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: June 30, 2015

 

or

 

¨ 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, Suite 250, 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  ¨

 

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  ¨

 

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

 

Large accelerated filer ¨   Accelerated filer ¨
Non-accelerated filer ¨   Smaller reporting company x

 

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

 

As of August 14, 2015, there were 20,174,821 shares outstanding of the registrant’s Common Stock.

 

 

 

 

PART I. FINANCIAL INFORMATION    
         
  ITEM 1 Financial Statements    
         
    Condensed consolidated balance sheets as of June 30, 2015 (unaudited) and December 31, 2014   3
         
    Condensed consolidated statements of operations for the three and six months ended June 30, 2015 and 2014 (unaudited)   4
         
    Condensed consolidated statement of stockholders’ deficit for the six months ended June 30, 2015 (unaudited)   5
         
    Condensed consolidated statements of cash flows for the six months ended June 30, 2015 and 2014 (unaudited)   6
         
    Notes to condensed consolidated financial statements (unaudited)   7
         
  ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations   27
         
  ITEM 3. Quantitative and Qualitative Disclosures about Market Risk   34
         
  ITEM 4. Controls and Procedures   35
         
PART II. OTHER INFORMATION    
         
  ITEM 1. Legal Proceedings   35
  ITEM 1A. Risk Factors   35
  ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds   36
  ITEM 3. Defaults Upon Senior Securities   36
  ITEM 4. Mine Safety Disclosures   36
  ITEM 5. Other Information   36
  ITEM 6. Exhibits   36
         
  SIGNATURES   37

  

 2 

 

 

PART I

 

ITEM 1. FINANCIAL STATEMENTS

 

FIRST CHOICE HEALTHCARE SOLUTIONS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   June 30,   December 31, 
   2015   2014 
   (unaudited)     
ASSETS          
Current assets          
Cash  $1,054,565   $279,087 
Cash-restricted   372,822    318,259 
Accounts receivable, net   4,489,477    1,804,636 
Employee loans   577,286    - 
Prepaid and other current assets   228,443    153,296 
Capitalized financing costs, current portion   70,182    68,370 
Total current assets   6,792,775    2,623,648 
           
Property, plant and equipment, net of accumulated depreciation of $4,014,681 and $2,472,111   8,103,672    8,294,298 
           
Other assets          
Deferred costs, net of amortization of $53,774   3,172,653    - 
Capitalized financing costs, long term portion   -    37,775 
Patient list, net of accumulated amortization of $65,000 and $55,000   235,000    245,000 
Patents, net of amortization of $28,650 and $19,100   257,850    267,400 
Investments   23,026    - 
Deposits   2,571    2,571 
Total other assets   3,691,100    552,746 
           
Total assets  $18,587,547   $11,470,692 
           
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)          
Current liabilities          
Accounts payable and accrued expenses  $2,502,168   $1,457,275 
Stock based payable   147,500    537,750 
Advances   353,000    224,000 
Line of credit, short term   2,474,982    1,237,000 
Convertible note payable, short term portion   1,415,920    2,148,835 
Notes payable, current portion   702,950    732,791 
Unearned revenue   60,876    38,763 
Deferred rent, short term portion   118,810    - 
Total current liabilities   7,776,206    6,376,414 
           
Long term debt:          
Deposits held   67,432    72,901 
Notes payable, long term portion   8,227,555    8,184,560 
Deferred rent, long term portion   1,489,636    - 
Total long term debt   9,784,623    8,257,461 
           
Total liabilities   17,560,829    14,633,875 
           
Stockholders' equity (deficit)          
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, 19,468,255 and 17,951,055 shares issued and outstanding as of June 30, 2015 and December 31, 2014, respectively   19,468    17,951 
Additional paid in capital   17,465,052    12,671,942 
Accumulated deficit   (16,319,116)   (15,853,076)
Total stockholders' equity (deficit) attributable to First Choice Healthcare Solutions, Inc.   1,165,404    (3,163,183)
Non-controlling interest (Note 10)   (138,686)   - 
Total equity (deficit)   1,026,718    (3,163,183)
Total liabilities and equity  $18,733,531   $11,470,692 

 

See the accompanying notes to these unaudited condensed consolidated financial statements

 

 3 

 

 

FIRST CHOICE HEALTHCARE SOLUTIONS, INC

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

 

   Three months ended June 30,   Six months ended June 30, 
   2015   2014   2015   2014 
Revenues:                    
Patient service revenue  $3,810,299   $1,885,569   $6,095,587   $3,896,543 
Provision for bad debts   (6,260)   (37,128)   (51,484)   (75,272)
Net patient service revenue less provision for bad debts   3,804,039    1,848,441    6,044,103    3,821,271 
Rental revenue   520,276    258,723    785,379    520,646 
Total revenue   4,324,314    2,107,164    6,829,482    4,341,917 
                     
Operating expenses:                    
Salaries and benefits   2,125,481    1,090,806    3,071,601    2,156,327 
Other operating expenses   563,422    427,056    1,014,907    856,347 
General and administrative   1,649,870    669,208    2,203,154    1,075,120 
Depreciation and amortization   144,417    126,772    284,926    261,491 
Total operating expenses   4,483,190    2,313,842    6,574,588    4,349,285 
                     
Net income (loss) from operations   (158,875)   (206,678)   254,894    (7,368)
                     
Other income (expense):                    
Miscellaneous income   40,369    750    41,119    1,500 
Amortization financing costs   (19,229)   (25,466)   (39,915)   (41,372)
Interest expense, net   (358,994)   (217,177)   (722,138)   (436,430)
Total other expense   (337,854)   (241,893)   (720,934)   (476,302)
                     
Net loss before provision for income taxes   (496,729)   (448,571)   (466,040)   (483,670)
                     
Income taxes (benefit)   -    -    -    - 
                     
Net loss   (496,729)   (448,571)   (466,040)   (483,670)
                     
Non-controlling interest (Note  10)   -    -    -    - 
                     
Net Loss Attributable to First Choice Healthcare Solutions, Inc.  $(496,729)  $(448,571)  $(466,040)  $(483,670)
                     
Net loss per common share, basic and diluted  $(0.03)  $(0.03)  $(0.03)  $(0.03)
                     
Weighted average number of common shares outstanding, basic and diluted   18,999,475    16,988,149    18,533,559    16,873,038 

 

See the accompanying notes to these unaudited condensed consolidated financial statements

 

 4 

 

 

FIRST CHOICE HEALTHCARE SOLUTIONS, INC.

CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)

SIX MONTHS ENDED JUNE 30, 2015

(unaudited)

 

                   Additional             
   Preferred stock   Common stock   Paid in   Accumulated   Non-controlling     
   Shares   Amount   Shares   Amount   Capital   Deficit   Interest   Total 
Balance, December 31, 2014   -   $-    17,951,055   $17,951   $12,671,942   $(15,853,076)  $-   $(3,163,183)
Common stock issued for services rendered   -    -    506,000    506    529,494    -    -    530,000 
Common stock issued in settlement of notes payable and accrued interest   -    -    811,200    811    811,389    -    -    811,200 
Common stock issued in connection with loan extension   -    -    200,000    200    226,800    -    -    227,000 
Non-controlling interest of variable interest entry   -    -    -    -    -    -    (138,686)   (138,686)
Fair value of options issued to acquire management control of variable interest entity   -    -    -    -    3,226,427    -    -    3,226,427 
Net loss   -    -    -    -    -    (466,040)   -    (466,040)
Balance, June 30, 2015   -   $-    19,468,255   $19,468   $17,465,052   $(16,319,116)  $(138,686)  $1,026,718 

 

See the accompanying notes to these unaudited condensed consolidated financial statements

 

 5 

 

 

FIRST CHOICE HEALTHCARE SOLUTIONS, INC

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

   Six months June 30, 
   2015   2014 
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net Income (loss)  $(466,040)  $(483,670)
Adjustments to reconcile net loss to cash provided by operating activities:          
Depreciation and amortization   338,700    261,491 
Amortization of financing costs   39,915    41,371 
Bad debt expense   51,484    75,272 
Common stock issued in connection with loan extension   227,000    - 
Stock based compensation   139,750    96,000 
Changes in operating assets and liabilities:          
Accounts receivable   (556,635)   (858,362)
Prepaid expenses and other   237,431    (85,044)
Restricted funds   (54,563)   (25,207)
Employee loans   (103,654)   - 
Accounts payable and accrued expenses   160,359    453,192 
Deposits   (5,469)   - 
Deferred rent   39,603    - 
Unearned income   22,113    (24,080)
Net cash provided by (used in) operating activities   69,994    (549,037)
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Cash from variable interest entity   679,673    - 
Purchase of equipment   (40,065)   (87,982)
Net cash used in investing activities   639,608    (87,982)
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Proceeds from advances   129,000    - 
Proceeds from lines of credit   355,656    350,000 
Net payments on notes payable   (40,065)   (381,327)
Net cash provided by (used in) financing activities   65,876    (31,327)
           
Net increase (decrease) in cash and cash equivalents   775,478    (668,346)
Cash and cash equivalents, beginning of period   279,087    739,158 
           
Cash and cash equivalents, end of period  $1,054,565   $70,812 
           
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:          
Cash paid during the period for interest  $594,211   $436,528 
Cash paid during the period for taxes  $-   $- 
           
Supplemental disclosure on non-cash investing and financing activities:          
Common stock issued in settlement of accrued expenses  $15,000   $166,340 
Common stock issued in settlement of line of credit  $-   $150,000 
Common stock issued in settlement of convertible note and interest  $811,200   $208,700 
Fair value of options issued to acquire management control of variable interest entity  $3,226,427   $- 

 

See the accompanying notes to these unaudited condensed consolidated financial statements

 

 6 

 

 

FIRST CHOICE HEALTHCARE SOLUTIONS, INC

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015

 

NOTE 1 — SIGNIFICANT ACCOUNTING POLICIES; 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, 2014, 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 June 30, 2015 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 of 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 and six months ended June 30, 2015 are not necessarily indicative of results that may be expected for the year ending December 31, 2015. 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, 2014 included in the Company’s Annual Report on Form 10-K, filed with the Securities and Exchange Commission (the “SEC”) on April 15, 2015.

 

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”).

 

As a result of the Reincorporation, the Company changed its name to First Choice Healthcare Solutions, Inc. and its shares underwent an effective four-for-one reverse split.  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 (“First Choice – 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.

 

Effective May 1, 2015, the Company, through its recently formed 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 the Company will 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. The initial term of the Agreement expires on December 31, 2016, with an option by the Company to extend the term until December 31, 2023.

 

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.

 

 7 

 

 

FIRST CHOICE HEALTHCARE SOLUTIONS, INC

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015

 

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 FCID Holdings, Inc., MTMC of Melbourne, Inc., Marina Towers, LLC, FCID Medical Inc., TBC Holdings of Melbourne, Inc. and First Choice – Brevard, along with the VIE, The B.A.C.K. Center. All significant intercompany balances and transactions, including those involving the VIE, have been eliminated in consolidation.

 

Use of Estimates

 

The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect certain reported amounts and disclosures.  Accordingly, actual results could differ from those estimates.

 

Revenue Recognition

 

The Company recognizes revenue in accordance with Accounting Standards Codification subtopic 605-10, “Revenue Recognition” (“ASC 605-10”) which requires that four basic criteria be met before revenue can be recognized: (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 past history and identified trends for each of our payers.

 

 8 

 

 

FIRST CHOICE HEALTHCARE SOLUTIONS, INC

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015

 

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.

 

Rental Revenue

 

FCID Holdings, Inc. has one real estate holding, Marina Towers, LLC, a 78,000 square foot, Class A, six-story building located on the Indian River in Melbourne, Florida. In addition to housing our corporate headquarters and First Choice-Brevard, the building, which averages 95% annual occupancy, also leases approximately 48,698 square feet of commercial office space to third party tenants. The Company recognizes rental revenue associated with the period of time the facility is leased at the contractual lease rates (or on the basis of discounted rates, if negotiated). In addition, beginning May 1, 2015, TBC Holdings of Melbourne, Inc., through The B.A.C.K. Center, subleases approximately 34,480 square feet of commercial office space to third party tenants.

 

Cash and Cash Equivalents

 

The Company considers cash and cash equivalents to consist of cash on hand and investments having an original maturity of 90 days or less that are readily convertible into cash. As of June 30, 2015, the Company had $1,054,565 in cash.

 

Concentrations of Credit Risk

 

The Company’s financial instruments that are exposed to a concentration of credit risk are cash and accounts receivable.   Generally, 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.

 

Accounts Receivable

 

Accounts receivables are carried at their estimated collectible amounts net of doubtful accounts. The Company analyzes its past history and identifies trends for each major payer sources of revenue to estimate the appropriate allowance for doubtful accounts and provision for bad debts. Management regularly reviews data about these major payer sources of revenue in evaluating the sufficiency of the allowance for doubtful accounts.

 

  · Rental receivables. Accounts receivables from rental activities are periodically evaluated for collectability in determining the appropriate allowance for doubtful account provision for bad debts and provision of bad debts.

 

  · Patient receivables.  Accounts receivables from services provided to patients who have third-party coverage, the Company analyzes contractually due amounts and provides a provision for bad debts, if necessary.  The Company records a provision for bad debts in the period of service on the basis of past experience or when indications are the patients are unable or unwilling to pay the portion of their bill for which they are responsible.  The difference between the standard rates (or the discounted rates if negotiated) and the amounts actually collected after all reasonable collection efforts have been exhausted, is charged off against the allowance for doubtful accounts.

 

 9 

 

 

FIRST CHOICE HEALTHCARE SOLUTIONS, INC

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015

 

As of June 30, 2015 and December 31, 2014, the Company’s provision for bad debts was $1,648,785 and $1,482,212, respectively.

 

Capitalized Financing Costs

 

Capitalized financing costs represent costs incurred in connection with obtaining the debt financing. These costs are amortized ratably and charged to financing expenses over the term of the related debt. The amortization for the three and six months ended June 30, 2015 was $19,229 and $39,915, respectively; and for the three and six months ended June 30, 2014 was $25,466 and $41,372, respectively.  Accumulated amortization of deferred financing costs were $287,091 and $231,369 at June 30, 2015 and December 31, 2014, respectively.

 

Segment Information

 

Accounting Standards Codification subtopic “Segment Reporting” 280-10 (“ASC 280-10”) establishes standards for reporting information regarding operating segments in annual financial statements and requires selected information for those segments to be presented in interim financial reports issued to stockholders. ASC 280-10 also establishes standards for related disclosures about products and services and geographic areas. Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, or decision-making group, in making decisions how to allocate resources and assess performance. The information disclosed herein represents all of the material financial information related to the Company’s two principal operating segments (see Note 11 – Segment Information).

 

Patents

 

Intangible assets with finite lives are amortized over their estimated useful lives. Intangible assets with indefinite lives are not amortized, but are tested for impairment annually. The Company's intangible assets with finite lives are patent costs, which are amortized over their economic or legal life, whichever is shorter. These patent costs were acquired on September 7, 2013 by the issuance of 636,666 shares of the Company's common stock to a related party. The shares of common stock were valued at $286,500, which was estimated to be approximately the fair value of the patent acquired and did not materially differ from the fair value of the common stock. The amortization for the three and six months ended June 30, 2015 was $4,775 and $9,550, respectively; and for the three and six months ended June 30, 2014 was $-0-. Accumulated amortization of Patent costs were $28,650 and $19,100 at June 30, 2015 and December 31, 2014, respectively.

 

Patient List

 

Patient list is comprised of acquired patients in connection with the acquisition of First Choice - Brevard and is amortized ratably over the estimated useful life of 15 years. The amortization for the three and six months ended June 30, 2015 was $5,000 and $10,000, respectively; and for the three and six months ended June 30, 2014 was $5,000 and $10,000, respectively. Accumulated amortization of patient list costs were $65,000 and $55,000 at June 30, 2015 and December 31, 2014, respectively.

 

 10 

 

 

FIRST CHOICE HEALTHCARE SOLUTIONS, INC

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015

 

Property and Equipment

 

Property and equipment are stated at cost. When retired or otherwise disposed, the related carrying value and accumulated depreciation are removed from the respective accounts and the net difference less any amount realized from disposition, is reflected in earnings. For financial statement purposes, property and equipment are recorded at cost and depreciated using the straight-line method over their estimated useful lives of 5 to 39 years.

 

Deferred costs

 

On May 1, 2015, in connection with the operating and control agreement with Brevard Orthopaedic Spine & Pain Clinic, Inc., the Company issued 3,000,000 options to purchase the Company’s common stock at $1.35 per share, expiring on December 31, 2023 and vesting contingent on The B.A.C.K. Center employees executing employment agreements with TBC Holding and the acquisition of the variable interest entity. The determined fair value of $3,226,427, determined using the Black Scholes option pricing model with the following assumptions: Dividend yield: 0%; Volatility: 134.09% and Risk free rate: 2.12%, is amortized ratably to operations over an estimated 8.67 year life. The amortization for the three and six months ended June 30, 2015 was $53,774. Accumulated amortization of the deferred costs were $53,774 at June 30, 2015.

 

Net Income (Loss) Per Share

 

The Company accounts for net income (loss) per share in accordance with Accounting Standards Codification subtopic 260-10, Earnings Per Share (“ASC 260-10”), which requires presentation of basic and diluted earnings per share (“EPS”) on the face of the statement of operations for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS.

 

Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during each period. It excludes the dilutive effects of potentially issuable common shares such as those related to our issued convertible debt, warrants and stock options. Diluted net loss per share for three and six months ended June 30, 2015 and June 30, 2014 does not reflect the effects of 2,990,920 and 5,885,811 shares, respectively, potentially issuable upon the conversion of our convertible note payable or the exercise of the Company's stock options and warrants (calculated using the treasury stock method) as including such would be anti-dilutive.

 

Fair Value

 

Accounting Standards Codification subtopic 825-10, “Financial Instruments” (“ASC 825-10”) requires disclosure of the fair value of certain financial instruments. The carrying value of cash and cash equivalents, accounts payable and accrued liabilities, and short-term borrowings, as reflected in the balance sheets, approximate fair value because of the short-term maturity of these instruments. All other significant financial assets, financial liabilities and equity instruments of the Company are either recognized or disclosed in the financial statements together with other information relevant for making a reasonable assessment of future cash flows, interest rate risk and credit risk. Where practicable the fair values of financial assets and financial liabilities have been determined and disclosed; otherwise only available information pertinent to fair value has been disclosed.

 

The Company follows Accounting Standards Codification subtopic 820-10, Fair Value Measurements and Disclosures (“ASC 820-10”) and Accounting Standards Codification subtopic 825-10, Financial Instruments (“ASC 825-10”), which permits entities to choose to measure many financial instruments and certain other items at fair value. Neither of these statements had an impact on the Company’s financial position, results of operations nor cash flows.

 

 11 

 

 

FIRST CHOICE HEALTHCARE SOLUTIONS, INC

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015

 

Stock-Based Compensation

 

Share-based compensation issued to employees is measured at the grant date, based on the fair value of the award, and is recognized as an expense over the requisite service period.  The Company measures the fair value of the share-based compensation issued to non-employees using the stock price observed in the arms-length private placement transaction nearest the measurement date (for stock transactions) or the fair value of the award (for non-stock transactions), which were considered to be more reliably determinable measures of fair value than the value of the services being rendered. The measurement date is the earlier of (1) the date at which commitment for performance by the counterparty to earn the equity instruments is reached, or (2) the date at which the counterparty’s performance is complete.

 

As of June 30, 2015, the Company had 3,000,000 employee options outstanding to purchase shares of common stock (see above).

 

Investments

 

The Company has adopted Accounting Standards Codification subtopic 323-10, Investments-Equity Methods and Joint Ventures (“ASC 323-10) which requires the accounting for investments where the Company can exert significant influence, but not control of a joint venture or equity investment. The Company owned a 0.6660% interest in a non-consolidated affiliate, Doctor’s Surgical Partnership, LTD. In accordance with the equity method of accounting, investments in non-consolidated affiliates are carried at cost and adjusted for the Company’s proportionate share of their undistributed earnings or losses.

 

Recent Accounting Pronouncements

 

In April 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) Number 2015-3 entitled “Simplifying the Presentation of Debt Issuance Costs.” The new guidance specifies that debt issuance costs under the new standard are to be netted against the carrying value of the financial liability. Under current guidance, debt issuance costs are recognized as a deferred charge and reported as a separate asset on the balance sheet. The new guidance aligns the treatment of debt issuance costs and debt discounts in that both reduce the carrying value of the liability. It is important to note that neither the recognition nor measurement of debt issuance costs is changed as a result of the ASU. Amortization of debt issuance costs is to be recorded as interest expense on the income statement.

 

The effective date of the new guidance is for fiscal years beginning after December 15, 2015, for public business entities and interim periods within those fiscal years. Early adoption is permitted for financial statements that have not been issued previously. The Company does not believe the effect of the adoption of this standard to have a material impact on the Company’s consolidated financial statements.

 

There are other 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.

 

 12 

 

 

FIRST CHOICE HEALTHCARE SOLUTIONS, INC

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015

 

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.

 

NOTE 2 – LIQUIDITY

 

The Company incurred various non-recurring expenses in 2014 in connection with the planned development of its medical practice.  Management believes the continuing trend of positive growth before interest, taxes, depreciation and amortization into 2015 will support improved liquidity. In the fourth quarter of 2013, the Company paid off or converted to equity a total of $1,238,480 in outstanding debt. Currently, the Company has three main sources of liquidity, its line of credit with CT Capital, LP, patient service revenue received from FCID Medical, Inc. and rental revenue received from its real estate interest, FCID Holdings, Inc. and TBC Holdings of Melbourne, Inc.

 

On June 13, 2013, the Company’s subsidiary, First Choice – Brevard entered into a loan and security agreement with CT Capital, Ltd., d/b/a CT Capital, LP, a Florida limited liability partnership for an accounts receivable line of credit in the maximum aggregate amount of $2,000,000. Under the line of credit with CT Capital, the Company reduced the annual interest rate from 12% per annum to 6% per annum in exchange for the issuance to CT Capital of 100,000 restricted shares of the Company’s common stock. As of June 30, 2015, the Company has used $1,575,000 of the amount available under the line of credit.

 

The Company’s wholly owned subsidiary, FCID Holdings, Inc. (“FCID Holdings”) operates its real estate interests. Currently, FCID Holdings has one real estate holding, Marina Towers, LLC, a 78,000 square foot, Class A, six-story building located on the Indian River in Melbourne, Florida. In addition to housing the Company’s corporate headquarters and First Choice – Brevard, the building, which averages 95% annual occupancy, also leases approximately 48,698 square feet of commercial office space to third party tenants. In addition, beginning May 1, 2015, TBC Holdings of Melbourne, Inc., through The B.A.C.K. Center, subleases approximately 34,480 square feet of commercial office space to third party tenants.

 

The Company believes that ongoing operations of Marina Towers, LLC and the current positive cash balance 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 that is one year and one day from the filing of this report.  However, in order to execute the Company’s business development plan, which there can be no assurance it will do, 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 3 — CASH – RESTRICTED

 

Cash-restricted is comprised of funds deposited to and held by the mortgage lender for payments of property taxes, insurance, replacements and major repairs of the Company's commercial building. The majority of the restricted funds are reserved for tenant improvements. As of June 30, 2015, the Company had $372,822 in restricted cash as compared to $318,259 at December 31, 2014.

 

 13 

 

 

FIRST CHOICE HEALTHCARE SOLUTIONS, INC

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015

 

NOTE 4 — PROPERTY, PLANT, AND EQUIPMENT

 

Property, plant and equipment at June 30, 2015 and December 31, 2014 are as follows:

 

   June 30,
2015
   December 31,
2014
 
Land  $1,000,000   $1,000,000 
Building   3,055,168    3,055,168 
Building improvements   4,098,910    3,970,603 
Automobiles   29,849    29,849 
Computer equipment   330,776    327,847 
Medical equipment   2,826,835    2,253,219 
Office equipment   776,815    129,723 
    12,118,353    10,766,409 
Less:  accumulated depreciation   (4,014,681)   (2,472,111)
   $8,103,672   $8,294,298 

 

During the three and six months ended June 30, 2015, depreciation expense charged to operations was $134,642 and $265,376, respectively; and during the three and six months ended June 30, 2014, depreciation expense charged to operations was $126,772 and $261,491, respectively.

 

NOTE 5 — LINE OF CREDIT

 

Line of Credit, CT Capital

 

On June 13, 2013, the Company’s subsidiary, First Choice – 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 $1,500,000 to First Choice - Brevard with an interest rate of 12% per annum (the “Loan”). The maturity date of the Loan is December 31, 2016. Interest is due and payable monthly. Upon default, the interest may be adjusted to the highest rate permissible by law. The Loan is secured by the accounts receivable and assets of the Company’s subsidiary, First Choice – Brevard, which 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: 80% of all receivables to be 120 days or less at the net collection rate of approximately 27% of total billings, excluding patient billings and collections. Additionally, allowable accounts receivable will also include 50% of all accounts receivable protected by legal letters of protection.  At any time, the Lender may convert all or any portion 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. The Company did not record an embedded beneficial conversion feature in the note since the fair value of the common stock did not exceed the conversion rate at the date of commitment.

 

On November 8, 2013, in consideration for the issuance of 100,000 restricted shares of the Company’s common stock, the Lender agreed to modify its Loan. Under the Loan Agreement, as amended, the annual rate of interest of the Loan was reduced from 12% per annum to 6% per annum and will remain at 6% until November 1, 2015. All other terms under the Loan Agreement remain the same.

 

 14 

 

 

FIRST CHOICE HEALTHCARE SOLUTIONS, INC

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015

 

On June 9, 2015, First Choice – Brevard and the Lender entered into a Modification Agreement (“Modification”) further amending the Loan Agreement dated June 13, 2013, thereby increasing the Company’s accounts receivable line of credit from $1,500,000 to $2,000,000. All of the other terms and conditions of the Loan Agreement, as amended, remain in full force and effect.

 

The obligations of the Company under the Loan Agreement, as amended, are guaranteed by certain affiliates of the Company, including a personal guarantee issued by the Company’s Chief Executive Officer.

 

As of June 30, 2015 and December 31, 2014, the outstanding balance was $1,575,000 and $1,237,000, respectively.

 

Line of Credit, Florida Business Bank

 

On June 27, 2012, The B.A.C.K. Center entered into 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 $1,000,000, with an interest rate of Prime floating plus 1.0%, as published in The Wall Street Journal, with a floor of 4.50% per annum (the “Loan”).

 

The Loan was modified on April 9, 2013, allowing a temporary increase to $1,383,000 and allowing for a one time draw of up to $995,000 to be distributed to the shareholders for the purposes of financing the capitalization of TBC Equipment Leasing, LLC. The one time draw was repaid within 45 days and the availability under the Loan returned to $1,000,000. The modification allows for an interest rate of one month Libor floating plus 2.75%, as published in The Wall Street Journal, with a floor of 2.96% per annum (2.96% at December 31, 2014 and 2013, respectively).

 

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 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 June 30, 2015, 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 June 30, 2015, the outstanding balance on the Loan was $899,982.

 

 15 

 

 

FIRST CHOICE HEALTHCARE SOLUTIONS, INC

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015

 

NOTE 6 - CONVERTIBLE NOTES PAYABLE

 

Hillair Capital Investments, L.P.

 

On November 8, 2013, the Company entered into a securities purchase agreement (the “Securities Purchase Agreement”) with Hillair Capital Investments L.P. ("Hillair") in exchange for the issuance of (i) a $2,320,000, 8% original issue discount convertible debenture, which was originally due on December 28, 2013 and subsequently extended on December 28, 2013 through November 1, 2015 (the “Debenture”), and (ii) a common stock purchase warrant (the “Warrant”) to purchase up to 2,320,000 shares of the Company’s common stock at an exercise price of $1.35 per share, which may be exercised on a cashless basis, until November 8, 2018. The Debenture and the Warrant may not be converted if such conversion would result in Hillair beneficially owning in excess of 4.99% of the Company’s common stock. Hillair may waive this 4.99% restriction with 61 days’ notice to the Company.

  

The Company issued to Hillair the Debenture with the Warrant for the net purchase price of $2,000,000 (reflecting the $320,000 original issue discount of the Debenture). Until the Debenture is no longer outstanding, the Debenture is convertible, in whole or in part at the option of Hillair, into shares of common stock, subject to certain conversion limitations set forth above at a conversion price of $1.00 per share, subject to adjustment for stock splits, stock dividends, and sales of securities or other distributions by the Company.

 

In connection with the issuance of the Debenture, the Company issued the Warrant, granting the holder the right to acquire an aggregate of 2,320,000 shares of the Company’s common stock at $1.35 per share. In accordance with ASC 470-20, the Company recognized the value attributable to the Warrant and the conversion feature of the Debenture in the amount of $1,871,117 to additional paid-in capital and a discount against the notes. The Company valued the warrants in accordance with ASC 470-20 using the Black-Scholes pricing model and the following assumptions: contractual terms of 3.6 years, an average risk free interest rate of 1.42%, a dividend yield of 0%, and volatility of 147.94%. During the year ended December 31, 2013, the Company amortized $1,871,117 of the debt discount to operations as interest expense.

 

On January 30, 2015, the Company and Hillair entered into an Extension Agreement (“Extension”) amending the 8% Original Issue Discount Secured Convertible Debenture due November 1, 2015, in order to extend the Periodic Redemption due February 1, 2015, in the principal amount of $580,000 (the “February Periodic Redemption”) to April 1, 2015.

 

In consideration of the Extension, the Company issued to Hillair 100,000 shares of common stock valued at $99,000 and remitted a payment of $30,000. The Extension also provides that, for an additional $20,000 payment (provided written notice and payment are made prior to March 15, 2015), the Company may request that the February Periodic Redemption be extended to May 1, 2015.

 

On March 15, 2015, the Company provided written notice and remitted $20,000 to Hillair to extend the February Redemption to May 1, 2015.

 

On April 9, 2015, the redemption terms of the Debenture were further modified as follows: Hillair agreed to convert $580,000 of the principal amount of the February Periodic Redemption into 580,000 shares of the Company’s common stock on or before May 1, 2015. In consideration of reducing the conversion price of $100,000 principal amount of the Debenture from $1.00 to $0.50 per share, the $580,000 principal amount of the Debenture due May 1, 2015 was extended to August 1, 2015.

  

As a result of the modification, Hillair converted $100,000 principal amount of the Debenture, at $.50 per share, into 200,000 shares of the Company’s common stock; and $580,000 principal amount of the February Periodic Redemption, at $1.00 per share, into 580,000 shares of the Company’s common stock. In total, Hillair converted $680,000 principal amount of the Debenture into 780,000 shares of the Company’s common stock. As a result of the transaction, the Company recorded the fair value of the 100,000 additional common shares issued of $128,000 as current period interest expense.

 

 16 

 

 

FIRST CHOICE HEALTHCARE SOLUTIONS, INC

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015

 

As of June 30, 2015, the outstanding principal amount and interest of the Debenture was $1,415,920.

 

On August 3, 2015, the remaining outstanding principal balance, and accrued interest, in the aggregate amount of $1,161,641 of the Debenture was fully satisfied three months prior to its maturity date (see Note 13 – Subsequent Events).

 

NOTE 7— NOTES PAYABLE

 

Notes payable as of June 30, 2015 and December 31, 2014 are comprised of the following:

 

   June 30,
2015
   December 31,
2014
 
Mortgage Payable  $7,205,024   $7,256,416 
Note Payable, GE Capital (construction), MRI   30,869    121,204 
Note Payable, GE Capital (construction), 2   15,249    44,911 
Note Payable, GE Capital (MRI)   1,035,065    1,218,625 
Note Payable, GE Capital (X-ray)   120,241    142,349 
Note Payable, GE Arm   79,923    91,925 
Note Payable, Auto   13,331    16,383 
Note payable, Florida Business Bank   393,130    - 
Capital Lease Equipment   37,673    25,538 
    8,930,505    8,917,351 
Less current portion   (702,950)   (732,791)
   $8,227,555   $8,184,560 

 

Mortgage Payable

 

On August 12, 2011, the Company refinanced its existing mortgage note payable as described below providing additional working capital funds. The aggregate amount of the note of $7,550,000 bears 6.10% interest per annum with monthly payments of $45,753 beginning in October 2011 based on a 30 year amortization schedule with all remaining principal and interest due in full on September 16, 2016. The note is secured by land and the building along with first priority assignment of leases and rents. Tenant rents are mailed to lockbox operated by the mortgage service company. In addition, the Company's Chief Executive Officer provided a limited personal guaranty.

 

In connection with the refinancing of the mortgage note payable, the Company incurred financing costs of $286,723 in the year 2011. The capitalized financing costs are amortized ratably over the term of the mortgage note payable.

 

Note Payable — Equipment Financing

 

On May 21, 2012, the Company entered into a note payable with GE Healthcare Financial Services (“GE Capital”) in the amount of approximately $2.4 million for equipment financing.

 

The Company also currently has two construction loans outstanding. As of December 2012, the construction loans are payable in 35 monthly payments (first three payments are $nil) including interest at 7.38%. On May 29, 2012, the Company drew down a total of $450,000 against the first construction loan. On September 24, 2012, the Company drew down a total of $150,000 against the second construction loan.

 

The Company entered into equipment finance leases for a total aggregate amount of $2,288,679, subject to delivery and acceptance of the underlying equipment. All notes and finance leases have been personally guaranteed by the Company's Chief Executive Officer.

 

 17 

 

 

FIRST CHOICE HEALTHCARE SOLUTIONS, INC

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015

 

On September 27, 2012, the Company accepted the delivery of MRI equipment under the equipment finance lease. As such, the component piece accepted of $1,771,390 is due over 60 months and the associated monthly payment is $0 for the first three months and $38,152 per month for the remaining 57 months including interest at 7.9375% per annum. On March 8, 2013, the Company amended the equipment finance lease to interest only payments of $11,779 for the first three months and $38,152 per month for the remaining monthly payments.

 

On August 22, 2012, the Company accepted the delivery of X-ray equipment under the equipment finance lease. As such, the component piece accepted of $212,389 is due over 60 months and the associated monthly payment is $0 for the first three months and $4,300 per month for the remaining 57 months including interest at 7.9375% per annum. On March 8, 2013, the Company amended the equipment finance lease to interest only payments of $1,384 for the first three months and $4,575 per month for the remaining monthly payments.

 

On February 25, 2013, the Company accepted the delivery of C-arm equipment under the equipment finance lease. As such, the component piece accepted of $124,797 is due over 63 months and the associated monthly payment is $0 for the first three months and $2,388 for the remaining 60 months, including interest at 7.39% per annum.

  

Note Payable — Auto

 

On May 21, 2012, the Company issued a note payable, in the amount of $29,850, due in monthly installments of $593 including interest of 6.99%, due to mature in June 2017 and secured by related equipment. The outstanding balance on the note payable as of June 30, 2015 was $13,331.

 

Note Payable — Florida Business Bank

 

On June 27, 2012, The B.A.C.K. Center issued a promissory note in the aggregate amount of $900,931, which bore 5.50% interest per annum with monthly payments of $14,753 beginning in July 16, 2012, based on a six- year amortization schedule with all remaining principal and interest due in full on June 16, 2018.

 

The note was modified on April 9, 2013 requiring a principal and interest payment of $11,434 and a fixed interest rate of 3.89%. The note is secured by a hypothecated first position lien on all assets leased to The B.A.C.K. Center by its subsidiary and the assignment of $634,000 of life insurance from each Guarantor. The obligations under the note are guaranteed by the shareholders of The B.A.C.K. Center.

 

Capital Leases — Equipment

 

On June 11, 2013, the Company entered into a lease agreement to acquire equipment with 48 monthly payments of $956 payable through June 1, 2017 with an effective interest rate of 14.002% per annum. The Company may elect to acquire the leased equipment at a nominal amount at the end of the lease.

 

On October 25, 2011, The B.A.C.K. Center entered into a lease agreement to acquire equipment with 60 monthly payments of $1,036 payable through October 26, 2016, with no stated interest rate. The B.A.C.K. Center may elect to acquire the leased equipment at a nominal amount at the end of the lease.

 

Aggregate Principal Maturities of Long-Term Debt as of June 30, 2015:

 

   Amount 
Six months ended December 31, 2015  $404,326 
Year ended December 31, 2016   7,779,410 
Year ended December 31, 2017   654,891 
Year ended December 31, 2018 and thereafter   91,878 
Total  $8,930,505 

 

 18 

 

 

FIRST CHOICE HEALTHCARE SOLUTIONS, INC

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015

 

NOTE 8 — CAPITAL STOCK

 

During the six months ended June 30, 2015, the Company issued an aggregate of 200,000 shares of its common stock in connection with a loan extension (see Note 6 – Convertible Notes Payable).

 

During the six months ended June 30, 2015, the Company issued an aggregate of 811,200 shares of its common stock in exchange for conversion of notes payable of $780,000 and $31,200 accrued interest.

 

During the six months ended June 30, 2015, the Company issued an aggregate of 506,000 shares of its common stock to officers, employees and service providers at an aggregate fair value of $530,000, of which $221,000 was expensed in 2014.

 

Stock-Based Payable

 

The Company is obligated to issue an aggregate of 147,500 shares of its common stock to officers and consultants for past and future services as of June 30, 2015. The estimated liability as of June 30, 2015 and December 31, 2014 of $147,500 ($1.00 per share) and $537,750 ($1.32 per share) was determined based on services rendered. The shares were issued in reliance upon the exemption from registration under Section 4(a)(2) of the Securities Act.

 

NOTE 9 — STOCK OPTIONS AND WARRANTS

 

Warrants

 

The following table summarizes the warrants outstanding and the related exercise prices for the underlying shares of the Company's common stock as of June 30, 2015:

 

Warrants Outstanding          Warrants Exercisable 
Price   Outstanding   Expiration Date  Weighted
Price
   Exercisable   Weighted
Price
 
                     
$1.35    2,320,000   November 8, 2018  $1.35    2,320,000   $1.35 
$3.60    1,875,000   December 31, 2016  $3.60    1,875,000   $3.60 
      4,195,000      $2.36    4,195,000   $2.36 

 

The warrant to purchase up to 2,320,000 shares of the Company's common stock may be exercised on a cashless basis. The warrant to purchase up to 1,875,000 shares of the Company's common stock may not be exercised on a cashless basis.

 

Transactions involving stock warrants issued to non-employees are summarized as follows:

 

 19 

 

 

FIRST CHOICE HEALTHCARE SOLUTIONS, INC

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015

 

   Number of
Shares
   Weighted
Average
Price
Per Share
 
Outstanding at December 31, 2013:   4,195,000   $2.36 
Granted   -    - 
Exercised   -    - 
Expired   -    - 
Outstanding at December 31, 2014:   4,195,000   $2.36 
           
Granted   -    - 
Exercised   -    - 
Expired   -    - 
Outstanding at June 30,2015   4,195,000   $2.36 

  

Options

 

The following table summarizes the stock option activity for the six months ended June 30, 2015:

 

   Shares  

Weighted-
Average

Exercise
Price

  

Weighted-
Average

Remaining

Contractual Term

  

Aggregate 

Intrinsic
Value

 
Outstanding at January 1, 2015   -   $-    -   $- 
Granted   3,000,000   1.35    8.67    - 
Canceled/expired   -    -    -    - 
Outstanding at June 30, 2015   3,000,000   $1.35    8.50   $- 
                     
Exercisable at June 30, 2015   -   $-    -   $- 

 

The following table presents information related to stock options at June 30, 2015:

 

Options Outstanding     
        Weighted     
        Average   Exercisable 
Exercise   Number of   Remaining Life   Number of 
Price   Options   In Years   Options 
 $1.35    3,000,000    8.50    -      

 

On May 1, 2015, in connection with the Operating and Control Agreement with Brevard Orthopaedic Spine & Pain Clinic, Inc., the Company issued 3,000,000 options to purchase the Company’s common stock at $1.35 per share, expiring on December 31, 2023 and vesting contingent on the variable interest entity (VIE), The B.A.C.K. Center, being acquired by the Company and The B.A.C.K. Center employees executing employment contracts with TBC Holdings. The determined fair value of $3,226,427, determined using the Black Scholes option pricing model with the following assumptions: Dividend yield: 0%; Volatility: 134.09% and Risk free rate: 2.12%, is amortized ratably to operations over an estimated 8.67 year life; and is recorded as deferred costs and amortized over the contract term of the Operating and Control Agreement of the VIE.

 

 20 

 

  

FIRST CHOICE HEALTHCARE SOLUTIONS, INC

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015

 

NOTE 10 — VARIABLE INTEREST ENTITY

 

Effective May 1, 2015, the Company, through its recently formed 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 the Company will 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 The initial term of the Agreement expires on December 31, 2016, with an option by the Company to extend the term until December 31, 2023. The Company issued 3,000,000 options to purchase the Company’s common stock, vesting contingent on The B.A.C.K. Center employees signing employment contracts with TBD Holdings and the variable interest entity, The B.A.C.K. Center, being acquired by the Company at $1.35 per share and expiring on December 31, 2023.

 

The Company has determined that The B.A.C.K. Center is a Variable Interest Entity ("VIE") in accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 810, "Consolidation". 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. 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 table below summarizes the assets and liabilities associated with The B.A.C.K. Center as of June 30, 2015:

 

Current assets:     
Cash  $999,128 
Accounts receivable   2,038,218 
Due from First Choice Healthcare Solutions   25,368 
Other current assets   632,853 
Total current assets   3,695,567 
Property and equipment, net   31,463 
Other assets   23,026 
Total assets  $3,750,056 
      
Current liabilities:     
Accounts payable and accrued liabilities  $970,626 
Other current liabilities   1,086,469 
Total current liabilities   2,057,095 
Long term debt   1,831,647 
Total liabilities   3,888,742 
      
Deficit   (138,686)
Total liabilities and deficit  $3,750,056 

 

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FIRST CHOICE HEALTHCARE SOLUTIONS, INC

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015

 

Total revenues from The B.A.C.K. Center were $2,206,102 for the three and six months ended June 30, 2015. Related expenses consisted primarily of salaries and benefits of $1,250,618, general and administrative expenses of $969,706, depreciation of $3,223 and interest and financing costs of $7,923.

 

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: Marina Towers, LLC, FCID Medical, Inc. and The B.A.C.K Center.

 

The Marina Towers, LLC segment derives revenue from the operating leases of its owned building, FCID Medical segment derives revenue for medical services provided to patients, and The B.A.C.K Center derives revenue for subleasing space within its building and medical services provided to patients.

 

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

 

Summary Statement of Operations for the three months ended June 30, 2015:

 

   Marina   FCID   Brevard       Intercompany     
   Towers   Medical   Orthopedic   Corporate   Eliminations   Total 
Revenue:                              
Net Patient Service Revenue  $-   $1,873,219   $1,930,820   $-   $-   $3,804,039 
Rental revenue   375,512    -    256,132    -    (111,368)   520,276 
Total Revenue   375,512    1,873,219    2,186,952    -    (111,368)   4,324,315 
                               
Operating expenses:                              
Salaries & benefits   3,000    781,064    1,250,618    90,799    -    2,125,481 
Other operating expenses   109,943    564,847    -    -    (111,368)   563,422 
General and administrative   24,148    319,237    917,456    389,029    -    1,649,870 
Depreciation and amortization   69,674    66,745    3,223    4,775    -    144,417 
Total operating expenses   206,765    1,731,893    2,171,297    484,603    (111,368)   4,483,190 
                               
Net income (loss) from operations:   168,747    141,326    15,655    (484,603)   -    (158,875)
                               
Interest expense   (109,300)   (68,798)   (7,264)   (173,632)   -    (358,994)
Amortization of financing costs   (14,337)   (4,233)   (659)   -    -    (19,229)
Other income (expense)   21,219    -    19,150    -    -    40,369 
                               
Net Income (loss):   66,329    68,295    26,882    (658,235)   -    (496,729)
                               
Income taxes   -    -    -    -    -    - 
                               
Net income (loss)  $66,329   $68,295   $26,882   $(658,235)  $-   $(496,729)

 

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FIRST CHOICE HEALTHCARE SOLUTIONS, INC

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015

 

Summary Statement of Operations for the three months ended June 30, 2014:

 

   Marina   FCID   Brevard       Intercompany     
   Towers   Medical   Orthopedic   Corporate   Eliminations   Total 
Revenue:                              
Net Patient Service Revenue  $-   $1,848,441   $-   $-   $-   $1,848,441 
Rental revenue   367,460    -    -    -    (108,737)   258,723 
Total Revenue   367,460    1,848,441    -    -    (108,737)   2,107,164 
                               
Operating expenses:                              
Salaries & benefits   3,000    996,555    -    91,251    -    1,090,806 
Other operating expenses   109,989    425,804    -    -    (108,737)   427,056 
General and administrative   21,903    328,909    -    318,396    -    669,208 
Depreciation and amortization   69,219    57,553    -    -    -    126,772 
Total operating expenses   204,111    1,808,821    -    409,647    (108,737)   2,313,842 
                               
Net income (loss) from operations:   163,349    39,620    -    (409,647)   -    (206,678)
                               
Interest expense   (114,067)   (55,951)   -    (47,159)   -    (217,177)
Amortization of financing costs   (14,337)   (11,129)   -    -    -    (25,466)
Other income (expense)   750    -    -    -    -    750 
                               
Net Income (loss):   35,695    (27,460)   -    (456,806)   -    (448,571)
                               
Income taxes   -    -    -    -    -    - 
                               
Net income (loss)  $35,695   $(27,460)  $-   $(456,806)  $-   $(448,571)

 

Summary Statement of Operations for the six months ended June 30, 2015:

 

   Marina   FCID   Brevard       Intercompany     
   Towers   Medical   Orthopedic   Corporate   Eliminations   Total 
Revenue:                              
Net Patient Service Revenue  $-   $4,113,283   $1,930,820   $-   $-   $6,044,103 
Rental revenue   750,833    -    256,132    -    (221,586)   785,379 
Total Revenue   750,833    4,113,283    2,186,952    -    (221,586)   6,829,482 
                               
Operating expenses:                              
Salaries & benefits   6,000    1,618,051    1,250,618    196,932    -    3,071,601 
Other operating expenses   213,274    1,023,219    -    -    (221,586)   1,014,907 
General and administrative   46,790    610,396    917,456    628,512    -    2,203,154 
Depreciation and amortization   138,893    133,260    3,223    9,550    -    284,926 
Total operating expenses   404,957    3,384,926    2,171,297    834,994    (221,586)   6,574,588 
                               
Net income (loss) from operations:   345,876    728,357    15,655    (834,994)   -    254,894 
                               
Interest expense   (219,796)   (120,582)   (7,264)   (374,496)   -    (722,138)
Amortization of financing costs   (28,674)   (10,582)   (659)   -    -    (39,915)
Other income (expense)   21,969    -    19,150    -    -    41,119 
                               
Net Income (loss):   119,375    597,193    26,882    (1,209,490)   -    (466,040)
                               
Income taxes   -    -         -    -    - 
                               
Net income (loss)  $119,375   $597,193   $26,882   $(1,209,490)  $-   $(466,040)

 

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FIRST CHOICE HEALTHCARE SOLUTIONS, INC

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015

 

Summary Statement of Operations for the six months ended June 30, 2014:

 

   Marina   FCID   Brevard       Intercompany     
   Towers   Medical   Orthopaedic   Corporate   Eliminations   Total 
Revenue:                              
Net Patient Service Revenue  $-   $3,821,271   $-   $-   $-   $3,821,271 
Rental revenue   736,971    -    -    -    (216,325)   520,646 
Total Revenue   736,971    3,821,271    -    -    (216,325)   4,341,917 
                               
Operating expenses:                              
Salaries & benefits   6,000    1,976,438    -    173,889    -    2,156,327 
Other operating expenses   213,601    859,071    -    -    (216,325)   856,347 
General and administrative   43,722    565,161    -    466,237    -    1,075,120 
Depreciation and amortization   138,228    123,263    -    -    -    261,491 
Total operating expenses   401,551    3,523,933    -    640,126    (216,325)   4,349,285 
                               
Net income (loss) from operations:   335,420    297,338    -    (640,126)   -    (7,368)
                               
Interest expense   (226,091)   (115,288)   -    (95,051)   -    (436,430)
Amortization of financing costs   (28,674)   (12,698)   -    -    -    (41,372)
Other income (expense)   1,500    -    -    -    -    1,500 
                               
Net Income (loss):   82,155    169,352    -    (735,177)   -    (483,670)
                               
Income taxes   -    -    -    -    -    - 
                               
Net income (loss)  $82,155   $169,352   $-   $(735,177)  $-   $(483,670)

 

   Marina   FCID   Brevard       Intercompany     
   Towers   Medical   Orthopaedic   Corporate   Eliminations   Total 
Assets:                              
At June 30, 2015:  $6,508,932   $4,873,844   $3,724,688   $3,480,083   $-   $18,587,547 
At December 31, 2014:  $6,726,759   $4,407,749   $-   $336,184   $-   $11,470,692 
                               
Assets acquired                              
Three month ended June 30, 2015:  $29,781   $1,999   $-   $-   $-   $31,780 
Three months ended June 30, 2014:  $6,319   $70,665   $-   $-   $-   $76,984 
Six months ended June 30, 2015:  $36,409   $3,656   $-   $-   $-   $40,065 
Six months ended June 30, 2014:  $16,758   $71,224   $-   $-   $-   $87,982 

 

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FIRST CHOICE HEALTHCARE SOLUTIONS, INC

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015

 

NOTE 12 - COMMITMENTS AND CONTINGENCIES

 

Litigation

 

On or about July 25, 2014, MedTRX Health Care Solutions, LLC and MedTRX Collection Services, LLC (“MedTRX”) filed a demand for arbitration with the American Arbitration Association (“AAA”) against FCID Medical, Inc. and First Choice Medical Group of Brevard, LLC (collectively, “First Choice”). MedTRX claims that First Choice breached an exclusive five-year billing and collection agreement, dated December 9, 2011, (“Billing Agreement”) by engaging another billing service on or about June 1, 2014. MedTRX also claims that First Choice failed to pay for services that MedTRX had performed prior to June 1, 2014, leaving a balance due of $93,280.84. MedTRX claims total damages of “not less than $3 million.” On or about September 15, 2014, First Choice served its Answering Statement and Counterclaims (“Answering Statement”). In the Answering Statement, First Choice denied all liability to MedTRX due to MedTRX’s numerous material breaches of the Billing Agreement and asserted two counterclaims for fraudulent inducement and negligence against MedTRX. On July 18, 2015, the arbitrator granted the Company’s request to withdraw its Answer and Counterclaims and deemed the Company to have denied only the amount of damages claimed by MEDTRX. The parties are engaged in discovery. The arbitration hearing is scheduled to commence on December 7, 2015. No assurance can be given that any amounts ultimately due by the Company will not have a material impact on the Company’s financial condition.

 

The B.A.C.K. Center has a claim filed in Brevard County, Florida Circuit Court against Health First Management, Inc. due to a contract dispute. A counterclaim was filed against the Company. The case has been litigated for a substantial amount of time and a trial is anticipated to take place within the next twelve months. The Company has vigorously defended against the counterclaim. The Company has accrued a possible loss contingency of approximately $118,000.

 

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.

 

Operating Leases

 

The B.A.C.K. Center leases office space under various non-cancelable operating leases that expire at various dates through June 2026. Terms of the lease agreements provide for rental payments ranging from approximately $4,200 to $200,000 per month. Certain leases include charges for sales and real estate taxes and a proration of common area maintenance expenses. Under generally accepted accounting principles (GAAP), all rental payments, including fixed rent increases, are recognized on a straight-line basis over the life of the lease. The GAAP rent expense and the actual lease payments are reflected as deferred rent on the accompanying balance sheet. From the date of the Operating and Control Agreement through June 30, 2015, lease expense amounted to $260,234, respectively.

 

The following is a schedule of future minimum lease payments for all non-cancelable operating leases for each of the next five years ending December 31 and thereafter:

 

Six months ended December 31 2015:  $1,732,268 
Year ended December 31, 2016   3,494,547 
Year ended December 31, 2017   3,444,197 
Year ended December 31, 2018   3,444,209 
Year ended December 31, 2019   3,444,221 
   $15,559,442 

 

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FIRST CHOICE HEALTHCARE SOLUTIONS, INC

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015

 

Guarantees

 

Two of The B.A.C.K. Center’s shareholders and a related party have guaranteed the full and prompt payment of the base rent, the additional rent and any all other sums and charges payable by a tenant, its successors and assigns under the lease, and the full performance and observance of all the covenants, terms, conditions and agreements for one of the above mentioned operating leases.

 

NOTE 13 – SUBSEQUENT EVENTS

 

Hillair Capital Investments, L.P.

  

On August 3, 2015, the remaining outstanding principal balance and accrued interest in the aggregate amount of $1,161,641 of the Company’s 8% Original Issue Discount Secured Convertible Debenture due November 1, 2015 (“Debenture”) issued to Hillair Capital Investments, L.P. was fully satisfied three months prior to its maturity date. In accordance with the terms of the Debenture, the outstanding principal balance and accrued interest was converted into shares of the Company’s Common Stock by dividing such amount by $1.00. As a result of the extinguishment of the Debenture, the Company expects to record a final non-cash gain in the third quarter ending September 30, 2015, representing a $1,161,641 increase to total shareholders’ equity.

 

 26 

 

 

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.

 

Company Overview

 

Overview

 

First Choice Healthcare Solutions, Inc. (“FCHS,” the “Company,” “we,” “our” or “us”) is engaged in the creation of state-of-the-art, multi-specialty “Medical Centers of Excellence” primarily in select markets in the southeastern region of the United States. We intend to own and operate these “Medical Centers of Excellence” under the FCHS brand.

 

We believe by integrating the synergistic mix of orthopedic, spine, neurology and interventional pain specialties with related diagnostic and ancillary services and state-of-the-art equipment and technologies all in one location, or a “Medical Center of Excellence,” we are able to:

 

  · provide patients with convenient access to musculoskeletal and rehabilitative care via orthopedic, spine, neurology and interventional pain medicine treatment, diagnostics and ancillary care services, including, but not limited to magnetic resonance imaging (“MRI”), x-ray (“X-ray”), durable medical equipment (“DME”) and physical therapy (“PT”);

 

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

 

  · advance the quality and cost effectiveness of our patients’ healthcare; and ultimately, achieve strong, sustainable financial performance that serves to create long-term value for our stockholders.

 

 27 

 

 

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 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. We currently have 116 employees, including physicians and physician assistants.

 

Our Healthcare Services Business

 

We currently own and operate First Choice Medical Group of Brevard, LLC (“FCMG”), our model multi-specialty Medical Center of Excellence. FCMG will serve as the model for replicating our “Medical Center of Excellence” strategy in our target expansion markets. Located in Melbourne, Florida, FCMG specializes in the delivery of musculoskeletal medicine, via our strategically aligned sub-specialties in orthopedics, neurology and interventional pain medicine, coupled with on-site diagnostic and ancillary services, including MRI, X-ray, DME and rehabilitative care with multiple quality-focused goals centered on enriching our patients’ care experiences.

 

On May 1, 2015, through our wholly-owned subsidiary, TBC Holdings of Melbourne, Inc., we entered into an Operating and Control Agreement (the “Agreement”) with Brevard Orthopaedic Spine & Pain Clinic, Inc. (“The B.A.C.K. Center”), a premier spine, orthopaedic and pain practice in Brevard County, Florida. The B.A.C.K. Center operates two medical offices located in Melbourne and Merritt Island, Florida. 

 

Our Real Estate Business

 

FCID Holdings, Inc. (“FCID Holdings”) is our wholly owned subsidiary which operates our real estate interests. Currently, FCID Holdings has one real estate holding, Marina Towers, LLC, a 78,000 square foot, Class A, six-story building located on the Indian River in Melbourne, Florida. In addition to housing our corporate headquarters and FCMG, the building, which averages 95% annual occupancy, also leases approximately 48,698 square feet of commercial office space to third party tenants. In addition, beginning May 1, 2015, TBC Holdings of Melbourne, Inc., through The B.A.C.K. Center, subleases approximately 34,480 square feet of commercial office space to third party tenants.

 

 New Accounting Pronouncements

 

In April 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) Number 2015-3 entitled “Simplifying the Presentation of Debt Issuance Costs.” The new guidance specifies that debt issuance costs under the new standard are to be netted against the carrying value of the financial liability. Under current guidance, debt issuance costs are recognized as a deferred charge and reported as a separate asset on the balance sheet. The new guidance aligns the treatment of debt issuance costs and debt discounts in that both reduce the carrying value of the liability. It is important to note that neither the recognition nor measurement of debt issuance costs is changed as a result of the ASU. Amortization of debt issuance costs is to be recorded as interest expense on the income statement.

 

The effective date of the new guidance is for fiscal years beginning after December 15, 2015, for public business entities and interim periods within those fiscal years. Early adoption is permitted for financial statements that have not been issued previously. We do not believe the effect of the adoption of this standard to have a material impact on the Company’s consolidated financial statements.

 

There are other 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.

 

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Results of Operations for the Three Months Ended June 30, 2015 and 2014

 

Revenues

 

Total revenues increased 105% to $4,324,314 for the three months ended June 30, 2015 as compared to revenues of $2,107,164 for the same period in the prior year. The increase is primarily attributed to the addition on May 1, 2015 of Brevard Orthopaedic Spine & Pain Clinic, Inc. (“The B.A.C.K. Center”), which contributed revenues of $2,186,952 for the quarter, which was comprised of additional patient services revenue of $1,930,820 and rental revenue of $256,132. Our existing patient services revenue increased by $24,778, or 1%, after factoring provision for doubtful accounts. Rental revenue increased by $261,553, totaling $520,276 and $258,723 for the three months ended June 30, 2015 and 2014, respectively, primarily due to the addition of revenue from The B.A.C.K. Center.

 

The provision for doubtful accounts during the second quarter of 2015 totaled $6,260. The charge to the provision for doubtful accounts in the second quarter 2015 resulted from writing off old receivables from The B.A.C.K. Center. We adopted the provisions of ASU 2011-07 in 2014, which requires that healthcare entities change the presentation of the statement of operations by reclassifying the provision for doubtful accounts from an operating expense to a deduction from patient service revenues. All periods presented have been reclassified in accordance with ASU 2011-07.

 

Operating Expenses

 

Operating expenses include the following:

 

   Three Months Ended
June 30, 2015
   Three Months Ended
June 30, 2014
 
Salaries and Benefits  $2,125,481   $1,090,806 
Other operating expenses   563,422    427,056 
General and administrative   1,649,870    669,208 
Depreciation and amortization   144,417    126,772 
Total operating expenses  $4,483,190   $2,313,842 

 

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 95% to $2,125,481 for the three months ended June 30, 2015, compared to $1,090,806 for the three months ended June 30, 2014. The increase was primarily due to the addition on May 1, 2015 of The B.A.C.K. Center, which represented an additional $1,250,618 in the reporting period. The existing segments netted a reduction of $215,943 as compared to 2014. Other operating expenses increased 32% to $563,422 from $427,056 due to the increase in patient service volume from 2014 to 2015.

 

  General and administrative expenses for the three months ended June 30, 2015 increased 147% to $1,649,870, up from $669,208. The increase was largely attributable to higher corporate expenses related to transaction costs associated with The B.A.C.K. Center, adding$969,706 in costs. We believe that each additional sale or service and corresponding gross profit of such sale or service has minimal incremental offsetting operating expenses. Thus, additional sales could contribute to profit at a higher rate of return on sales as a result of not needing to expand operating expenses at the same pace as sales.

 

Depreciation and amortization increased 14% from $126,772 for the three months ended June 30, 2014 to $144,417 for the three months ended June 30, 2015.

 

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Net Income (Loss) on Operations

 

The loss from operations for the three months ended June 30, 2015 declined 23% to $158,875, which compared to loss from operations of $206,678 for the same period in the prior year. Notwithstanding non-cash expenses totaling $295,951 for the three months ended June 30, 2015, which included stock-based compensation, depreciation and amortization, income from operations totaled $137,076. This compared to income from operations of $53,222 after factoring $259,900 in non-cash stock-based compensation, depreciation and amortization recorded for the three months ended June 30, 2014.

 

Interest Expense

 

Interest expense increased measurably, rising 65% to $358,994 for the three months ended June 30, 2015, which compared to $217,177 for the three months ended June 30, 2014. The increase primarily is due to a $128,000 non-cash interest payment to extend our convertible note payable due to Hillair Capital Investments during the three months ended June 30, 2015 as compared to nil in the same period last year.

 

Net Income (Loss)

 

As a result of all the above, our net loss decreased 11% to $496,729 for the three months ended June 30, 2015, which compared to a net loss of $448,571 for the same period in the previous year.

 

Results of Operations for the Six Months Ended June 30, 2015 and 2014

 

Revenues

 

Total revenues increased 57% to $6,829,482 for the six months ended June 30, 2015 as compared to revenues of $4,341,917 for the same period in the prior year. The increase is primarily attributed to the addition on May 1, 2015 of Brevard Orthopaedic Spine & Pain Clinic, Inc. (“The B.A.C.K. Center”), which contributed revenues of $2,186,952 for the period, which was comprised of additional patient services revenue of $1,930,820 and rental revenue of $256,132. Our existing patient services revenue increased by $290,012, or 8%, after factoring provision for doubtful accounts. Rental revenue increased by $264,733, totaling $785,379 and $520,646 for the six months ended June 30, 2015 and 2014, respectively, primarily due to the addition of revenues from The B.A.C.K. Center.

 

The provision for doubtful accounts during the six months ended June 30, 2015 totaled $51,484. The charge to the provision for doubtful accounts in the first quarter 2015 resulted from writing off old receivables from our prior MedTRX accounts receivable system, which was replaced by athenahealth in June 2014. We adopted the provisions of ASU 2011-07 in 2014, which requires that healthcare entities change the presentation of the statement of operations by reclassifying the provision for doubtful accounts from an operating expense to a deduction from patient service revenues. All periods presented have been reclassified in accordance with ASU 2011-07.

 

Operating Expenses

 

Operating expenses include the following:

 

   Six Months Ended
June 30, 2015
   Six Months Ended
June 30, 2014
 
Salaries and Benefits  $3,071,601   $2,156,327 
Other operating expenses   1,014,907    856,347 
General and administrative   2,203,154    1,075,120 
Depreciation and amortization   284,926    261,491 
Total operating expenses  $6,574,588   $4,349,285 

 

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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 42% to $3,071,601 for the six months ended June 30, 2015, which compared to $2,156,327 for the six months ended June 30, 2014. The increase was primarily due to the addition on May 1, 2015 of The B.A.C.K. Center, which added additional costs of $1,250,618 in the reporting period. The existing segments netted a reduction of $335,344 as compared to 2014. Other operating expenses increased 18% to $1,014,907 from $856,347 due to the increase in patient services volume from 2014 to 2015.

 

  General and administrative expenses for the six months ended June 30, 2015 increased 105% to $2,203,154, up from $1,075,120. The increase was largely attributable to higher corporate expenses related to transaction costs associated with The B.A.C.K. Center with $969,706 in additional costs. We believe that each additional sale or service and corresponding gross profit of such sale or service has minimal incremental offsetting operating expenses. Thus, additional sales could contribute to profit at a higher rate of return on sales as a result of not needing to expand operating expenses at the same pace as sales.

 

Depreciation and amortization increased 9% from $261,491 for the six months ended June 30, 2014 to $284,926 for the six months ended June 30, 2015.

 

Net Income (Loss) on Operations

 

Income from operations for the six months ended June 30, 2015 increased $262,262 to $254,894, which compared to loss from operations of $7,368 for the same period in the prior year. Notwithstanding non-cash expenses totaling $529,934 for the six months ended June 30, 2015, which included stock-based compensation, depreciation and amortization, income from operations totaled $784,828. This compared to income from operations of $425,395 after factoring $432,763 in non-cash stock-based compensation, depreciation and amortization recorded for the six months ended June 30, 2014.

 

Interest Expense

 

Interest expense rose 65% to $722,138 for the six months ended June 30, 2015, which compared to $436,430 for the six months ended June 30, 2014. The increase is primarily due to a $227,000 non-cash interest payment to extend our convertible note payable due to Hillair Capital Investments during the six months ended June 30, 2015 as compared to nil in the same period last year.

 

Net Income (Loss)

 

As a result of all the above, our net loss decreased 4% to $466,040 for the six months ended June 30, 2015, which compared to a net loss of $483,670 for the same period in the previous 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 loss by segment for the three and six months ended June 30, 2015 and 2014, respectively. The significant fluctuations in the line items are described above.

 

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For the Three Months Ended June 30, 2015:

 

 

   Marina   FCID   Brevard       Intercompany     
   Towers   Medical   Orthopedic   Corporate   Eliminations   Total 
Revenue:                              
Net Patient Service Revenue  $-   $1,873,219   $1,930,820   $-   $-   $3,804,039 
Rental revenue   375,512    -    256,132    -    (111,368)   520,276 
Total Revenue   375,512    1,873,219    2,186,952    -    (111,368)   4,324,315 
Total operating expenses   206,765    1,731,893    2,171,297    484,603    (111,368)   4,483,190 
                               
Net income (loss) from operations:   168,747    68,295    15,655    (484,603)   -    (158,875)

 

For the Three Months Ended June 30, 2014:

 

   Marina   FCID   Brevard       Intercompany     
   Towers   Medical   Orthopedic   Corporate   Eliminations   Total 
Revenue:                              
Net Patient Service Revenue  $-   $1,848,441   $-   $-   $-   $1,848,441 
Rental revenue   367,460    -    -    -    (108,737)   258,723 
Total Revenue   367,460    1,848,441    -    -    (108,737)   2,107,164 
Total operating expenses   204,111    1,808,821    -    409,647    (108,737)   2,313,842 
                               
Net income (loss) from operations:   163,349    39,620    -    (409,647)   -    (206,678)

 

For the Six Months Ended June 30, 2015:

 

   Marina   FCID   Brevard       Intercompany     
   Towers   Medical   Orthopedic   Corporate   Eliminations   Total 
Revenue:                              
Net Patient Service Revenue  $-   $4,113,283   $1,930,820   $-   $-   $6,044,103 
Rental revenue   750,833    -    256,132    -    (221,586)   785,379 
Total Revenue   750,833    4,113,283    2,186,952    -    (221,586)   6,829,482 
Total operating expenses   404,957    3,384,926    2,171,297    834,994    (221,586)   6,574,588 
                               
Net income (loss) from operations:   345,876    597,193    15,655    (834,994)   -    254,894 

 

For the Six Months Ended June 30, 2015:

 

   Marina   FCID   Brevard       Intercompany     
   Towers   Medical   Orthopaedic   Corporate   Eliminations   Total 
Revenue:                              
Net Patient Service Revenue  $-   $3,821,271   $-   $-   $-   $3,821,271 
Rental revenue   736,971    -    -    -    (216,325)   520,646 
Total Revenue   736,971    3,821,271    -    -    (216,325)   4,341,917 
Total operating expenses   401,551    3,523,933    -    640,126    (216,325)   4,349,285 
                               
Net income (loss) from operations:   335,420    297,338    -    (640,126)   -    (7,368)

 

Liquidity and Capital Resources

 

As of June 30, 2015, we had cash of $1,054,565, restricted cash of $372,822 and accounts receivable totaling $4,489,477. This compared to cash of $279,087, restricted cash of $318,259 and accounts receivable of $1,804,636 as of the end of 2014.

 

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The Marina Towers building is 95% occupied. We believe that ongoing operations of Marina Towers, LLC, the current positive cash balance, along with continued execution of Marina Tower's business development plan, will allow us to further improve our working capital; and that we will have sufficient capital resources to meet projected cash flow requirements through the date that is one year plus a day from the filing date of this report. However, there can be no assurance that we will be successful in fully executing our business development plan.

 

Net cash provided by our operating activities for the six months ended June 30, 2015 totaled $69,994, which compared to net cash used in our operations for the six months ended June 30, 2014 of $549,037. The decrease in cash used was due primarily to a net loss of $466,040 for the current period as compared to a net loss of $483,670 for the six months ended June 30, 2014. This was offset by stock-based compensation of $139,750 and payment of the non-cash loan extension of $227,000 for the six months ended June 30, 2015 as compared to $96,000 for the same period last year. In addition, our operating assets increased by $477,421 and $968,613 for the six months ended June 30, 2015 and 2014, respectively; and our operating liabilities increased in 2015 by $216,606 as compared to increasing by $429,112 for the six months ended June 30, 2014.

 

Net cash flows provided by investing activities was $639,608 for the six months ended June 30, 2015, compared to $87,982 used in investing activities for the six months ended June 30, 2014. In 2015, we received $679,673 as part of the combining with The B.A.C.K. Center. Purchases of equipment were $40,065 and $87,982 for the six months ended June 30, 2015 and 2014, respectively, due to less cash spent on the purchase of equipment in 2015 compared to the prior year.

 

Cash flows provided by financing activities was $65,876 for six months ended June 30, 2015, compared to net cash used in financing activities of $31,327 for the six months ended June 30, 2014. The cash flows provided by (used in) financing activities were the result of: 

 

  

Six Months ended

June 30, 2015

  

Six Months ended

June 30, 2014

 
Proceeds from advances  $129,000   $ 
Proceeds from lines of credit   355,656    350,000 
Net payments on notes payable   (418,780)   (381,327)
Net cash provided by (used in) financing activities  $65,876   $(31,327)

 

On April 9, 2015, the redemption terms of our debenture were further modified as follows: Hillair agreed to convert $580,000 of the principal amount of the February Periodic Redemption into 580,000 shares of the Company’s common stock on or before May 1, 2015. In consideration of reducing the conversion price of $100,000 principal amount of the Debenture from $1.00 to $0.50 per share, the $580,000 principal amount of the Debenture due May 1, 2015 was extended to August 1, 2015.

 

Additionally, the modification provides the Company, upon the payment of $150,000 (on or before July 1, 2015) and the reduction of the exercise price of the 2,320,000 warrants issued to Hillair from $1.35 per share to $1.00 per share, to extend the $580,000 principal amount of the Debenture plus interest due August 1, 2015 and the balance of the principal amount of the Debenture plus interest due November 1, 2015 until January 15, 2016.   Reducing the exercise price of the warrants would increase the number of warrants granted to Hillair by 601,481. Subsequent to the end of the second quarter 2015, ended June 30, 2015, we announced that the remaining outstanding principal balance, and accrued interest, in the aggregate amount of $1,161,641 of the Debenture was fully satisfied three months prior to its maturity date on November 1, 2015. In accordance with the terms of the Debenture, the outstanding principal balance and accrued interest was converted into shares of the Company’s Common Stock by dividing such amount by $1.00. As a result of the extinguishment of the Debenture, the Company expects to record a final non-cash gain in the third quarter ending September 30, 2015, representing a $1,161,641 increase to total shareholders’ equity.

 

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Currently, we are actively engaged in identifying and pursuing discussions with prospective acquisitions and/or implementation of operation and management agreements that qualify as variable interest entities in accordance with generally accepted accounting practices in key target markets — with those being largely in the southeastern U.S. Over the next 12 months, we expect to incur significant capital costs to further develop and expand our medical operations. We plan to add another medical center of excellence and purchase additional diagnostic equipment for our operations. We expect to need additional capital of approximately $4-6 million to fund the development and expansion of our operations over the next 12 months. However, there can be no assurance that we will be able to negotiate acceptable terms for, or find suitable candidates for, such acquisition.

 

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.

 

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.

 

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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 June 30, 2015, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II

 

Item 1.  Legal Proceedings

 

On or about July 25, 2014, MedTRX Health Care Solutions, LLC and MedTRX Collection Services, LLC (“MedTRX”) filed a demand for arbitration with the American Arbitration Association (“AAA”) against FCID Medical, Inc. and First Choice Medical Group of Brevard, LLC (collectively, “First Choice”). MedTRX claims that First Choice breached an exclusive five-year billing and collection agreement dated as of December 9, 2011 (“Billing Agreement”) by engaging another billing service on or about June 1, 2014. MedTRX also claims that First Choice failed to pay for services that MedTRX had performed prior to June 1, 2014 leaving a balance due of $93,280.84. MedTRX claims total damages of “not less than $3 million”. On or about September 15, 2014, First Choice served its Answering Statement and Counterclaims (“Answering Statement”). In the Answering Statement, First Choice denied all liability to MedTRX due to MedTRX’s numerous material breaches of the Billing Agreement and asserted two counterclaims for fraudulent inducement and negligence against MedTRX. On July 18, 2015, the arbitrator granted the Company’s request to withdraw its Answer and Counterclaims and deemed the Company to have denied only the amount of damages claimed by MEDTRX. The parties are engaged in discovery. The arbitration hearing is scheduled to commence on December 7, 2015. No assurance can be given that any amounts ultimately due by the Company will not have a material impact on the Company’s financial condition.

 

The B.A.C.K. Center has a claim filed, in Brevard County, Florida Circuit Court, against Health First Management, Inc. due to a contract dispute. A counterclaim was filed against the Company. The case has been litigated for a substantial amount of time and a trial is anticipated to take place within the next 12 months. The Company has vigorously defended against the counterclaim. The Company has accrued a possible loss contingency of approximately $118,000.

 

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 for the year ended December 31, 2014

 

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

 

Issuances to Directors, Officers, Employees and Service Providers

 

During the six months ended June 30, 2015, we issued an aggregate of 506,000 shares of our common stock to certain service providers; and such shares had an aggregate fair value of $530,000 of which $221,000 was expensed in 2014. The shares were issued in reliance upon the exemption from registration under Section 4(a)(2) of the Securities Act.

 

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: August 14, 2015 By: /s/ Christian C. Romandetti
    Christian C. Romandetti
    Chief Executive Officer (Principal Executive Officer)
     
Dated: August 14, 2015 By: /s/ Donald A. Bittar
    Donald A. Bittar
    Interim Chief Financial Officer (Principal Accounting Officer)

 

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