorized, Nil issued and outstanding        
Common stock, $0.001 par value; 100,000,000 shares authorized, 26,803,994 and 24,631,327 shares issued and outstanding as of March 31, 2017 and December 31, 2016, respectively   26,804    24,631 
Additional paid in capital   24,081,761    24,020,610 
Accumulated deficit   (9,898,015)   (10,100,534)
Total stockholders’ equity attributable to First Choice Healthcare Solutions, Inc.   14,210,550    13,944,707 
Non-controlling interest (note 10)   938,631    1,011,649 
Total equity   15,149,181    14,956,356 
           
Total liabilities and equity  $22,653,545   $22,146,094 

 

See the accompanying notes to these unaudited condensed consolidated financial statements

3

 

FIRST CHOICE HEALTHCARE SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)

 

   For the Three months ended March 31, 
   2017   2016 
Revenues:          
Patient service revenue  $7,406,986   $6,877,665 
Allowance for bad debts   (264,996)   (262,524)
Net patient service revenue less allowance for bad debts   7,141,990    6,615,141 
Rental revenue   578,363    626,612 
Total revenue   7,720,353    7,241,753 
           
Operating expenses:          
Salaries and benefits   3,354,376    2,780,569 
Other operating expenses   2,529,183    2,045,575 
General and administrative   1,535,833    1,547,576 
Depreciation and amortization   189,488    298,950 
Total operating expenses   7,608,880    6,672,670 
           
Net income from operations   111,473    569,083 
           
Other income (expense):          
Gain on sale of property and improvements       9,188,968 
Miscellaneous income (expense)   50,102    58,857 
Amortization financing costs       (15,325)
Interest expense   (32,074)   (181,135)
Total other income   18,028    9,051,365 
           
Net income before provision for income taxes   129,501    9,620,448 
           
Income taxes (benefit)        
           
Net income   129,501    9,620,448 
           
Non-controlling interest (note 10)   73,018    (53,507)
           
NET INCOME ATTRIBUTABLE TO FIRST CHOICE HEALTHCARE SOLUTIONS, INC.  $202,519   $9,566,941 
           
Net income per common share, basic  $0.01   $0.42 
           
Net income per common share, diluted  $0.01   $0.37 
           
Weighted average number of common shares outstanding, basic   26,252,505    22,886,307 
           
Weighted average number of common shares outstanding, diluted   27,052,505    25,552,974 

 

See the accompanying notes to these unaudited condensed consolidated financial statements

4

 

FIRST CHOICE HEALTHCARE SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2017
(unaudited)

 

           Additional             
   Common stock   Paid in   Accumulated   Non-controlling     
   Shares   Amount   Capital   Deficit   Interest   Total 
Balance, December 31, 2016   24,631,327    24,631    24,020,610    (10,100,534)   1,011,649    14,956,356 
Common stock issued in settlement of convertible debt, previously accrued   1,866,667    1,867    (1,867)            
Stock based compensation, previously accrued   306,000    306    63,018            63,324 
Net income               202,519    (73,018)   129,501 
 Balance, March 31, 2017   26,803,994   $26,804   $24,081,761   $(9,898,015)  $938,631   $15,149,181 

 

See the accompanying notes to these unaudited condensed consolidated financial statements

5

 

FIRST CHOICE HEALTHCARE SOLUTIONS, INC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)

 

   For the Three months ended March 31, 
   2017   2016 
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net Income  $129,501   $9,620,448 
Adjustments to reconcile net income to cash (used in) provided by operating activities:          
Depreciation and amortization   189,488    298,950 
Amortization of financing costs       15,325 
Bad debt expense   264,996    262,524 
Gain on sale of property       (9,188,968)
Common stock issued in connection with loan extension       92,000 
Stock based compensation   63,324    81,300 
Changes in operating assets and liabilities:          
Accounts receivable   (1,118,306)   (1,087,059)
Prepaid expenses and other current assets   (229,258)   91,623 
Restricted funds       359,414 
Employee loans   (132,791)   (245,933)
Accounts payable and accrued expenses   353,849    122,628 
Settlement payable       (150,000)
Deposits       (14,432)
Deferred rent   51,871    59,404 
Unearned income   16,918     
 Net cash (used in) provided by operating activities   (410,408)   317,224 
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Proceeds from sale of property       15,068,497 
Purchase of equipment   (173,729)   (126,073)
 Net cash (used in) provided by investing activities   (173,729)   14,942,424 
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Proceeds from advances       90,714 
Proceeds from notes payable   22,113     
Proceeds from line of credit       372,636 
Payments on notes payable   (130,125)   (7,265,997)
Net cash used in financing activities   (108,012)   (6,802,647)
           
Net (decrease) increase in cash and cash equivalents   (692,149)   8,457,001 
Cash and cash equivalents, beginning of period   4,593,638    1,594,998 
           
Cash and cash equivalents, end of period  $3,901,489   $10,051,999 
           
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:          
Cash paid during the period for interest  $32,328   $181,135 
Cash paid during the period for taxes  $   $ 

 

See the accompanying notes to these unaudited condensed consolidated financial statements

6

 

FIRST CHOICE HEALTHCARE SOLUTIONS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2017

 

NOTE 1 — BASIS OF PRESENTATION

 

A summary of the significant accounting policies applied in the presentation of the accompanying unaudited condensed consolidated financial statements follows:

 

General

 

The (a) condensed consolidated balance sheet as of December 31, 2016, which has been derived from the audited financial statements of First Choice Healthcare Solutions, Inc. (“FCHS” and including, where appropriate, its consolidated subsidiaries and entities in which we have a controlling financial interest, the “Company”), and (b) the unaudited condensed consolidated interim financial statements as of March 31, 2017 and 2016 of the Company have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. To determine if we hold a controlling financial interest in an entity, we first evaluate if we are required to apply the variable interest entity (“VIE”) model to the entity, otherwise the entity is evaluated under the voting interest model.

 

Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2017 are not necessarily indicative of results that may be expected for the year ending December 31, 2017. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2016 included in the Company’s Annual Report on Form 10-K/A, filed with the Securities and Exchange Commission (the “SEC”) on April 3, 2017.

 

Basis of Presentation

 

Effective April 4, 2012, Medical Billing Assistance, Inc., a Colorado corporation (“Medical Billing”), merged with and into the Company. The effect of the merger was that Medical Billing reincorporated from Colorado to Delaware (the “Reincorporation”). The Company is deemed to be the successor issuer of Medical Billing under Rule 12g-3 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

 

Other than the foregoing, the Reincorporation did not result in any change in the business, management, fiscal year, accounting, and location of the principal executive offices, assets or liabilities of the Company.

 

On April 2, 2012, the Company completed its acquisition of First Choice Medical Group of Brevard, LLC (“FCMG - Brevard”), pursuant to the Membership Interest Purchase Closing Agreement (the “Purchase Agreement”). The Company has been managing the practice of First Choice – Brevard since November 1, 2011, pursuant to a Management Services Agreement.

 

Brevard Orthopedic Spine & Pain Clinic, Inc.

  

Effective May 1, 2015, the Company, through its wholly owned subsidiary, TBC Holdings of Melbourne, Inc., entered into an Operating and Control Agreement (the Agreement”) with Brevard Orthopaedic Spine & Pain Clinic, Inc. (“The B.A.C.K. Center”), whereby we have sole and exclusive management and control of The B.A.C.K. Center, including, but not limited to, administrative, financial, facility and business operations including the requirement to absorb losses or right to receive economic benefits. We issued 3,000,000 options to purchase our Company’s Common Stock at $1.35 per share to The B.A.C.K. Center employees providing specific qualifications are met. The initial term of the Agreement relating to the options expired on December 31, 2016, with the Company having the right to extend the term until December 31, 2023. We exercised our option to extend the term until December 31, 2017. 

7

 

FIRST CHOICE HEALTHCARE SOLUTIONS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2017

 

The Agreement allows the Company to hold the current or potential rights that give it the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance, combined with a variable interest that gives the Company the right to receive potentially significant benefits or the obligation to absorb potentially significant losses. The Company has a controlling financial interest in the VIE. Rights held by others to remove the party with power over the VIE are not considered unless one party can exercise those rights unilaterally. When changes occur to the structure of the entity, the Company will reconsider whether it is subject to the VIE model. The Company continuously evaluates whether it has a controlling financial interest in the VIE.

 

Crane Creek Surgery Center

 

Effective October 1, 2015, the Company, through its wholly owned subsidiary, CCSC Holdings, Inc., acquired a 40% interest in Crane Creek Surgery Center (“Crane Creek”). In connection with the investment, the Company is entitled to 51% voting rights for all decisions that most significantly affect the economic performance of Crane Creek. The 40% equity interest acquired entitles the Company to 40% of the profit or loss of Crane Creek.

 

Non-controlling interests relate to the third-party ownership in a consolidated entity in which the Company has a controlling interest. For financial reporting purposes, the entity’s assets, liabilities, and operations are consolidated with those of the Company, and the non-controlling interest in the entity is included in the Company’s consolidated financial statements within the equity section of the consolidated Balance Sheets.

 

The unaudited condensed consolidated financial statements include the accounts of the Company and its direct and indirect wholly owned subsidiaries: Marina Towers, LLC, FCID Medical Inc., TBC Holdings of Melbourne, Inc., First Choice – Brevard, Surgical Partners of Melbourne, Inc. and CCSC Holdings, Inc., along with two VIEs, The B.A.C.K. Center and Crane Creek. All significant intercompany balances and transactions, including those involving the VIEs, have been eliminated in consolidation.

 

NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES

 

Use of estimates

 

The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. Significant estimates include the recoverability and useful lives of long-lived assets, provision against bad debt, the fair value of the Company’s stock, and stock-based compensation. Actual results may differ from these estimates.

 

Revenue recognition

 

The Company recognizes revenue when: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the selling price is fixed or determinable; and (4) collectability is reasonably assured. Determination of criteria (3) and (4) are based on management’s judgments regarding the fixed nature of the selling prices of the products delivered and the collectability of those amounts. Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments are provided for in the same period the related sales are recorded.

 

ASC 605-10 incorporates Accounting Standards Codification subtopic 605-25, “Multiple-Element Arrangements” (“ASC 605-25”). ASC 605-25 addresses accounting for arrangements that may involve the delivery or performance of multiple products, services and/or rights to use assets. The effect of implementing ASC 605-25 on the Company’s financial position and results of operations was not significant.

 

The Company recognizes in accordance with Accounting Standards Codification subtopic 954-310, “Health Care Entities” (“ASC 954-310”), significant patient service revenue at the time the services are rendered, even though it does not assess the patient’s ability to pay. Therefore, The Company’s interim and annual periods reports disclose both, its policy for assessing and disclosing the timing and amount of uncollectable patient service revenue recognized as doubtful. Qualitative and quantitative information about significant changes in the allowance for doubtful accounts related to patient accounts receivable are disclosed in the Company’s reports. These estimates are based upon the history and identified trends for each of our payers.

8

 

FIRST CHOICE HEALTHCARE SOLUTIONS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2017

 

Patient service revenue

 

The Company recognizes patient service revenue associated with services provided to patients who have third-party payer coverage on the basis of contractual rates for the services provided. For uninsured or self-pay patients that do not qualify for charity care, the Company recognizes revenue on the basis of its standard rates for services provided (or on the basis of discounted rates, if negotiated or provided by policy). On the basis of historical experience, a portion of the Company’s patient service revenue may be potentially uncollectible due to patients who are unable or unwilling to pay for the services provided or the portion of their bill for which they are responsible. Thus, the Company records a provision for bad debts related to potentially uncollectible patient service revenue in the period the services are provided.

 

Concentrations of credit risk

 

The Company’s financial instruments that are exposed to a concentration of credit risk are cash and accounts receivable. Occasionally, the Company’s cash and cash equivalents in interest-bearing accounts may exceed FDIC insurance limits. The financial stability of these institutions is periodically reviewed by senior management. Revenues and accounts receivable are concentrated between two major payers, Medicare at approximately 30% and a third party commercial insurer at approximately 20%.

 

Accounts receivables

 

As of March 31, 2017 and December 31, 2016, the Company’s allowance for bad debts was $3,750,802 and $3,680,837, respectively.

9

 

FIRST CHOICE HEALTHCARE SOLUTIONS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2017

 

Net income per share

 

Basic net income per common share is based upon the weighted-average number of common shares outstanding. Diluted net income per common share is based on the weighted-average number of common shares outstanding and potentially dilutive common shares outstanding and computed as follows:

 

   Three months ended March 31, 
   2017   2016 
Numerator:          
Net income  $202,519   $9,566,941 
           
Denominator:          
Weighted-average common shares, basic   26,252,505    22,886,307 
Weighted-average common shares, diluted   27,052,505    25,552,974 
           
Basic:  $0.01   $0.42 
Diluted:  $0.01   $0.37 

 

The diluted earnings per common share included the effect of 800,000 and 2,666,667 common shares issuable upon the conversion of debt for the three months ended March 31, 2017 and 2016, respectively.

 

Potentially dilutive common shares from employee equity plans and issued warrants are determined by applying the treasury stock method to the assumed exercise of warrants and share options are were excluded from the computation of the diluted net income per share because their inclusion would be anti-dilutive. In addition, there were no vested restrict stock for periods presented. Potentially dilutive securities excluded from the basic and diluted net income per share are as follows:

 

   March 31, 
   2017   2016 
Warrants to purchase common stock   1,875,000    4,324,630 
Options to purchase common stock   3,000,000    3,000,000 
Restricted stock awards   660,000     
    5,535,000    7,324,630 

 

Reclassification

 

Certain reclassifications have been made to prior periods’ data to conform to the current year’s presentation. These reclassifications had no effect on reported income or losses.

 

Recent accounting pronouncements

 

There are updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to a have a material impact on the Company’s financial position, results of operations or cash flows.

 

In January 2017, the FASB issued Accounting Standards Update (“ASU”) 2017-04, Intangibles – Goodwill and Other (Topic 350). The amendments in this update simplify the test for goodwill impairment by eliminating Step 2 from the impairment test, which required the entity to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities following the procedure that would be required in determining fair value of assets acquired and liabilities assumed in a business combination. The amendments in this update are effective for public companies for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. We are evaluating the impact of adopting this guidance on our Consolidated Financial Statements.

 

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805); Clarifying the Definition of a Business. The amendments in this update clarify the definition of a business to help companies evaluate whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The amendments in this update are effective for public companies for annual periods beginning after December 15, 2017, including interim periods within those periods. We are evaluating the impact of adopting this guidance on our Consolidated Financial Statements. 

 

Subsequent events

 

The Company evaluates events that have occurred after the balance sheet date but before the financial statements are issued. Based upon the evaluation, the Company did not identify any recognized or non-recognized subsequent events that would have required adjustment or disclosure in the condensed consolidated financial statements, except as disclosed.

10

 

FIRST CHOICE HEALTHCARE SOLUTIONS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2017

 

NOTE 3 – LIQUIDITY

 

The Company incurred various non-recurring expenses in 2016 in connection with the planned development of its Healthcare Services Business. Management believes continued growth of earnings before interest, taxes, depreciation and amortization in 2017 will support improved liquidity.

 

The Company believes that the current cash balance and line of credit (see notes), along with continued execution of its business development plan, will allow the Company to further improve its working capital; and currently anticipates that it will have sufficient capital resources to meet projected cash flow requirements through the date at least one year from the filing of this report.

 

However, in order to execute the Company’s business development plan, which there can be no assurance we will achieve, the Company may need to raise additional funds through public or private equity offerings, debt financings, corporate collaborations or other means and potentially reduce operating expenditures. If the Company is unable to secure additional capital, it may be required to curtail its business development initiatives and take additional measures to reduce costs in order to conserve its cash.

 

NOTE 4 — OTHER ASSETS

 

Other assets are comprised of the following:

  

March 31,

2017

  

December 31,

2016

 
Goodwill (amount relating to VIE of $899,465)  $899,465   $899,465 
Deferred costs, net of amortization of $618,401 and $537,740   2,608,026    2,688,687 
Patient list, net of accumulated amortization of $100,000 and $95,000   200,000    205,000 
Patents, net of accumulated amortization of $62,075 and $57,300   224,425    229,200 
Investments (amounts related to VIE of $22,005)   22,005    22,005 
Deferred tax asset   181,029    181,029 
Deposits   2,571    2,571 
Total other assets  $4,137,521   $4,227,957 

11

 

FIRST CHOICE HEALTHCARE SOLUTIONS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2017

 

NOTE 5 — LINES OF CREDIT

 

Line of credit, CT Capital

 

FCMG - Brevard entered into a Loan and Security Agreement (the “Loan Agreement”) with CT Capital, Ltd., d/b/a CT Capital, LP, a Florida limited liability partnership (the “Lender”). Under the Loan Agreement, the Lender committed to make an accounts receivable line of credit in the maximum aggregate amount of $2,500,000 to FCMG - Brevard with an interest rate of 6% per annum (the “Loan”). The maturity date of the Loan is June 30, 2017. Interest is due and payable monthly. The Lender may convert up to $2,000,000 of the outstanding principal amount or interest on the Loan into common stock of the Company at a conversion price of $0.75 per share.

 

On March 30, 2017, the Company’s Loan and Security Agreement with CT Capital, Ltd. (“Lender”) was amended to extend the Maturity Date to June 30, 2018 (the “Loan”) and further provide that neither the Company nor Lender shall effectuate any conversion of the Loan to the extent that after giving effect to any such conversion, the Lender would beneficially own in excess of 9.99% of the number of shares of our Company’s shares of Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock issuable upon conversion of the Loan by the Lender.

 

As of March 31, 2017 and December 31, 2016, the outstanding balance was $1,100,000 and the remaining principal amount the Lender can convert into common stock is $600,000.

 

Line of credit, Florida Business Bank

 

The B.A.C.K. Center is a party to a Promissory Note (the “Loan Agreement”) with Florida Business Bank, a Florida banking corporation (the “Lender”). Under the Loan Agreement, the Lender committed to make an accounts receivable line of credit in the maximum aggregate amount of $1,383,000 (as amended), with an interest rate of Prime floating plus 1.0%, as published in The Wall Street Journal, with a floor of 2.75% per annum (the “Loan”) (as amended).

 

Interest shall be due and payable monthly and principal is due on demand. The outstanding principal balance plus all accrued but unpaid interest shall be due on demand (the “Maturity Date”). Upon default, the interest may be adjusted to the highest rate permissible by law.

 

The Loan is secured by all assets of The B.A.C.K. Center now owned or hereafter acquired. The assets constitute the collateral for the repayment of the Loan.

 

The Loan Agreement also includes covenants, representations, warranties, indemnities and events of default that are customary for facilities of this type. The advance rate is defined as: 60% of eligible accounts receivables. Eligible receivables include all Medicare and Medicaid receivables less than 90 days old multiplied by a factor of 0.25, plus all other receivables less than 90 days old multiplied by a factor of 0.50. As of March 31, 2017, The B.A.C.K. Center had not violated the loan covenants.

 

The obligations of The B.A.C.K Center under the Loan Agreement are guaranteed by the shareholders of The B.A.C.K. Center. The Loan Agreement is also guaranteed in the amount of $950,000 by related parties of The B.A.C.K. Center. As of March 31, 2017 and December 31, 2016, the outstanding balance on the Loan was $439,524.

 

NOTE 6 — COMMITMENTS AND CONTINGENCIES

 

Litigations, Claims and Assessments

 

From time to time, we may become involved in lawsuits and legal proceedings which arise in the ordinary course of business including potential disputes with patients. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. Our contracts with hospitals generally requires us to indemnify them and their affiliates for losses resulting from the negligence of our physicians. Currently, we have no pending litigation that is deemed to be material.

12

 

FIRST CHOICE HEALTHCARE SOLUTIONS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2017

 

NOTE 7 — CAPITAL STOCK

 

During the three months ended March 31, 2017, the Company issued an aggregate of 306,000 shares of its common stock to officers, employees and service providers at an aggregate fair value of $301,840, which were earned and expensed in 2016.

 

During the three months ended March 31, 2017, the Company issued 1,866,667 shares of its common stock in exchange for $1,400,000 in convertible debt. The value of shares was recorded as a share issuance liability as of December 31, 2016 and issued in the first quarter of 2017.

 

NOTE 8 — STOCK OPTIONS, WARRANTS AND RESTRICTED STOCK UNITS

 

Restricted Stock Units (“RSU”)

 

The following table summarizes the restricted stock activity for the three months ended March 31, 2017:

 

Restricted shares units issued as of December 31, 2016   660,000 
Granted    
Forfeited    
Total Restricted Shares Issued at March 31, 2017   660,000 
Vested at March 31, 2017    
Unvested restricted shares as of March 31, 2017   660,000 

 

At March 31, 2017, the Company determined that there is a 100% probability the performance based restricted stock units will be earned. The fair value of all restricted stock units vesting during the three months ended March 31, 2017 and 2016 of $63,324 and $-0-, respectively, was charged to current period operations.

 

As of March 31, 2017, stock-based compensation related to restricted stock awards of $488,830 remains unamortized and is expected to be amortized over the weighted average remaining period of 2.13 years.

 

NOTE 9 — VARIABLE INTEREST ENTITY

 

Brevard Orthopaedic Spine & Pain Clinic, Inc.

 

Effective May 1, 2015, the Company, through its wholly owned subsidiary, TBC Holdings of Melbourne, Inc., entered into an Operating and Control Agreement (the “Agreement”) with Brevard Orthopaedic Spine & Pain Clinic, Inc. (“The B.A.C.K. Center”), whereby we have sole and exclusive management and control of The B.A.C.K. Center, including, but not limited to, administrative, financial, facility and business operations including the requirement to absorb losses or right to receive economic benefits. We issued 3,000,000 options to purchase our Company’s Common Stock at $1.35 per share with vesting contingent on The B.A.C.K. Center employees signing employment contracts with First Choice – Brevard. The initial term of the Agreement relating to the options expired on December 31, 2016, with the Company having the right to extend the term until December 31, 2023. We exercised our option to extend the term until December 31, 2017.

 

The Company has determined that The B.A.C.K. Center is a Variable Interest Entity (“VIE”). In evaluating whether the Company has the power to direct the activities of a VIE that most significantly impact its economic performance, the Company considers the purpose for which the VIE was created, the importance of each of the activities in which it is engaged and the Company’s decision-making role, if any, in those activities that significantly determine the entity’s economic performance as compared to other economic interest holders. This evaluation requires consideration of all facts and circumstances relevant to decision-making that affects the entity’s future performance and the exercise of professional judgment in deciding which decision-making rights are most important.

 

In determining whether the Company has the right to receive benefits or the obligation to absorb losses that could potentially be significant to the VIE, the Company evaluates all of its economic interests in the entity, regardless of form (debt, equity, management and servicing fees, and other contractual arrangements). This evaluation considers all relevant factors of the entity’s structure, including: the entity’s capital structure, contractual rights to earnings (losses), subordination of our interests relative to those of other investors, contingent payments, as well as other contractual arrangements that have potential to be economically significant.

13

 

FIRST CHOICE HEALTHCARE SOLUTIONS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2017

 

The evaluation of each of these factors in reaching a conclusion about the potential significance of the Company’s economic interests is a matter that requires the exercise of professional judgment. The assets of The B.A.C.K. Center can only be used to settle obligations of the VIE, additionally, creditors of The B.A.C.K. Center do not have recourse against the general credit of the primary beneficiary. 

 

The tables below summarize the assets and liabilities associated with The B.A.C.K. Center as of March 31, 2017 and December 31, 2016:

 

  

March 31,

2017

  

December 31,

2016

 
Current assets:          
Cash  $813,427   $355,491 
Accounts receivable   4,826,389    4,830,054 
Other current assets   772,001    691,847 
Total current assets   6,411,817    5,877,392 
Property and equipment, net   71,226    70,444 
Other assets   22,005    22,005 
Total assets  $6,505,048   $5,969,841 
Current liabilities:          
Accounts payable and accrued liabilities  $1,242,054   $904,684 
Due to First Choice Healthcare Solutions, Inc.   3,040,529    2,867,539 
Other current liabilities   677,447    677,446 
Total current liabilities   4,960,030    4,449,669 
Long term debt   1,683,704    1,658,858 
Total liabilities   6,643,734    6,108,527 
Non-controlling interest   (138,686)   (138,686)
Total liabilities and deficit  $6,505,048   $5,969,841 

 

Total revenues from The B.A.C.K. Center were $3,430,655 for the three months ended March 31, 2017. Related expenses consisted primarily of salaries and benefits of $1,718,717, operating expenses of $856,482, general and administrative expenses of $720,232, depreciation of $6,162, interest and financing costs of $3,904; and other income of $45,684 for the three months ended March 31, 2017. (See Note 11 – Segment Reporting)

 

Total revenues from The B.A.C.K. Center were $3,392,997 for the three months ended March 31, 2016. Related expenses consisted primarily of salaries and benefits of $1,457,911, operating expenses of $858,301, general and administrative expenses of $723,492, depreciation of $5,515 and interest and financing costs of $3,447 and other income of $56,725. (See Note 11 – Segment Reporting)

 

Crane Creek Surgery Center

 

Effective October 1, 2015, the Company, through its then newly formed wholly owned subsidiary, CCSC Holdings, Inc., acquired a 40% interest in Crane Creek Surgery Center (“Crane Creek”).

 

In connection with the investment, the Company is entitled to 51% voting rights for all decisions that most significantly affect the economic performance of Crane Creek. The 40% equity interest acquired entitles the Company to 40% of the profit or loss of Crane Creek.

 

The Company has determined that Crane Creek is a Variable Interest Entity (“VIE”). In evaluating whether the Company has the power to direct the activities of a VIE that most significantly impact its economic performance, the Company considers the purpose for which the VIE was created, the importance of each of the activities in which it is engaged and the Company’s decision-making role, if any, in those activities that significantly determine the entity’s economic performance as compared to other economic interest holders.

14

 

FIRST CHOICE HEALTHCARE SOLUTIONS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2017

 

This evaluation requires consideration of all facts and circumstances relevant to decision-making that affects the entity’s future performance and the exercise of professional judgment in deciding which decision-making rights are most important.

 

In determining whether the Company has the right to receive benefits or the obligation to absorb losses that could potentially be significant to the VIE, the Company evaluates all of its economic interests in the entity, regardless of form (debt, equity, management and servicing fees, and other contractual arrangements). This evaluation considers all relevant factors of the entity’s structure, including: the entity’s capital structure, contractual rights to earnings (losses), subordination of our interests relative to those of other investors, contingent payments, as well as other contractual arrangements that have potential to be economically significant. The evaluation of each of these factors in reaching a conclusion about the potential significance of the Company’s economic interests is a matter that requires the exercise of professional judgment.

 

The assets of Crane Creek can only be used to settle obligations of the VIE, additionally, creditors of the Crane Creek do not have recourse against the general credit of the primary beneficiary.

 

The tables below summarize the assets and liabilities associated with the Crane Creek as of March 31, 2017 and December 31, 2016:

 

  

March 31,

2017

  

December 31,

2016

 
Current assets:          
Cash  $94,714   $353,367 
Accounts receivable   1,286,577    1,180,907 
Other current assets   112,510    129,430 
Total current assets   1,493,801    1,663,704 
Property and equipment, net   606,792    623,185 
Goodwill   899,465    899,465 
Total assets  $3,000,058   $3,186,354 

 

  

March 31,

2017

  

December 31,

2016

 
Current liabilities:          
Accounts payable and accrued liabilities  $396,094   $461,489 
Other current liabilities   251,588    251,588 
Total current liabilities   647,682    713,077 
Deferred rent   556,848    556,051 
Total liabilities   1,204,530    1,269,128 
           
Equity-First Choice Healthcare Solutions, Inc.   718,211    766,891 
Non-controlling interest   1,077,317    1,150,335 
Total liabilities and deficit  $3,000,058   $3,186,354 

 

Total revenues from Crane Creek were $1,190,425 for the three months ended March 31, 2017. Related expenses consisted primarily of salaries and benefits of $298,299, surgical supplies and operating expenses of $852,122, general and administrative expenses of $136,354, depreciation of $28,149, interest expense of $866 and miscellaneous income of $3,668 for the three months ended March 31, 2017. (See Note 11 – Segment Reporting)

 

Total revenues from the Crane Creek were $1,271,308 for the three months ended March 31, 2016. Related expenses consisted primarily of salaries and benefits of $293,337, surgical supplies and operating of $709,646, general and administrative expenses of $109,275, depreciation of $71,256, interest expense of $8,726 and miscellaneous income of $1,382. (See Note 11 – Segment Reporting)

15

 

FIRST CHOICE HEALTHCARE SOLUTIONS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2017

 

NOTE 10 — NON-CONTROLLING INTEREST

 

Effective May 1, 2015, the Company, through its wholly owned subsidiary, TBC Holdings of Melbourne, Inc., entered into an Operating and Control Agreement (the Agreement”) with Brevard Orthopaedic Spine & Pain Clinic, Inc. (“The B.A.C.K. Center”), whereby we have sole and exclusive management and control of The B.A.C.K. Center, including, but not limited to, administrative, financial, facility and business operations including the requirement to absorb losses or right to receive economic benefits. We issued 3,000,000 options to purchase our Company’s Common Stock at $1.35 per share with vesting contingent on The B.A.C.K. Center employees signing employment contracts with First Choice – Brevard. The initial term of the Agreement relating to the options expired on December 31, 2016, with the Company having the right to extend the term until December 31, 2023. We exercised our option to extend the term until December 31, 2017.

 

A reconciliation of the non-controlling income attributable to the Company:

 

Net income attributable to non-controlling interest for the three months ended March 31, 2017:

 

Net income  $170,842 
Average Non-controlling interest percentage of profit/losses   -0-%
Net income attributable to the non-controlling interest  $-0- 

 

Net loss attributable to non-controlling interest for the three months ended March 31, 2016:

 

Net income  $328,741 
Average Non-controlling interest percentage of profit/losses   -0-%
Net income attributable to the non-controlling interest  $-0- 

 

The following table summarizes the changes in non-controlling interest from December 31, 2016 through March 31, 2017:

 

Balance, December 31, 2016  $(138,686)
Transfer (to) from the non-controlling interest as a result of change in ownership    
Net income attributable to the non-controlling interest    
Balance, March 31, 2017  $(138,686)

 

Effective October 1, 2015, the Company, through its wholly owned subsidiary, CCSC Holdings, Inc., acquired a 40% interest in Crane Creek Surgery Center (“Crane Creek”). In connection with the investment, the Company is entitled to 51% voting rights for all decisions that most significantly affect the economic performance of Crane Creek. The 40% equity interest acquired entitles the Company to 40% of the profit or loss of Crane Creek.

 

A reconciliation of the non-controlling income attributable to the Company:

 

Net loss attributable to non-controlling interest for the three months ended March 31, 2017:

 

Net loss  $(121,698)
Average Non-controlling interest percentage of profit/losses   60%
Net income/loss attributable to the non-controlling interest  $(73,018)

 

Net income attributable to non-controlling interest for the three months ended March 31, 2016:

 

Net income  $89,177 
Average non-controlling interest percentage of profit/losses   60%
Net income/loss attributable to the non-controlling interest  $53,507 

16

 

FIRST CHOICE HEALTHCARE SOLUTIONS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2017

 

The following table summarizes the changes in non-controlling interest from December 31, 2016 through March 31, 2017:

 

Balance, December 31, 2016   1,150,335 
Transfer (to) from the non-controlling interest as a result of change in ownership    
Net income attributable to the non-controlling interest   (73,018)
Balance, March 31, 2017  $1,077,317 

 

NOTE 11 — SEGMENT REPORTING

 

The Company reports segment information based on the “management” approach. The management approach designates the internal reporting used by management for making decisions and assessing performance as the source of the Company’s reportable segments. The Company has three reportable segments: FCID Medical, Inc., The B.A.C.K. Center and CCSC Holdings, Inc. (“CCSC”).

 

All reportable segments derive revenue for medical services provided to patients; and The B.A.C.K Center additionally derives revenue for subleasing space within its building and medical services provided to patients. With the aforementioned sale and leaseback of Marina Towers on March 31, 2016, the Company will no longer report segmented rental revenue received from third-party Marina Tower tenants under the segment heading “Marina Towers.” Rather, the Company has consolidated rental revenue received from third-party tenants of Marina Towers under the “Corporate” segment for both the 2017 and 2016 comparable reporting periods; and will continue to do so hereafter.

 

Information concerning the operations of the Company’s reportable segments is as follows:

 

Summary Statement of Income for the three months ended March 31, 2017:

 

       The                 
   FCID   B.A.C.K.           Intercompany     
   Medical   Center   CCSC   Corporate   Eliminations   Total 
Revenue:                              
Net Patient Service Revenue  $2,860,986   $3,090,579   $1,190,425   $   $   $7,141,990 
Rental revenue       340,076         431,850    (193,563)   578,363 
Total Revenue   2,860,986    3,430,655    1,190,425    431,850    (193,563)   7,720,353 
                               
Operating expenses:                              
Salaries & benefits   1,095,236    1,718,717    298,299    242,124         3,354,376 
Other operating expenses   591,151    856,482    852,122    408,861    (179,433)   2,529,183 
General and administrative   525,309    638,798    136,354    249,502    (14,130)   1,535,833 
Depreciation and amortization   69,741    6,162    28,149    85,436        189,488 
Total operating expenses   2,281,437    3,220,159    1,314,924    985,923    (193,563)   7,608,880 
                               
Net income (loss) from operations:   579,549    210,496    (124,499)   (554,073)       111,473 
                               
Interest income (expense)   (27,558)   (3,904)   (866)   254        (32,074)
Other income       45,684    3,668    750        50,102 
                               
Net Income (Loss) before income taxes:   551,991    252,276    (121,697)   (553,069)       129,501 
                               
Income taxes                          
                               
Net income (Loss)   551,991    252,276    (121,697)   (553,069)       129,501 
                               
Non-controlling interest           73,018            73,018 
                               
Net income (loss) attributable to First Choice Healthcare Solutions  $551,991   $252,276   $(48,679)  $(553,069)  $   $202,519 

17

 

FIRST CHOICE HEALTHCARE SOLUTIONS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2017

 

Summary Statement of Income for the three months ended March 31, 2016:

 

       The                 
   FCID   B.A.C.K.           Intercompany     
   Medical   Center   CCSC   Corporate   Eliminations   Total 
Revenue:                              
Net Patient Service Revenue  $2,308,935   $3,034,898   $1,271,308   $   $   $6,615,141 
Rental revenue       358,099         428,246    (159,733)   626,612 
Total Revenue   2,308,935    3,392,997    1,271,308    428,246    (159,733)   7,241,753 
                               
Operating expenses:                              
Salaries & benefits   829,220    1,457,911    293,337    200,101        2,780,569 
Other operating expenses   531,407    858,301    709,646    105,954    (159,733)   2,045,575 
General and administrative   361,803    723,492    109,275    353,006        1,547,576 
Depreciation and amortization   66,792    5,515    71,256    155,387        298,950 
Total operating expenses   1,789,222    3,045,219    1,183,514    814,448    (159,733)   6,672,670 
                               
Net income (loss) from operations:   519,713    347,778    87,794    (386,202)       569,083 
                               
Interest income (expense)   (56,818)   (2,459)   (8,726)   (113,132)       (181,135)
Amortization of financing costs       (988)       (14,337)       (15,325)
Gain on sale of property               9,188,968        9,188,968 
Other income (expense)       56,725    1,382    750        58,857 
                               
Net Income (loss) before income taxes:   462,895    401,056    80,450    8,676,047        9,620,448 
                               
Income taxes                          
                               
Net income   462,895    401,056    80,450    8,676,047        9,620,448 
                               
Non-controlling interest           (53,507)           (53,507)
                               
Net income attributable to First Choice Healthcare Solutions  $462,895   $401,056   $26,943   $8,676,047   $   $9,566,941 

 

Selected financial data:

 

   FCID   Brevard   The Crane         
   Medical   Orthopaedic   Center   Corporate   Total 
Assets:                         
At March 31, 2017:  $7,078,560   $6,533,306   $3,000,058   $6,041,621   $22,653,545 
At December 31, 2016:  $6,033,019   $5,995,253   $3,186,354   $6,931,468   $22,146,094 
                          
Assets acquired                         
Three months ended March 31, 2017  $150,329   $6,944   $11,756   $4,500   $173,529 
Three months ended March 31, 2016  $49,893   $2,116   $24,240   $49,824   $126,073 

 

NOTE 12 – SUBSEQUENT EVENTS

 

Effective May 5, 2017, we appointed Marcum LLP (“Marcum”) as our independent registered public accounting firm. Our engagement was approved by our Board of Directors. We previously reported in our Current Report on Form 8-K (date of Report: May 5, 2017), as filed with the Securities and Exchange Commission on May 9, 2017, our termination of our prior independent registered public accounting firm, RBSM, LLP.

18

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

This quarterly report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (“Securities Act”), and Section 21E of the Securities Exchange Act of 1934 (“Exchange Act”). Forward-looking statements reflect the current view about future events. When used in this quarterly report on Form 10-Q, the words “anticipate,” “believe,” “estimate,” “expect,” “future,” “intend,” “plan,” or the negative of these terms and similar expressions, as they relate to us or our management, identify forward-looking statements. Such statements, include, but are not limited to, statements contained in this quarterly report on Form 10-Q relating to our business strategy, our future operating results, and our liquidity and capital resources outlook. Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy and other future conditions. Because forward–looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Our actual results may differ materially from those contemplated by the forward-looking statements. They are neither statements of historical fact nor guarantees of assurance of future performance. We caution you therefore against relying on any of these forward-looking statements. Important factors that could cause actual results to differ materially from those in the forward-looking statements include, without limitation, the execution of our strategy to grow our business by hiring additional physicians to create Medical Centers of Excellence that fit our defined criteria; evolving healthcare laws and regulations; changes in the rates or methods of third-party reimbursements for medical services; accelerated pace of consolidation in the hospital industry; changes in our medical technology as it relates to our services and procedures; any failures in our information technology systems to protect the privacy and security of protected information and other similar cyber security risks; our ability to raise capital to fund continuing operations; and other factors relating to our industry, our operations and results of operations and any new Medical Centers of Excellence that we may open. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended or planned.

 

Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We cannot guarantee future results, levels of activity, performance or achievements. Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results.

 

Overview

 

First Choice Healthcare Solutions, Inc. (“FCHS,” “the Company,” “we,” “our” or “us”) is implementing the second phase of a defined growth strategy aimed at building a network of localized, integrated healthcare delivery platforms in key expansion markets throughout the Southeastern U.S. Our flagship platform in Melbourne, Florida is comprised of non-physician-owned medical centers of excellence, which concentrate on treating patients in the following specialties: Orthopaedics, Spine Surgery, Neurology and Interventional Pain Management; and provide a robust offering of related diagnostic and ancillary services – all centrally located in a geographic region.

 

Successful implementation of our first phase allowed us to confirm that by integrating the synergistic mix of Orthopaedic, Spine Surgery, Neurology and Interventional Pain specialties with related diagnostic and ancillary services and state-of-the-art equipment and technologies across legacy brick-and-mortar boundaries, we are able to effectively:

 

provide patients with direct and convenient access to musculoskeletal and rehabilitative care via our best-in-class team of surgeons, physicians and care specialists, and wide array of ancillary and diagnostic services, which includes, but is not limited to, magnetic resonance imaging (“MRI”), X-ray (“X-ray”), durable medical equipment (“DME”) and rehabilitative care, including physical therapy (“PT”) and occupational therapy (“OT”).

 

empower physicians to collaborate as a unified care team, optimizing care coordination and improving patient outcomes;

 

advance the quality and cost effectiveness of our patients’ healthcare, thereby achieving faster recoveries at materially reduced cost to payors; and

 

achieve strong, sustainable financial performance that serves to create long-term value for our stockholders.

19

 

Our goal is to build a network of non-physician-owned and operated Medical Centers of Excellence in diverse locations, primarily throughout the southeastern region of the United States. By centralizing current and future Centers’ business management functions, including call center operations, scheduling, billing, compliance, accounting, marketing, advertising, legal, information technology and record-keeping, at our corporate headquarters, we will maintain efficiencies and achieve scales of economies. We believe our structure will enable our staff physicians to focus on the practice of medicine and the delivery of quality care to the patients we serve, as opposed to having their time and attention focused on business administration responsibilities. As of March 31, 2017, we had 166 employees, including 13 doctors and nine physician assistants.

 

Our Healthcare Services Business

 

We have operated as First Choice Healthcare Solutions, Inc., a Delaware corporation, since February 13, 2012. Our corporate address is 709 S. Harbor City Blvd., Suite 530, Melbourne, Florida, 32901 and our phone number is 321-725-0090. Our corporate website address is www.myfchs.com. Information contained in our website is not incorporated by reference herein. In 2016, we operated our business through seven wholly owned subsidiaries; and in 2017, we have operated our business through five wholly owned subsidiaries.

 

FCID Medical, Inc. (“FCID Medical”) is the subsidiary under which we wholly own and operate First Choice Medical Group of Brevard, LLC (“FCMG”), our original Medical Center of Excellence located in Melbourne, Florida. First Choice Medical Group specializes in the delivery of Orthopaedics, Sports Medicine, Neurology and Interventional Pain Medicine, as well as diagnostic and ancillary services. The web site is www.myfcmg.com.

 

TBC Holdings of Melbourne, Inc. (“TBC Holdings”) is our wholly owned subsidiary that operates and controls Brevard Orthopaedic Spine & Pain Clinic, Inc., d/b/a The B.A.C.K. Center (“TBC”). Pursuant to an Operation and Control Agreement with The B.A.C.K. Center, TBC Holdings exercises effective control over the business of the practice to treat it as a Variable Interest Entity in accordance with Financial Accounting Standards Board and Accounting Standards Codification, effective May 1, 2015. As a result, we include the financial results of TBC in our consolidated financial statements in accordance with generally accepted accounting principles. TBC specializes in Orthopaedic Spine Surgery and Interventional Pain Management, and its website is www.thebackcenter.net.

 

In addition, TBC subleases 29,629 square feet of commercial office space to affiliated and non-affiliated tenants, including 18,828 square feet to Crane Creek Surgery Center (“CCSC”), located at 2222 South Harbor City Boulevard, Melbourne, Florida 32901, which is also TBC’s main medical practice location.

 

CCSC Holdings, Inc. (“CCSC Holdings”) is our wholly owned subsidiary which acquired a 40% interest in Crane Creek Surgery Center (“CCSC”). The other owners are CCSC TBC Group, LLC, owned by Richard Hynes, M.D., FASC and Devin Datta, M.D.; and Blue Chip Crane Creek Investments, LLC, owned by NueHealth, LLC, which develops and manages world class ambulatory surgery centers and specialty hospitals across the United States. Dr. Hynes and Dr. Datta are both affiliated with The B.A.C.K. Center. Pursuant to the CCSC Restated and Amended Operating Agreement, CCSC Holdings now exercises sufficient control over the business of CCSC to treat it as a Variable Interest Entity in accordance with Financial Accounting Standards Board and Accounting Standards Codification, effective October 1, 2015. As a result, we include the financial results of CCSC in our consolidated financial statements in accordance with generally accepted accounting principles. CCSC is an AAAHC accredited facility dedicated to delivering excellent ambulatory care in a convenient, comfortable outpatient environment, and its website is www.cranecreeksurgerycenter.com.

 

Up until its sale and leaseback on March 31, 2016, Marina Towers, a 78,000 square foot, Class A, six-story building located on the Indian River in Melbourne, Florida, was owned by our wholly owned subsidiaries, FCID Holdings, Inc. (“FCID Holdings”), which held 99% ownership, and MTMC of Melbourne, Inc., which held 1% ownership. On March 31, 2016, we completed the sale of Marina Towers to Global Medical REIT Inc. for a purchase price of $15.45 million. In addition, our wholly owned subsidiary, Marina Towers, LLC, leased back the entire facility via a 10-year absolute triple-net master lease agreement that will expire in 2026 and has two successive options to renew the lease for five-year periods on the same terms and conditions as the primary lease term with the exception of rent, which will be adjusted to the prevailing market rent at renewal and will escalate in successive years during the extended lease period. In September 2016, both FCID Holdings and MTMC of Melbourne were dissolved and Marina Towers, LLC became wholly owned by First Choice Healthcare Solutions, Inc. Marina Towers subleases 38,334 square feet of commercial office space to non-affiliated tenants.

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New Accounting Pronouncements

 

There are various updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to a have a material impact on the Company’s financial position, results of operations or cash flows.

 

Results of Operations for the Three Months Ended March 31, 2017 and 2016

 

Revenues

 

Total revenues increased 7% to $7,720,353 for the three months ended March 31, 2017 as compared to revenues of $7,241,753 for the same period in the prior year. The increase is primarily attributed by an increase in patient services revenue generated by First Choice Medical Group (“FCMG”), which increased by $552,051, or 24%, after factoring provision for doubtful accounts. In addition, Brevard Orthopedic Spine & Pain Clinic, Inc. (“The B.A.C.K. Center”) patient services revenue increased by $55,681 or 2% and Crane Creek Surgical Center (“Crane Creek”) declined by 6% for the same period last year. Rental revenue decreased by $48,249, totaling $578,363 and $626,612 for the three months ended March 31, 2017 and 2016, respectively.

 

The provision for doubtful accounts during the first quarter of 2017 totaled $264,996, which represents 3.6% of patient service revenue.

 

Operating Expenses

 

Operating expenses include the following:

 

   Three Months Ended
March 31, 2017
   Three Months Ended
March 31, 2016
 
Salaries and benefits  $3,354,376   $2,780,569 
Other operating expenses   2,529,183    2,045,575 
General and administrative   1,535,833    1,547,576 
Depreciation and amortization   189,488    298,950 
Total operating expenses  $7,608,880   $6,672,670 

 

The major components of operating expenses include practice salaries and benefits, practice supplies and other operating costs, depreciation and general and administrative expenses, which included legal, accounting and professional fees associated with being a public entity.

 

Salaries and benefits increased 21% to $3,354,376 for the three months ended March 31, 2017, compared to $2,780,569 for the three months ended March 31, 2016. The increase was primarily due to the addition of physicians, physician assistants and physical therapy professional personnel in the later part of 2016 and 2017. Other operating expenses increased 24% to $2,529,183 from $2,045,575 due to the increase in patient service volume from 2016 to 2017 stemming from the addition of new personnel and one-time expenses related to setting up two new physical therapy locations approved to open in May 2017.

 

General and administrative expenses for the three months ended March 31, 2017 and 2016 remained flat for the periods at $1,535,833 and $1,547,576, respectively.

 

Depreciation and amortization decreased 37% from $298,950 reported for the three months ended March 31, 2016 to $189,488 reported for the three months ended March 31, 2017. The decrease is primarily due to the sale/leaseback of our Marina Towers office building in first quarter 2016.

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Net Income from Operations

 

The decrease in net income from operations, for the reasons stated above, for the three months ended March 31, 2017 decreased 80% to $111,473, which compared to $569,083 for the same period in the prior year.

 

Gain on Sale of Property and Improvements

 

Effective March 31, 2016, we sold and leased back Marina Towers under a sale/leaseback transaction via a 10-year absolute triple-net master lease agreement that expires in 2026. The Company has two successive options to renew the lease for five-year periods on the same terms and conditions as the primary non-revocable lease term with the exception of rent, which will be adjusted to the prevailing fair market rent at renewal and will escalate in successive years during the extended lease period. In connection with the sale, we reported a one-time gain on sale of property of $9,188,968 for the three months ended March 31, 2016.

 

Interest Expense

 

Interest expense decreased 82% to $32,074 for the three months ended March 31, 2017, which compared to $181,135 for the three months ended March 31, 2016. The decrease primarily is due to payoff of our Marina Towers mortgage in the first quarter of 2016 and a reduction of 56% of the accounts receivable line of credit with CT Capital at the end of 2016 as compared to the same period last year.

 

Net Income

 

As a result of all the above, we reported net income of $202,519 for the three months ended March 31, 2017 as compared to net income from $9,566,941 reported for the same three-month period in the prior year.

 

Segment Results

 

The Company reports segment information based on the “management” approach. The management approach designates the internal reporting used by management for making decisions and assessing performance as the source of the Company’s reportable segments.

 

The following are the revenues, operating expenses and net income (loss) by segment for the three months ended March 31, 2017 and 2016, respectively.

 

With the aforementioned sale and leaseback of Marina Towers on March 31, 2016, the Company will no longer report segmented rental revenue received from third party Marina Tower tenants under the segment heading “Marina Towers.” Rather, the Company has consolidated rental revenue received from third party tenants of Marina Towers under the “Corporate” segment for both the 2017 and 2016 comparable reporting periods; and will continue to do so hereafter. The significant fluctuations in the line items are described above.

 

For the Three Months Ended March 31, 2017:

 

       The                 
   FCID   B.A.C.K.           Intercompany     
   Medical   Center   CCSC   Corporate   Eliminations   Total 
Revenue:                              
Net Patient Service Revenue  $2,860,986   $3,090,579   $1,190,425   $   $   $7,141,990 
Rental revenue       340,076         431,850    (193,563)   578,363 
Total Revenue   2,860,986    3,430,655    1,190,425    431,850    (193,563)   7,720,353 
Total operating expenses   2,281,437    3,220,159    1,314,924    985,923    (193,563)   7,608,880 
                               
Net income (loss) from operations:  $579,549   $210,496   $(124,499)  $(554,073)  $   $111,473 

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For the Three Months Ended March 31, 2016:

 

       The                 
   FCID   B.A.C.K.           Intercompany     
   Medical   Center   CCSC   Corporate   Eliminations   Total 
Revenue:                              
Net Patient Service Revenue  $2,308,935   $3,034,898   $1,271,308   $   $   $6,615,141 
Rental revenue       358,099         428,246    (159,733)   626,612 
Total Revenue   2,308,935    3,392,997    1,271,308    428,246    (159,733)   7,241,753 
Total operating expenses   1,789,222    3,045,219    1,183,514    814,448    (159,733)   6,672,670 
                               
Net income (loss) from operations:  $519,713   $347,778   $87,794   $(386,202)  $   $569,083 

 

Liquidity and Capital Resources

 

As of March 31, 2017, we had cash of $3,901,489 and accounts receivables totaling $10,390,140. This compared to cash of $4,593,638 and accounts receivable of $9,536,830 as of the end of 2016.

 

The Company believes that the current cash balance and line of credit (see notes, there is $1,400,000 available as of March 31, 2017), along with continued execution of its business development plan, will allow the Company to further improve its working capital; and currently anticipates that it will have sufficient capital resources to meet projected cash flow requirements through the date at least one year from the filing of this report.

 

However, in order to execute the Company’s business development plan, which there can be no assurance we will achieve, the Company may need to raise additional funds through public or private equity offerings, debt financings, corporate collaborations or other means and potentially reduce operating expenditures. If the Company is unable to secure additional capital, it may be required to curtail its business development initiatives and take additional measures to reduce costs in order to conserve its cash.

 

Net cash used in our operating activities for the three months ended March 31, 2017 totaled $410,408, which compared to net cash provided by our operations for the three months ended March 31, 2016 of $317,224. The decrease in cash used for the three months ended March 31, 2017 was due primarily to increases in our operating assets of $1,480,355 net with increases in our operating liabilities of $422,638 as compared to $881,955 and $17,600 for the three months ended March 31, 2016.

 

Net cash flows used in investing activities was $173,729 for the three months ended March 31, 2017, compared to $14,942,424 provided by investing activities for the three months ended March 31, 2016. In 2016, we received $15,068,497 net proceeds from the sale of Marina Towers. Purchases of equipment were $173,729 and $126,073 for the three months ended March 31, 2017 and 2016, respectively.

 

Net cash used in financing activities was $108,012 for three months ended March 31, 2017, compared to net cash used in financing activities of $6,802,647 for the three months ended March 31, 2016. The cash flows used in our financing activities were the result of:

 

   Three Months
ended March 31,
2017
   Three Months
ended March 31,
2016
 
Proceeds from advances  $   $90,714 
Proceeds from note payable   22,113     
Proceeds from line of credit       372,636 
Payments on notes payable   (130,125)   (7,265,997)
Net cash used in financing activities  $(108,012)  $(6,802,647)

 

On March 31, 2016, in connection with the sale/leaseback transaction of Marina Towers, we paid off the outstanding mortgage balance of $7,223,771.

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Our aim is to distinguish our Medical Centers of Excellence from our competition by earning our Centers’ reputations as premier destinations for clinically superior, patient-centric care which is coordinated across our patients’ entire care continuums. By doing so, we deliver more meaningful and collaborative doctor-patient experiences, provide more accurate diagnoses resulting from care coordination, effective treatment plans, faster recoveries, and materially reduced costs.

 

Based on the dynamic growth taking place on Florida’s Space Coast, we are currently estimating that the total market opportunity for Orthopaedic and Spine care approximates $150 million annually, and we are working towards capturing a larger share of that market. In an effort to fully round out our Space Coast Platform, we have begun exploring opportunities to establish the infrastructure necessary to address a patient’s end-to-end episode of care by offering both pharmacy and home health services. We are also planning to expand the number of PT/OT centers that we operate to provide greater travel convenience for our patients. Currently, we own and operate one state-of-the-art PT/OT center based in Melbourne. We anticipate that in 2017 we will expand to a total of five centers geographically situated across Brevard County, Florida, which extends 72 miles from north to south on Florida’s east coast. Thus far in 2017, we have approval by the State Agency of Healthcare Administration to open two additional centers in May 2017.

 

Our longer term strategic focus is to grow primarily in select U.S. markets that can accommodate our unique business model. We have estimated there are in excess of 240 locations that might qualify for our model to be implemented. We are now studying and reviewing that list and narrowing it down to the top 10 that we feel would be a good fit to successfully replicating our current Platform. Our growth will be fueled by hiring best-in-class Orthopaedic physicians currently practicing in our target expansion markets. We will identify physicians in those markets that are seeking an alternative to owning and operating their own private practices or being employed by local hospitals. As necessary we will add diagnostic and ancillary services, to include an ambulatory surgery center, MRI, X-Ray, DME and PT/OT will also be added to these platforms.

 

Our business model is centered on our team of physicians being employees, thereby permitting us to optimize revenue generation from both physicians and ancillary services, while also providing our employed care providers with the ability to utilize our on-site diagnostic and ancillary services. Physician-owned practices, on the other hand, may be subject to prevailing federal regulations (e.g., The Ethics in Patient Referral Act of 1989, as amended; more commonly known as the “Stark Law”), which may limit their ability to refer patients for certain healthcare services provided by entities in which a physician-owner(s) has a financial interest.

 

We believe that our centralized system of back office operations will continue to allow us to achieve measurable cost and productivity efficiencies as we expand the number of centers and platforms we own and operate. We have specifically designed our centralized back office system to alleviate staff physicians from business administrative responsibilities associated with operating a medical practice or clinic, enabling them to focus strictly on caring for our patients (allowing “Doctors to be Doctors”). This is extremely attractive to physicians who own and manage their own private practices or clinics and devote valuable time and resources towards addressing business concerns – time and resources that might otherwise be spent on treating their patients.

 

There can be no assurance that our cash flow will increase in the near future from anticipated new business activities, or that revenues generated from our existing operations will be sufficient to allow us to continue to pursue new customer programs or profitable ventures.

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Off Balance Sheet Arrangements

 

We currently have no off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

 

Critical Accounting Policies and Estimates

 

Our unaudited condensed consolidated financial statements have been prepared by management in accordance with U.S. GAAP.

 

Recently Issued Accounting Pronouncements

 

There were various updated recently issued, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

 

Management does not believe that any other recently issued but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying financial statements.

 

Inflation

 

The effect of inflation on our revenue and operating results was not significant.

 

Climate Change

 

We believe that neither climate change, nor government regulations related to climate change, have had, or are expected to have, any material effect on our operations.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

As a smaller reporting company, we are electing scaled disclosure reporting obligations and therefore are not required to provide the information required by this Item.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Pursuant to Rule 13a-15(b) under the Exchange Act, we carried out an evaluation, with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

 

Changes in Internal Control over Financial Reporting

 

There have been no changes in our internal controls over financial reporting (as such term is defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended March 31, 2017, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II

 

Item 1. Legal Proceedings

 

From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business.

 

Item 1A. Risk Factors

 

There have been no material changes to the Risk Factors reported in Item 1A of our Annual Report on Form 10-K/A for the year ended December 31, 2016.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

None

 

Item 3. Defaults upon Senior Securities

 

There has been no default in the payment of principal, interest, sinking or purchase fund installment, or any other material default, with respect to any indebtedness of our Company.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None.

 

Item 6. Exhibits

 

31.1   Certification by the Principal Executive Officer of Registrant pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a) or Rule 15d-14(a)).*
31.2   Certification by the Principal Accounting Officer of Registrant pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a) or Rule 15d-14(a)).*
32.1   Certification by the Principal Executive Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
32.2   Certification by the Principal Accounting Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

 

* Filed herewith.

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SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report on Form 10-Q to be signed on its behalf by the undersigned thereunto duly authorized.

 

  FIRST CHOICE HEALTHCARE SOLUTIONS, INC.
     
Dated: May 15, 2017 By: /s/ Christian C. Romandetti
    Christian C. Romandetti
    Chief Executive Officer (Principal Executive Officer)
     
Dated: May 15, 2017 By: /s/ Timothy K. Skeldon
    Timothy K. Skeldon
    Chief Financial Officer (Principal Accounting Officer)

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