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Exhibit A Page 1 of 23
EXHIBIT A
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Exhibit A Page 2 of 23
TABLE OF CONTENTS
Supplementary Information
To the Members of
Liberation Behavioral Health, LLC
We have audited the accompanying financial statements of Liberation Behavioral Health LLC and
Subsidiaries, which comprise the consolidated balance sheet as of December 31, 2016, and the
related consolidated statements of operations and members’ equity and cash flows for the year
then ended, and the related notes to the financial statements.
Management is responsible for the preparation and fair presentation of these financial statements
in accordance with accounting principles generally accepted in the United States of America; this
includes the design, implementation, and maintenance of internal control relevant to the
preparation and fair presentation of financial statements that are free from material misstatement
whether due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on these financial statements based on our audit. We
conducted our audit in accordance with auditing standards generally accepted in the United States
of America. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and
disclosures in the financial statements. The procedures selected depend on the auditors’ judgment,
including the assessment of the risks of material misstatement of the financial statements, whether
due to fraud or error. In making those risk assessments, the auditor considers internal control
relevant to the entity’s preparation and fair presentation of the financial statements in order to
design audit procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express
no such opinion. An audit also includes evaluating the appropriateness of accounting policies used
and the reasonableness of significant accounting estimates made by management, as well as
evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis
for our audit opinion.
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Marcum LLP n 1600 Market Street n 32nd Floor n Philadelphia, Pennsylvania 19103 n Phone 215.297.2100 n Fax 215.297.2101 n www.marcumllp.com
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Exhibit A Page 5 of 23
Opinion
In our opinion, the 2016 financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Liberation Behavioral Health LLC and Subsidiaries
as of December 31, 2016 and the consolidated results of their operations and their cash flows for
the year then ended in accordance with accounting principles generally accepted in the United
States of America.
As part of our audit of the 2016 consolidated financial statements, we also audited the adjustment
to the 2015 consolidated financial statements to restate accounts receivable as described in Note
8. In our opinion, such adjustment is appropriate and has been properly applied.
Our audit was conducted for the purpose of forming an opinion on the consolidated financial
statements taken as a whole. The consolidating information on pages 16 – 19 is presented for
purposes of additional analysis rather than to present the financial position, results of operations,
and cash flows of the individual companies, and is not a required part of the consolidated financial
statements. Such information is the responsibility of management and was derived from and
relates directly to the underlying accounting and other records used to prepare the consolidated
financial statements. The consolidating information has been subjected to the auditing procedures
applied in the audit of the consolidated financial statements and certain additional procedures,
including comparing and reconciling such information directly to the underlying accounting and
other records used to prepare the consolidated financial statements or to the consolidated financial
statements themselves, and other additional procedures in accordance with auditing standards
generally accepted in the United States of America. In our opinion, the consolidating information
is fairly stated in all material respects in relation to the consolidated financial statements taken as
a whole.
Philadelphia, Pennsylvania
April 14, 2017
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Exhibit A HEALTH,
LIBERATION BEHAVIORAL Page 6 of LLC
23 AND SUBSIDIARIES
Current Assets
Cash $ 1,008,380 $ 1,089,486
Accounts receivable, net 9,597,385 1,673,933
Prepaid expenses 150,000 120,000
Current liabilities:
Accounts payable and accrued liabilities $ 74,316 $ 98,274
Line of credit 2,000,000 -
Notes payable - current 916,667 -
Deferred compensation - 225,556
Long-term liabilities
Deferred lease liability 74,310 26,087
Notes payable, net 2,019,333 750,000
The accompanying notes are an integral part of these consolidated financial statements.
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Exhibit A HEALTH,
LIBERATION BEHAVIORAL Page 7 ofLLC
23 AND SUBSIDIARIES
Cost of Sales
Housing - Sober Living 3,933,241 830,362
Labor 1,204,345 397,349
Operating Expenses
Advertising 200,690 21,791
Bad debts 91,348 1,527,038
Bank charges 27,689 49,228
Charitable contributions 55,333 -
Commissions & fees 11,976 1,927
Computer expense 44,053 17,142
Consulting fees 285,032 538,611
Depreciation 88,431 14,293
Dues & subscriptions 74,064 39,275
Employee heath insurance 103,329 19,921
Employee training 5,000 -
Guaranteed payments 8,822,325 -
Insurance 64,040 6,688
Legal & professional fees 885,918 271,237
Meals & entertainment 89,897 32,433
Miscellaneous - 3,866
Office expense 187,701 37,015
Payroll 994,049 -
Postage 4,383 1,374
Supplies 32,735 2,285
Taxes & licenses 2,896 1,748
Travel 146,998 35,057
Utilities 37,823 12,788
Rent 341,700 69,291
The accompanying notes are an integral part of these consolidated financial statements.
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LIBERATION BEHAVIORAL
Exhibit A HEALTH,
Page 8 of LLC
23 AND SUBSIDIARIES
The accompanying notes are en integral part of these consolidated financial statements.
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LIBERATION BEHAVIORAL
Exhibit A HEALTH,
Page 9 of LLC
23 AND SUBSIDIARIES
The accompanying notes are en integral part of these consolidated financial statements.
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Exhibit A Page 10 of 23
LIBERATION BEHAVIORAL HEALTH, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NATURE OF BUSINESS
Liberation Behavioral Health, LLC and Subsidiaries (“Company”) owns and operates
outpatient addiction treatment centers and ancillary service providers. The Company’s
service offering includes outpatient substance abuse counseling, an addiction medicine
practice, and a holistic medicine provider. The Company works with its clients to improve
their overall well-being, aid their recovery process, and help clients re-assimilate back into
society.
In March 2016, the Company formed MCI Real Estate Holdings, LLC which is wholly-
owned by Liberation Behavioral Health, LLC. This entity was formed to acquire real estate
to be used in the operations of the Company.
During 2016, Afton Medical Solutions, LLC and, Afton Health & Wellness, LLC were
dissolved into Liberation Way. The services provided by these two entities are now being
performed by Liberation Way.
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of Liberation Behavioral Health,
LLC, and its wholly-owned subsidiaries: Liberation Way, LLC, MCI Real Estate Holdings,
Afton Medical Solutions, LLC and, Afton Health & Wellness, LLC. All intercompany
balances and transactions have been eliminated in consolidation.
BASIS OF ACCOUNTING
The accompanying consolidated financial statements have been prepared on the accrual basis
of accounting in accordance with generally accepted accounting principles in the United
States of America which reflects revenues and expenses when earned and incurred rather than
when received or paid.
The Company was formed as a limited liability company in August 2014 in the State of
Delaware. Profits and losses are allocated to members in accordance with provisions in the
operating agreement. Operations of the Company began in July 2015. The Company shall
continue until terminated pursuant to statute or any provision of the operating agreement.
The Company’s operating agreement authorizes and provides for membership interests as
follows:
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Exhibit A Page 11 of 23
LIBERATION BEHAVIORAL HEALTH, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Distribution rights, as defined in the operating agreement, are determined by the class of
units. Each class of units has the same rights to share in profits and losses and the same
voting rights. Generally, Class A Units are entitled to a preferred return currently equal to
such Class Member’s Unreturned Capital Contributions multiplied by the Dividend Rate of
12.5%, which to the extent not paid shall be simple and not compounding.
Distributions will be made according to the operating agreement. Upon dissolution of the
Company, Units are generally paid in the following order of priority:
a) First, to the holders of the Class A Units, pro rata in proportion to their Class A units
as a percentage of the Class A units owned by all of the Class A members, until each
Class A member’s unreturned capital contributions have been reduced to zero;
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Exhibit A Page 12 of 23
LIBERATION BEHAVIORAL HEALTH, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
b) Second, to the holders of the Class A Units pro rata in proportion to their Class A units
as a percentage of the Class A units owned by all of the Class A members, until each
Class A member’s unpaid preferred return has been reduced to zero; and
c) Thereafter, to the members, pro rata based on their respective percentage interests,
without respect to the different classes.
CASH
The Company maintains substantially all of its cash accounts at one financial institution. The
total cash balance is insured by the Federal Deposit Insurance Corporation ("FDIC") up to
$250,000. Throughout the year, the Company had amounts in excess of FDIC limits. As of
December 31, 2016, uninsured cash amounted to approximately $5.9 million. The Company
has not experienced any losses in such accounts and management believes it is not exposed
to any significant credit risk on cash. The Company does not have any cash equivalents. The
Company had a senior debt agreement (See Note 3), which required the Company to establish
a separate lockbox account and maintain a minimum amount of cash in that account. The
Company was in compliance with the lockbox requirement and the senior debt agreement
was repaid during 2016.
Accounts receivable result from the various health care services provided by the Company to
the patients. For receivables associated with services provided to patients with third-party
coverage, the Company is an out-of-network provider, and although there are no
contractually agreed upon amounts for services, the Company provides for a contractual
allowance based on past history of payments from these providers. For receivables associated
with self-pay patients, the Company records a provision for bad debts in the period of service
on the basis of past experience of patients unable or unwilling to pay the service fee they are
financially responsible. Accounts receivable are also reduced by an allowance for doubtful
accounts. In evaluating the collectability of accounts receivable, the Company analyzes its
past history and identifies trends for each of its payor sources of revenue to estimate the
appropriate allowance for doubtful accounts. The difference between the standard rates and
the amounts actually collected after all reasonable collection efforts have been exhausted is
charged against the allowance for doubtful accounts.
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Exhibit A Page 13 of 23
LIBERATION BEHAVIORAL HEALTH, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accounts receivable consisted of the following as of December 31, 2016 and 2015:
2016 2015
Gross accounts receivable $ 29,046,675 $ 7,286,329
Less: contractual allowance (19,449,290) (4,085,358)
Less: Allowance for doubtful accounts - (1,527,038)
Net accounts receivable $ 9,597,385 $ 1,673,933
Property and equipment is stated at cost and depreciated using the straight line method over
the estimated useful lives of the respective assets which range from 3-39 years. Leasehold
improvements are amortized over the lesser of the lease term or their estimated useful life.
Expenditures for major additions and improvements are capitalized and minor replacements,
maintenance, and repairs are charged to expense as incurred. When property and equipment
are retired or otherwise disposed of, the cost and accumulated depreciation are removed from
the accounts and any resulting gain or loss is included in the results of operations.
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Exhibit A Page 14 of 23
LIBERATION BEHAVIORAL HEALTH, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
REVENUE RECOGNITION
Over 90% of payments to the Company are from major commercial insurance carriers for
outpatient addiction treatment services on an out-of-network basis. The Company does not
accept any in-network, HMO, EPO, Medicare or Medicaid insurance. As an out-of-network
provider, payments are made according to the reimbursement parameters of the client’s
insurance policy. Other factors include: a client’s deductible, co-insurance, and out-of-
pocket maximum. Revenue is recognized when the service has been rendered. As is standard
with out-of-network reimbursement, the Company must actively pursue reimbursement for
services and advocate on behalf of the client. Payments are not made on a pre-determined
schedule, and the Company may pursue reimbursement for up to one year from the date the
claim was billed.
As part of this collections process, in many cases, the Company is required to receive
authorizations from the insurance carriers prior to receiving any reimbursement. There are
occasions where authorizations are denied and the Company cannot receive coverage for
services rendered. Once taken through the three stages of appeal, if the coverage continues
to be denied, the client must be discharged and the associated revenue is lost. To minimize
these situations, the Company utilizes a pre-admission verification of benefits process, but
there are occasions where an insurance carrier will not authorize treatment.
INCOME TAXES
Each company was formed in Delaware as a limited liability company for federal and state
income tax purposes. Accordingly, no provision for income taxes has been reflected in the
consolidated financial statements. Limited liability companies are pass-through entities and
there are no uncertain tax positions that would require recognition in the consolidated
financial statements. If the Company were to incur an income tax liability in the future,
interest on any income tax liability would be reported as interest expense and penalties on
any income tax liability would be reported as income taxes. All taxes are the responsibility
of the members of the Company.
Debt issuance costs are presented as a direct reduction from the carrying amount of the related
debt and consists primarily of direct costs associated with the incurrence of obtaining debt.
Debt issuance costs totaled $64,000 and are being amortized over the life of the underlying
debt. There was no amortization of the debt issuance costs in 2016 since the costs were
incurred at the end of the year (See Note 3).
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Exhibit A Page 15 of 23
LIBERATION BEHAVIORAL HEALTH, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GUARANTEED PAYMENTS
Three of the members who represent the management of the Company receive guaranteed
payments for their services. The guaranteed payments are reflected as an expense of the
Company in these consolidated financial statements.
ADVERTISING
Advertising and promotion costs are expensed as incurred. Advertising and promotion
expense totaled $200,690 and $21,791 for the years ended December 31, 2016 and 2015.
ESTIMATES
Depreciation and amortization expense amounted to $88,431 and $14,293 for the years
ended December 31, 2016 and 2015, respectively.
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Exhibit A Page 16 of 23
LIBERATION BEHAVIORAL HEALTH, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - DEBT
On July 31, 2015, CFG Financial Services extended a loan to the Company with a maximum
limit of $2 million, issued in four tranches of $500,000 per tranche. Each tranche was
evidenced by a senior secured promissory note. The notes required quarterly, interest only
payments at a rate of 14%, non-compounded. Interest only payments were required until
maturity of each tranche which was eighteen months from the date of issuance. The debt was
secured by substantially all of the Company’s assets and was subject to certain financial
covenants. As of December 31, 2015, the balance of these notes payable amounted to
$750,000 and was repaid in 2016. The Company obtained a new financing arrangement with
a different lender in 2016.
On December 30, 2016, the Company obtained a $2 million line of credit with Univest Bank
and Trust Co. with interest payable at the bank’s LIBOR rate plus 3% (3.77% at December
31, 2016) which expires on December 31, 2049. On December 30, 2016, the Company also
obtained a $3 million term loan for working capital needs. Monthly principal payments of
$83,333 along with interest at the bank’s LIBOR rate plus 3.25% (4.02% at December 31,
2016), are due commencing February 1, 2017 with final payment due January 1, 2020. Both
the line of credit and term loan are secured by substantially all assets of the Company and
personal guarantees of two members of management.
As of December 31, 2016, the balance outstanding on the line of credit and term loan
amounted to $2,000,000 and $3,000,000, respectively. As of December 31, 2016, the long
term portion of the term loan was reduced by the unamortized balance of the debt issuance
costs in the amount of $64,000.
During 2015, the Company had entered into a non-qualified deferred compensation
agreement with certain key employees for compensation that was deferred during the first
months of operation. The amount due as of December 31, 2015 was $225,556 and the entire
balance was paid in 2016.
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Exhibit A Page 17 of 23
LIBERATION BEHAVIORAL HEALTH, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Providing a safe, independent, and clean living environment is critical to a client’s recovery.
The Company works closely with Legacy House, LLC (“Legacy House”), a provider of sober
living for people in outpatient treatment for substance abuse disorders. Legacy House is
responsible for the housing and supervision of the Company’s clients when they are not in
treatment at the Company’s facilities. A 1% owner of the Company is the owner of Legacy
House. During the years ended December 31, 2016 and 2015, the Company paid Legacy
House $3,933,241 and $830,362, respectively, for its services.
The Company leases office space in Pennsylvania and New Jersey under non-cancelable
operating lease agreements with monthly rent payments ranging from $944 to $7,429 per
month. The Company records rent on a straight line basis based on the average monthly lease
rental for the lease term. As of December 31, 2016 and 2015, the Company recorded a
deferred rent liability of $74,310 and $26,087, respectively, as a long term liability.
Rent expense for the above leases was approximately $342,000 and $69,000 for the years
ended December 31, 2016 and 2015, respectively.
$ 1,762,381
During 2015, the Company settled a non-compete claim against them. As a result, the Company
was required to pay $180,000 to settle the claim. As of December 31, 2015, $100,000 was paid
and $80,000 was accrued and was included in accounts payable and accrued liabilities. The
remaining $80,000 was paid in January 2016.
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Exhibit A Page 18 of 23
LIBERATION BEHAVIORAL HEALTH, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has a salary deferral plan under Section 401(k) of the Internal Revenue Code.
The plan allows eligible employees to defer a portion of their compensation, subject to
normal Internal Revenue Service limitations. Such deferrals accumulate on a tax deferred
basis until the employee withdraws the funds. There were no discretionary matching
contributions in 2016 and 2015.
In 2015, the Company had used an outsourced billing service for billing its patients. There
were several issues with the billing service in 2015 which resulted in the Company having to
resubmit many claims. As of December 31, 2015, there was approximately $1.6 million
remaining in these re-billed claims and no allowance for doubtful accounts was established.
Accordingly, the Company has included an allowance for doubtful accounts for $1.5 million
of uncollected accounts receivable related to these 2015 re-billed amounts. As such, the
consolidated financial statements were re-stated for the year ended December 31, 2015 to
properly reflect accounts receivable. Adjustments to the consolidated financial statements
for the year ended December 31, 2015 follow:
Subsequent events have been evaluated for potential recognition or disclosure through April
14, 2017, the date the financial statements were available to be issued.
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Exhibit A Page 19 of 23
SUPPLEMENTARY INFORMATION
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Exhibit A Page 20 of 23
LIBERATION BEHAVIORAL HEALTH, LLC AND SUBSIDIARIES
Liberation
Behavioral Health Liberation Way MCI Eliminations Consolidated
ASSETS
Current assets:
Cash $ (1,573) $ 960,042 $ 49,911 $ - $ 1,008,380
Accounts receivable - 9,585,385 12,000 - 9,597,385
Due from related party - 3,124,000 - (a) (3,124,000) -
Prepaid expenses - 150,000 - - 150,000
Noncurrent assets:
Property and equipment, net 65,886 484,719 2,718,673 - 3,269,278
Investments in affiliates 2,785,000 - - (b) (2,785,000) -
Security deposits - 179,090 - - 179,090
LIABILITIES
Current liabilities:
Accounts payable and accrued liabilities $ - $ 74,316 $ - $ - $ 74,316
Due to related party 3,124,000 (a) (3,124,000) -
Line of credit 2,000,000 - - - 2,000,000
Notes payable - current 916,667 916,667
Long-term liabilities:
Deferred lease liability - 74,310 - - 74,310
Notes payable, net 2,019,333 - - - 2,019,333
Total liabilities and members' equity (deficit) $ 2,849,313 $ 14,483,236 $ 2,780,584 $ (5,909,000) $ 14,204,133
Liberation
Behavioral Health Liberation Way MCI Eliminations Consolidated
Revenue
Claims - Insurance $ - 76,307,948 $ - $ - $ 76,307,948
Claims - Self-pay - 114,555 - - 114,555
Provision for contractual allowance - (50,400,141) - - (50,400,141)
Management fees 230,000 (a) (230,000) -
Rental income - - 22,000 - 22,000
Cost of Sales
Housing - Sober Living - 3,933,241 - - 3,933,241
Labor 805 1,203,540 - - 1,204,345
Operating Expenses
Advertising 1,446 199,244 - - 200,690
Bad debts - 91,348 - - 91,348
Bank charges 36 27,545 108 - 27,689
Charitable contributions - 55,333 - - 55,333
Commissions & fees - 11,976 - - 11,976
Computer expense 3,636 40,417 - - 44,053
Consulting fees - 285,032 - - 285,032
Corporate service fees - 230,000 - (a) (230,000) -
Depreciation and amortization 13,352 54,119 20,960 - 88,431
Dues & subscriptions 548 73,124 392 - 74,064
Guaranteed payments 5,053,733 3,768,592 - - 8,822,325
Employee heath insurance - 103,329 - - 103,329
Employee training - 5,000 - - 5,000
Insurance 21,106 39,717 3,217 - 64,040
Legal & professional fees 11,071 874,097 750 - 885,918
Meals & entertainment 1,365 88,532 - - 89,897
Office expense 7,996 178,716 989 - 187,701
Payroll - 994,049 - - 994,049
Postage 63 4,320 - - 4,383
Rent 30,624 311,076 - - 341,700
Supplies - 32,735 - - 32,735
Taxes & licenses 345 2,551 - - 2,896
Travel 1,641 145,357 - - 146,998
Utilities 9,856 27,967 - - 37,823
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LIBERATION BEHAVIORAL HEALTH, LLC AND SUBSIDIARIES
Exhibit A Page 22 of 23
CONSOLIDATING STATEMENT OF OPERATIONS AND MEMBERS' EQUITY, CONTINUED
Liberation
Behavioral Health Liberation Way MCI Eliminations Consolidated
Members' Equity (Deficit) - End of Year $ (5,210,687) $ 14,334,610 $ 2,780,584 $ (2,785,000) $ 9,119,507
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LIBERATION BEHAVIORAL
Exhibit A HEALTH,
Page 23LLC
of AND
23 SUBSIDIARIES
CONSOLIDATING STATEMENT OF CASH FLOWS
Liberation
Behavioral Health Liberation Way MCI Eliminations Consolidated
Cash Flows From Operating Activities
Net income (loss) $ (4,902,171) $ 13,047,676 $ (4,416) $ - $ 8,141,089
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation 13,352 54,119 20,960 - 88,431
Bad debt expense - 91,348 - - 91,348
Reserve for contractual allowances - 15,363,932 - - 15,363,932
Changes in operating assets and liabilities:
Accounts receivable - (23,366,732) (12,000) - (23,378,732)
Due to (from) affiliates 3,124,000 (3,124,000) -
Prepaid expenses - (30,000) - - (30,000)
Security deposits - (161,600) - - (161,600)
Accounts payable and accrued liabilities - (23,958) - - (23,958)
Deferred compensation - (225,556) - (225,556)
Deferred lease liability - 48,223 - 48,223
Net Cash Provided by (Used in) Operating Activities (1,764,819) 1,673,452 4,544 - (86,823)
Net Cash Used in Investing Activities (2,200,332) (386,160) (2,739,633) 2,121,094 (3,205,031)
Net Cash Provided by (Used in) Financing Activities 3,960,748 (1,413,906) 2,785,000 (2,121,094) 3,210,748
19