ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
FORWARD LOOKING STATEMENTS
From time to time, we or our representatives have made or may make forward-looking statements, orally or in writing. Such forward-looking statements may be included in, but not limited to, press releases, oral statements made with the approval of an authorized executive officer or in various filings made by us with the Securities and Exchange Commission. Words or phrases “will likely result”, “are expected to”, “will continue”, “is anticipated”, “estimate”, “project or projected”, or similar expressions are intended to identify “forward-looking statements”. Such statements are qualified in their entirety by reference to and are accompanied by the above discussion of certain important factors that could cause actual results to differ materially from such forward-looking statements.
Management is currently unaware of any trends or conditions other than those mentioned elsewhere in this management’s discussion and analysis that could have a material adverse effect on the Company’s consolidated financial position, future results of operations, or liquidity. However, investors should also be aware of factors that could have a negative impact on the Company’s prospects and the consistency of progress in the areas of revenue generation, liquidity, and generation of capital resources. These include: (i) variations in revenue,
(ii) possible inability to attract investors for its equity securities or otherwise raise adequate funds from any source should the Company seek to do so,
(iii) increased governmental regulation, (iv) increased competition, (v) unfavorable outcomes to litigation involving the Company or to which the Company may become a party in the future and, (vi) a very competitive and rapidly changing operating environment. The risks identified here are not all inclusive. New risk factors emerge from time to time and it is not possible for management to predict all of such risk factors, nor can it assess the impact of all such risk factors on the Company’s business or the extent to which any factor or combination of factors may cause actual results to differ materially from those contained in any forward-looking statements. Accordingly, forward-looking statements should not be relied upon as a prediction of actual results. Unless required by law, we undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events, or otherwise. However, readers should carefully review the risk factors set forth herein and in other reports and documents that we file from time to time with the Securities and Exchange Commission, particularly the Annual Reports on Form 10-K, Quarterly reports on Form 10-Q and any Current Reports on Form 8-K.
The financial information set forth in the following discussion should be read in conjunction with the consolidated financial statements of First Choice Healthcare Solutions, Inc. included elsewhere herein.
OVERVIEW AND HISTORY
We were incorporated in the State of Colorado on May 30, 2007 to act as a holding corporation for I.V. Services Ltd., Inc. (“IVS”), a Florida corporation engaged in providing billing services to providers of medical services. IVS was incorporated in the State of Florida on September 28, 1987, and on June 30, 2007, we issued 8,000,000 pre-reverse split common shares (or 2,000,000 post-reverse split common shares) to Mr. Michael West in exchange for 100% of the capital stock of IVS. In the second quarter of 2011, we disposed of IVS, which, at the time, was a wholly-owned subsidiary of the Company that was inactive. The consideration for the disposition was the net liability assumption by the purchaser.
On December 29, 2010, we entered into a Share Exchange Agreement (the “Share Exchange Agreement”) with FCID Medical, Inc., a Florida corporation (“FCID Medical”) and FCID Holdings, Inc., a Florida corporation (“FCID Holdings)”, which together will be referred to herein with FCID Medical as “FCID”, and the shareholders of FCID (the “FCID Shareholders”). Pursuant to the terms of the Share Exchange Agreement, the FCID Shareholders exchanged 100% of the outstanding common stock of FCID for a total of 40,000,000 pre-reverse split common shares (or 10,000,000 post-reverse split common shares) of the Company, resulting in FCID Medical and FCID Holdings being 100% owned subsidiaries of the Company (the “Share Exchange”).
In connection with the Share Exchange Agreement, in addition to the foregoing and effective on the closing date, Michael West resigned as President, Treasurer and director of the Company. Mr. Steve West resigned as officer of the Company but retained a directorship with the Company and subsequently resigned in 2011. After such resignations, Christian Charles Romandetti was appointed President, Chief Executive Officer and a director of the Company, and Donald Bittar was appointed Chief Financial Officer, Treasurer and Secretary. Currently, Mr. Bittar also is a director.
Merger, Re-Incorporation and Name Change
On or about February 13, 2012, we obtained stockholder consent for (i) the approval of an agreement and plan of merger (the “Merger Agreement”) with First Choice Healthcare Solutions, Inc., (“FCHS Delaware”), a Delaware corporation formed exclusively for the purpose of merging with the Company, pursuant to which (a) the Company’s state of incorporation changed from Colorado to Delaware (the “Reincorporation”) (b) the Company’s name changed from Medical Billing Assistance, Inc. to First Choice Healthcare Solutions, Inc. (the “Name Change”), and (c) every four shares of Company’s common stock was exchanged for one share of FCHS Delaware common stock (effectively resulting in a four-to-one reverse split of the Company’s common stock) (the “Reverse Split”), and (ii) the approval of the Medical Billing Assistance, Inc. 2011 Incentive Stock Plan. The effective date for the Reincorporation and the Reverse Split was April 4, 2012.
All of our operations are conducted out of our wholly-owned subsidiaries: FCID Medical and FCID Holdings. The wholly-owned subsidiary operating the multi-specialty medical clinic is owned by FCID Medical. We have real estate holdings through FCID Holdings, Inc., under which Marina Towers, LLC is wholly-owned subsidiary. A diagram of our corporate structure is set forth below:
The cornerstone of the FCID Medical business plan is to develop and acquire efficient, specialized healthcare clinical units. The Company is carving a new niche in the multi-billion dollar medical clinical service industry with this new paradigm, professional multi-specialty medical centers. These multi-specialty medical centers include an optimal mix of synergistic multi-specialty physicians combined with an array of diagnostic capabilities.
First Medical Clinic Acquisition
On October 5, 2011, FCID Medical, Inc., a wholly owned subsidiary of the Company, entered into a management agreement to manage the medical practice of First Choice Medical Group of Brevard, LLC. On April 2, 2012, we completed the acquisition of the practice and acquired all of the issued and outstanding membership interests of First Choice Medical Group of Brevard, LLC.
A new paradigm medical clinic
Some retail business models have been successful with broad customer demographics, easy service provider substitution, intense competition and continuing lower profit margins. We view medical centers as a retail-oriented business delivering medical services direct to consumers. Unlike transportation, fast food, electronics and other retailers, medical centers, generally, have not been quick to adapt themselves to operating successfully with lower profit margins and growing competition. The successful retail businesses recognized the importance of embracing information technology, telecommunication and functional economies of scale to allow high service levels to continue, while retaining acceptable profit margins. Their corporate cultures include a commitment to insuring the best possible customer experience through consistent, predictable and superior service levels in every aspect of their business. They have learned to become profitable in the face of lower margins and increasing competition.
The key to our success is our new paradigm multi-specialty medical centers. While adopting the leading edge retail service practices, the Company remains committed to high patient service levels intended to achieve predictable and acceptable profit margins.
Excellent medical service levels with a human touch
Our business model is intended to bring the best retail practices to operating a multi-specialty medical centers successfully with a ‘human touch’. Patients want their pain, fear and concerns acknowledged and considered. They want to be treated with dignity and respect. From the patient’s first interaction with us, making an appointment to see a doctor, our strategic and tactical goals are to provide the best possible patient healthcare experience through consistent, predictable and superior service levels in every aspect of our clinics. On time appointments, accurate and current patient information, attention to detail and careful patient follow up are part of our commitment to an excellent patient experience. Management actively monitors the daily service level objectives for every aspect of the patient experience from the initial appointment through the end of treatment. Clinic staff is encouraged and rewarded for exceeding their service level objectives.
Medical service mix
Like other successful business models for professional medical services, ours is designed to offer the most synergistic and profitable medical service mix. By their nature, some combinations of medical specialties can be more revenue positive than others. Physicians need access to diagnostic equipment like, X-Ray, MRI and physical therapy. Patients expect their physicians to have access to the best diagnostic and service delivery equipment. Without diagnostic services many medical practices will find it difficult to maintain their current margins of profitability. We combine medical specialties and diagnostic services at our locations to maintain or increase the capability for profit. While one specialty may have high reimbursements for their professional service but insufficient volume to profitably support the necessary diagnostic equipment, another medical specialty may have a lower professional service reimbursement but high volume diagnostic equipment use. Operating independently, each specialty group would face retreating profit margins and a significant challenge to maintain high service levels with adequate equipment and current technologies. However, operating together, they create the optimal mix of professional service fee income and diagnostic equipment procedure income. Since the combination is more profitable than either of its components, there is a most favorable opportunity to sustain profit margins that will allow the facility to maintain high service levels with leading edge equipment and state of the art technologies.
In recruiting, selecting and hiring physicians, we employ physicians with the highest patient care reviews always making superior quality of service our number one priority. Our expansion plan is to employee physicians in multiple multi-specialty medical centers located in other geographic markets. In future facilities, we will work to maintain the optimal combination of medical specialties we believe will support the most profitable mix of professional service fees. This business model, in turn, is most likely to provide our physicians with the best diagnostic equipment available, our patients with the best possible medical experience and our Company with the potential when combining physicians and diagnostic equipment to maintain attractive profit margins. The model is also designed to allow physicians to concentrate exclusively on delivering excellent patient care. The requirements for running the business functions of a successful medical clinic are the sole responsibility of the business management team and not the physicians.
Scalable back office and economies of scale
Fixed cost legacy administrative functions have subjected many established medical centers to a downward spiral of diminishing profit margins and losses. In legacy medical centers, administrative management, billing, compliance, accounting, marketing, advertising, scheduling, customer service, record keeping functions represent fixed overhead for the practice. The fixed administrative overhead of a practice has the effect of reducing profit margins as the practice experiences declining revenues as a result of lower patient volumes from increasing competition, lower pricing, lower reimbursements or patient migration to competitors.
We intend to achieve and sustain profitability, in part, first by introducing economies of scale to our nonclinical administrative functions and second to scale these economies, with similar profit margins, to higher operating volumes from future multi-specialty medical centers. Nonclinical administrative functions operating with economies of scale are intended to improve the profit margin for our medical clinic retail model. More significantly, our administrative functions are readily scalable to allow profit margins at relatively low clinic volume and also with larger numbers of physicians and locations.
A key to our success is our ability to employ a highly experienced team of business managers supported by an array of professional, experienced and compliant subcontractors. Using the best project management practices, our business managers contract services for the billing, compliance, accounting, marketing, advertising, legal, information technology and record keeping functions. The cost of our ‘back office operation’ scales quickly in direct relation to our volume, allowing us to sustain profit margins with a cost effective and scalable back office. As the number of physicians increases so do the economies of scale for our back office. The economies of scale support selecting the best and not the lowest cost subcontractors, while allowing our multi-specialty medical centers to operate cost effectively with higher service levels.
Developing and operating additional multi-specialty medical centers in other geographic areas will take advantage of the economies of scale for our administrative back office functions. Our plan calls for opening up multiple clinics in multiple states and cities at a pace that will allow us to maintain the same levels of quality and acceptable profitability from each location. We believe that the scalable structure of our administrative back office functions will efficiently support our expansion plans.
High technology infrastructure supporting excellent human touch patient experiences
Successful retail models in other industries already effectively use telecommunications, remote computing, mobile computing, cloud computing, virtual networks and other leading-edge technologies to manage geographically diverse operating units. These technologies create the infrastructure to allow a central management team to monitor, direct and control geographically disbursed operating units and subcontractors, including national operations.
The FCHS business model is designed to incorporate the best of these technologies. Each day, a central management team monitors, directs and controls our multi-specialty medical centers and all the necessary support subcontractors. We operate a paperless system with electronic patient medical records. Test results, X-ray images, MRI, diagnosis, patient notes, visit reports, billing information, insurance coverage, and patient identification information are all contained an electronic medical record. This will allow physicians and staff instant access to every aspect of a patient’s medical information from anywhere, in any clinic, and remotely with mobile computing devices. The patient billing, accounts receivable and collection functions also are paperless. A majority of our third party payors remit by EDI and wire transfers. Accordingly, every aspect of the business is positioned to achieve high productivity and lower administrative headcounts and per capita expenses.
We intend to grow by replicating our multi-specialty medical centers, supported by our standardized policies, procedures and clinic setup guidelines. The administrative functions can be quickly scaled to handle multiple additional clinics. As we roll out our business model, we expect our administrative core and clinic retail model to transform the economics of multi-specialty medical centers.
Results of Operations
Three months ended March 31, 2012 compared to three months ended March 31, 2011:
The following discussion involves our results of operations for the three months ended March 31, 2012 compared to the three months ended March 31, 2011.
Comparing our operations, we had revenues of $330,216 for the three months ended March 31, 2012, compared to revenues of $311,197 for the three months ended March 31, 2011. The increase in revenue of $19,019 or 6%, is primarily attributable to an increase in revenue generated by escalation increases from our Marina Towers.
Operating expenses, which include general and administrative expenses for the three months ended March 31, 2012, were $429,406 compared to expenses of $203,531 for the three months ended March 31, 2011. The increase of $225,875, or 111%, is mainly attributable to legal, accounting and other professional expenses incurred in connection with our operation as a public entity. Depreciation of our building remained constant at approximately $40,000 for the three months ended March 31, 2012 and 2011, respectively.
The major components of operating expenses include general and administrative, legal, accounting and professional fees associated maintaining a public entity.
We believe that the general and administrative expenses in current operations should scale as our revenues develop. Each additional sale or service and corresponding gross profit of such sale or service have minimal 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.
Interest expense, primarily composed of our mortgage interest on our building was $114,736 and $74,332 for the three months ended March 31, 2012 and 2011, respectively. The increase in our interest expense was due to our higher mortgage loan on our Marina Towers we put in place in the later part of 2011.
We had a net loss of $204,409 for the three months ended March 31, 2012 compared to net income of $27,576 for the three months ended March 31, 2011. This decrease in net income of $231,985 is mainly attributable to reasons as described above.
Liquidity and Capital Resources
As of March 31, 2012, we had cash or cash equivalents of $31,505.
Net cash used in operating activities was $224,717 for the three months ended March 31, 2012, compared to cash provided by operating activities of $83,342 for the same period last year. We anticipate that overhead costs in current operations will remain fairly constant as revenues develop.
Net cash flows used in investing activities was $362,064 for the three months ended March 31, 2012, compared to $-0- for the three months ended March 31, 2011.
Cash flows provided by financing activities was $89,983 for the three months ended March 31, 2012, compared to net cash used in financing activities of $74,000 for the three months ended March 31, 2011.
On February 1, 2012, the Company opened a $500,000 unsecured, revolving line of credit loan with CCR of Melbourne, Inc, an entity owned and controlled by the Company’s Chief Executive Officer. The revolving line of credit loan matures on October 1, 2013 with interest and is paid monthly at a per annum rate of 8.5% beginning March 1, 2012. As of March 31, 2012, $110,000 was outstanding.
Over the next twelve months we expect significant capital costs to further develop operations. We plan to buy diagnostic equipment to be used in our operations. We anticipate raising funds in an estimated amount of $2-3 million for the development of our operations.
We believe that we have sufficient capital in the short term through one year plus a day from the filing date of this report for our current level of operations. This is because we have sufficient revenues generated from Marina Towers and First Choice Medical Group of Brevard to allow us to maintain operations.
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 do not have any off-balance sheet arrangements.
It is our opinion that inflation has not had, and is not likely to have, a material effect on our operations.
CRITICAL ACCOUNTING POLICIES
The Company recognizes revenue in accordance with Accounting Standards Codification subtopic 605-10, Revenue Recognition (“ASC 605-10″) which requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the selling price is fixed and 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.
The Company follows Accounting Standards Codification subtopic 360-10, Property, plant and equipment (“ASC 360-10″). The Statement requires that long-lived assets and certain identifiable intangibles held and used by the Company be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Events relating to recoverability may include significant unfavorable changes in business conditions, recurring losses, or a forecasted inability to achieve break-even operating results over an extended period. The Company evaluates the recoverability of long-lived assets based upon forecasted undiscounted cash flows. Should impairment in value be indicated, the carrying value of intangible assets will be adjusted, based on estimates of future discounted cash flows resulting from the use and ultimate disposition of the asset. ASC 360-10 also requires assets to be disposed of be reported at the lower of the carrying amount or the fair value less costs to sell.
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.