10-Q 1 v377520_10q.htm 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

(Mark One)

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

For the quarterly period ended: March 31, 2014

¨	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: 000-54527

HEALTHCARE CORPORATION OF AMERICA

(Exact name of the registrant as specified in its charter)

Delaware		27-4563770
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

66 Ford Road, Suite 230 Denville, New Jersey		07834
(Address of principal executive offices)		(Zip Code)

(973) 983-6300

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

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 preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ¨ No x

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 (Sec.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, 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	¨	(Do not check if a smaller reporting company)	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

Number of shares of common stock outstanding as of May 8, 2014: 8,907,692

TABLE OF CONTENTS

		Page

PART I – FINANCIAL INFORMATION

ITEM 1.	FINANCIAL STATEMENTS	4

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	27

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	32

ITEM 4.	CONTROLS AND PROCEDURES	33

PART II – OTHER INFORMATION

ITEM 1.	LEGAL PROCEEDINGS	33

ITEM 1A. RISK FACTORS		34

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	34

ITEM 3.	DEFAULT UPON SENIOR SECURITIES	34

ITEM 4.	MINE SAFETY DISCLOSURES	34

ITEM 5.	OTHER INFORMATION	34

ITEM 6.	EXHIBITS	34

CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS

This Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, or the Exchange Act. The statements contained in this report that are not purely historical are forward-looking statements. Our forward-looking statements include, but are not limited to, statements regarding our or our management’s expectations, hopes, beliefs, intentions or strategies regarding the future. In addition, any statements that refer to projections, forecasts or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. The words “anticipates,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “possible,” “potential,” “predict,” “project,” “should,” “would” and similar expressions may identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking.

The forward-looking statements contained in this report are based on our current expectations and beliefs concerning future developments and their potential effects on us. There can be no assurance that future developments affecting us will be those that we have anticipated. These forward-looking statements involve a number of risks, uncertainties (some of which are beyond our control) or other assumptions that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements. These risks and uncertainties include, but are not limited to, those factors described under the heading “Risk Factors,” which include, among other things:

changing principles of generally accepted accounting principles;

market acceptance of our products;

changes in government regulations related to the pharmaceutical industry;

changes in government regulations related to healthcare, generally;

fluctuations in customer demand;

management of growth;

general economic conditions;

relationships with suppliers;

overall economic conditions and local market conditions;

our ability to keep information confidential;

the volume of prescriptions for certain drugs or drugs generally; and

retaining key customer relationships.

Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, actual results may vary in material respects from those projected in these forward-looking statements. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws and/or if and when management knows or has a reasonable basis on which to conclude that previously disclosed projections are no longer reasonably attainable.

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

HEALTHCARE CORPORATION OF AMERICA

CONSOLIDATED FINANCIAL STATEMENTS

As of March 31, 2014

HEALTHCARE CORPORATION OF AMERICA

CONSOLIDATED BALANCE SHEETS

As of March 31, 2014 and December 31, 2013

	March 31,			December 31,
	2014			2013
	(Unaudited)
Assets

Current assets:
Cash and cash equivalents	$	1,527,073		$	2,614,375
Accounts receivable		1,322,165			1,512,254
Inventory		427,660			638,858
Rebates receivable		1,780,546			2,072,049
Prepaid expenses and other current assets		77,117			164,450

Total current assets		5,134,561			7,001,986

Property and equipment, net		1,071,859			1,148,515
Deferred financing costs, net		246,086			254,252
Software, net		374,993			399,383
Other assets		362,566			406,463

Total assets	$	7,190,065		$	9,210,599

Liabilities and Stockholders’ Deficit

Current liabilities:
Accounts payable	$	5,250,349		$	5,184,273
Accrued expenses		3,896,012			3,294,467
Deferred revenue		1,766,375			2,090,614
Senior convertible note, net of debt discount		2,066,463			1,296,776
Junior convertible note, net of debt discount		74,591			-
Current portion of capital leases		209,267			216,400
Other current liabilities		12,125			19,503

Total current liabilities		13,275,182			12,102,033

Incentive Notes		3,133,213			2,934,297
Capital leases, net of current portion		535,704			579,390
Derivative liabilities		4,703,589			5,405,889
Other liabilities		47,785			44,631

Total liabilities		21,695,473			21,066,240

Commitments and contingencies

Stockholders’ deficit:
Common stock, $.0001 par value; 30,000,000 shares authorized; 8,907,492 and 8,832,492 shares issued and outstanding at March 31, 2014 and December 31, 2013, respectively		890			882
Additional paid-in capital		23,724,108			23,327,727
Accumulated deficit		(38,230,406	)		(35,184,250	)

Total stockholders’ deficit		(14,505,408	)		(11,855,641	)

Total liabilities, redeemable securities and stockholders’ deficit	$	7,190,065		$	9,210,599

The accompanying notes form an integral part of the consolidated financial statements.

HEALTHCARE CORPORATION OF AMERICA

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	For the Three Months Ended March 31, 2014			For the Three Months Ended March 31, 2013

Sales	$	14,921,025		$	11,961,723
Cost of sales		14,302,185			11,450,011

Gross profit		618,840			511,712

Operating expenses:
Selling, general and administrative		3,483,049			2,974,020

Loss from operations		(2,864,209	)		(2,462,308	)

Other income (expense):
Interest expense		(884,247	)		(1,186,305	)
Change in fair value of derivative liabilities		702,300			-

Total other income (expense)		(181,947	)		(1,186,305	)

Loss before provision for income taxes		(3,046,156	)		(3,648,613	)

Provision for income taxes		-			-

Net loss	$	(3,046,156	)	$	(3,648,613	)

Earnings per share:
Basic and diluted loss per share	$	(0.34	)	$	(0.09	)

Weighted average number of shares outstanding		8,846,103			40,250,009

The accompanying notes form an integral part of the consolidated financial statements

HEALTHCARE CORPORATION OF AMERICA

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

For the Three Months Ended March 31, 2014

(Unaudited)

	Common Stock				Additional		Accumulated			Stockholders’
	Shares		Amount		Paid-In Capital		Deficit			Deficit

Balance at January 1, 2014		8,832,492	$	882	$	23,327,727	$	(35,184,250	)	$	(11,855,641	)
Issuance of shares of common stock in connection with settlement of disputes		75,000		8		112,492					112,500
Stock based compensation						283,889					283,889
Net loss		-		-		-		(3,046,156	)		(3,046,156	)

Balance at March 31, 2014		8,907,492	$	890	$	23,724,108	$	(38,230,406	)	$	(14,505,408	)

The accompanying notes form an integral part of the financial statements

HEALTHCARE CORPORATION OF AMERICA

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Three Months Ended March 31, 2014			Three Months Ended March 31, 2013

Cash used in operating activities:
Net loss	$	(3,046,156	)	$	(3,648,613	)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization		112,666			74,693
Non cash interest expense		815,188			218,566
Stock-based compensation		283,889			480,000
Note-based compensation		18,394			-
Mark to market adjustment on derivative liabilities		(702,300	)		-
Changes in assets and liabilities:
Accounts receivable		190,089			(857,974	)
Rebates receivable		291,503			(221,432	)
Inventory		211,198			119,693
Prepaid expenses and other current assets		112,836			1,055
Accounts payable and accrued expenses		539,188			1,730,261
Deferred revenues		(324,239	)		166,475
Other liabilities		(4,224	)		(1,415	)

Total cash used in operating activities		(1,501,968	)		(1,938,691	)

Cash used in investing activities:
Purchase of property and equipment		(11,620	)		(123,939	)

Total cash used in investing activities		(11,620	)		(123,939	)

Cash from financing activities:
Proceeds from senior convertible note		500,000			-
Proceeds from notes payable		-			611,311
Debt costs		(22,895	)		-
Warrants issued		-			120,937
Payments of capital leases		(50,819	)		(51,729	)

Total cash provided by financing activities		426,286			680,519

Net increase (decrease) in cash		(1,087,302	)		(1,382,111	)

Cash, beginning of period		2,614,375			1,791,134

Cash, end of period	$	1,527,073		$	409,023

The accompanying notes form an integral part of the consolidated financial statements

(Continued on next page)

HEALTHCARE CORPORATION OF AMERICA

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Unaudited)

	Three Months Ended			Three Months Ended
	March 31, 2014			March 31, 2013

Supplemental disclosures:

Interest	$	(69,059	)	$	(960,416	)

Income taxes	$	-		$	-

Issuance of shares in settlement of disputes	$	(112,500	)	$	-

The accompanying notes form an integral part of the consolidated financial statements

HEALTHCARE CORPORATION OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of March 31, 2014 and December 31, 2013 and for the Three Months Ended March 31, 2014 and 2013

1. Description of Business

Selway Capital Acquisition Corporation (“SCAC” or “Selway”) was originally incorporated under the laws of Delaware on January 12, 2011 for the purpose of acquiring one or more operating businesses through merger or capital stock exchange. On January 25, 2013, an agreement and plan of merger (the “Merger”) was entered into between SCAC and Healthcare Corporation of America (“HCCA”). The Merger closed on April 10, 2013 with SCAC being the surviving entity upon the consummation of the Merger (see Note 3).

HCCA and its wholly-owned subsidiaries, Prescription Corporation of America Benefits (“PCA Benefits”) and Prescription Corporation of America (“PCA”), are engaged in providing benefits management and mail order pharmaceutical fulfillment services to companies primarily in the northeast United States.

On June 3, 2013, SCAC amended its articles of incorporation to change its name to Healthcare Corporation of America (collectively with its subsidiaries, the “Company”).

On April 22, 2013, the Company’s board of directors approved the change of its fiscal year end from December 31 to June 30.

On November 7, 2013, the board of directors approved the change of its fiscal year end back to December 31.

The accompanying historical consolidated financial statements represent the financial position and results of operations of HCCA through April 10, 2013 and the financial position and results of operations of the Company thereafter (see Note 3).

2. Liquidity and Financial Condition

The Company has a working capital deficit and a history of recurring losses and negative cash flows from operating activities. As of March 31, 2014 and December 31, 2013, the Company has working capital deficiencies of $8,140,621 and $5,100,047, respectively and stockholders’ deficit of $14,505,408 and $11,855,641, respectively. During the three months ended March 31, 2014 and the year ended December 31, 2013, the Company incurred net losses of $3,046,156 and $24,544,708, respectively, and negative cash flows from operating activities of $1,501,968 and $9,606,056, respectively. Collectively, these factors raise substantial doubt about the Company’s ability to continue as a going concern.

The Company is currently making efforts to raise capital in the form of debt and/or equity. No assurance can be given that the debt and/or equity can be raised and if available it will be on terms acceptable to the Company.

The accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern. The ability of the Company to continue as a going concern is dependent upon adequate capital to fund operating losses until it becomes profitable. If the Company is unable to obtain adequate capital, it could be forced to cease operations.

3. The Merger

On January 25, 2013, an Agreement and Plan of Merger (the “Agreement”) was entered into by and among the Company, Selway Merger Sub, Inc., a New Jersey corporation and wholly owned subsidiary of the Company (“Merger Sub”), HCCA, PCA, and representatives of HCCA and the Company. On April 10, 2013 (the “Closing Date”), the Merger and other transactions contemplated by the Agreement closed.

Pursuant to the Agreement, Merger Sub merged with and into HCCA, resulting in HCCA becoming a wholly owned subsidiary of the Company. PCA and PCA Benefits, a dormant entity, remain wholly owned subsidiaries of HCCA.

HEALTHCARE CORPORATION OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

As of March 31, 2014 and December 31, 2013 and for the Three Months Ended March 31, 2014 and 2013

3. The Merger (Continued)

Holders of all of the issued and outstanding shares of common stock of HCCA immediately prior to the time of the Merger had each of their shares of common stock of HCCA converted into the right to receive: (i) a proportional amount of 5,200,000 shares of the Company’s Series C common stock and promissory notes with an aggregate face value of $7,500,000 (collectively, the “Closing Payment”); plus (ii) a proportional amount of up to 2,800,000 shares of the Company’s common stock, if any, (the “Earn-out Payment Shares”) issuable upon the Company achieving certain consolidated gross revenue thresholds as more fully described below; plus (iii) the right to receive a proportional amount of the proceeds from the exercise of certain warrants being issued to Selway Capital Holdings, LLC, Selway’s sponsor, as more fully described below. A portion of the Closing Payment (520,000 shares and promissory notes with an aggregate face value of $750,000) was being held in escrow for a period of 12 months following the Merger to satisfy indemnification obligations of HCCA. Effective December 20, 2013, the escrowed portion of the Closing Payment, together with a portion of the shares issued to HCCA’s investment banking advisor (an aggregate of 546,002 shares, and promissory notes with an aggregate face value of $750,000) were released from escrow and cancelled.

The promissory notes included in the Closing Payment are non-interest bearing and subordinated to all senior debt of the combined company in the event of a default under such senior debt. The notes will be repaid from 18.5% of the Company’s free cash-flow (as defined) in excess of $2,000,000. The Company will be obligated to repay such notes if, among other events, there is a transaction that results in a change of control of the Company. The Company valued the notes at $1,977,570, which represented the present value of the estimated future cash flows to be generated by the combined companies discounted using an interest rate reflective of the uncertainty and credit risk of the notes.

Certain members of HCCA’s management received an aggregate of 1,500,000 shares of our common stock (the “Management Incentive Shares”), which shares were placed in escrow and subject to release in three installments through June 30, 2015. Subsequently, certain members of HCCA management agreed to cancel an aggregate of 750,000 shares pursuant to rescission agreements entered into June 2013. Of the remaining Management Incentive Shares outstanding, 400,000 shares have vested but remain in escrow until June 30, 2014 and 350,000 shares will vest on June 30, 2015 and will remain in escrow until June 30, 2015.

As part of the Merger, Selway’s net liabilities, consisting primarily of warrant liabilities, were assumed. As part of its Initial Public Offering, Selway issued 2,000,000 warrants, with an exercise price of $7.50 and an expiration date of November 6, 2016 (“Selway IPO Warrants”). These warrants are classified as liabilities based on certain anti-dilution features. The Selway IPO Warrants were recorded at $4,018,000 based on the closing price of the warrants on the date of Merger.

The Earn-out Payment Shares, if any, will be issued as follows: (i) 1,400,000 shares if the Company achieves consolidated gross revenue of $150,000,000 for the twelve months ended March 31, 2014 or June 30, 2014; and (ii) 1,400,000 shares if the Company achieves consolidated gross revenue of $300,000,000 for the twelve months ended March 31, 2015 or June 30, 2015. In the event the Company does not achieve the first earn-out threshold, but does achieve the second earn-out threshold, then all of the Earn-out Payment Shares shall be issued. If the Company consolidates, merges or transfers substantially all of its assets prior to June 30, 2015 at a valuation of at least $15.00 per share, then all of the Earn-out Payment Shares not previously paid out shall be issued immediately prior to such transaction. If, prior to achieving either earn-out threshold the Company acquires another business in exchange for its equity or debt securities, then any remaining earn-out thresholds may be adjusted by the independent members of the Company’s board of directors at their sole discretion. The Company estimates that it will not achieve any of the abovementioned revenue targets and, therefore, no provision has been made for the Earn-out Payment Shares.

The Agreement required 10% of the consideration, or 520,000 shares of the Company’s Series C common stock and promissory notes with a face value of $750,000 to be held in escrow for a period of one year. As a result of the investigation and subsequent restatement (see Note 4), in December 2013 these shares of stock and promissory notes were returned to the Company. Also in December 2013, the rights to additional proceeds from the exercise of certain warrants issued to Selway Capital Holdings, LLC as part of the merger were cancelled.

In connection with a bridge financing (the “Bridge Financing”) completed by HCCA in September 2012, HCCA issued 59.25 units, each unit consisted of 10,000 Convertible Preferred Shares, a warrant for 5,000 shares of common stock that, upon a merger with Selway, converted to warrants with the same terms as Selway IPO warrants and a Promissory Note with a face value of $100,000 (“Promissory Notes”). At the time of the Merger, holders of all of the issued and outstanding shares of preferred stock of HCCA, by virtue of the Merger, had each of their shares of Preferred Stock of HCCA converted into the right to receive a proportional amount of 592,500 shares of the Company’s Series C common stock and warrants to purchase 296,250 shares of the Company’s Series C common stock. If a Merger with Selway or equivalent, as defined in the Preferred Stockholder agreement, occurred before the maturity date of the promissory notes, the preferred stock converted on a 1 to 1 basis into Series C Common Stock of Selway. If such Merger did not occur, then at the maturity of the Promissory Notes, the Preferred Stock converted into 3.7% of common stock of HCCA on a fully diluted basis. Upon issuing the preferred stock, HCCA determined the contingent beneficial conversion feature to the holders of the Preferred Stock if the Merger with Selway occurred to be $3,532,858 and recorded that as a deemed dividend to the Preferred Stockholders upon the closing of the Merger.

The warrants issued in connection with the bridge loan were initially exercisable at $7.50 into shares of common stock of HCCA and expired on November 7, 2016. The warrants contained certain anti-dilution that caused them to be classified as liabilities. Upon completion of the Merger with Selway, the warrants became exercisable in Series C shares of Common Stock of Selway. The exercise price and expiration date remained the same.

The Promissory Notes bore interest at 8%, were convertible into 10,000 shares of Series C Common Stock if a transaction with Selway occurred and matured on the earlier of a transaction with Selway or September 12, 2013. HCCA allocated the value received from the sale of the units first to the estimated fair value of warrants. The residual value was then allocated to the preferred stock and promissory note based on their relative fair values. As a result of the allocation, HCCA recorded a debt discount of $2,445,242. The debt discount was amortized to interest expense over the term of the Promissory Note. HCCA recorded interest expense of $1,732,047, including $1,018,851 to recognize the unamortized debt discount at the April 10, 2013 transaction date. HCCA recorded interest expense of $713,196 related amortization of the debt discount in the year ended December 31, 2012. Upon issuing the promissory notes, HCCA determined the contingent beneficial conversion feature to the holders of the Promissory Notes, if they converted into shares of Selway and recorded additionally $1,182,327, as additional interest expense upon the conversion of the promissory notes. In accordance with the terms of the promissory notes issued in the Bridge Financing, at the time of the Merger, notes in the aggregate amount of $3,159,624 (including principal and interest accrued to date) were converted into 315,959 shares of the Company’s Series C common stock and notes in the aggregate principal amount of $3,025,000 were repaid in full. The promissory note included in the Bridge Financing was only convertible into shares of common stock if the transaction with Selway closed before the maturity of the note. At the issuance of the Bridge Financing, the Company determined that a contingent beneficial conversion feature existed representing the difference in the value of the underlying shares and the allocated value to the promissory note. Upon closing of the transaction, the Company recognized the contingent beneficial conversion feature in additional paid-in capital and recorded $1,182,327 as additional interest expense.

In connection with the Bridge Financing, HCCA executed a registration rights agreement that required it to register the shares underlying the Bridge Financing if the transaction was completed. The agreement required HCCA to file a registration statement within 60 days of the completion of the transaction with Selway and have the registration statement declared effective within 120 days. The agreement requires damages of 1% per month of the Bridge Financing, capped at 10%, for each month the Company does not comply with the requirement. As a result of the restatements and investigation, the Company did not file a registration statement and have it declared effective within the period required and recorded the maximum damages under the agreement ($592,000).

In conjunction with the merger of Merger Sub into HCCA:

The Company entered into exchange agreements with three beneficial holders of HCCA’s bridge loan who were also beneficial holders of greater than 5% of the Company’s Series A common stock. Pursuant to the exchange agreements, such holders converted an aggregate of 281,554 shares of the Company’s Series A common stock to the Company’s Series C common stock. In conjunction with the exchange, such holders were repaid bridge notes in the aggregate principal amount of $3,025,000.

HEALTHCARE CORPORATION OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

As of March 31, 2014 and December 31, 2013 and for the Three Months Ended March 31, 2014 and 2013

The Company entered into exchange agreements with three beneficial holders of greater than 5% of the Company’s Series A common stock. Pursuant to the exchange agreements, such holders converted an aggregate of 878,481 shares of the Company’s Series A common stock to the Company’s Series C common stock and received $3.53 per share of Series A common stock exchanged, or an aggregate of $3,101,038.

An aggregate of $11,948,361 was released from the Company’s trust account, reflecting the number of shares of the Company’s Series A common stock that were converted into the Company’s Series C common stock, of which $237,007 was paid to the underwriters from the Company’s initial public offering. The Company incurred other costs related to the transaction totaling $577,069 and recorded both these costs and the costs paid to the underwriters as a reduction to Additional Paid In Capital.

The placement warrants held by the Company’s founders were converted into the right to receive: (i) an aggregate of 100,000 shares of common stock; and (ii) warrants to purchase an aggregate of 1,000,000 shares of common stock at an exercise price of $10.00 per share. The proceeds from the exercise of the exchange warrants will be paid: (i) 75% to the holders of all of the issued and outstanding shares of common stock of HCCA immediately prior to the time of the merger; and (ii) 25% to certain members of HCCA management. The exchange warrants are only exercisable for cash, may not be exercised on a cashless basis, and must be exercised if the closing price for the combined company’s common stock exceeds $12.00 per share for 20 trading days in any 30-trading-day period. On November 22, 2013, the Company cancelled these warrants and issued a new warrant to purchase 1 million shares of common stock. The replacement warrant was recorded to additional paid in capital. Per the terms of the warrant agreement, the warrant’s initial exercise price was $7.50 per share, subject to adjustment upon the first subsequent financing of the Company. This financing occurred on December 31, 2013 upon which the exercise price of this warrant was adjusted from $7.50 to $1.50. The new warrants do not include the provision to share the exercise proceeds with former shareholders of HCCA or management. The Company recorded a charge to interest expense of $561,712 reflecting the value of the modification to the warrant.

Pursuant to an engagement letter entered into by HCCA with its investment banking adviser, 5% of all consideration received was owed to the adviser. Accordingly the Company issued 335,000 shares of common stock representing 5% of the common stock and incentive stock, as adjusted, received by HCCA and issued an incentive note of $500,000 representing 5% of the incentive notes issued to HCCA. The present value of the incentive note was recorded to additional paid in capital and is included in liabilities assumed. 26,002 shares issued to the advisor were placed in escrow and cancelled in December 2013.

The business combination of the Company and HCCA was accounted for as a reverse recapitalization of HCCA, since prior to the merger the Company was a shell corporation as defined under Rule 12b-2 of the Exchange Act. HCCA was treated as the accounting acquirer in this transaction due to the following factors:

HCCA’s management pre-closing remained as the management of the Company post-closing;

The members of the board of directors of HCCA pre-closing represent the majority of directors of the Company post- closing; and

The majority of shares of the Company post-closing were still owned by HCCA shareholders, who represented 60% of the Company’s shares outstanding immediately after closing, if all shares subject to conversion in our post-closing tender offer actually convert to Series C (non-redeemable) common shares, and 65% of the Company’s shares outstanding if all shares subject to conversion do not convert to Series C shares and opt to receive their pro rata cash in trust at the time of the post-closing tender offer. Estimates of HCCA’s ownership do not include shares underlying warrants held by public investors and the Company’s sponsors restricted incentive shares held by management. However, HCCA shareholders would still have 51% of the Company’s shares post-closing when including shares underlying warrants and restricted shares and assuming all redeemable shares convert to Series C shares, and 54% of the Company’s shares post-closing if all shares subject to conversion do not convert to Series C shares and opt to receive their pro rata cash in trust at the time of the post-closing tender offer.

HEALTHCARE CORPORATION OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

As of March 31, 2014 and December 31, 2013 and for the Three Months Ended March 31, 2014 and 2013

4. Significant Accounting Policies

Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”).

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements including disclosure of contingent assets and liabilities, at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period and accompanying notes. The Company’s critical accounting policies are those that are both most important to the Company’s financial condition and results of operations and require the most difficult, subjective or complex judgments on the part of management in their application, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Because of the uncertainty of factors surrounding the estimates or judgments used in the preparation of the financial statements, actual results could differ from these estimates.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances have been eliminated in consolidation.

Accounts Receivable

Accounts receivable represent amounts owed to the Company for products sold and services rendered net of an allowance for doubtful accounts. The Company grants unsecured credit to its customers. The Company continuously monitors the payment performance of its customers to ensure collections and minimize losses. Management does not believe that significant credit risks exist. An allowance for doubtful accounts is based upon the credit profiles of specific customers, economic and industry trends and historic payment experience. There is no allowance for doubtful accounts at March 31, 2014 and December 31, 2013.

Inventory

Inventories consist of finished pharmaceutical products and are recorded at the lower of cost or market, with the cost determined on a first-in, first-out basis. The Company periodically reviews the composition of inventory in order to identify obsolete, slow-moving or otherwise non-saleable items. If non-saleable items are observed and there are no alternate uses for the inventory, the Company will record a write-down to net realizable value in the period that the decline in values is first recognized.

Rebates

Pharmaceutical manufacturers offer rebates for selected brand drugs. The Company currently receives these rebates through a third party administrator. The rebates are considered earned when members (employees of customers) order the drugs. Rebates earned are paid to the Company by the third party administrator quarterly. Rebates earned are recognized as a reduction to cost of revenue. The portion of the rebate payable to customers is simultaneously recognized as a reduction of revenue. Management evaluates rebates receivable at the end of every reporting period and adjusts the amount reflected on the accompanying balance sheet to net realizable value. An adjustment is also made to the rebate payable to customers to correspond with any adjustment that applies to rebates receivable.

HEALTHCARE CORPORATION OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

As of March 31, 2014 and December 31, 2013 and for the Three Months Ended March 31, 2014 and 2013

Property and Equipment

Property and equipment are stated at cost less accumulated amortization and depreciation. Leasehold improvements are amortized using the straight-line method over the shorter of the term of the lease or the estimated useful lives of the assets. Furniture and fixtures are depreciated using the straight-line method over the estimated useful lives of the assets of 5 years. Computer equipment and software are depreciated using the straight-line method over the estimated useful lives of the assets, which range from 3 to 5 years.

Internal-Use Software Development Costs

The Company capitalizes certain costs associated with the purchase and/or development of internal-use software, including its website. Generally, external and internal costs incurred during the application development stage of a project are capitalized. The application development stage of a project generally includes software design and configuration, coding, testing and installation activities. Training and maintenance costs are expensed as incurred. Upgrades and enhancements are capitalized if it is probable that such expenditures will result in additional functionality. Capitalized software costs are amortized using the straight-line method over the estimated useful life of the assets, which approximates 3 years.

Long-Lived Assets

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. The Company assesses recoverability by determining whether the net book value of the related asset will be recovered through the projected undiscounted future cash flows of the asset. If the Company determines that the carrying value of the asset may not be recoverable, it measures any impairment based on the fair value of the asset as compared to its carrying value. During the three months ended March 31, 2014 and March 31, 2013, the Company did not record any impairment charges.

Investments Held in Trust

The Company applies the provisions of ASC Topic 320-10, Investment - Debt and Equity, to account for investments held in trust, which comprise only of held-to maturity securities. Held-to-maturity securities are those securities, which the Company has the ability and intent to hold until maturity. Held-to-maturity securities are recorded at amortized cost on the accompanying balance sheets and adjusted for any amortization or accretion of premiums or discounts.

Deferred Financing Costs

Costs related to obtaining long-term debt financing have been capitalized and amortized over the term of the related debt using the straight line method. Amortization of deferred financing costs charged to interest expense was $31,061 and $400,704 for the three months ended March 31, 2014 and 2013, respectively. The unamortized balance was $246,086 and $254,252 at March 31, 2014 and December 31, 2013, respectively.

Derivative Financial Instruments

The Company applies the provisions of ASC Topic 815-40, Contracts in Entity’s Own Equity (“ASC Topic 815-40”), under which convertible instruments and warrants, which contain terms that protect holders from declines in the stock price (reset provisions), may not be exempt from derivative accounting treatment. As a result, such warrants are recorded as a liability and are revalued at fair value at the end of each reporting period. Furthermore, under derivative accounting, the warrants are initially recorded at their fair value. If the fair value of the warrants exceeds the face value of the related debt, the excess is recorded as a change in fair value in the statement of operations on the issuance date.

Debt Discounts

Debt discounts are amortized using the effective interest rate method over the term of the related debt. The result achieved using the straight-line method is not materially different than those which would result using the effective interest method.

HEALTHCARE CORPORATION OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

As of March 31, 2014 and December 31, 2013 and for the Three Months Ended March 31, 2014 and 2013

Share-Based Payments

Share-based payments to employees are measured at the fair value of the award on the date of grant based on the estimated number of awards that are ultimately expected to vest. The compensation expense resulting from such awards is recorded over the vesting period of the award in selling, general and administrative expenses on the accompanying consolidated statements of operations.

Share-based payments to non-employees for services rendered are recorded at either the fair value of the services rendered, or the fair value of the awards, whichever is more readily determinable. The expense resulting from such awards is marked to market over the vesting period of the award in selling, general and administration expenses on the accompanying consolidated statements of operations.

Revenue Recognition

The Company typically enters into annual renewable agreements with its customers to provide pharmacy benefit management on a fixed price or self-insured basis. The Company records revenues from all its current contracts with customers gross as the Company acts as principal based on the following factors: 1) the Company has a separate contractual relationship with its customers and with its claims adjudicator to whom the Company pays the costs of the prescription drugs consumed by its customers (the claims), 2) the Company through its claim adjudicator is responsible to validate and manage the claims, and 3) the Company bears the credit risk for the amount due from the customers. Revenues are recorded monthly as earned. The Company also operates a mail order pharmacy that services plan members. All revenues and associated costs from dispensing drugs by the mail order pharmacy to our plan members, excluding the members’ co-pay are eliminated as inter-company revenues. Some of the contracts contain terms whereby the Company makes certain financial guarantees regarding prescription costs. Actual performance is compared to the guaranteed measure throughout the period and accruals are recorded as an offset to revenue if the Company fails to meet a financial guarantee.

Cost of Sales

Cost of sales includes claim payments for both fixed- price and self-insured programs, administrative fees paid for processing the claims to the claims adjudicator and, the cost of prescription drugs of the mail order pharmacy.

Advertising Expenses

Advertising expenses are expensed as incurred and included in selling, general and administrative expenses on the accompanying statements of operations. Advertising expenses were approximately $0 and $24,624 for the three months ended March 31, 2014 and 2013, respectively.

Income Taxes

The Company accounts for income taxes using the liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. A valuation allowance is established when realization of net deferred tax assets is not considered more likely than not.

Uncertain income tax positions are determined based upon the likelihood of the positions being sustained upon examination by taxing authorities. The benefit of a tax position is recognized in the consolidated financial statements in the period during which management believes it is more likely than not that the position will not be sustained. Income tax positions taken are not offset or aggregated with other positions. Income tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of income tax benefit that is more than 50 percent likely of being realized if challenged by the applicable taxing authority. The portion of the benefits associated with income tax positions taken that exceeds the amount measured is reflected as income taxes payable.

HEALTHCARE CORPORATION OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

As of March 31, 2014 and December 31, 2013 and for the Three Months Ended March 31, 2014 and 2013

The Company recognizes interest related to uncertain tax positions in interest expense. The Company recognizes penalties related to uncertain tax positions in income tax expense.

Fair Value Measurements

The Company applies recurring fair value measurements to its derivative instruments in accordance with ASC 820, Fair Value Measurements. In determining fair value, the Company uses a market approach and incorporates assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and/or the risks inherent in the inputs to the valuation techniques. These inputs can be readily observable, market corroborated or generally unobservable internally-developed inputs. Based upon the observability of the inputs used in these valuation techniques, the Company’s derivative instruments are classified as follows:

Level 1:

The fair value of derivative instruments classified as Level 1 is determined by unadjusted quoted market prices in active markets for identical assets or liabilities that are accessible at the measurement date.

Level 2:

The fair value of derivative instruments classified as Level 2 is determined by quoted market prices for similar assets or liabilities in active markets, quoted market prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data.

Level 3:

The fair value of derivative instruments classified as Level 3 is determined by internally-developed models and methodologies utilizing significant inputs that are generally less readily observable from objective sources.

At March 31, 2014 and December 31, 2013 the Company had 2,000,000 warrants exercisable into its shares of common stock that were issued in connection with Selway’s initial public offering (“Selway IPO Warrants”). These warrants are publicly traded and are classified as liabilities. Additionally, HCCA issued 296,250 warrants in connection with the Bridge Financing with identical terms as the Selway IPO Warrants. The Company has valued all of these warrants at March 31, 2014 and December 31, 2013 based on the closing price of the Selway IPO Warrants. Because the market for the Selway IPO Warrants is not active, the valuation is classified as a Level 2 measurement. These warrants are exercisable at $7.50 a share and expire on November 7, 2016.

On December 31, 2013, the Company executed a forbearance agreement with the holders of its senior convertible debt. Among other things, this agreement required the Company to issue 425,000 shares of common stock to the senior convertible debt holders and permit the redemption of 25,000 shares at the rate of $10 per share through June 30, 2019 (the “Senior Debt Redemption Feature”). The Company evaluated the redemption terms embedded in the agreement and determined that such terms should be bifurcated from the common stock and recorded as a liability. The Company determined the fair value of the Senior Debt Redemption Feature utilizing a Black-Scholes valuation model. The key inputs to the valuation were the Company’s share price at the date of valuation and the expected volatility. The Company did not become publicly traded until April 11, 2013 and therefore determined its expected volatility from a selection of similar publicly traded companies. The valuation is classified as a Level 2 valuation based on the use of volatility calculations from other publicly traded companies.

On December 31, 2013, the Company issued $2,325,125 of Junior Convertible Notes convertible into 1,550,083 shares of common stock maturing on December 31, 2015 and Warrants to acquire 1,550,083 shares of common stock at $1.50 that expire on December 31, 2018. The conversion feature in the Junior Convertible Notes and Warrant agreement contain anti-dilution provisions that cause the related conversion rate and exercise price to decrease and the related shares increase if the Company is deemed to issue equity at a per share value less than the then conversion rate and exercise price. The Company evaluated this feature and determined that conversion feature in the Junior Convertible Notes should be bifurcated from the underlying debt agreement and recorded as a liability and the Warrants to be classified as liabilities (the Junior Convertible Notes Conversion Feature and Warrants).

The Company utilized a Monte Carlo simulation model to estimate the value of the Junior Convertible Notes Conversion Feature and Warrants. The Company classified this valuation as Level 3 valuation as the key inputs to the Monte Carlo include timing of equity raises and the estimated share price at such dates.

HEALTHCARE CORPORATION OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

As of March 31, 2014 and December 31, 2013 and for the Three Months Ended March 31, 2014 and 2013

The table below presents the Company’s fair value hierarchy for those derivative instruments measured at fair value on a recurring basis as of March 31, 2014:

	Level 1		Level 2		Level 3		Total

Senior debt redemption feature	$	-	$	250,000	$	-	$	250,000
Warrants and convertible feature junior convertible note	$	-	$		$	4,201,000	$	4,201,000
Warrants	$	-	$	252,589	$	-	$	252,589

Total derivative liabilities	$	-	$	502,589	$	4,201,000	$	4,703,589

The table below presents the activity in the Company’s derivative instruments measured at fair value on a recurring basis for the three months ended March 31, 2014:

	Beginning of Period		Issuances		Changes in Fair Value			Balance at end of Period

Warrants and convertible feature convertible notes	$	5,087,000	$	-	$	(886,000	)	$	4,201,000

The table below presents the Company’s fair value hierarchy for those derivative instruments measured at fair value on a recurring basis as of December 31, 2013:

	Level 1		Level 2		Level 3		Total

Senior debt redemption feature	$	-	$	250,000	$	-	$	250,000
Warrants and convertible feature junior convertible note	$	-	$		$	5,087,000	$	5,087,000
Warrants	$	-	$	68,889	$	-	$	68,889

Total derivative liabilities	$	-	$	318,889	$	5,087,000	$	5,405,889

Fair Value of Financial Instruments

The fair values of cash and cash equivalents, accounts receivable, rebates receivable and accounts payable approximate their carrying values due to the short-term nature of the instruments. The fair values of long-term debt approximates their carrying value due to the fact that these instruments were modified or executed at year-end. The fair value of investments held in trust is not materially different than its carrying value because of the short-term nature of the investments.

Risks and Concentrations

The Company utilizes the services of a single claims adjudicator. If there is an adverse situation in this relationship, the Company’s mail order pharmaceutical fulfillment services would be ineffective until a replacement claims adjudicator was obtained.

Approximately 25% of the Company’s revenues for the three months ended March 31, 2014 were derived from one customer. Revenues from this customer were 13% of the Company’s revenues for the year ended December 31, 2013. No amounts were due from this customer at March 31, 2014 or December 31, 2013. In addition, the customers of one of the Company’s resellers accounted for approximately 25% of the Company’s revenue for the three months ended March 31, 2014 and for the year ended December 31, 2013. Amounts due from these customers represented 63% and 76% of accounts receivable at March 31, 2014 and December 31, 2013, respectively.

HEALTHCARE CORPORATION OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

As of March 31, 2014 and December 31, 2013 and for the Three Months Ended March 31, 2014 and 2013

Cash and Cash Equivalents

The Company considers all cash in bank, money market funds and certificates of deposit with an original maturity of less than three months to be cash equivalents. The Company maintains its cash and cash equivalents in one financial institution. Cash balances on hand at this financial institution may exceed the insurance coverage provided to the Company by the Federal Deposit Insurance Corporation at various times during the year.

Earnings (Loss) Per Share

Basic earnings (loss) per share is computed by dividing net income (loss) available to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted earnings (loss) per share are determined in the same manner as basic earnings (loss) per share, except that the number of shares is increased to include potentially dilutive securities using the treasury stock method. Because the Company incurred a net loss in all periods presented, all potentially dilutive securities were excluded from the computation of diluted loss per share because the effect of including them is anti-dilutive.

	Three Months Ended March 31, 2014			Three Months Ended March 31, 2013
Basic and Diluted:
Net loss	$	(3,046,156	)	$	(3,648,613	)
Weighted average shares		8,846,103			40,250,009
Basic loss per common share	$	(0.34	)	$	(0.09	)

The following table summarizes the number of shares of common stock attributable to potentially dilutive securities outstanding for each of the periods which are excluded in the calculation of diluted loss per share:

	Three Months Ended March 31, 2014		Three Months Ended March 31, 2013
Dilutive Potential Common Shares
Warrants		5,596,106		1,585,833
Restricted stock awards		-		75,292
Convertible notes payable		3,750,083		2,666,667

5. Property and Equipment

Property and equipment is as follows:

	March 31, 2014			December 31, 2013

Furniture, fixtures and equipment	$	1,662,201		$	1,662,201
Leasehold improvements		60,168			50,548
		1,722,369			1,712,749
Accumulated depreciation and amortization		(650,510	)		(564,234	)

Net property and equipment	$	1,071,859		$	1,148,515

Amortization and depreciation was approximately $88,276 and $74,693 for the three months ended March 31, 2014 and 2013, respectively.

HEALTHCARE CORPORATION OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

As of March 31, 2014 and December 31, 2013 and for the Three Months Ended March 31, 2014 and 2013

6. Software, net

Software, net is as follows:

	March 31, 2014			December 31, 2013

Software costs	$	472,489		$	472,489
Accumulated amortization		(97,496	)		(73,106	)

Net software costs	$	374,993		$	399,383

Amortization expense was $24,390 and $0 for the three months ended March 31, 2014, and 2013 respectively.

7. Investments Held in Trust

Following the initial public offering (“IPO”) of Selway in November 2011, a total of $20.6 million was placed in a trust account maintained by American Stock Transfer & Trust Company, as trustee. None of the funds held in the trust were to be released from the trust account, other than interest income, net of taxes, until the earlier of (i) consummation of an acquisition and (ii) redemption of 100% of the public shares sold in the IPO if Selway failed to consummate an acquisition by May 14, 2013.

On April 10, 2013, Selway closed the acquisition of HCCA through the Merger (see Notes 1 and 3). At the time of the Merger, holders of 1,160,035 shares of redeemable common stock decided not to redeem their shares and accordingly approximately $11,948,000 was released from the escrow. As per the certificate of incorporation of Selway, the remaining balance of the trust account of approximately $8,652,000 was used to redeem the remaining 839,965 redeemable common shares through a tender offer which closed on August 15, 2013. The amount in trust can be invested only in United States “government securities” within the meaning of Section 2(a)(16) of the Investment Company Act of 1940 having a maturity of 180 days or less. Prior to being released from the escrow, the United States government securities were in an account at Wells Fargo Bank, while the cash amount was in a JP Morgan Chase cash account. The United States government securities matured and the total trust balance of $8,652,482 was in cash.

The Company classified its United States Treasury and equivalent securities as held-to-maturity in accordance with FASB ASC 320, “Investments - Debt and Equity Securities.” Held-to-maturity treasury securities are recorded at amortized cost on the accompanying balance sheet and adjusted for the amortization or accretion of premiums or discounts.

8. Deferred Financing Costs

Deferred financing costs are as follows:

Balance January 1, 2014	$	254,252
Costs incurred for forbearance, waiver and modification to the senior convertible note for the three months ended March 31, 2014		22,895
Amortization for the three months ended March 31, 2014		(31,061	)

Balance March 31, 2014	$	246,086

HEALTHCARE CORPORATION OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

As of March 31, 2014 and December 31, 2013 and for the Three Months Ended March 31, 2014 and 2013

9. Accrued Expenses

Accrued expenses are as follows:

	March 31, 2014		December 31, 2013

Accrued severance costs*	$	271,154	$	750,000
Accrued rebates		691,983		596,905
Accrued registration rights penalties**		910,000		864,000
Accrued professional fees		480,000		67,686
Accrued commissions		723,332		225,125
Accrued franchise tax		303,981		263,981
Accrued payroll		285,022		327,357
Accrued expenses other		230,540		199,363

	$	3,896,012	$	3,294,467

Payable to a former executive of the Company.

Estimated penalties relating to late registration of shares of common stock in connection with the bridge notes and senior convertible note.

10. Line of Credit

On April 11, 2013, the wholly-owned subsidiaries of HCCA, entered into a credit and security agreement for a secured revolving credit facility with an initial aggregate credit limit of $5,000,000. The facility has a term of 3 years, through April 11, 2016, during which the loan proceeds are to be used solely for working capital. The facility was terminated in September 2013 due to the Company’s inability to meet certain financial covenants and all outstanding balances under the line were repaid, and the carrying value of the related financing costs of $538,637 were written off to interest expense.

11. Junior Convertible Note

On December 31, 2013, the Company entered into a securities purchase agreement with certain investors and an administrative and collateral agent representing the investors. Pursuant to the securities purchase agreement, the Company issued $2,112,500 of Junior Convertible Notes due on December 31, 2015, which are convertible into shares of the Company’s common stock at an initial fixed conversion price equal to $1.50 per share, and included the conversion of $250,000 of accrued legal costs.

In connection with its services related to the Junior Convertible Notes as well as the forbearance, waiver and modification agreement of the Senior Convertible Note (see Note 12) the Company agreed to pay the agent a fee in the form of junior convertible notes and warrants and accordingly Junior Convertible Notes in the amount of $212,625 were issued to the agent.

In connection with Junior Convertible Notes, the Company issued warrants to purchase an aggregate of 1,550,083 shares of common stock (including warrants to purchase 141,750 shares issued to the Agent for its fees), at an initial exercise price of $3.00 per share (the “Exercise Price”), at any time on or prior to December 31, 2018 (the “Warrants”). The Warrants may also be exercised on a cashless basis.

The conversion price of the Junior Convertible Notes (initially $1.50) as well as the exercise price of the related warrants (initially $3) are subject to further down adjustments depending on the terms of subsequent capital raises.

The Company also agreed to secure the payment of all obligations under the notes by granting and pledging a continuing security interest in all of the Company’s and its subsidiaries’ property now owned or at any time hereafter acquired by them. The Junior Convertible Notes are subordinated to the Senior Convertible Notes.

HEALTHCARE CORPORATION OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

As of March 31, 2014 and December 31, 2013 and for the Three Months Ended March 31, 2014 and 2013

At the time of the transaction, the Company recorded a derivative liability in the amount of $5,087,000, a loan discount of $2,325,000 and an interest charge of $2,762,000. In addition, the Company incurred loan costs amounting to $202,035.

In addition, as of March 31 2014 the Company recorded an accrual of $46,000 and a corresponding interest charge reflecting the estimated penalty relating to late registration of the underlying shares of common stock.

12. Senior Convertible Note

On July 17, 2013, the Company entered into a loan and security agreement with Partners for Growth III, LP (“PFG”) for a one-time convertible secured loan of $5,000,000 with a maturity date of July 17, 2018. Pursuant to the terms of the Loan Agreement, the loan is convertible at $8 per share and interest on the PFG Loan is payable on a monthly basis at an annual rate of prime plus 5.25% per annum, subject to certain reductions if certain financial targets are met.

If the Company fails to achieve certain revenue and earnings targets, PFG may elect to accelerate the repayment of the loan portion of the PFG Loan over the shorter of the 24-month period from the date of the election or the remaining term of the loan. Upon acceleration of repayment, the Company must make monthly payments of principal and interest, such that 60% of the outstanding principal is repaid in the first year and 40% is paid in the second year.

The Loan Agreement contains certain financial covenants as well as customary negative covenants and events of default.

As part of consideration for the PFG Loan, the Company issued to Lender and its designees warrants to purchase an aggregate of 220,000 shares of Series C common stock, for $7.50 per share, at any time on or prior to July 17, 2018 (the “PFG Warrants”).

At the time of the transaction, the Company recorded a beneficial conversion feature in the amount $654,144, the warrants were recorded as equity warrants in the amount of $1,154,144 and the notes were recorded at a value of $3,191,711 reflecting a loan discount of $1,808,289. In addition, the Company incurred loan costs amounting to $328,712.

In addition, as of December 31, 2013 the Company recorded an accrual of $272,000 and a corresponding interest charge reflecting the estimated penalty relating to the late registration of the underlying shares of common stock.

On October 15, 2013, the Company received a notice of events of default from PFG.

On December 31, 2013, the Company entered into a Forbearance, Waiver and Modification to the loan agreement. Pursuant to the terms of the modification PFG (i) lent an additional $500,000 to the Company (received on January 6, 2014), (ii) The conversion price of the promissory notes issued under the original loan agreement and the modification was reduced to $2.50 per share from $7.50 per share, (iii) PFG’s right to accelerate repayment of the loan if certain conditions were not met was eliminated, (iv) The Company agreed to pay $150,000 in fees, (v) Certain financial covenants were revised, (vi) The number of shares issuable upon exercise of warrants issued to PFG was increased from 220,000 to 555,000 and the exercise price of the warrants was reduced to $3.00 per share from $8.00 per share, (vii) The number of shares issuable under contingently exercisable warrants was increased from 625,000 shares to 2,200,000 and the exercise price reduced from $8.00 per share to $2.50 per share, (viii) The Company issued 425,000 shares of its common stock to PFG, and (ix) PFG has the option, until June 30, 2019, to require the Company to purchase from it, at PFG’s option, up to 25,000 shares (of the 425,000) of common stock for a purchase price of $250,000.

HEALTHCARE CORPORATION OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

As of March 31, 2014 and December 31, 2013 and for the Three Months Ended March 31, 2014 and 2013

The revised financial covenants of the Senior Convertible Note, beginning July 1, 2014, require the Company to maintain a specified ratio of cash and accounts receivable to the outstanding Senior Convertible Note. The Company is currently not in compliance with this covenant and needs additional equity investments to meet this requirement. There is no guarantee that such equity investments would be available to the Company in order to comply with this covenant, and accordingly the Senior Convertible Note is presented as current in the accompanying consolidated balance sheet.

The Company recorded the Forbearance, Waiver and Modification to the loan agreement as an extinguishment of the July 2013 Senior Convertible Note. Accordingly as of December 31, 2013 the Company fully amortized the remaining balance of the debt costs incurred in connection with the original note in the amount of $298,129 and, wrote off the balance of the loan discount of $1,642,529 to loss on extinguishment. As of December 31, 2013 the Company recorded the new note at its estimated fair value of $1,296,776 which is net of the additional $500,000 received on January 6, 2014. The fair value is based on the Company’s estimates of similar interest rates for an entity with similar credit characteristics. Additionally, the Company recorded the value of the modification of warrants of $2,866,566, value of the common stock issued of $637,500, the value of the redemption feature of $250,000, and the fees due of $150,000 offset by the value of the new debt discount of $3,703,224, as loss on extinguishment. The resulting decrease from face value will be accreted to interest expense using the effective interest rate method.

13. Bridge Notes

On September 12, 2012, the Company completed a bridge financing (the “Bridge Financing”) consisting of 59.25 units, each unit consisting of 10,000 preferred shares, 5,000 warrants and a promissory note with a face value of $100,000. At the time of the transaction, the value of the units was allocated as follows: Preferred Stock was recorded at a value of $2,362,517, the warrants were recorded as a warrant liability of $82,726 and the notes were recorded at a value of $3,479,757, reflecting a loan discount of $2,445,242. In addition, the Company incurred loan fees amounting to $673,229. The Company recorded interest expense associated with the amortization of the loan discount and the loan fees through the Merger date.

At the time of the Merger, holders of all of the issued and outstanding shares of preferred stock of HCCA, by virtue of the Merger, had each of their shares of preferred stock of HCCA converted into the right to receive a proportional amount of 592,500 shares of the Company’s Series C common stock and warrants to purchase 296,250 shares of the Company’s Series C common stock. In accordance with the terms of the promissory notes issued in the Bridge Financing, at the time of the Merger, notes in the aggregate amount of $3,159,592 (including principal and interest accrued to date) were converted into 315,959 shares of the Company’s Series C common stock and notes in the aggregate principal amount of $3,025,000 were repaid in full.

14. Long-Term Debt

Incentive Notes

Upon consummation of the merger (see Note 3), Holders of all of the issued and outstanding shares of common stock of HCCA immediately prior to the time of the Merger had each of their shares of common stock of HCCA converted into the right to receive a proportional amount of 5,200,000 shares of the Company’s Series C common stock and promissory notes with an aggregate face value of $7,500,000 (collectively, the “Closing Payment”). On December 31, 2013, promissory notes with a face value of $750,000 were returned to the Company (see Note 3).

In addition, the Company issued to its management $2,500,000 of Management Incentive Notes and paid fees in connection with the transaction by issuing promissory notes having an aggregate principal amount of $500,000, which reflects five percent of all promissory notes issued in the transaction.

The above described notes with an aggregate face value of $10,500,000 have identical terms and conditions, are non-interest bearing and are subordinated to all senior debt of the Company in the event of a default under such senior debt. The notes will be repaid from 25% of the Company’s free cash-flow (defined as in the notes) in excess of $2,000,000. The Company will be obligated to repay such notes if, among other events, there is a transaction that results in a change of control of the Company. These notes are subordinated to all other debt, and repayment could be deferred if the terms of other debt instruments then outstanding prohibit repayment.

HEALTHCARE CORPORATION OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

As of March 31, 2014 and December 31, 2013 and for the Three Months Ended March 31, 2014 and 2013

The notes were recorded at their estimated present value, based on the estimated time of repayment discounted to the balance sheet date. The Company will continue to re-evaluate its estimates on a periodic basis and adjust the present value of the notes accordingly. Of the Management Incentive Notes, $222,477, net of discount vested immediately and $395,514 is being recognized as management incentive compensation over the estimated payment periods.

	March 31, 2014			December 31, 2013

Shareholder notes	$	6,750,000		$	6,750,000
Placement notes		500,000			500,000
Management incentive notes		2,500,000			2,500,000
		9,750,000			9,750,000

Less debt discount		(6,616,787	)		(6,815,703	)

	$	3,133,213		$	2,934,297

Future maturities of the Incentive Notes based on the Company’s estimates which do not reflect any limitation of repayment that may exist due to the terms of other debt then outstanding are as follows:

June 30,

2014	$	-
2015		-
2016		399,000
2017		1,789,000
2018		3,622,000
Thereafter		3,940,000

	$	9,750,000

Capital Leases

The Company has entered into capital lease agreements for equipment, which expire at various dates through November 2019. The assets capitalized under these leases and associated accumulated depreciation at March 31, 2014 and December 31, 2013 are as follows:

	March 31, 2014			December 31, 2013

Furniture and equipment	$	1,050,343		$	1,050,343
Accumulated depreciation		(431,014	)		(370,780	)

	$	619,329		$	679,563

HEALTHCARE CORPORATION OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

As of March 31, 2014 and December 31, 2013 and for the Three Months Ended March 31, 2014 and 2013

Amortization of capital leases is included in depreciation expense.

Minimum future lease payments under capital lease obligations as of March 31, 2014 are as follows:

Year Ended March 31,

2015	$	264,006
2016		240,390
2017		169,297
2018		137,316
2019		35,747
Thereafter		23,831

Total future minimum lease payments		870,587
Less amount representing interest		(125,616	)
Present value of net minimum lease payments		744,971
Less current portion		(209,267	)

	$	535,704

15. Stockholders’ Equity

The Company is authorized 30,000,000 shares of common stock, par value $.0001, which shares may, but are not required to, be designated as part of one of three series, callable Series A, callable Series B and Series C shares. The holders of all common shares shall possess all voting power and each share shall have one vote.

Series A – Holders of shares of Series A Common Stock are entitled to cause the Corporation to redeem all or a portion of their shares in connection with an acquisition transaction. If the holders of Series A Common Stock do not elect to have their shares redeemed, then they will automatically be converted to Series B Common Stock. As of March 31, 2014 there are no outstanding Series A Common Stock.

Series B – Holders of shares of Series B Common Stock have the same rights as Series A Common Stock, except Series B Common Stock cannot be issued until such time as all outstanding shares of Series A Common Stock are converted to Series B Common Stock. The holders of Series B Common Stock have the right to participate in a Post-Acquisition Tender Offer or Post-Acquisition Automatic Trust Liquidation. 839,965 shares of Series B common shares were redeemed from the trust account on August 15, 2013. As of March 31, 2014 there were no outstanding redeemable shares.

Series C – Holders of shares of Series C Common Stock have the same rights as Series A Common Stock, except holders of Series C Common Stock are not entitled to (1) cause the Corporation to redeem all or a portion of such Series C Common Stock in connection with the Acquisition Transaction, (2) share ratably in the Trust Account or (3) participate in a Post-Acquisition Tender Offer or Post-Acquisition Automatic Trust Liquidation. As of March 31, 2014, there are 8,907,492 shares of Series C Common Stock outstanding.

HEALTHCARE CORPORATION OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

As of March 31, 2014 and December 31, 2013 and for the Three Months Ended March 31, 2014 and 2013

In August 2013 following the redemption of the 839,965 shares of the series B common stock, the Series A Common Stock, Series B Common Stock and Series C Common Stock were consolidated into one series of Common Stock. The consolidation was on a one-for-one basis of the outstanding shares of each series of common stock. Currently following the automatic consolidation, only one series of Common Stock is authorized, which will be referred to as “Common Stock.”

On December 31, 2013, 546,002 shares of common stock were returned to the Company (see Note 3).

Prior to the merger the Company’s operations were conducted under the HCCA corporate entity (see Note 1). HCCA had authorized 50,000,000 shares of common stock, no par value. Upon the merger, every 7.6923 HCCA shares of common stock were exchanged into 1 share of the Company’s common stock.

During 2012, the Company issued 2,120,200 shares of common stock with a fair value range of $0.01 to $0.31. These shares are freely tradable.

During 2012, the Company settled a suit with a shareholder to repurchase 500,000 shares of its common stock. These shares were recorded as a stock redemption for $100,000 and the shares were received in February 2013. In February 2013, these shares were issued to employees in recognition of service performed and an expense of $480,000 was recorded representing the estimate fair value of the shares issued.

As part of the Merger, 750,000 restricted shares of stock were issued to certain members of management. The shares were valued at $7.30, the share price at the date of the merger. 400,000 shares vested immediately and the remaining vest through June 30, 2015. In the year ended December 31, 2013, the Company recorded an expense of $2,920,000 for the shares that vested on the date of the Merger and $851,667 for the shares that vest through June 30, 2015.

During the three months ended March 31, 2014, the Company issued 75,000 shares of common stock as part of the settlement of two disputed claims. The Company recorded a gain of approximately $340,000 in Selling General and Administrative expenses as result of the difference in value of the executed settlement and the Company’s initial estimate.

16. Commitments and Contingencies

Operating Leases

The Company has certain non-cancelable operating leases for facilities and equipment that expire over the next three years. Future minimum payments for non-cancelable operating leases are as follows as of March 31, 2014:

Year ended March 31,

2015	$	205,510
2016		216,975
2017		201,465

	$	623,950

Rent expense for the three months ended March 31, 2014 and 2013 was $48,346 and $48,234, respectively.

HEALTHCARE CORPORATION OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

As of March 31, 2014 and December 31, 2013 and for the Three Months Ended March 31, 2014 and 2013

Employment Agreements

As of March 31, 2014, the Company had entered into employment agreements with senior officers and other members of management. The agreements specify aggregate guaranteed annual salaries of $1.7 million for each year of employment and extended through May 2017. The agreements allowed the Company to terminate these individuals for cause and not for cause. Depending on the terms of the individual contract upon termination without cause the Company would either be required to continue to pay salary through the original term of the contract or pay severance, typically one year of salary.

As of March 31, 2014, the Company entered into employment contracts or employment arrangement letters with certain members of management and directors that among other things committed the Company to issuing approximately 1.9 million stock options. The Company does not currently have a stock option plan and 650,000 of these stock options will be granted at the time the stock option plan is appropriately established.

Litigation

During 2012, the Company filed a lawsuit against its past adjudicator of claims for overcharges, over payment on claims, errors and misclassifications, and rebates owed from drug manufacturers claiming damages of over $5 million. Additionally, the Company has recorded an expense for the amount owed for claims payable. The adjudicator of claims filed a counterclaim for amounts it claims are owed to it by the Company.

In August 2013, the Company settled the suit with the claims adjudicator. Under the terms of the settlement the Company agreed to pay the claims adjudicator $2.7 million over 15 months commencing in September 2013. The settlement was discounted to its present value at settlement date and $1,224,140 is recorded in accounts payable at March 31, 2014.

On August 14, 2012, the Company entered into an agreement with a shareholder to buy back 500,000 shares of common stock for $100,000. The order also called upon the payment of $50,000 in legal fees. As of December 31, 2012, the Company had not received the 500,000 shares of common stock but had paid the settlement. The Company received these shares in February 2013.

17. Related Party

Otis Fund, a company controlled by a former consultant, who owns in excess of 5% of the Company’s outstanding shares, had a consulting agreement to provide marketing and sales services to HCCA. The contract was due to expire on January 2, 2017; however the Company terminated the agreement for cause in September 2013. The annual fees related to these services were $360,000. In connection with this agreement, the Company recorded $300,000 and $360,000 for the years ended December 31, 2013 and 2012, respectively.

18. Subsequent Events

On April 4, 2014, we entered into a Note Purchase Agreement (the “Purchase Agreement”) with the persons named therein (each a “Lender”, and, collectively, the “Lenders”) pursuant to which the Lenders loaned us $1,000,000 and we issued $1,000,000 in Secured Convertible Term Notes (the “Notes”) to the Lenders. Selway Capital Holdings LLC, which loaned us $900,000 as a Lender, is 50% owned by Edmundo Gonzalez and Yaron Eitan, each of whom is one of our directors. The Notes: (i) bear interest at the annual rate of eight percent (8%), (ii) will be payable as to principal and interest on demand on April 2, 2015 (the “Maturity Date”), subject to acceleration upon an event of default, and (iii) may be prepaid by the Company at any time prior to the maturity date.

Pursuant to the Security Agreement dated April 4, 2014 (the “Security Agreement”), we granted the Lenders a first priority security interest to all of the and assets of 340 Basics. In addition, we granted the Lenders a second priority security interest in and to all our other assets, including equity interests in all other subsidiaries. Such second priority security interest is subordinate only to the security interest of Partners for Growth III, L.P., the Company’s senior lender.

We covenanted and agreed that: (a) if, as of May 4, 2014, we had failed to secure at least $1,500,000 in a new financing (the “Next Financing Round”), such failure would constitute an event of default; (b) if, as of May 4, 2014, we had secured at least $1,500,000 in a new financing, but less than $3,500,000, then we would be entitled to an additional 30 days in which to secure an additional amount so that the aggregate amount raised totals $3,500,000; (c) if, on or before expiration of such second 30 day period, we had failed to secure at least $3,500,000, such failure will constitute an event of default.

On May 2, 2014, we and the Lenders agreed to extend the time periods specified in the foregoing covenants by five days from the original maturity date to May 9th, 2014. On May 7, 2014, the Company and the Lenders agreed to further extend the time periods specified in the foregoing covenants from May 9, 2014 to May 23, 2014, which will allow the Company time to continue exploring its financing options.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Overview

We are a company that was organized under the laws of the State of Delaware on January 12, 2011 to acquire, through a merger, capital stock exchange, asset acquisition, stock purchase or similar acquisition transaction, one or more operating businesses. Although we were not limited to a particular geographic region or industry, we focused on acquiring operating businesses in the United States. Until the acquisition the Acquisition, we did not operate a business and our activities were limited to locating a business to acquire. As a result of the closing of the Acquisition, we operate our business through our wholly owned subsidiary, HCCA.

Our subsidiary, HCCA, is a Pharmacy Benefit Manager, or PBM. Its mission is to reduce prescription drug costs for clients while improving the quality of care. HCCA administers prescription drug benefits programs for employers who contract with HCCA directly in order to provide this component of healthcare benefits to their employees. It is also the PBM for healthcare management companies who partner with HCCA in order to provide prescription drug benefits along with their core offering, other health benefits products, to their clients.

Restatement of Financial Information

On May 9, 2013, we issued a Current Report on Form 8-K announcing that our Board of Directors, after consultation with, and upon recommendation from, our management, concluded the previously issued audited financial statements for the years ended December 31, 2011 and 2012 for HCCA, which we recently acquired and which is currently our wholly owned subsidiary, should no longer be relied upon and that disclosure should be made, and action should be taken, to prevent future reliance on such financial statements. For a description of the basis for the Board’s determination, please see our Current Report on Form 8-K dated May 9, 2013, which description is incorporated by reference herein.

Our officers discussed the foregoing matters with HCCA’s independent registered public accounting firm during the period, Thomas J. Harris, Certified Public Accountant. The Board of Directors authorized and directed that our officers take the appropriate and necessary actions to amend and restate the Current Report on Form 8-K (the “Original 8-K”), pursuant to which HCCA’s financial statements were filed with the SEC on May 16, 2013.

The restated financial statements also include certain reclassifications related to revenue and cost of sales for the fiscal years ended December 31, 2011 and 2012. We previously disclosed in our Current Reports on Form 8-K filed on March 25, 2013 and April 16, 2013 HCCA’s practice of recognizing revenue from rebates as well as from its mail-order pharmacy business. HCCA has reclassified these figures as decreases to cost of sales, with the exception of co-pays from members who order from its mail-order facility. There is no impact on gross profit, nor is there an impact on operating expenses related to this reclassification.

On September 16, 2013, the Board of Directors of the Company, after consultation with, and upon recommendation from, management of the Company, concluded that the previously issued and restated audited financial statements for the years ended December 31, 2011 and 2012 of HCCA, and the previously issued unaudited financial statements for the quarter ended March 31, 2013 of HCCA, should no longer be relied upon and that disclosure should be made, and action should be taken, to prevent future reliance on such financial statements. The Company reported this information in its Current Report on Form 8-K dated September 16, 2013.

Our officers discussed the foregoing matters with HCCA’s independent registered public accounting firm during the period, Thomas J. Harris, Certified Public Accountant. The Board of Directors authorized and directed that our officers take the appropriate and necessary actions to amend and restate the Original 8-K. As a result, we reviewed our financial statements in an attempt to discover all the material errors and misstatements that were included therein. As part of this review we engaged external consultants to review and investigate our books and records and other related transactions and activities for 2012 and 2011.

On November 11, 2013, the Company issued a press release announcing that the Company had discovered additional issues that necessitated an in-depth analysis of the books and records of HCCA for 2011, 2012 and the three months ended March 31, 2013. As a result of this review our management concluded that it will be unable to complete our restated 2011 financial statements, due to lack of sufficient source documents and other information, and that, as a result of the analysis, management had decided to exclude the 2011 income statement from our Transition Report on Form 10-K, in which it would otherwise be required, and that we would adjust the financial statements for 2012 and the 6 months ended June 30, 2013 to reflect the correction of the errors that were discovered.

The errors requiring a restatement of HCCA’s financial statements resulted in material weaknesses in internal control over financial reporting which were noted in the amended filings. In order to help prevent similar accounting errors in the future, the Company has hired a new CFO effective as of June 3, 2013 and instituted new procedures and controls where all material schedules and related journal entries are reviewed by the CFO on a monthly basis. On January 7, 2014, the Company’s Board of Directors established an Audit Committee consisting of Mr. Thomas Rebar and Edmundo Gonzalez, with Mr. Rebar as Chairman. In addition, the Company is in the process of locating additional independent directors eligible to serve on the audit committee.

Acquisition of HCCA

On January 25, 2013, the Agreement was entered into by and among the Company, Merger Sub, HCCA, PCA, Gary Sekulski, as the representative of the stockholders of HCCA, and Edmundo Gonzalez, as our representative. On April 10, 2013 the Acquisition and other transactions contemplated by the Agreement closed. Pursuant to the Agreement, Merger Sub merged with and into HCCA, resulting in HCCA becoming our wholly owned subsidiary. PCA and PCA Benefits, Inc., a dormant entity, remain wholly owned subsidiaries of HCCA.

Changes in Fiscal Year

On April 22, 2013, the Company determined to change its fiscal year end from December 31 to June 30. As a result of the change in fiscal year, the Company’s next fiscal year end was June 30, 2013. Accordingly, the Company filed a transition report on Form 10-K for the six months ended June 30, 2013, on March 13, 2014. On November 7, 2013, the Company determined to change its fiscal year end from June 30 back to December 31. As a result of the change in fiscal year, the Company is filing this report on Form 10-K for the year ended December 31, 2013.

Going Concern

We continue generating substantial losses and expect to into the foreseeable future, while successfully completing various financings as described herein during 2012, 2013 and 2014. Nevertheless, as of the date of this report we have not yet established an ongoing source of revenues sufficient to cover our operating costs to allow us to continue as a going concern. Our ability to continue as a going concern is dependent on our obtaining additional adequate capital to fund operating losses until we become profitable and generate cash flows from our operations. If we are unable to obtain adequate capital, we could be forced to cease operations. We are contemplating conducting additional offering of our debt or equity securities to obtain additional operating capital. There are no assurances we will be successful and without sufficient financing it would be unlikely for us to continue as a going concern.

2014 Bridge Financing

Results of Operations

THREE MONTHS ENDED MARCH 31, 2014 COMPARED TO THE THREE MONTHS ENDED MARCH 31, 2013

Revenue

HCCA’s revenue includes revenues earned on its fully funded and self-funded plans. Revenue for the three months ended March 31, 2014 was $14,921,025, an increase of $2,959,302, or 25% as compared to revenue of $11,961,723 for the three months ended March 31, 2013. The increase was primarily attributable to growth in HCCA’s core PBM business (Fully-Funded and Self-Funded). HCCA’s revenue is based on contracts that generally last for one year and are billed on a monthly basis. Revenue is recognized as the products and services are delivered to members (typically employees of the client). Recently, we have decided to de-emphasize our focus on the fixed fee local government PBM marketplace due to its lack of profitability. We estimate that the Fully-Funded business line, which accounted for approximately 74% of our revenues in the three months ended March 31, 2014, and which generated substantial operating losses, will decline in the months to come as annual renewable contracts may not renew due to our demand for substantial price increases as a condition for contract renewals.

Cost of Revenue

Cost of revenue for the three months ended March 31, 2014 was $14,302,185 an increase of $2,852,174 or 25%, as compared to $11,450,011 for the three months ended March 31, 2013. The increase was primarily attributable to HCCA’s growth in its core business.

HCCA’s cost of revenue for its PBM business derives from the cost of claims related to its clients. All claims are adjudicated via the Argus system. Cost of claims includes the cost of drugs dispensed and charged by pharmacies servicing HCCA’s members and an administrative fee charged by Argus. The cost of claims relating to HCCA’s mail-order pharmacy, which directly services our members, exclusively comes from the cost of each individual drug as set by the manufacturer. HCCA’s mail-order pharmacy purchases drugs from various suppliers, who are mainly drug wholesalers.

Rebates received from pharmaceutical manufacturers are recorded as reduction of cost of revenues, and the portion of the rebate payable to customers is treated as reduction of revenues.

Gross Profit

HCCA’s gross profit increased from $511,712 in the three months ended March 31, 2013 to $618,840 in the three months ended March 31, 2014. Gross margin was 4.1% in the three months ended March 31 2014, almost unchanged when compared to 4.3% in the three months ended March 31, 2013.

SG&A Costs

HCCA’s SG&A costs totaled $3,483,049 for the three months ended March 31, 2014 compared to $2,974,020 in the three months ended March 31, 2013, representing an increase of approximately $509,000 or 17%. SG&A costs derive primarily from wages and stock based compensation costs, which represented 42% of SG&A in the three months ended March 31, 2014, as well from commissions on sales to brokers, professional fees and reinsurance costs relating to the fully funded programs that collectively amounted to 37% of SG&A costs.

The increase in SG&A costs is primarily attributable to: increase of approximately $442,000 in reinsurance expenses relating to the fully funded business due to premium increases , professional fees that increased by approximately $220,000 due to public company costs, and wages and payroll taxes that increased by approximately $146,000 due to the increased staff. These expense increases were partly offset by a gain of approximately $340,000 relating to a reduction of a liability which was settled during the first quarter of 2014 partly through the issuance of shares of the Company’s common stock.

Other Income (expense), net

Other (Expense) Income, net for the three months ended March 31, 2014 which included interest expense, net of positive change in fair value of derivative liabilities, totaled ($591,212) compared to a net expense of ($1,186,305) for the three months ended March 31, 2013.

Interest expenses for the three months ended March 31, 2014 were approximately $0.9 million and included approximately $0.4 million incurred in connection with the senior convertible note, approximately $0.2 million in connection with the junior convertible notes, approximately $0.2 million in connection with the Incentive Notes and the balance of $0.1 million was incurred in connection with the capital leases and other interest expenses.

Interest expenses for the three months ended March 31, 2013 of approximately $1.2 million were all incurred in connection with the September 19, 2012 bridge notes.

For the three months ended March 31, 2014 HCCA recorded a decrease in the fair value of derivative liabilities of $0.7 million. The primary reason for the decrease was the decline of the market price of HCCA’s common stock as quoted on the financial markets during the first quarter of 2014 which led to the decline of the value of the derivative liabilities that are connected to the price of the common stock.

Liquidity and Capital Resources

HCCA’s sources of liquidity have historically primarily consisted of cash provided from purchases of equity and debt securities of the company by investors.

Since its inception through March 31, 2014 HCCA incurred an accumulated (deficit) of ($38,230,406) and it has continued to generate losses since April 1, 2014.

We have generated substantial losses, while successfully completing various financings as described herein, during 2012, 2013 and 2014. Nevertheless, as of the date of this report we have not yet established an ongoing source of revenues sufficient to cover our operating costs to allow us to continue as a going concern. Our ability to continue as a going concern is dependent on our obtaining additional adequate capital to fund operating losses until we become profitable and generate cash flows from our operations. If we are unable to obtain adequate capital, we could be forced to cease operations. We are contemplating conducting additional offering of our debt or equity securities to obtain additional operating capital. There are no assurances we will be successful and without sufficient financing it would be unlikely for us to continue as a going concern. In addition, our independent registered public accounting firm has issued a going concern opinion.

Net cash used in operating activities for the three months ended March 31, 2013 was approximately $1.5 million. Net loss for the quarter was $3.0 million, increased by a non cash market to market adjustment on derivative liabilities of approximately $0.7 million and offset by non-cash adjustments for approximately $1.2 million of stock and note based compensation, non-cash interest expense, and depreciation and amortization expense. Net changes in working capital increased cash from operating activities by approximately $1.0 million, primarily due to an increase in accounts payable and accrued expenses of approximately $0.5 million due in part to the timing of invoice payments and reduction in inventory.

Cash used in the first quarter of 2014 for purchasing of property and equipment was $11,620.

For the three months ended March 31, 2014, cash provided by financing activities was $426,286. The Company’s net cash in–flow from the senior convertible loan was $500,000 offset by debt costs of $22,895 and repayment capital leases of $50,819.

In connection with the Bridge Financing completed by HCCA in September 2012, HCCA issued 59.25 units, each unit consisting of 10,000 preferred shares and a promissory note with a face value of $100,000. At the time of the Merger, holders of all of the issued and outstanding shares of preferred stock of HCCA, by virtue of the Merger, had each of their shares of preferred stock of HCCA converted into the right to receive a proportional amount of 592,500 shares of Selway Series C common stock and warrants to purchase 296,250 shares of Selway Series C common stock. In accordance with the terms of the promissory notes issued in the Bridge Financing, at the time of the Merger, notes in the aggregate amount of $3,159,591.78 (including principal and interest accrued to date) were converted into 315,959 shares of Selway Series C common stock and notes in the aggregate principal amount of $3,025,000 were repaid in full.

In addition to the conversion of the Notes described at the completion of the Merger, HCCA received $4.9 million in cash, after expenses related to the transaction, including investment banking fees, legal and other costs. In connection with the Merger, on April 10, 2013, Selway entered into exchange agreements with 3 beneficial holders of greater than 5% of Selway’s Series A common stock. Pursuant to the exchange agreements, such holders converted an aggregate of 878,481 shares of Selway’s Series A common stock to Selway’s Series C common stock and received $3.53 per share of Series A common stock exchanged, or an aggregate of $3,101,038.

Subsequent to the closing of the Merger, on April 11, 2013, PCA and PCA Benefits, Inc. (together, the “Borrower”), the wholly-owned subsidiaries of HCCA, entered into a credit and security agreement, as amended, with a fund managed by Muneris Capital Group (“Muneris”) for a secured revolving credit facility with an initial aggregate credit limit of $2,000,000 (the “Muneris Facility”). The facility was terminated in September 2013 due to HCCA’s inability to meet certain financial covenants.

On July 17, 2013, the Company obtained a $5,000,000 loan (the “PFG Loan”) from Partners for Growth III, LP (“PFG”) for a term of five years, with HCCA, PCA and PCA Benefits, Inc. serving as guarantors. Interest on the PFG Loan is payable on a monthly basis at an annual rate of prime (as quoted by the Wall Street Journal or other nationally recognized rate quoting service reasonably acceptable to Lender) plus 5.25% per annum, provided that the interest rate will automatically be reduced to prime plus 3.25% if our revenues and EBITDA for the six months ending December 31, 2013 exceed $35.5 million and $(3.1 million), respectively. The principal amount of the PFG Loan and all other accrued and unpaid monetary obligations under the loan and security agreement shall be repaid on July 17, 2018, unless earlier amortized, converted, or prepaid.

The agreement governing the PFG Loan contains certain financial covenants, including the requirement to: (i) maintain a cash and cash equivalents balance of at least $2 million from July 17, 2013 to January 31, 2014 and at least $3 million from February 1, 2014 to July 17, 2018; and (ii) limit our principal borrowings under the Muneris Facility at any given time to no more than $5 million, unless our EBITDA exceeds $0 in three consecutive months, upon which any increase in the amount of indebtedness under the Muneris Facility may not result in principal borrowings under the facility to exceed $25,000,000 without PFG’s consent. The agreement also includes customary negative covenants and financial reporting requirements, as well as certain customary events of default that would render all outstanding amounts under the agreement immediately due and payable, including but not limited to: (i) our failure to pay amounts due within 3 business days after the due date; (ii) PFG ceasing to have a valid perfected first priority security interest in any material portion of the collateral; (iii) we or any current subsidiary undergoing a change in the ownership of 35% or more of the voting power of its then outstanding securities; (iv) we or any current subsidiary acquiring or disposing of any assets, except as relates to certain permitted investments, including but not limited the incorporation of certain new subsidiaries, provided however that PFG may elect to add such new subsidiaries as guarantors for the PFG Loan.

Pursuant to the terms of agreement governing the PFG Loan, we issued a senior convertible note to PFG, in the amount of $5,000,000, representing the principal amount of the PFG Loan. All amounts owing under the Note are convertible, at PFG’s option, into Selway Series C common stock at an initial rate of $8.00 per share. The Note is also subject to mandatory conversion by us in the event that certain conditions are met. Additionally, as part of consideration for the PFG Loan, we issued to PFG and its designees warrants to purchase an aggregate of 220,000 shares of Series C common stock, for $7.50 per share, at any time on or prior to July 17, 2018. In order to include a provision in the loan and security agreement allowing us to prepay the PFG Loan, we issued to PFG and its designees an aggregate of 625,000 warrants that are not exercisable unless and until we choose to prepay the PFG Loan in full. These warrants will become exercisable, for $8.00 per share, only upon our optional prepayment of the loan in full, and will expire on July 17, 2018.

For a more detailed description of the terms of the PFG Loan, please see our Current Report on Form 8-K dated July 23, 2013, which description is incorporated by reference herein.

On December 31, 2013, we entered into a Forbearance, Waiver and Modification No. 1 to the PFG Loan. Pursuant to the terms of the modification, in January 2014, we received an additional $500,000 in loan proceeds, the conversion price of the warrants was reduced from $7.50 to $2.50, the number of shares issuable upon exercise of the warrants was increased from 220,000 to 555,000 shares, among other changes. For a more detailed description of the terms of the modification, please see our Current Report on Form 8-K dated January 3, 2014, which description is incorporated by reference herein.

On December 31, 2013, we entered into a securities purchase agreement (the “SPA”) with certain purchasers (each a “Purchaser” and collectively, the “Purchasers”) named therein and Chardan Capital Markets, LLC (“Agent”) as administrative and collateral agent. Pursuant to the SPA, we issued $2,325,125 of Junior Secured Convertible Term Notes (the “Junior Secured Notes”), including $212,625 as fees to the Agent, which Junior Secured Notes are convertible into shares of the Company’s common stock at an initial fixed conversion price equal to $1.50 per share. The Purchasers of these notes also received warrants (the “Warrants”) to purchase one share for every $1.50 of Junior Secured Notes purchased by such Purchaser. We completed the closing of a private placement of Junior Secured Notes and Warrants under the SPA on December 31, 2013. For a more detailed description of the terms of the SPA, the Junior Secured Notes and the Warrants, please see our Current Report on Form 8-K dated January 3, 2014, which description is incorporated by reference herein.

On April 4, 2014, we entered into a Note Purchase Agreement (the “Purchase Agreement”) with the persons named therein (each a “Lender”, and, collectively, the “Lenders”) pursuant to which the Lenders loaned the Company $1,000,000 and the Company issued $1,000,000 in Secured Convertible Term Notes (the “Notes”) to the Lenders. Selway Capital Holdings LLC, which loaned the Company $900,000 as a Lender, is 25% owned by each of Edmundo Gonzalez and Yaron Eitan, each of whom is one of our directors. The Notes: (i) bear interest at the annual rate of eight percent (8%), (ii) will be payable as to principal and interest on demand on April 2, 2015 (the “Maturity Date”), subject to acceleration upon an event of default, and (iii) may be prepaid by the Company at any time prior to the maturity date.

The Company covenanted and agreed that: (a) if, as of May 4, 2014, the Company has failed to secure at least $1,500,000 in a new financing (the “Next Financing Round”), such failure will constitute an event of default; (b) if, as of May 4, 2014, the Company has secured at least $1,500,000 in a new financing, but less than $3,500,000, then the Company shall be entitled to an additional 30 days in which to secure an additional amount so that the aggregate amount raised totals $3,500,000; (c) if, on or before expiration of such second 30 day period, the Company has failed to secure at least $3,500,000, such failure will constitute an event of default.

The Notes are convertible into validly issued, fully paid and non-assessable shares of common stock of the Company (“Conversion Shares”). The number of Conversion Shares to be issued upon conversion of the Notes are equal to (x) the sum of the outstanding principal amount and/or accrued interest and fees due or accrued and payable under the Note (the “Conversion Amount”) divided by (y) the lowest price per share offered for the securities sold in the Next Financing Round. At any time and from time to time holders may convert the Notes into common stock at the Conversion Price compensate the holder in the form of cash or shares and cash. The Company also agreed to grant the holder the same registration rights as were granted in the December 31, 2013 Registration Rights Agreement, or any newer Registration Rights Agreement, if any.

In connection with the issuance of the Notes under the Purchase Agreement, on April 4, 2014 the Company issued warrants to purchase an aggregate of 2,000,000 shares of its common stock, (the “Warrants”). The term of the Warrants is five (5) years. The exercise price of the Warrants will be equal to the lowest of the following: (i) the price of common equity sold in the Next Financing Round, (ii) the conversion price of a convertible note raised after the Next Financing Round, or (iii) the exercise price of warrants issued in the Next Financing Round. The Warrants may also be exercised on a cashless basis. The Company also agreed to grant the holder the same registration rights as were granted in the December 31, 2013 Registration Rights Agreement, or any newer Registration Rights Agreement, if any.

For a more detailed description of the terms of the modification, please see our Current Report on Form 8-K dated April 7, 2014, which description is incorporated by reference herein.

Off-Balance Sheet Arrangements

HCCA has no off-balance sheet arrangements.

Critical Accounting Policies and Estimates

The preparation of financial statements and related disclosures in conformity with generally accepted accounting principles in the United States, or GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and income and expenses during the periods reported. Actual results could materially differ from those estimates. We have identified the following as our critical accounting policies:

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements including disclosure of contingent assets and liabilities, at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period and accompanying notes. The Company’s critical accounting policies are those that are both most important to the Company’s financial condition and results of operations and require the most difficult, subjective or complex judgments on the part of management in their application, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Because of the uncertainty of factor surrounding the estimates or judgments used in the preparation of the financial statements, actual results could differ from these estimates.

Rebates Receivable

Pharmaceutical manufacturers offer rebates for selected brand drugs. We currently receive these rebates through a third party administrator. The rebates are considered earned when our members (employees of customers) order the drugs. Rebates earned are paid to us by the third party administrator quarterly. Rebates earned are recognized as a reduction to cost of revenue. The portion of the rebate payable to customers is simultaneously recognized as a reduction of revenue. Management evaluates rebates receivable at the end of every reporting period and adjusts the amount reflected on the accompanying balance sheet to net realizable value. An adjustment is also made to the rebate payable to customers to correspond with any adjustment that Management applies to rebates receivable. Management estimates the rebates receivable based on the estimated number of brands dispensed through the end of reporting date multiplied by the rebate per prescription as agreed with the third party administrator.

Revenue Recognition

The Company typically enters into annual renewable agreements with its customers to provide pharmacy benefit management on a fixed price or self-insured basis. The Company records revenues from all its current contracts with customers gross as the Company acts as principal based on the following factors: 1) the Company has a separate contractual relationship with its customers and with its claims adjudicator to whom the Company pays the costs of the prescription drugs consumed by its customers (the claims), 2) the Company through its claim adjudicator is responsible to validate and manage the claims, and 3) the Company bears the credit risk for the amount due from the customers. Revenues are recorded monthly as earned. The Company also operates a mail order pharmacy that services our plan members. All revenues and associated costs from dispensing drugs by our mail order pharmacy to our plan members, excluding the members’ co-pay are eliminated as inter-company revenues. Some of the contracts contain terms whereby we make certain financial guarantees regarding prescription costs. Actual performance is compared to the guaranteed measure throughout the period and accruals are recorded as an offset to revenue if we fail to meet a financial guarantee.

Incentive Notes

Upon consummation of the merger, Holders of all of the issued and outstanding shares of common stock of HCCA immediately prior to the time of the Merger had each of their shares of common stock of HCCA converted into the right to receive: (i) a proportional amount of 5,200,000 shares of the Company’s Series C common stock and promissory notes with an aggregate face value of $7,500,000 (collectively, the “Closing Payment”).

In addition the Company issued to its management $2,500,000 of Management Incentive Notes and paid fees in connection with the transaction by issuing promissory notes having an aggregate principal amount of $500,000, which reflects five percent of all promissory notes issued in the transaction.

The above described notes with an aggregate face value of $10,500,000 have identical terms and conditions, are non-interest bearing and are subordinated to all senior debt of the Company in the event of a default under such senior debt. The notes will be repaid prorate from 75% of 25% of the Company’s free cash-flow (defined as in the notes) in excess of $2,000,000. The Company will be obligated to repay such notes if, among other events, there is a transaction that results in a change of control of the Company.

Derivative Policy

Derivative financial liabilities are recorded at fair value, with gains and losses arising from changes in fair value recognized in the statement of operations at each period end while such instruments are outstanding. If the Company issues shares to discharge the liability, the derivative financial liability is derecognized and common stock and additional paid-in capital are recognized on the issuance of those shares. Derivative liabilities are valued using quoted market prices, Black-Scholes option pricing model or Monte Carlo simulation depending on the assumptions necessary to properly value the related instrument.

Recent Accounting Pronouncements:

Management does not believe that any recently issued, but not effective, accounting standards, if currently adopted, would have a material effect on our financial statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As a smaller reporting company, we are not required to respond to this Item.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in reports filed or submitted under the Securities Exchange Act of 1934 ("Exchange Act") is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. Disclosure controls include, without limitation, controls and procedures designed to ensure that information required to be disclosed under the Exchange Act is accumulated and communicated to management, including principal executive and financial officers, as appropriate, to allow timely decisions regarding required disclosure. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.

Management carried out an evaluation, under the supervision of the Chief Executive Officer and Chief Financial Officer, of the effectiveness of disclosure controls and procedures as of March 30, 2014. Based upon that evaluation, management, including the Chief Executive Officer and Chief Financial Officer, concluded that the design and operation of disclosure controls and procedures were not effective as of March 30, 2014.

Changes in internal control over financial reporting

During the most recently completed fiscal quarter, there has been no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

During 2012, we filed a lawsuit against our past adjudicator of claims for overcharges, over payment on claims, errors and misclassifications, and rebates owed from drug manufacturers claiming damages of over $5 million. Additionally, we have recorded an expense for the amount owed for claims payable. The adjudicator of claims filed a counterclaim for amounts it claims are owed to it by us. In August 2013, we settled the suit with the claims adjudicator. Under the terms of the settlement we agreed to pay the claims adjudicator $2.7 million over 15 months, commencing in September 2013. This amount was recorded as a liability as of December 31, 2012, in accounts payable. The settlement was discounted to its present value at settlement date and $1,555,712 is recorded in accounts payable at December 31, 2013.

On August 14, 2012, we entered into an agreement with a shareholder to buy back 500,000 shares of common stock for $100,000. The agreement also called for the payment of $50,000 in legal fees. As of December 31, 2012, we had not received the 500,000 shares of common stock but had paid the settlement. We received these shares in February 2013. A stock redemption was recorded on December 31, 2012 in the amount of $100,000.

ITEM 1A. RISK FACTORS

As a smaller reporting company, we are not required to respond to this Item.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None that have not been previously reported.

ITEM 3. DEFAULT UPON SENIOR SECURITIES

None that have not been previously reported.

ITEM 4. MINE SAFETY DISCLOSURES

Not Applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

Exhibit No.		Description
31.1		Certification of Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1		Certification of the Chief Executive Officer and Chief Financial Officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		XBRL Taxonomy Extension Label Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	HEALTHCARE CORPORATION OF AMERICA

Date: May 9, 2014	By:	/s/ Yoram Bibring
	Name:	Yoram Bibring
	Title:	Chief Financial Officer
		(Principal Accounting and Financial Officer)

EXHIBIT INDEX

Exhibit No.		Description
31.1		Certification of Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1		Certification of the Chief Executive Officer and Chief Financial Officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		XBRL Taxonomy Extension Label Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document