NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For
the Three and Nine Months Ended September 30, 2020 and 2019
(unaudited)
Note
1 – Organization and Summary of Significant Accounting Policies
Description
of Business
Rennova
Health, Inc. (“Rennova”), together with its subsidiaries (the “Company”, “we”, “us”
or “our”) is a provider of health care services for healthcare providers, patients and individuals. In late
2016, the Company decided to pursue the opportunity to acquire and operate clusters of rural hospitals and is currently focused
on implementing this business model. The Company now owns three hospitals, a physician’s office in Tennessee and a rural
clinic in Kentucky. During the three months ended September 30, 2020, the Company’s announced that it had reached an agreement
to sell its last clinical laboratory, EPIC Reference Labs, Inc., and as a result, EPIC Reference Labs, Inc.’s operations
have been classified as held for sale and included in discontinued operations for all periods presented. The Company’s operations
now consist of only one business segment, Hospital Operations.
Basis
of Presentation
The
accompanying unaudited condensed consolidated financial statements were prepared using generally accepted accounting principles
for interim financial information and the instructions to Form 10-Q and Regulation S-X. Accordingly, these financial statements
do not include all information or notes required by generally accepted accounting principles for annual financial statements and
should be read in conjunction with the consolidated financial statements as filed in the Company’s Annual Report on Form
10-K for the year ended December 31, 2019, filed with the Securities and Exchange Commission (“SEC”) on June
29, 2020. In the opinion of management, the unaudited condensed consolidated financial statements included herein contain all
adjustments necessary to present fairly the Company’s consolidated financial position as of September 30, 2020, and the
results of its operations, changes in stockholders’ deficit and cash flows for the three and nine months ended September
30, 2020 and 2019. Such adjustments are of a normal recurring nature. The results of operations for the three and nine months
ended September 30, 2020 may not be indicative of results for the year ending December 31, 2020.
Principles
of Consolidation
The
accompanying unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America (“U.S. GAAP”), include the accounts of Rennova and its wholly-owned
subsidiaries. All intercompany transactions and balances have been eliminated in the consolidation.
Reverse
Stock Split
On
July 22, 2020, the Company’s Board of Directors approved an amendment to the Company’s Certificate of Incorporation
to effect a 1-for-10,000 reverse stock split effective July 31, 2020 (the “Reverse Stock Split”). On May 7, 2020,
the holders of a majority of the total voting power of the Company’s securities approved an amendment to the Company’s
Certificate of Incorporation to effect a reverse split of all of the Company’s shares of common stock at a specific ratio
within a range from 1-for-100 to 1-for-10,000, and granted authorization to the Board of Directors to determine in its discretion
the specific ratio and timing of the reverse split on or prior to December 31, 2020.
As
a result of the Reverse Stock Split, every 10,000 shares of the Company’s common stock was combined and automatically converted
into one share of the Company’s common stock on July 31, 2020. In addition, the conversion and exercise prices of all of
the Company’s outstanding preferred stock, common stock purchase warrants, stock options, equity incentive plans and convertible
debentures were proportionately adjusted at the applicable reverse split ratio in accordance with the terms of such instruments.
In addition, proportionate voting rights and other rights of common stockholders were not affected by the Reverse Stock Split,
other than as a result of the payment of cash in lieu of fractional shares as no fractional shares were issued in connection with
the Reverse Stock Split.
All
share, per share and capital stock amounts and common stock equivalents as of and for the three and nine months ended September
30, 2020 and 2019 presented herein have been restated to give effect to the Reverse Stock Split.
Reclassification
Cash
payment amounts related to the right-of-use liabilities for the nine months ended September 30, 2019 have been reclassified on
the statements of cash flows and in Note 10 for comparative purposes.
Comprehensive
Loss
During
the three and nine months ended September 30, 2020 and 2019, comprehensive loss was equal to the net loss amounts presented in
the accompanying unaudited condensed consolidated statements of operations.
Use
of Estimates
The
preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, and disclosure of contingent liabilities at the date of the consolidated financial
statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those
estimates. Significant estimates and assumptions include the estimates of fair values of assets acquired and liabilities assumed
in business combinations, including hospital acquisitions, reserves and write-downs related to receivables and inventories, the
recoverability of long-lived assets, stock based compensation, the valuation allowance relating to the Company’s deferred
tax assets, deferred liabilities, valuation of equity and derivative instruments, deemed dividends and debt discounts, among others.
Actual results could differ from those estimates and would impact future results of operations and cash flows.
Cash
and Cash Equivalents
The
Company considers all highly liquid temporary cash investments with an original maturity of three months or less to be cash equivalents.
Revenue
Recognition
We
review our calculations for the realizability of gross service revenues monthly to make certain that we are properly allowing
for the uncollectable portion of our gross billings and that our estimates remain sensitive to variances and changes within our
payer groups. The contractual allowance calculation is made based on historical allowance rates for the various specific payer
groups monthly with a greater weight being given to the most recent trends; this process is adjusted based on recent changes in
underlying contract provisions. This calculation is routinely analyzed by us based on actual allowances issued by payers and the
actual payments made to determine what adjustments, if any, are needed.
Our
revenues generally relate to contracts with patients in which our performance obligations are to provide health care services
to the patients. Revenues are recorded during the period our obligations to provide health care services are satisfied. Our performance
obligations for inpatient services are generally satisfied over periods that average approximately five days, and revenues are
recognized based on charges incurred in relation to total expected charges. Our performance obligations for outpatient services
are generally satisfied over a period of less than one day. The contractual relationships with patients, in most cases, also involve
a third-party payer (Medicare, Medicaid, managed care health plans and commercial insurance companies, including plans offered
through the health insurance exchanges) and the transaction prices for the services provided are dependent upon the terms provided
by (Medicare and Medicaid) or negotiated with (managed care health plans and commercial insurance companies) the third-party payers.
The payment arrangements with third-party payers for the services we provide to the related patients typically specify payments
at amounts less than our standard charges. Medicare generally pays for inpatient and outpatient services at prospectively determined
rates based on clinical, diagnostic and other factors. Services provided to patients having Medicaid coverage are generally paid
at prospectively determined rates per discharge, per identified service or per covered member. Agreements with commercial insurance
carriers, managed care and preferred provider organizations generally provide for payments based upon predetermined rates per
diagnosis, per diem rates or discounted fee-for-service rates. Management continually reviews the contractual estimation process
to consider and incorporate updates to laws and regulations and the frequent changes in managed care contractual terms resulting
from contract renegotiations and renewals. Our revenues are based upon the estimated amounts we expect to be entitled to receive
from patients and third-party payers. Estimates of contractual allowances under managed care and commercial insurance plans are
based upon the payment terms specified in the related contractual agreements. Revenues related to uninsured patients and uninsured
copayment and deductible amounts for patients who have health care coverage may have discounts applied (uninsured discounts and
contractual discounts). We also record estimated implicit price concessions (based primarily on historical collection experience)
related to uninsured accounts to record self-pay revenues at the estimated amounts we expect to collect.
Laws
and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation. Estimated reimbursement
amounts are adjusted in subsequent periods as cost reports are prepared and filed and as final settlements are determined (in
relation to certain government programs, primarily Medicare, this is generally referred to as the “cost report” filing
and settlement process). There were no adjustments to estimated Medicare and Medicaid reimbursement amounts and disproportionate-share
funds related primarily to cost reports filed during the three and nine months ended September 30, 2020 and 2019.
The
Emergency Medical Treatment and Labor Act (“EMTALA”) requires any hospital participating in the Medicare program to
conduct an appropriate medical screening examination of every person who presents to the hospital’s emergency room for treatment
and, if the individual is suffering from an emergency medical condition, to either stabilize the condition or make an appropriate
transfer of the individual to a facility able to handle the condition. The obligation to screen and stabilize emergency medical
conditions exists regardless of an individual’s ability to pay for treatment. Federal and state laws and regulations require,
and our commitment to providing quality patient care encourages, us to provide services to patients who are financially unable
to pay for the health care services they receive. The federal poverty level is established by the federal government and is based
on income and family size. The Company considers the poverty level in determining whether patients qualify for free or reduced
cost of care. Because we do not pursue collection of amounts determined to qualify as charity care, they are not reported in revenues.
We provide discounts to uninsured patients who do not qualify for Medicaid or charity care. In implementing the uninsured discount
policy, we may first attempt to provide assistance to uninsured patients to help determine whether they may qualify for Medicaid,
other federal or state assistance, or charity care. If an uninsured patient does not qualify for these programs, the uninsured
discount is applied.
The
collection of outstanding receivables for Medicare, Medicaid, managed care payers, other third-party payers and patients is our
primary source of cash and is critical to our operating performance. The primary collection risks relate to uninsured patient
accounts, including patient accounts for which the primary insurance carrier has paid the amounts covered by the applicable agreement,
but patient responsibility amounts (deductibles and copayments) remain outstanding. Implicit price concessions relate primarily
to amounts due directly from patients. Estimated implicit price concessions are recorded for all uninsured accounts, regardless
of the aging of those accounts. Accounts are written off when all reasonable internal and external collection efforts have been
performed. The estimates for implicit price concessions are based upon management’s assessment of historical write offs
and expected net collections, business and economic conditions, trends in federal, state and private employer health care coverage
and other collection indicators. Management relies on the results of detailed reviews of historical write-offs and collections
at facilities that represent a majority of our revenues and accounts receivable (the “hindsight analysis”) as a primary
source of information in estimating the collectability of our accounts receivable. We perform the hindsight analysis quarterly,
utilizing rolling twelve-months accounts receivable collection and write off data. We believe our quarterly updates to the estimated
contractual allowance amounts at each of our hospital facilities provide reasonable estimates of our revenues and valuations of
our accounts receivable. At September 30, 2020 and December 31, 2019, estimated contractual allowances of $14.2 million and $16.8
million, respectively, had been recorded as reductions to our accounts receivable balances to enable us to record our revenues
and accounts receivable at the estimated amounts we expect to collect.
Allowances
for Doubtful Accounts Policy
Accounts
receivable are reported at realizable value, net of allowances for credits and doubtful accounts, which are estimated and recorded
in the period the related revenue is recorded. The Company has a standardized approach to estimating and reviewing the collectability
of its receivables based on a number of factors, including the period they have been outstanding. Historical collection and payer
reimbursement experience is an integral part of the estimation process related to allowances for contractual credits and doubtful
accounts. In addition, the Company regularly assesses the state of its billing operations in order to identify issues which may
impact the collectability of these receivables or reserve estimates. Receivables deemed to be uncollectible are charged against
the allowance for doubtful accounts at the time such receivables are written-off. Recoveries of receivables previously written-off
are recorded as credits to the allowance for doubtful accounts. Revisions to the allowances for doubtful accounts estimates are
recorded as an adjustment to provision for bad debts.
Total
gross revenues were reduced by approximately $2.2 million and $0.9 million for bad debt for the three months ended September 30,
2020 and 2019, respectively. After bad debt and contractual and related allowance adjustments to revenues of $16.2 million and
$21.9 million, for the three months ended September 30, 2020 and 2019, respectively, we reported net revenues of $2.0 million
and $3.9 million.
Total
gross revenues were reduced by approximately $6.2 million and $4.8 million for bad debt for the nine months ended September 30,
2020 and 2019, respectively. After bad debt and contractual and related allowance adjustments to revenues of $39.1 million and
$86.7 million, for the nine months ended September 30, 2020 and 2019, respectively, we reported net revenues of $5.9 million and
$13.2 million. We continue to review the provision for bad debt and contractual and related allowances. Accounts receivable are
presented in Note 4.
Derivative
Financial Instruments and Fair Value, Including the Adoption of ASU 2017-11
We
account for warrants issued in conjunction with the issuance of common stock and certain convertible debt instruments in accordance
with the guidance contained in Accounting Standards Codification (“ASC”) Topic 815, Derivatives and Hedging (“ASC
815”) and ASC Topic 480, Distinguishing Liabilities from Equity (“ASC 480”). For warrant instruments and conversion
options embedded in promissory notes that are not deemed to be indexed to the Company’s own stock, we classified such instruments
as liabilities at their fair values at the time of issuance and adjusted the instruments to fair value at each reporting period.
These liabilities were subject to re-measurement at each balance sheet date until extinguished either through repayment, conversion
or exercise, and any change in fair value was recognized in our statement of operations. The fair values of these derivative and
other financial instruments had been estimated using a Black-Scholes model and other valuation techniques.
In
July 2017, the FASB issued ASU 2017-11 “Earnings Per Share (Topic 260) Distinguishing Liabilities from Equity (Topic 480)
Derivatives and Hedging (Topic 815).” The amendments in Part I of this Update change the classification analysis of certain
equity-linked financial instruments (or embedded features) with down round features. When determining whether certain financial
instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification
when assessing whether the instrument is indexed to an entity’s own stock. The amendments also clarify existing disclosure
requirements for equity-classified instruments. As a result, a freestanding equity-linked financial instrument (or embedded conversion
option) no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round
feature. For freestanding equity classified financial instruments, the amendments require entities that present earnings per share
(EPS) in accordance with Topic 260 to recognize the effect of the down round feature when it is triggered. That effect is treated
as a dividend and as a reduction of income available to common shareholders in basic EPS. Convertible instruments with embedded
conversion options that have down round features are now subject to the specialized guidance for contingent beneficial conversion
features (in Subtopic 470-20, Debt—Debt with Conversion and Other Options), including related EPS guidance (in Topic 260).
When
the down round feature is included in an equity-classified freestanding financial instrument, the value of the effect of the down
round feature is treated as a dividend when it is triggered and as a numerator adjustment in the basic EPS calculation. This reflects
the occurrence of an economic transfer of value to the holder of the instrument, while alleviating the complexity and income statement
volatility associated with fair value measurement on an ongoing basis. Deemed dividends of $59.8 million were recorded during
both the three months and nine months ended September 30, 2020 and $123.9 million was recorded during the nine months ended September
30, 2019, as a result of down round provision features. We did not record deemed dividends during the three months ended September
30, 2019. See Note 11 for an additional discussion of derivative financial instruments.
(Loss)Earnings
Per Share
The
Company reports (loss) earnings per share in accordance with ASC Topic 260, “Earnings Per Share,” which establishes
standards for computing and presenting earnings per share. Basic earnings (loss) per share of common stock is calculated by dividing
net (loss) earnings available to common stockholders by the weighted-average shares of common stock outstanding during the period,
without consideration of common stock equivalents. Diluted (loss) earnings per share is calculated by adjusting the weighted-average
shares of common stock outstanding for the dilutive effect of common stock equivalents, including stock options and warrants outstanding
for the period as determined using the treasury stock method. For purposes of the diluted loss per share calculation, common stock
equivalents are excluded from the calculation when their effect would be anti-dilutive. Therefore, basic and diluted loss per
share applicable to common stockholders is the same for periods with a net loss. See Note 3 for the computation of (loss) earnings
per share for the three and nine months ended September 30, 2020 and 2019.
Note
2 – Liquidity and Financial Condition
Impact
of the Pandemic
A
novel strain of coronavirus (“COVID-19”) was declared a global pandemic by the World Health Organization on March
11, 2020. We have been closely monitoring the COVID-19 pandemic and its impact on our operations and we have taken steps intended
to minimize the risk to our employees and patients. These steps have increased our costs and our revenues have been significantly
adversely affected. Demand for hospital services has substantially decreased. As discussed in Note 7, we have received Paycheck
Protection Program (“PPP”) loans. We have also received Health and Human Services (“HHS”) Provider Relief
Funds from the federal government as more fully discussed below. If the COVID-19 pandemic continues for a further extended period,
we expect to incur significant losses and additional financial assistance may be required. Going forward, the Company is unable
to determine the extent to which the COVID-19 pandemic will continue to affect its business. The nature and effect of the COVID-19
pandemic on our balance sheet and results of operations will depend on the severity and length of the pandemic in our service
areas; government activities to mitigate the pandemic’s effect; regulatory changes in response to the pandemic, especially
those affecting rural hospitals; and existing and potential government assistance that may be provided.
Hospitalizations in Tennessee for COVID-19
have been increasing. In particular, infection levels in each of the three counties in which the Company owns hospitals
are at the highest levels to date. These developments may have a material adverse effect on the Company and the operations
of our hospitals. Our plans to reopen our Jamestown Regional Medical Center, whose operations were suspended in June 2019,
have been disrupted by the pandemic and the timing of the opening has been delayed.
HHS
Provider Relief Funds
The
Company received Provider Relief Funds from the United States Department of HHS provided to eligible healthcare providers out
of the $100 billion Public Health and Social Services Emergency Fund provided for in the Coronavirus Aid, Relief and Economic
Security Act (the “CARES Act”). The funds are allocated to eligible healthcare providers for expenses and lost revenue
attributable to the COVID-19 pandemic. The funds are being released in tranches, and HHS partnered with UnitedHealth Group to
distribute the initial $30 billion in funds by direct deposit to providers. As of September 30, 2020, Company-owned facilities
have received approximately $12.5 million in relief funds. The fund payments are grants, not loans, and HHS will not require repayment,
but providers are restricted and the funds must be used only for grant approved purposes. Based on an analysis of the compliance
and reporting requirements of the Provider Relief Funds and the impact of the pandemic on our operating results through the end
of the third quarter, we recognized $0.6 million and $8.0 million of these payments as income in the three and nine months ended
September 30, 2020, respectively. The income has been recorded under the caption “Other income (expense)” and
the unrecognized portion has been recorded in accrued liabilities in our unaudited condensed consolidated statements of operations.
The Company’s assessment of whether the terms and conditions for amounts received have been met considers all frequently
asked questions and other interpretive guidance issued by HHS. On September 19, 2020, HHS issued a Post-Payment Notice of Reporting
Requirements (the “September 19, 2020 Notice”) which indicates that providers may recognize reimbursement for healthcare-related
expenses, as defined therein, attributable to coronavirus that another source has not reimbursed and is not obligated to reimburse.
Additionally, amounts received from the HHS that are not fully expended on eligible healthcare-related expenses may be recognized
as reimbursement for lost revenues, represented as a negative change in year-over-year net patient care operating income. Providers
may apply payments to lost revenues up to the amount of the 2019 net gain from healthcare-related sources or, for entities that
reported a negative net operating gain in 2019, receipts from the HHS may be recognized up to a net zero gain/loss in 2020. During
the three months ended September 30, 2020, the Company’s estimate of the amount for which it is reasonably assured of meeting
the underlying terms and conditions was updated based on, among other things, the September 19, 2020 Notice, the Company’s
results of operations during such period and the receipt of additional payments during such period. Taking into account these
countervailing factors, the Company believes that the amount recognized as of June 30, 2020 of approximately $7.4 million remains
an appropriate estimate as of September 30, 2020.
On
October 22, 2020, HHS issued an updated Post-Payment Notice of Reporting Requirements and a Reporting Requirements Policy Update
(together, the “October 22, 2020 Notice”) which, among other changes, effectively reinstates the definition of lost
revenues that was the basis for the $7.4 million of pandemic relief funds recognized during the three and six months ended June
30, 2020. As a non-recognizable subsequent event, the Company’s estimate as of September 30, 2020, as set forth above, has
not been updated for the October 22, 2020 Notice; additional information is included in Note 18.
Provider
Relief Funds received through HHS that have not yet been recognized as income or otherwise have not been refunded to HHS as
of September 30, 2020, are reflected within accrued liabilities in the unaudited condensed consolidated balance sheet, and such
unrecognized amounts may be recognized as income in future periods if the underlying conditions for recognition are met. As evidenced
by the October 22, 2020 Notice, HHS’ interpretation of the underlying terms and conditions of such payments, including auditing
and reporting requirements, continues to evolve. Additional guidance or new and amended interpretations of existing guidance on
the terms and conditions of such payments may result in changes in the Company’s estimate of amounts for which the terms
and conditions are reasonably assured of being met, and any such changes may be material. Additionally, any such changes may result
in the Company’s inability to recognize additional Provider Relief Fund payments or may result in the derecognition of amounts
previously recognized, which (in any such case) may be material.
Going
Concern
Under
ASU 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40) (“ASC 205-40”), the Company
has the responsibility to evaluate whether conditions and/or events raise substantial doubt about its ability to meet its future
financial obligations as they become due within one year after the date that the financial statements are issued. As required
by ASC 205-40, this evaluation shall initially not take into consideration the potential mitigating effects of plans that have
not been fully implemented as of the date the financial statements are issued. Management has assessed the Company’s ability
to continue as a going concern in accordance with the requirement of ASC 205-40.
As
reflected in the unaudited condensed consolidated financial statements, the Company had a working capital deficit and an accumulated
deficit of $47.6 million and $663.5 million, respectively, at September 30, 2020. In addition, the Company had a loss from
continuing operations of approximately $9.7 million and cash used in operating activities of $13.4 million for the nine months
ended September 30, 2020. As of the date of this report, our cash is deficient and payments for our operations in the ordinary
course are not being made. The continued losses and other related factors, including the payment defaults under the terms of outstanding
debentures and notes payable as more discussed in Notes 7 and 8, raise substantial doubt about the Company’s ability to
continue as a going concern for twelve months from the filing date of this report.
The
Company’s unaudited condensed consolidated financial statements are prepared assuming the Company can continue as a going
concern, which contemplates continuity of operations through realization of assets, and the settling of liabilities in the normal
course of business. The Company plans to separate out its Advanced Molecular Services Group (“AMSG”) and Health Technology
Solutions, Inc. (“HTS”), as independent publicly traded companies in either a spin off or transaction with a publicly
quoted company. The separations are subject to numerous conditions, including effectiveness of Registration Statements that may
need to be filed with the SEC and consents, including under various funding agreements previously entered into by the Company.
The intent of the separation of AMSG and HTS is to create separate public companies, each of which can focus on its own strengths
and operational plans. In accordance with ASC 205-20 and having met the criteria for “held for sale”, the Company
has reflected amounts relating to AMSG and HTS as disposal groups classified as held for sale and included as part of discontinued
operations. AMSG and HTS are no longer included in the segment reporting following the reclassification to discontinued operations.
The discontinued operations of AMSG and HTS are described further in Note 16. On June 10, 2020, the Company signed an agreement
with TPT Global Tech, Inc. (OTC: TPTW), a California-based public company, to merge HTS and AMSG into a public company (target)
after TPT completes a merger of its wholly-owned subsidiary, InnovaQor, Inc. with this target. Completion of the agreement is
subject to a number of approvals and consents which need to be secured to complete the transaction as more fully discussed in
Note 16.
In
addition, during the third quarter of 2020, the Company’s announced that it had reached an agreement to sell its last clinical
laboratory, EPIC Reference Labs, Inc., and as a result, EPIC Reference Labs, Inc.’s operations have been classified as held
for sale and included in discontinued operations for all periods presented.
The
Company’s core business is now rural hospitals, which is a specialized marketplace with a requirement for capable and knowledgeable
management. The Company’s current financial condition may make it difficult to attract and maintain adequate expertise in
its management team to successfully operate the Company’s hospitals.
There
can be no assurance that the Company will be able to achieve its business plan, which is to acquire and operate clusters of rural
hospitals, raise any additional capital or secure the additional financing necessary to implement its current operating plan.
The ability of the Company to continue as a going concern is dependent upon its ability to raise adequate capital to fund its
operations and repay its outstanding debentures and other past due obligations, fully align its operating costs, increase its
revenues, and eventually regain profitable operations. The accompanying unaudited condensed consolidated financial statements
do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
Note
3 – Loss Per Share Available to Common Stockholders
Basic
loss per share is computed by dividing the loss available to common stockholders by the weighted-average number of shares of common
stock outstanding during the period. Basic loss per share excludes potential dilution of securities or other contracts to issue
shares of common stock. Diluted loss per share reflects the potential dilution that could occur if securities or other contracts
to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared
in the income of the Company. For each of the three and nine months ended September 30, 2020 and 2019, basic net loss per share
available to common stockholders is the same as diluted loss per share.
The
following table sets forth the computation of the Company’s basic and diluted net loss per share during the three and nine
months ended September 30, 2020 and 2019:
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Numerator
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
$
|
(6,025,885
|
)
|
|
$
|
(12,003,960
|
)
|
|
$
|
(9,697,922
|
)
|
|
$
|
(37,865,236
|
)
|
Deemed dividends
|
|
|
(63,544,950
|
)
|
|
|
-
|
|
|
|
(66,695,318
|
)
|
|
|
(123,861,587
|
)
|
Net loss available to common stockholders, continuing operations
|
|
$
|
(69,570,835
|
)
|
|
$
|
(12,003,960
|
)
|
|
$
|
(76,393,240
|
)
|
|
$
|
(161,726,823
|
)
|
Net loss from discontinued operations
|
|
|
(166,180
|
)
|
|
|
(261,808
|
)
|
|
|
(164,293
|
)
|
|
|
(1,266,764
|
)
|
Net loss available to common stockholders
|
|
$
|
(69,737,015
|
)
|
|
$
|
(12,265,768
|
)
|
|
$
|
(76,557,533
|
)
|
|
$
|
(162,993,587
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted weighted average common shares outstanding
|
|
|
1,283,559
|
|
|
|
663,405
|
|
|
|
1,085,650
|
|
|
|
446,192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share, basic and diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted, continuing operations
|
|
$
|
(54.20
|
)
|
|
$
|
(18.10
|
)
|
|
$
|
(70.37
|
)
|
|
$
|
(362.46
|
)
|
Basic and diluted, discontinued operations
|
|
$
|
(0.13
|
)
|
|
$
|
(0.39
|
)
|
|
$
|
(0.15
|
)
|
|
$
|
(2.84
|
)
|
Total basic and diluted
|
|
$
|
(54.33
|
)
|
|
$
|
(18.49
|
)
|
|
$
|
(70.52
|
)
|
|
$
|
(365.30
|
)
|
Diluted
loss per share excludes all dilutive potential shares if their effect is anti-dilutive. As of September 30, 2020 and 2019, the
following potential common stock equivalents were excluded from the calculation of diluted loss per share as their effect was
anti-dilutive:
|
|
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
Warrants
|
|
|
335,446,218
|
|
|
|
63,452,563
|
|
Convertible preferred stock
|
|
|
313,807,465
|
|
|
|
8,290,179
|
|
Convertible debentures
|
|
|
51,133,333
|
|
|
|
3,063,478
|
|
Stock options
|
|
|
26
|
|
|
|
30
|
|
|
|
|
700,387,042
|
|
|
|
74,806,250
|
|
The
terms of certain of the warrants, convertible preferred stock and convertible debentures issued by the Company provide for reductions
in the per share exercise prices of the warrants and the per share conversion prices of the debentures and preferred stock (if
applicable and subject to a floor in certain cases), in the event that the Company issues common stock or common stock equivalents
(as that term is defined in the agreements) at an effective exercise/conversion price that is less than the then exercise/conversion
prices of the outstanding warrants, preferred stock or debentures, as the case may be. In addition, many of these equity-based
securities contain exercise or conversion prices that vary based upon the price of the Company’s common stock on the date
of exercise/conversion (see Notes 11, 12 and 13). These provisions have resulted in significant dilution of the Company’s
common stock and have given rise to reverse splits of the Company’s common stock, including the Reverse Stock Split effected
on July 31, 2020, which is more fully discussed in Note 1.
Note
4 – Accounts Receivable and Income Tax Refunds Receivable
Accounts
receivable at September 30, 2020 (unaudited) and December 31, 2019 consisted of the following:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
21,920,386
|
|
|
$
|
26,687,028
|
|
Less:
|
|
|
|
|
|
|
|
|
Allowance for discounts
|
|
|
(14,190,812
|
)
|
|
|
(16,801,910
|
)
|
Allowance for bad debts
|
|
|
(4,331,671
|
)
|
|
|
(5,245,817
|
)
|
Accounts receivable owed under sales agreements
|
|
|
(966,188
|
)
|
|
|
(1,073,854
|
)
|
Accounts receivable, net
|
|
$
|
2,431,715
|
|
|
$
|
3,565,447
|
|
The
allowance for discounts reflected in the table above increased as a percentage of accounts receivable to 64.7% at September 30,
2020 compared to 63.0% at December 31, 2019. The allowance for discounts varies based on changes in historical contractual allowance
rates.
For
the three months ended September 30, 2020 and 2019, bad debt expense was $2.2 million and $0.9 million, respectively. For the
nine months ended September 30, 2020 and 2019, bad debt expense was $6.2 million and $4.8 million, respectively. The allowance
for bad debts decreased by $0.9 million at September 30, 2020 compared to the balance at December 31, 2019. The Company’s
policy is to write off accounts receivable balances against the allowance for bad debts once an accounts receivable ages past
a specified number of days.
Accounts
Receivable Sales Agreements and Installment Promissory Note
During
the year ended December 31, 2019, the Company entered into five accounts receivable sales agreements. The aggregate amount of
accounts receivable sold on a non-recourse basis during the year ended December 31, 2019 was $3.9 million. The aggregate purchase
price paid to the Company was $2.7 million, less $0.1 million of origination fees. As of December 31, 2019, $1.1 million was outstanding
and owed under these accounts receivable sales agreements. On January 29, 2020, the Company entered into a Secured Installment
Promissory Note (the “Installment Note”) in the principal amount of $1.2 million, less $0.1 million in origination
fees, the proceeds of which were used to satisfy in full the amounts due under accounts receivable sales agreements. The Installment
Note is more fully discussed in Note 7.
During
the nine months ended September 30, 2020, the Company entered into three accounts receivable sales agreements under which the
Company sold $1.9 million of accounts receivable on a non-recourse basis for a purchase price paid to the Company of $1.3 million,
less origination fees. Accordingly, the Company recorded a loss on the sale of $0.3 million and $0.6 million during the three
and nine months ended September 30, 2020, respectively. As of September 30, 2020, $1.0 million was outstanding and owed under
the accounts receivable sales agreements.
Income
Tax Refunds Receivable
As
of September 30, 2020, the Company had $1.2 million of income tax refunds receivable. During the three and nine months ended September
30, 2020, the Company received $0.6 million of income tax refunds. During the first quarter of 2020, the U.S. Congress approved
the CARES Act, which allows a five-year carryback privilege for federal net operating tax losses that arose in a tax year beginning
in 2018 and through the current tax year, that is, 2020. As a result, during the nine months ended September 30, 2020, the Company
recorded approximately $1.1 million in refunds from the carryback of certain of its federal net operating losses. The Company’s
federal net operating losses are more fully discussed in Note 15 to the Company’s Annual Report on Form 10-K for the year
ended December 31, 2019.
Note
5 – Acquisition
Purchase
Agreement re Jellico Community Hospital and CarePlus Center
Effective
March 5, 2019, the Company acquired certain assets related to Jellico Community Hospital and CarePlus Center. Jellico Community
Hospital is a fully operational 54-bed acute care facility that offers comprehensive services, including diagnostic imaging, radiology,
surgery (general, gynecological and vascular), nuclear medicine, wound care and hyperbaric medicine, intensive care, emergency
care and physical therapy. The CarePlus Center offers sophisticated testing capabilities and compassionate care, all in a modern,
patient-friendly environment. Services include diagnostic imaging services, x-ray, mammography, bone densitometry, computed tomography
(CT), ultrasound, physical therapy and laboratory services on a walk-in basis.
The
purchase price for Jellico Community Hospital and CarePlus Center was $658,537. This purchase price was made available by Mr.
Diamantis, a former member of the Company’s Board of Directors. The total cost of the acquisition was approximately $908,537,
including $250,000 of diligence, legal and other costs associated with the acquisition. The acquisition costs were fully expensed
in 2019.
The
fair value of the purchase consideration paid to the sellers was allocated to the net tangible and intangible assets acquired.
The Company accounted for the acquisition as a business combination under U.S. GAAP. In accordance with the acquisition method
of accounting under ASC 805 the assets acquired, and liabilities assumed were recorded as of the acquisition date, at their respective
fair values and consolidated with those of the Company.
The
fair value of the assets acquired, net of the liabilities assumed, was $0.9 million. The excess of the aggregate fair value of
the net tangible assets acquired over the purchase price was $250,000 and has been treated as a gain on bargain purchase in accordance
with ASC 805. The gain was primarily due to the value of the intangible assets acquired. In addition, after evaluation, the Company
has made no material adjustments to its preliminary allocation as set forth below. The purchase price allocation was based, in
part, on management’s knowledge of hospital operations.
The
following table shows the allocation of the purchase price of Jellico Community Hospital and CarePlus Center to the acquired identifiable
assets acquired, and liabilities assumed:
Total purchase price
|
|
$
|
658,537
|
|
Tangible and intangible assets acquired, and liabilities assumed at estimated fair value:
|
|
|
|
|
Inventories
|
|
$
|
317,427
|
|
Property and equipment
|
|
|
500,000
|
|
Intangible asset- certificate of need
|
|
|
250,000
|
|
Accrued expenses
|
|
|
(158,890
|
)
|
Net tangible and intangible assets acquired
|
|
$
|
908,537
|
|
Gain on bargain purchase
|
|
$
|
250,000
|
|
The
following presents the unaudited pro-forma combined results of operations of the Company and Jellico Community Hospital and CarePlus
Center as if the acquisition had occurred on January 1, 2019. The unaudited pro-forma results of operations are presented for
information purposes only. The unaudited pro-forma results of operations are not intended to present actual results that would
have been attained had the acquisition been completed as of January 1, 2019 or to project potential operating results as of any
future date or for any future periods.
|
|
Nine months Ended
|
|
|
|
September 30, 2019
|
|
|
|
|
|
Net revenue
|
|
$
|
14,873,502
|
|
Net loss from continuing operations
|
|
|
(38,062,595
|
)
|
Deemed dividends from trigger of down round provisions
|
|
|
(123,861,587
|
)
|
Net loss from discontinued operations
|
|
|
(1,266,764
|
)
|
Net loss available to common stockholders
|
|
$
|
(163,190,946
|
)
|
|
|
|
|
|
Net loss per common share:
|
|
|
|
|
Basic and diluted net loss from continuing operations available to common stockholders
|
|
$
|
(362.90
|
)
|
Basic and diluted net loss available to common stockholders
|
|
$
|
(365.74
|
)
|
Note
6 – Accrued Expenses
Accrued
expenses at September 30, 2020 (unaudited) and December 31, 2019 consisted of the following:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Accrued payroll and related liabilities
|
|
$
|
7,357,041
|
|
|
$
|
7,603,077
|
|
Deferred HHS Provider Relief Funds
|
|
|
4,400,000
|
|
|
|
-
|
|
Accrued interest
|
|
|
3,373,430
|
|
|
|
4,905,749
|
|
Accrued legal
|
|
|
770,019
|
|
|
|
1,226,997
|
|
Other accrued expenses
|
|
|
574,658
|
|
|
|
509,469
|
|
Accrued expenses
|
|
$
|
16,475,148
|
|
|
$
|
14,245,292
|
|
Accrued
payroll and related liabilities at September 30, 2020 included approximately $1.8 million for penalties associated with approximately
$5.0 million of accrued past due payroll taxes.
As
of September 30, 2020, we have deferred $4.4 million of HHS Provider Relief funds as more fully discussed in Note 1.
Accrued
interest decreased by $1.5 million at September 30, 2020 as compared to December 31, 2019. On June 30, 2020, the Company exchanged
loans and the related accrued interest owed to Mr. Diamantis, a former member of our Board of Directors, outstanding as of that
date for shares of the Company’s newly-issued Series M Convertible Preferred Stock (the “Series M Preferred Stock”)
as more fully discussed in Notes 7 and 13. On August 31, 2020, the Company exchanged certain debentures and associated accrued
interest outstanding as of that date for shares of its newly-issued Series N Convertible Redeemable Preferred Stock (the
“Series N Preferred Stock”) and the interest accrued on certain outstanding debentures was reduced as more fully discussed
in Note 8. Accrued interest at December 31, 2019 included accrued interest of $1.9 million on loans made to the Company by Mr.
Diamantis. No accrued interest was owed to Mr. Diamantis at September 30, 2020.
Note
7 – Notes Payable
The
Company and its subsidiaries are party to a number of loans with unrelated and related parties. At September 30, 2020 (unaudited)
and December 31, 2019, notes payable consisted of the following:
Notes
Payable – Third Parties
|
|
September 30,
2020
|
|
|
December 31,
2019
|
|
|
|
(unaudited)
|
|
|
|
|
Loan payable to TCA Global Credit Master Fund, LP (“TCA”) in the
original principal amount of $3 million at 16% interest (the “TCA Debenture”). Principal and interest payments
due in various installments through December 31, 2017
|
|
$
|
1,741,893
|
|
|
$
|
1,741,893
|
|
|
|
|
|
|
|
|
|
|
Notes payable to CommerceNet and Jay Tenenbaum in the original principal amount of $500,000, bearing interest at 6% per annum (the “Tegal Notes”). Principal and interest payments due annually from July 12, 2015 through July 12, 2017
|
|
|
297,068
|
|
|
|
335,817
|
|
|
|
|
|
|
|
|
|
|
Note payable to Anthony O’Killough dated September 27, 2019 in the original principal amount of $1.9 million. Interest is due only upon event of default. Issued net of $0.3 million of debt discount and $0.1 million of financing fees. Payment is due in installments through November 2020.
|
|
|
1,450,000
|
|
|
|
1,900,000
|
|
|
|
|
|
|
|
|
|
|
Notes payable under the Paycheck Protection Program (“PPP) issued on April 20, 2020 through
May 1, 2020 bearing interest at a rate of 1% per annum. To the extent not forgiven, principal and interest payments
are due monthly beginning sixteen months from the date of issuance and the notes mature 40 months from the date of issuance.
|
|
|
2,385,921
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Installment note payable to Ponte Investments, LLC dated January 29, 2020,
in the original principal amount of $1.2 million less original issue discount of $0.1 million, non-interest
bearing, payable in weekly installment payments ranging from $22,500 to $34,000 due on or before February 5, 2020 through
on or before October 21, 2020, the maturity date.
|
|
|
122,074
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,996,956
|
|
|
|
3,977,710
|
|
Less current portion
|
|
|
(3,776,294
|
)
|
|
|
(3,977,710
|
)
|
Notes payable - third parties, net of current portion
|
|
$
|
2,220,662
|
|
|
$
|
-
|
|
The
Company did not make the required monthly principal and interest payments due under the TCA Debenture for the period from October
2016 through March 2017. On February 2, 2017, the Company made a payment to TCA in the amount of $0.4 million, which was applied
to accrued and unpaid interest and fees, including default interest, as of the date of payment. On March 21, 2017, the Company
made a payment to TCA in the amount of $0.75 million, of which approximately $0.1 million was applied to accrued and unpaid interest
and fees under the TCA Debenture. Also on March 21, 2017, the Company entered into a letter agreement with TCA, which (i) waived
any payment defaults through March 21, 2017; (ii) provided for the $0.75 million payment discussed above; (iii) set forth a revised
repayment schedule whereby the remaining principal plus interest aggregating to approximately $2.6 million was to be repaid in
various monthly installments from April of 2017 through September of 2017; and (iv) provided for payment of an additional service
fee in the amount of $150,000, which was due on June 27, 2017, the day after the effective date of the registration statement
filed by the Company; which amount was reflected in accrued expenses at September 30, 2020. In addition, TCA entered into an inter-creditor
agreement with the purchasers of the convertible debentures (see Note 8) which sets forth rights, preferences and priorities with
respect to the security interests in the Company’s assets. On September 19, 2017, the Company entered into a new agreement
with TCA, which extended the repayment schedule through December 31, 2017. The remaining debt to TCA remains outstanding and TCA
has made a demand for payment. In May 2020, the SEC appointed a Receiver to close down the TCA Global Credit Master Fund,
L.P. over allegations of accounting fraud. The amount recorded by the Company as being owed to TCA was based on TCA’s application
of prior payments made by the Company. The Company believes that prior payments of principal and interest may have been applied
to unenforceable investment banking and other fees and charges. It is the Company’s position that the amount owed to TCA
is less than the amount set forth above.
The
Company did not make the second annual principal payment under the Tegal Notes that was due on July 12, 2016. On November 3, 2016,
the Company received a default notice from the holders of the Tegal Notes demanding immediate repayment of the outstanding principal
of $341,612 and accrued interest of $43,000. On December 7, 2016, the Company received a breach of contract complaint with a request
for the entry of a default judgment (see Note 15). On April 23, 2018, the holders of the Tegal Notes received a judgment against
the Company. As of September 30, 2020, the Company has paid $38,749 of principal on these notes.
On
September 27, 2019, the Company issued a promissory note to a lender in the principal amount of $1.9 million and received proceeds
of $1.5 million, which was net of a $0.3 million original issue discount and $0.1 million in financing fees. The first principal
payment of $1.0 million was due on November 8, 2019 and the remaining $0.9 million was due on December 26, 2019. These payments
were not made. In February 2020, the note holder sued the Company and Mr. Diamantis, as guarantor, in New York State Court for
the County of New York, for approximately $2.2 million for non-payment of the promissory note. As a result of the payment default,
the Company accrued “penalty” interest in the amount of approximately $0.3 million. In May 2020, the Company, Mr.
Diamantis, as guarantor, and the note holder entered into a Stipulation providing for a payment of a total of $2.2 million (which
included accrued interest) in installments through November 1, 2020. As of September 30, 2020, $450,000 has been paid, which is
$150,000 less than the required amount through that date. The Stipulation is more fully discussed in Note 15.
On
January 29, 2020, the Company entered into the Installment Note in the principal amount of $1.2 million. The Company used the
proceeds to satisfy in full the amounts due under accounts receivable sales agreements. These sales agreements are more fully
discussed in Note 4. Pursuant to the Installment Note, weekly installment payments ranging from $22,500 to $34,000 are due on
or before February 5, 2020 through on or before October 21, 2020, the maturity date. Accordingly, the Company made payments totaling
$1.1 million during the nine months ended September 30, 2020. The Installment Note, which was issued with an original issue discount
in the amount of approximately $0.1 million, is non-interest bearing and subject to late-payment fees of 10%.
As
of April 20, 2020 and through May 1, 2020, the Company and its subsidiaries entered into promissory notes (the “PPP
Notes”) and received PPP loan proceeds in the aggregate amount of approximately $2.3 million. A portion of the PPP
Notes and accrued interest are forgivable as long as the borrower uses the loan proceeds for eligible purposes, including payroll,
benefits, rent and utilities, and maintains its payroll levels. The amount of loan forgiveness will be reduced if the borrower
terminates employees or reduces salaries. No collateral or guarantees were provided in connection with the PPP Notes. The unforgiven
portion of the PPP Notes are payable over two years at an interest rate of 1.0% per annum, with a deferral of payments for the
first sixteen months. Beginning sixteen months from the dates of issuance, the Company is required (if not forgiven) to make monthly
payments of principal and interest to the lenders. The aggregate monthly payment of all of the PPP Notes is approximately $0.1
million. As of September 30, 2020, the Company has used a portion of and intends to use all of the proceeds
for purposes consistent with the PPP. While the Company currently believes that its use of the loan proceeds will meet the conditions
for forgiveness of the loans, we cannot assure you that we will not take actions that could cause the Company to be ineligible
for forgiveness of the loans, in whole or in part.
Notes
Payable – Related Party
At
September 30, 2020 (unaudited) and December 31, 2019, related party loans consisted of the following:
|
|
September 30, 2020
|
|
|
December 31, 2019
|
|
|
|
(unaudited)
|
|
|
|
|
Loans payable to Christopher Diamantis
|
|
$
|
278,000
|
|
|
$
|
15,159,455
|
|
|
|
|
|
|
|
|
|
|
Total notes payable, related party
|
|
|
278,000
|
|
|
|
15,159,455
|
|
|
|
|
|
|
|
|
|
|
Less current portion of notes payable, related party
|
|
|
(278,000
|
)
|
|
|
(15,159,455
|
)
|
Total notes payable, related party, net of current
portion
|
|
$
|
—
|
|
|
$
|
—
|
|
During
the three months ended September 30, 2020, Mr. Diamantis loaned the Company $1.2 million and the Company repaid Mr. Diamantis
$0.9 million. During the six months ended June 30, 2020, Mr. Diamantis loaned the Company $4.6 million, the majority of which
was for working capital purposes. During the nine months ended September 30, 2019, Mr. Diamantis advanced the Company $9.1 million
which was used for the settlement of a prepaid forward purchase contract, $0.7 million for the purchase of Jellico Community Hospital
and CarePlus Center as more fully discussed in Note 5 and $6.7 million that was used primarily for working capital purposes. On
June 30, 2020, we exchanged the total amount owed to Mr. Diamantis on that date for outstanding loans and accrued interest, net
of repayments, of approximately $18.8 million for shares of the Company’s Series M Preferred Stock. The Series M Preferred
Stock is more fully discussed in Note 13.
During
the three months ended September 30, 2020 and 2019, we accrued interest of $55,000 and $0.6 million, respectively, on the loans
from Mr. Diamantis and during the nine months ended September 30, 2020 and 2019, we accrued interest of $0.5 million and $1.5
million, respectively, on the loans from Mr. Diamantis. Interest accrued on loans from Mr. Diamantis at a rate of 10% on the majority
of the amounts loaned.
Note
8 – Debentures
The
carrying amount of all outstanding debentures as of September 30, 2020 (unaudited), and December 31, 2019 was as follows:
|
|
September 30, 2020
|
|
|
December 31, 2019
|
|
|
|
(unaudited)
|
|
|
|
|
Debentures
|
|
$
|
14,341,713
|
|
|
$
|
29,873,740
|
|
|
|
|
14,341,713
|
|
|
|
29,873,740
|
|
Less current portion
|
|
|
(14,341,713
|
)
|
|
|
(29,873,740
|
)
|
Debentures, long-term
|
|
$
|
-
|
|
|
$
|
-
|
|
The
original terms of outstanding debentures at September 30, 2020 and December 31, 2019, which were issued during the years ending
December 31, 2017, 2018 and 2019, are more fully described in Note 9 to the Company’s audited consolidated financial statements
included in its Annual Report on Form 10-K for the year ended December 31, 2019. Certain of these debentures were issued with
warrants to purchase shares of the Company’s common stock. Outstanding warrants are more fully discussed in Note 13.
During
the nine months ended September 30, 2019, the Company realized a total of $3.8 million in proceeds from issuances of debentures.
No debentures were issued during the nine months ended September 30, 2020. During the three and nine months ended September 30,
2019, the Company recorded approximately $1.4 million and $15.9 million, respectively, of non-cash interest and amortization
of debt discount expense primarily in connection with the debentures and warrants. The interest expense for the nine months ended
September 30, 2019 included $9.5 million of expense due to the modifications of warrants during the period. The modifications
are more fully discussed in Notes 11 and 13. These discounts were fully amortized as of September 30, 2019 and, accordingly, no
amortization associated with the debentures was recorded in the three and nine months ended September 30, 2020.
In
addition to the non-cash interest expense and amortization of debt discount recorded during the three and nine months ended September
30, 2019 discussed in the paragraph above, during the three months ended September 30, 2020 and 2019, the Company accrued interest
expense on outstanding debentures of $1.5 million and $0.2 million, respectively, and during the nine months ended September 30,
2020 and 2019, the Company accrued interest expense on outstanding debentures of $5.4 million and $0.4 million, respectively.
Payment
of all outstanding debentures totaling $14.3 million at September 30, 2020 was past due by the debentures’ original
terms and the Company recorded approximately $6.6 million of non-payment penalties, of which $5.7 million was recorded in the
nine months ended September 30, 2019, as a result of the payment defaults. In January 2020, the Company and Mr. Diamantis entered
into a Forbearance Agreement with certain debenture holders under which Mr. Diamantis paid the debenture holders $50,000 for legal
fees and $220,000 in principal payments on debentures that were issued in February 2019. In addition, Mr. Diamantis, who had guaranteed
certain of the debentures, agreed to grant the debenture holders security interests in certain potential legal settlements funds
that may become due to Mr. Diamantis. The Forbearance Agreement, which terminated on March 15, 2020, required the Company and
Mr. Diamantis to repay the debenture holders a total of $4.9 million on or before the termination date, of which $4.7 million
was not repaid. During May 2020, the Company repaid $0.5 million of the debentures. On June 30, 2020, the Company received a formal
notice of default and demand for full payment of the $29.2 million of outstanding debentures on that date plus accrued interest.
The Company repaid $0.2 million of the debentures in July 2020.
On
August 31, 2020, the Company and the debenture holders entered into the Exchange, Redemption and Forbearance Agreements (the “Exchange
and Redemption Agreements”) wherein they agreed to:
|
1)
|
Exchange
outstanding Series I-1 Convertible Preferred Stock (the “Series I-1 Preferred Stock”) and Series I-2 Convertible
Preferred Stock (the “Series I-2 Preferred Stock” and, collectively, with the Series I-1 Preferred Stock,
the “Series I-1 and I-2 Preferred Stock”) for shares of Series N Preferred Stock at the face value
of the Series I-1 and I-2 Preferred Stock, which was $6,257,616. The Series I-1 and I-2 Preferred Stock
are more fully discussed in Note 13 and the Series N Preferred Stock is more fully discussed in Notes 13 and 14;
|
|
2)
|
Exchange
on August 31, 2020 outstanding debentures totaling $19.3 million, which included principal and penalties of $16.5 million
and accrued interest of $2.8 million for Series N Preferred Stock with a face value (and determined to be fair value) of $24.2
million;
|
|
|
|
|
3)
|
Provide
for the repayment of outstanding debentures and accrued interest of approximately $9.8 million at August 31, 2020, for a
payment of $10.0 million in cash any time on or before November 29, 2020, however, if the payment is not made timely, a
“potential exchange premium” of $1.65 million will also become due for these debentures;
|
|
|
|
|
4)
|
Provide,
if the payment in Number 3 above is made timely, to allow for the exchange of outstanding non-convertible debentures,
with a carrying value on Rennova’s books of $4.8 million at August 31, 2020, including penalties at 30% of the
original principal balance and penalty interest calculated at 18% per annum, into Series N Preferred Stock with a face value
of $4.9 million. Under this provision, the penalty interest is accrued at the rate of 18% per annum and not the original interest
terms, which were 5% per month and 24% per annum on late payment of penalty interest, as a concession and to offset the premium
paid for the exchange of the debentures noted in Number 2 above. This interest rate concession, which totaled $2.3 million
at August 31, 2020, is permanent and will not be reversed in any event, including non-payment of the $10.0 million by November
29, 2020;
|
|
|
|
|
5)
|
Provide
that if the $10.0 million cash payment is made timely, no interest will accrue or be due under the outstanding debentures
for the periods subsequent to August 31, 2020, however, interest will again accrue on these outstanding debentures at a rate
of 18% per annum subsequent to August 31, 2020 if the $10.0 million cash payment is not made timely;
|
|
|
|
|
6)
|
During
the 90-day redemption period (or until the occurrence of certain specified events, if earlier), the investors will forbear
from exercising any remedies against the Company or Mr. Diamantis as a result of any existing defaults under the outstanding
securities; and
|
|
|
|
|
7)
|
Provide
that the embedded conversion options of the outstanding debentures noted in Number 3 above have been suspended as of August
31, 2020 and that the conversion terms will only be reinstated to their original terms after November 29, 2020 if the $10.0
million cash payment is not made.
|
During
the three and nine months ended September 30, 2020, as a result of the Exchange and Redemption Agreements, the Company recorded
(i) a $0.4 million gain on the extinguishment of debt, which included the potential exchange premium of $1.65 million, and
a $0.3 million fair value adjustment to the debenture principal, partially offset by the reduction in interest expense of
$2.3 million; and (ii) deemed dividends of $3.7 million as a result of the exchange of the debentures and Series I-1 and I-2 Preferred
Stock for shares of the Series N Preferred Stock. The Company recorded the $1.65 million potential exchange premium as
of September 30, 2020 because its ability to raise sufficient capital to make the $10 million cash payment on
or before November 29, 2020 is uncertain at this time.
In
addition, during the three and nine months ended September 30, 2020, the Company recorded $59.8 million of deemed dividends as
a result of the down round provisions of debentures and warrants. See Notes 11 and 13.
Note
9 – Related Party Transactions
Alcimede
billed $0.2 million and $0.1 million for consulting fees for the three months ended September 30, 2020 and 2019, respectively,
and $0.4 million and $0.3 million for consulting fees for the nine months ended September 30, 2020 and 2019, respectively. Seamus
Lagan, the Company’s President and Chief Executive Officer, is the sole manager of Alcimede (see Note 13).
See
Notes 5 and 7 for discussions of transactions between the Company and Mr. Diamantis.
The
terms of the foregoing transactions, including those discussed in Notes 5, 7 and 13, are not necessarily indicative of those that
would have been agreed to with unrelated parties for similar transactions.
Note
10 – Finance and Operating Lease Obligations
We
adopted ASU No. 2016-02, Leases (Topic 842), which requires leases with durations greater than 12 months to be recognized
on the balance sheet, effective January 1, 2019, using the modified retrospective approach. We elected the package of transition
provisions available, which allowed us to carryforward our historical assessments of (1) whether contracts are or contain leases,
(2) lease classification and (3) initial direct costs. We lease property and equipment under finance and operating leases. For
leases with terms greater than 12 months, we record the related right-of-use assets and right-of-use obligations at the present
value of lease payments over the term. We do not separate lease and non-lease components of contracts.
Generally,
we use our estimated weighted average cost of capital at lease commencement as our interest rate, as most of our operating leases
do not provide a readily determinable implicit interest rate.
The
following table presents our lease-related assets and liabilities at September 30, 2020 (unaudited) and December 31, 2019:
|
|
Balance Sheet Classification
|
|
September 30, 2020
|
|
|
December 31, 2019
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
Right-of-use operating lease assets
|
|
$
|
1,030,021
|
|
|
$
|
88,905
|
|
Finance leases
|
|
Property and equipment, net
|
|
|
249,985
|
|
|
|
1,119,418
|
|
|
|
|
|
|
|
|
|
|
|
|
Total lease assets
|
|
|
|
$
|
1,280,006
|
|
|
$
|
1,208,323
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
Right-of-use operating lease obligations
|
|
$
|
152,609
|
|
|
$
|
30,311
|
|
Finance leases
|
|
Current liabilities
|
|
|
249,985
|
|
|
|
1,119,418
|
|
Noncurrent:
|
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
Right-of-use operating lease obligations
|
|
|
877,412
|
|
|
|
58,594
|
|
|
|
|
|
|
|
|
|
|
|
|
Total lease liabilities
|
|
|
|
$
|
1,280,006
|
|
|
$
|
1,208,323
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average remaining term:
|
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
|
|
4.39 years
|
|
|
|
2.96 years
|
|
Finance leases
|
|
|
|
|
0 years
|
|
|
|
0.08 years
|
|
Weighted-average discount rate:
|
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
|
|
13.0
|
%
|
|
|
13.0
|
%
|
Finance leases
|
|
|
|
|
4.9
|
%
|
|
|
5.1
|
%
|
The
following table presents certain information related to lease expense for finance and operating leases for the three and nine
months ended September 30, 2020 and 2019:
|
|
Three Months Ended September 30, 2020
|
|
|
Three Months Ended September 30, 2019
|
|
|
Nine Months Ended September 30, 2020
|
|
|
Nine Months Ended September 30, 2019
|
|
Finance lease expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation/amortization of leased assets (1)
|
|
$
|
-
|
|
|
$
|
15,004
|
|
|
$
|
26,349
|
|
|
$
|
(30,055
|
)
|
Interest on lease liabilities
|
|
|
-
|
|
|
|
704
|
|
|
|
9,455
|
|
|
|
5,804
|
|
Operating leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term lease expense (2)
|
|
|
49,196
|
|
|
|
42,221
|
|
|
|
219,138
|
|
|
|
178,795
|
|
Total lease expense
|
|
$
|
49,196
|
|
|
$
|
57,929
|
|
|
$
|
254,942
|
|
|
$
|
154,544
|
|
(1)
|
Adjusts
depreciation recorded in the nine months ended September 30, 2019.
|
(2)
|
Expenses
are included in general and administrative expenses in our unaudited condensed consolidated statements of operations.
|
Other
Information
The
following table presents supplemental cash flow information for the nine months ended September 30, 2020 and 2019:
|
|
Nine Months Ended September 30, 2020
|
|
|
Nine Months Ended September 30, 2019
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
|
|
|
|
Operating cash flows for operating leases
|
|
$
|
-
|
|
|
$
|
118,512
|
|
Financing cash flows for operating leases
|
|
$
|
98,374
|
|
|
$
|
41,953
|
|
Operating cash flows for finance leases
|
|
$
|
9,455
|
|
|
$
|
5,800
|
|
Financing cash flows for finance leases payments
|
|
$
|
200,709
|
|
|
$
|
143,930
|
|
Aggregate
future minimum lease payments under right-of-use operating and finance leases are as follows:
|
|
Right-of-Use Operating Leases
|
|
|
Finance Leases
|
|
October 1, 2020 to September 30, 2021
|
|
$
|
277,940
|
|
|
$
|
253,776
|
|
October 1, 2021 to September 30, 2022
|
|
|
337,357
|
|
|
|
-
|
|
October 1, 2022 to September 30, 2023
|
|
|
307,082
|
|
|
|
-
|
|
October 1, 2023 to September 30, 2024
|
|
|
217,839
|
|
|
|
-
|
|
October 1, 2024 to September 30, 2025
|
|
|
223,795
|
|
|
|
-
|
|
Thereafter
|
|
|
18,650
|
|
|
|
|
|
Total
|
|
|
1,382,663
|
|
|
|
253,776
|
|
|
|
|
|
|
|
|
|
|
Less interest
|
|
|
(352,642
|
)
|
|
|
(3,791
|
)
|
Present value of minimum lease payments
|
|
$
|
1,030,021
|
|
|
$
|
249,985
|
|
|
|
|
|
|
|
|
|
|
Less current portion of lease obligations
|
|
|
(152,609
|
)
|
|
|
(249,985
|
)
|
Lease obligations, net of current portion
|
|
$
|
877,412
|
|
|
$
|
-
|
|
As
of September 30, 2020, the Company was in default under its finance lease obligations, therefore, the aggregate future minimum
lease payments and accrued interest under this finance lease in the amount of $0.2 million are deemed to be immediately due. In
July 2020, the Company entered into a settlement with the holder of one of the finance leases and paid $0.1 million as full and
final settlement of the obligation as more fully discussed in Note 15.
Note
11 – Derivative Financial Instruments and Fair Value
The
estimated fair value of financial instruments was determined by the Company using available market information and valuation methodologies
considered to be appropriate. At September 30, 2020 and December 31, 2019, the carrying value of the Company’s accounts
receivable, accounts payable and accrued expenses approximated their fair values due to their short-term nature.
The
following table sets forth the financial assets and liabilities carried at fair value measured on a recurring basis as of September
30, 2020 and December 31, 2019:
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Embedded conversion options
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
455,336
|
|
|
$
|
455,336
|
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
455,336
|
|
|
$
|
455,336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Embedded conversion options
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
455,336
|
|
|
$
|
455,336
|
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
455,336
|
|
|
$
|
455,336
|
|
The
Company utilized the following methods to value its derivative liabilities as of September 30, 2020 and December 31, 2019 for
embedded conversion options that were valued at $455,336. The Company determined the fair value by comparing the discounted conversion
price per share (85% of market price, subject to a floor in certain cases) multiplied by the number of shares issuable at the
balance sheet date to the actual price per share of the Company’s common stock multiplied by the number of shares issuable
at that date with the difference in value recorded as a liability.
During
the three and nine months ended September 30, 2020, the conversions of preferred stock triggered a further reduction in the exercise
prices of any debentures and warrants containing ratchet features that had not already ratcheted down to their floor. In accordance
with U.S. GAAP, the incremental fair value of the debentures and warrants was measured, ignoring the down round provision, using
Black Scholes. The following assumptions were utilized in the Black Scholes valuation models: risk free rates ranging from 0.09%
to 0.12%, volatility ranging from 134.3% to 208.2% and weighted average lives ranging from .25 to 1.49 years. The incremental
value of $59.8 million was recorded as deemed dividends in both the three and nine months ended September 30, 2020, respectively.
During
the nine months ended September 30, 2019, the conversions of preferred stock triggered a further reduction in the exercise
prices of any debentures and warrants containing ratchet features that had not already ratcheted down to their floor. In accordance
with U.S. GAAP, the incremental fair value of the debentures and warrants was measured, ignoring the down round provision, using
Black Scholes. The following assumptions were utilized in the Black Scholes valuation models: risk free rates ranging from 2.4%
to 2.6%, volatility ranging from 189.5% to 273.1% and weighted average lives ranging from 0.3 to 3.2 years. The incremental
value of $123.9 million was recorded as a deemed dividend for the nine months ended September 30, 2019. Deemed dividends are also
discussed in Notes 1 and 3.
During
the nine months ended September 30, 2019, the Company recorded interest expense of $9.5 million, which represented the fair value
of the modification of warrants during the periods as more fully discussed in Note 13. The Company used the Black Scholes model
to calculate the fair value of the warrants as of the modification dates. Using the pre-modification terms and related assumptions
of risk free rates ranging from 2.44% to 2.46%, volatility ranging from 182.9% to 204.4% and weighted average remaining lives
of .24 years to .36 years, and the post-modification terms and related assumptions of risk free rates ranging from 2.23% to 2.49%,
volatility ranging from 198.3% to 259.4% and weighted average remaining lives ranging from .48 years to 2.89 years, the
changes in the fair value of the warrant instruments as a result of the modifications were estimated.
Note
12 – Redeemable Preferred Stock
The
Company has 5,000,000 authorized shares of Preferred Stock at a par value of $0.01. Issuances of the Company’s Preferred
Stock included as part of stockholders’ deficit are discussed in Note 13. The following is a summary of the issuances of
the Company’s Redeemable Preferred Stock.
Series
I-1 Convertible Preferred Stock and Series I-2 Convertible Preferred Stock
On
October 30, 2017, the Company closed an offering of $4,960,000 stated value of 4,960 shares of Series I-1 Preferred Stock. Each
share of Series I-1 Preferred Stock had a stated value of $1,000. The offering was pursuant to the terms of the Securities Purchase
Agreement, dated as of October 30, 2017 (the “Purchase Agreement”), between the Company and certain existing institutional
investors of the Company. The Company received proceeds of $4.0 million from the offering. Each share of Series I-1 Preferred
Stock was convertible into shares of the Company’s common stock at any time at the option of the holder at a conversion
price equal to 85% of the lesser of the volume weighted average market price of the common stock on the day prior to conversion
or on the day of conversion. The conversion price was subject to “full ratchet” and other customary anti-dilution
protections.
On
October 30, 2017, the Company entered into Exchange Agreements with the holders of debentures that were issued in September 2017
(the “September Debentures”) to provide that the holders could, from time to time, exchange their September Debentures
for shares of a Series I-2 Preferred Stock. The Exchange Agreements permitted the holders of the September Debentures to exchange
specified principal amounts of the September Debentures on various closing dates starting on December 2, 2017 (debentures are
more fully discussed in Note 8). At the holder’s option each holder could reduce the principal amount of September Debentures
exchanged on any particular closing date, or elect not to exchange any September Debentures at all on a closing date. If a holder
chose to exchange less principal amount of September Debentures or none at all, it could carry forward such lesser amount to a
future closing date and then exchange more than the originally specified principal amount for that later closing date. For each
$0.80 of principal amount of the debenture surrendered to the Company at any closing date, the Company would issue to the holder
a share of Series I-2 Preferred Stock with a stated value of $1.00. From December 2, 2017 through March 1, 2018, any exchange
under the Exchange Agreements was at the option of the holder. Subsequent to March 2018, any exchange was at the option of the
Company. Each share of Series I-2 Preferred Stock was convertible into shares of the Company’s common stock at any time
at the option of the holder at a conversion price equal to 85% of the lesser of the volume weighted average market price of the
common stock on the day prior to conversion or on the day of conversion. The conversion price was subject to “full ratchet”
and other customary anti-dilution protections.
The
Company’s Board of Directors designated up to 21,346 shares of the 5,000,000 authorized shares of preferred stock as
the Series I-2 Preferred Stock and the Company issued 3,907.67 shares of its Series I-2 Preferred Stock. Each share of Series
I-2 Preferred Stock had a stated value of $1,000.
During
the nine months ended September 30, 2020, the holder converted 236.30 shares of Series I-2 Preferred Stock into 313,000 shares
of the Company’s common stock and during the nine months ended September 30, 2019, the holder converted 982.101 shares of
Series I-2 Preferred Stock into 815,075 shares of the Company’s common stock.
On
August 31, 2020, 6,257.62 shares of the Series I-1 and Series I-2 Preferred Stock were exchanged for the Company’s
Series N Preferred Stock as more fully discussed below and in Note 8.
On
August 31, 2020, the Company entered into the Exchange and Redemption Agreements with certain institutional investors in the Company
wherein, the investors agreed to reduce their holdings of the Company’s debentures, which are more fully discussed in Note
8, by approximately $19.3 million (including accrued interest and penalties) by exchanging the debentures and all of the outstanding
shares of the Company’s Series I-1 Preferred Stock and Series I-2 Preferred Stock for 30,435.52 shares of the Company’s
Series N Preferred Stock. Mr. Diamantis is also a party to the Agreements as he continues to be a guarantor of a portion of the
remaining debentures. The Exchange and Redemption Agreements are more fully discussed in Note 8. The Series N Preferred Stock
is more fully discussed in Note 13.
Note
13 – Stockholders’ Deficit
Authorized
Capital
The
Company has 10,000,000,000 authorized shares of Common Stock at $0.0001 par value and 5,000,000 authorized shares of Preferred
Stock at a par value of $0.01.
Preferred
Stock
The
Company has 5,000,000 shares, par value $0.01, of preferred stock authorized. As of September 30, 2020, the Company had outstanding
shares of preferred stock consisting of shares of its Series N Preferred Stock (which are more fully discussed in Note 12), 10
shares of its Series H Convertible Preferred Stock (the “Series H Preferred Stock”), 1,750,000 shares of its Series
F Convertible Preferred Stock (the “Series F Preferred Stock”), 250,000 shares of its Series L Convertible Preferred
Stock, 22,000 shares of its Series M Preferred Stock and 30,304 shares of its Series N Preferred Stock.
The
Series H Preferred Stock has a stated value of $1,000 per share and is convertible into shares of the Company’s common stock
at a conversion price of 85% of the volume weighted average price of the Company’s common stock at the time of conversion.
In
September 2017, the Company issued 1,750,000 shares of its Series F Preferred Stock valued at $174,097 in connection with the
acquisition of Genomas Inc. Genomas Inc. is included in the Company’s discontinued operations, which are discussed in Note
17. As a result of the Reverse Stock Split, the maximum number of shares of common stock issuable upon the conversion of the Series
F Preferred Stock is one. Any shares of Series F Preferred Stock outstanding on the fifth anniversary of the issuance date will
be mandatorily converted into common stock at the applicable conversion price on such date. The Series F Preferred Stock has voting
rights. Each share of Series F Preferred Stock has one vote, and the holders of the Series F Preferred Stock shall vote together
with the holders of the Company’s common stock as a single class.
On
December 23, 2019, the Company entered into an Exchange Agreement (the “Agreement”) with Alcimede LLC (“Alcimede”),
of which Seamus Lagan, our Chief Executive Officer, is the sole manager as previously stated. Pursuant to the Agreement, the Company
issued to Alcimede 250,000 shares of its Series K Convertible Preferred Stock (the “Series K Preferred Stock”) in
exchange for the 250,000 shares of the Company’s Series J Convertible Preferred Stock (the “Series J Preferred Stock”)
held by Alcimede. The holder of the Series J Preferred Stock was entitled to receive, when and as declared by the Board of Directors
of the Company, but only out of funds that were legally available therefor, cumulative cash dividends at the rate of 8% of the
stated value per annum on each share of Series J Preferred Stock. The Series J Preferred Stock had been issued to Alcimede on
July 23, 2018 and upon the issuance of the Series K Preferred Stock to Alcimede, the shares of Series J Preferred Stock were cancelled.
Under the Agreement, Alcimede relinquished all rights to any cumulative dividends on the Series J Preferred Stock. The terms of
the Series K Preferred Stock did not provide for cumulative dividends.
On
May 4, 2020, the Company filed a Certificate of Designation with the Secretary of State of the State of Delaware to authorize
the issuance of up to 250,000 shares of its Series L Preferred Stock. On May 5, 2020, the Company entered into an exchange agreement
with Alcimede. Pursuant to the exchange agreement, the Company issued to Alcimede 250,000 shares of its Series L Preferred Stock
in exchange for the 250,000 shares of the Company’s Series K Preferred Stock held by Alcimede. Upon the issuance of the
Series L Preferred Stock to Alcimede, the shares of Series K Preferred Stock were cancelled. The Series L Preferred Stock is not
convertible into common stock prior to December 1, 2020 and is not entitled to receive any dividends.
Series
M Convertible Preferred Stock Exchanged for Loans from Mr. Diamantis
On
June 9, 2020, the Company filed a certificate of designation to authorize 30,000 shares of its Series M Preferred Stock with a
stated value of $1,000 per share. On June 30, 2020, the Company and Mr. Diamantis entered into an exchange agreement wherein Mr.
Diamantis agreed to the extinguishment of the Company’s indebtedness to Mr. Diamantis totaling $18.8 million, including
accrued interest, on that date in exchange for 22,000 shares of the Company’s Series M Preferred Stock with a par value
of $0.01 per share. As a result of the exchange, the Company recorded a deemed dividend of approximately $3.2 million in the nine
months ended September 30, 2020, which represented the difference between the $18.8 million of debt and accrued interest exchanged
and the value of the Series M Preferred Stock of $22.0 million. See Note 7 for a discussion of the Company’s former indebtedness
to Mr. Diamantis.
The
terms of the Series M Preferred Stock were set forth in the Company’s Current Report on Form 8-K filed with the SEC on June
16, 2020. In particular: (i) each holder of the Series M Preferred Stock shall be entitled to vote on all matters submitted to
a vote of the holders of the Company’s common stock. Regardless of the number of shares of Series M Preferred Stock outstanding
and so long as at least one share of Series M Preferred Stock is outstanding, the outstanding shares of Series M Preferred Stock
shall have the number of votes, in the aggregate, equal to 51% of all votes entitled to be voted at any meeting of stockholders
or action by written consent. Each outstanding share of the Series M Preferred Stock shall represent its proportionate share of
the 51% allocated to the outstanding shares of Series M Preferred Stock in the aggregate. The Series M Preferred Stock shall vote
with the common stock and any other voting securities as if they were a single class of securities; (ii) each share of the Series
M Preferred Stock is convertible into shares of the Company’s common stock at a conversion price equal to 90% of the average
closing price of the Company’s common stock on the ten trading days immediately prior to the conversion date but in any
event not less than the par value of the Company’s common stock; and (iii) dividends at the rate per annum of ten percent
(10%) of the stated value per share shall accrue on each outstanding share of Series M Preferred Stock from and after the date
of the original issuance of such share of Series M Preferred Stock (subject to appropriate adjustment in the event of any stock
dividend, stock split, combination or other similar recapitalization). The dividends shall accrue from day to day, whether or
not declared, and shall be cumulative and non-compounding; provided, however, that such dividend shall be payable
only when, as, and if declared by the Board of Directors and the Company shall be under no obligation to pay such dividends. No
cash dividends shall be paid on the Company’s common stock unless the dividends are paid on the Series M Preferred Stock.
On
August 13, 2020, Mr. Diamantis entered into a Voting Agreement and Irrevocable Proxy with the Company, Mr. Lagan and Alcimede
LLC (of which Mr. Lagan is the sole manager) pursuant to which Mr. Diamantis granted an irrevocable proxy to Mr. Lagan
to vote the Series M Preferred Stock held by Mr. Diamantis, Mr. Diamantis has retained all other rights under the Series M Preferred
Stock.
Series
N Convertible Preferred Stock Exchanged for Series I-1 and Series I-2 Preferred Stock and Debentures
On
August 31, 2020, the Company filed a certificate of designation to authorize 50,000 shares of its newly-authorized Series N Preferred
Stock with a stated value of $1,000 per share. On August 31, 2020, the Company and its debenture holders exchanged, under the
terms of the Exchange and Redemption Agreements, certain outstanding debentures and all of the outstanding shares of the Company’s
Series I-1 Preferred Stock and Series I-2 Preferred Stock for 30,435.52 shares of the Company’s Series N Preferred Stock.
The Exchange and Redemption Agreements are more fully discussed in Notes 8 and 12.
The
terms of the Series N Preferred Stock were set forth in the Company’s Current Report on Form 8-K filed with the SEC on September
1, 2020, In particular:
Voting
Rights. Except as provided below or by law, the Series N Preferred Stock shall have no voting rights. However, as long as
any shares of Series N Preferred Stock are outstanding, the Company shall not, without the affirmative vote of the holders of
a majority of the then outstanding shares of the Series N Preferred Stock, (a) alter or change adversely the powers, preferences
or rights given to the Series N Preferred Stock or alter or amend the Certificate of Designation, (b) amend its certificate of
incorporation or other charter documents in any manner that adversely affects any rights of the holders, (c) increase the number
of authorized shares of the Series N Preferred Stock, or (d) enter into any agreement with respect to any of the foregoing.
Dividends.
Dividends at the rate per annum of 10% of the stated value per share shall accrue on each outstanding share of Series N Preferred
Stock from and after the date of the original issuance of such share of Series N Preferred Stock (the “Preferred Accruing
Dividends”). The Preferred Accruing Dividends shall accrue from day to day, whether or not declared, and shall be cumulative
and non-compounding; provided, however, that such Preferred Accruing Dividends shall be payable only when, as, and
if declared by the Board of Directors. No cash dividends shall be paid on the common stock unless the Preferred Accruing Dividends
are paid.
Rank.
The Series N Preferred Stock ranks with respect to dividends or a liquidation, (i) on parity with the common stock, the Company’s
Series H Preferred Stock, the Company’s Series L Preferred Stock and the Company’s Series M Preferred Stock, (ii)
senior to the Company’s Series F Preferred Stock, and (iii) junior to any other class or series of preferred stock of the
Company afterwards created and ranking by its terms senior to the Series N Preferred Stock.
Conversion.
Each share of the Series N Preferred Stock is convertible into shares of the Company’s common stock, at any time and from
time to time, at the option of the holder, into that number of shares of common stock determined by dividing the stated value
of such share of Series N Preferred Stock, plus any accrued declared and unpaid dividends, by the conversion price. The conversion
price is equal to 90% of the lowest VWAP during the 10 trading days immediately prior to the conversion date. Holders of the Series
N Preferred Stock are prohibited from converting Series N Preferred Stock into shares of common stock if, as a result of such
conversion, the holder, together with its affiliates, would own more than 4.99% (or, upon election of the holder, 9.99%) of the
total number of shares of common stock then issued and outstanding. However, any holder may increase or decrease such percentage
to any other percentage not in excess of 9.99%, provided that any increase in such percentage shall not be effective until 61
days after notice to the Company.
Liquidation
Preference. Upon any liquidation, dissolution or winding up of the Company, the holders of the Series N Preferred Stock shall
be entitled to receive an amount equal to the stated value of the Series N Preferred Stock, plus any accrued declared and unpaid
dividends thereon and any other fees or liquidated damages then due and owing thereon, for each share of the Series N Preferred
Stock before any distribution or payment shall be made on any junior securities.
Redemption.
At any time the Company shall have the right to redeem all, or any part, of the Series N Preferred Stock then outstanding. The
Series N Preferred Stock subject to redemption shall be redeemed by the Company in cash in an amount equal to the stated value
of the shares of the Series N Preferred Stock being redeemed plus all accrued declared and unpaid dividends.
During
the nine months ended September 30, 2020, the holder converted 131 shares of its Series N Preferred Stock into 589,500 shares
of the Company’s common stock.
Common
Stock
The
Company has authorized 10,000,000,000 shares of Common Stock, par value $.0001 per share.
The
Company had 1,866,929 and 964,894 shares of common stock issued and outstanding at September 30, 2020 and December 31, 2019, respectively.
During the nine months ended September 30, 2020, the Company issued 313,000 shares of its common stock upon the conversion of
236.3 shares of its Series I-2 Preferred Stock and 589,500 shares of its common stock upon the conversion of 131 shares of its
Series N Preferred Stock.
Stockholder
Proposal Approval and Reverse Stock Split
On
May 7, 2020, Mr. Lagan and Alcimede LLC, the holders of 50.25% of the total voting power of the Company’s voting securities,
approved by written consent in lieu of a special meeting of stockholders the following proposal, which had previously been approved
and recommended to be approved by the stockholders by the Board of Directors of the Company.
Proposal
1: To approve an amendment to our Certificate of Incorporation, as amended, to effect a reverse stock split of all of the
outstanding shares of our common stock, at a specific ratio from 1-for-100 to 1-for-10,000, and grant authorization to our Board
of Directors to determine, in its discretion, the specific ratio and timing of the reverse split at any time on or before December
31, 2020, subject to the Board of Directors’ discretion to abandon such amendment.
The
stockholder approval of the above proposal became effective on June 9, 2020. As more fully discussed in Note 1, the Company effected
the Reverse Stock Split on July 31, 2020. The Reverse Stock Split did not have an effect on the par value or the number of authorized
shares of the Company’s common stock.
Common
Stock Equivalents
The
Company has outstanding options, warrants, convertible preferred stock and convertible debentures. Exercise of the options and
warrants, and conversions of the convertible preferred stock and debentures could result in substantial dilution of our common
stock and a decline in its market price. In addition, the terms of certain of the warrants, convertible preferred stock and convertible
debentures issued by us provide for reductions in the per share exercise prices of the warrants and the per share conversion prices
of the debentures and preferred stock (if applicable and subject to a floor in certain cases), in the event that we issue common
stock or common stock equivalents (as that term is defined in the agreements) at an effective exercise/conversion price that is
less than the then exercise/conversion prices of the outstanding warrants, preferred stock or debentures, as the case may be.
These provisions, as well as the issuances of debentures and preferred stock with conversion prices that vary based upon the price
of our common stock on the date of conversion, have resulted in significant dilution of our common stock and have given rise to
reverse splits of our common stock.
Stock
Options
The
Company maintained and sponsored the Tegal Corporation 2007 Incentive Award Plan (the “2007 Equity Plan”). Tegal Corporation
was the prior name of the Company. The 2007 Equity Plan, as amended, provided for the issuance of stock options and other equity
awards to the Company’s officers, directors, employees and consultants. The 2007 Equity Plan terminated pursuant to its
terms in September 2017. As a result of the Reverse Stock Split, the total number of outstanding stock options at September 30,
2020 was 26 and the exercise price was so high as to not be meaningful. All outstanding stock options as of September 30, 2020
were fully vested as of December 31, 2019 and, accordingly, the Company did not incur stock option compensation expense during
the nine months ended September 30, 2020. The Company recognized stock option compensation expense of $25,950 for the nine months
ended September 30, 2019. As of September 30, 2020, the weighted average remaining contractual life was 5.6 years for options
outstanding and exercisable. The intrinsic value of options exercisable at September 30, 2020 was $0.
Warrants
The
Company, as part of various debt and equity financing transactions, has issued warrants to purchase shares of the Company’s
common stock.
At
September 30, 2020, there were 335.4 million warrants outstanding primarily as a result of the anti-dilution provisions of outstanding
warrants that were issued in connection with the issuances of debentures, which are more fully discussed in Note 8. The number
of warrants issued and outstanding as well as the exercise prices of the warrants reflected in the table below have been adjusted
to reflect the full ratchet and other dilutive and down round provisions pursuant to the warrant agreements. As a result of the
current exercise prices for the majority of the outstanding warrants (subject to a floor in some cases), as well as the full ratchet
provisions of the majority of the outstanding warrants (again, subject to a floor in some cases), subsequent decreases in the
price of the Company’s common stock and subsequent issuances of the Company’s common stock or common stock equivalents
at prices below the current exercise prices of the warrants will result in (1) increases in the number of shares issuable pursuant
to the warrants and (2) decreases in the exercise prices of the warrants.
The
following summarizes the information related to warrants issued and the activity during the nine months ended September 30, 2020:
|
|
Number of warrants
|
|
|
Weighted average exercise price
|
|
Balance at December 31, 2019
|
|
|
63,458,546
|
|
|
$
|
1.44
|
|
Increase during the period as a result of down round provisions
|
|
|
271,987,673
|
|
|
|
|
|
Warrants expired
|
|
|
(1
|
)
|
|
$
|
(3,150.00
|
)
|
Balance at September 30, 2020
|
|
|
335,446,218
|
|
|
$
|
0.27
|
|
On
March 27, 2019, the expiration dates of certain warrants issued in March 2017 and September 2017 with convertible debentures,
referred to as the March 2017 Series B Warrants and the September 2017 Series B Warrants, were extended from June 2019 to September
2019. On May 12, 2019, the expiration date of these warrants was further extended to March 31, 2022. The Company used the Black
Scholes model to calculate the fair value of the warrants as of each modification date. Using the pre-modification terms
and related assumptions, and the post-modification terms and related assumptions, the Company determined that the change in fair
value of the warrants as a result of the March 27th modification was $4.1 million and the May 12th modification
was $5.4 million. Accordingly, the Company recorded the modification value of $9.5 million as interest expense in the nine months
ended September 30, 2019. See Note 11 for the assumptions used in the Black Scholes valuation models.
Note
14 – Supplemental Disclosure of Cash Flow Information
|
|
Nine Months Ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
Cash paid for interest
|
|
$
|
64,454
|
|
|
$
|
-
|
|
Cash paid for income taxes
|
|
$
|
-
|
|
|
$
|
45,000
|
|
|
|
|
|
|
|
|
|
|
Acquisition of Jellico Community Hospital and CarePlus Center:
|
|
|
|
|
|
|
|
|
Inventory
|
|
$
|
-
|
|
|
$
|
317,427
|
|
Property and equipment
|
|
|
-
|
|
|
|
500,000
|
|
Intangible assets
|
|
|
-
|
|
|
|
250,000
|
|
Accrued expenses
|
|
|
-
|
|
|
|
158,890
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Series I-2 Preferred Stock converted into common stock
|
|
$
|
277,994
|
|
|
$
|
1,143,973
|
|
Issuance of Series M Preferred Stock in exchange for related party loans and accrued
interest
|
|
|
22,000,000
|
|
|
|
-
|
|
Loans and accrued interest exchanged for Series M Preferred Stock
|
|
|
(18,849,632
|
)
|
|
|
-
|
|
Issuance of Series N Preferred Stock in exchange for debentures, accrued
interest and Series I-1 and Series I-2 Preferred Stock
|
|
|
30,435,519
|
|
|
|
-
|
|
Debentures, accrued interest and Series I-1 and Series I-2 Preferred Stock exchanged for
Series N Preferred Stock
|
|
|
(19,342,322
|
)
|
|
|
-
|
|
Series N Preferred Stock converted into common stock
|
|
|
58
|
|
|
|
-
|
|
Deemed dividends
|
|
|
66,695,318
|
|
|
|
123,861,587
|
|
Exchange of Series K Preferred Stock for Series L Preferred Stock
|
|
|
(2,500
|
)
|
|
|
-
|
|
Issuance of Series L Preferred Stock
|
|
|
2,500
|
|
|
|
-
|
|
Original issue discounts on debt
|
|
|
108,958
|
|
|
|
100,000
|
|
Note
15 – Commitments and Contingencies
Concentration
of Credit Risk
Credit
risk with respect to accounts receivable is generally diversified due to the large number of patients comprising the client base.
Generally, the Company does not require collateral or other security to support customer receivables. However, the Company continually
monitors its accounts receivable and establishes an allowance for uncollectible accounts and as a consequence, believes that its
accounts receivable credit risk exposure beyond such allowance is not material to the financial statements.
A
number of proposals for legislation continue to be under discussion which could substantially reduce Medicare and Medicaid (CMS)
reimbursements to hospitals. Depending upon the nature of regulatory action, and the content of legislation,
the Company could experience a significant decrease in revenues from Medicare and Medicaid (CMS), which could have a material
adverse effect on the Company. The Company is unable to predict, however, the extent to which such actions will be taken.
The
Company maintains its cash balances in high credit quality financial institutions. The Company’s cash balances may, at times,
exceed the deposit insurance limits provided by the Federal Deposit Insurance Corp.
Legal
Matters
From
time-to-time, the Company may be involved in a variety of claims, lawsuits, investigations and proceedings related to contractual
disputes, employment matters, regulatory and compliance matters, intellectual property rights and other litigation arising in
the ordinary course of business. The Company operates in a highly regulated industry which may inherently lend itself to legal
matters. Management is aware that litigation has associated costs and that results of adverse litigation verdicts could have a
material effect on the Company’s financial position or results of operations. The Company’s policy is to expense legal
fees and expenses incurred in connection with the legal proceedings in the period in which the expense is incurred. Management,
in consultation with legal counsel, has addressed known assertions and predicted unasserted claims below.
Biohealth
Medical Laboratory, Inc. and PB Laboratories, LLC (the “Companies”) filed suit against CIGNA Health in 2015 alleging
that CIGNA failed to pay claims for laboratory services the Companies provided to patients pursuant to CIGNA - issued and CIGNA
- administered plans. In 2016, the U.S. District Court dismissed part of the Companies’ claims for lack of standing. The
Companies appealed that decision to the Eleventh Circuit Court of Appeals, which in late 2017 reversed the District Court’s
decision and found that the Companies have standing to raise claims arising out of traditional insurance plans as well as self-funded
plans. In July 2019, the Companies and EPIC Reference Labs, Inc. filed suit against CIGNA Health for failure to pay claims for
laboratory services provided. Cigna Health, in turn, sued for improper billing practices. CIGNA’s case was dismissed on
June 22, 2020; the Company’s case remains in the early stages.
The
Company’s Epinex Diagnostics Laboratories, Inc. subsidiary was sued in a California state court by two former employees
who alleged that they were wrongfully terminated, as well as for a variety of unpaid wage claims. The parties entered into a settlement
agreement of this matter on July 29, 2016 for approximately $0.2 million, and the settlement was consummated on August 25, 2016.
In October of 2016, the plaintiffs in this matter filed a motion with the court seeking payment for attorneys’ fees in the
approximate amount of $0.7 million. On March 24, 2017, the court granted plaintiffs’ motion for payment of attorneys’
fees in the amount of $0.3 million, and the Company accrued this amount in its consolidated financial statements.
In
February 2016, the Company received notice that the Internal Revenue Service (the “IRS”) placed a lien against Medytox
Solutions, Inc. and its subsidiaries relating to unpaid 2014 taxes due, plus penalties and interest, in the amount of $5.0 million.
The Company paid $0.1 million toward its 2014 tax liability in March 2016. The Company filed its 2015 Federal tax return on March
15, 2016 and the accompanying election to carryback the reported net operating losses was filed in April 2016. On August 24, 2016,
the lien was released, and in September of 2016 the Company received a refund from the IRS in the amount of $1.9 million. In November
of 2016, the IRS commenced an audit of the Company’s 2015 Federal tax return. Based upon the audit results, the Company
made provisions of approximately $1.0 million as a liability and $0.6 million as a receivable in its financial statements. The
Company received the $0.6 million refund receivable during the three and nine months ended September 30, 2020. The $1.0 million
liability is still outstanding. The Company is also due a refund as a result of the five-year carryback privilege for federal
net operating tax losses per the CARES Act, which is more fully discussed in Note 4.
On
September 27, 2016, a tax warrant was issued against the Company by the Florida Department of Revenue (the “DOR”)
for unpaid 2014 state income taxes in the approximate amount of $0.9 million, including penalties and interest. The Company entered
into a Stipulation Agreement with the DOR allowing the Company to make monthly installments until July 2019. The Company has made
payments to reduce the amount owed. The Company intends to renegotiate another Stipulation agreement. However, there can be no
assurance the Company will be successful. The balance accrued of approximately $0.4 million remained outstanding to the DOR at
September 30, 2020.
In
December of 2016, TCS-Florida, L.P. (“Tetra”), filed suit against the Company for failure to make the required payment
under an equipment leasing contract that the Company had with Tetra and received a judgment against the Company. In May 2018,
Tetra and the Company agreed to dispose of certain equipment and the proceeds from the sale were applied to the outstanding balance.
In July 2020, the Company entered into a settlement with Tetra and paid $100,000 as full and final settlement of all liability
to Tetra. As a result of the settlement, the Company recorded a gain on settlement of approximately $0.9 million in the nine months
ended September 30, 2020.
In
December of 2016, DeLage Landen Financial Services, Inc. (“DeLage”), filed suit against the Company for failure to
make the required payments under an equipment leasing contract that the Company had with DeLage (see Note 10). On January 24,
2017, DeLage received a default judgment against the Company in the approximate amount of $1.0 million, representing the balance
owed on the lease, as well as additional interest, penalties and fees. The Company recognized this amount in its consolidated
financial statements as of December 31, 2016. On February 8, 2017, a Stay of Execution was filed and under its terms the balance
due was to be paid in variable monthly installments through January of 2019, with an implicit interest rate of 4.97%. The Company
and DeLage have now disposed of certain equipment and reduced the balance owed to DeLage. A balance of approximately $0.2 million
remained outstanding at September 30, 2020.
On
December 7, 2016, the holders of the Tegal Notes (see Note 7) filed suit against the Company seeking payment for the amounts due
under the notes in the aggregate of the principal of $341,612, and accrued interest of $43,000. A request for entry of default
judgment was filed on January 24, 2017. On April 23, 2018, the holders of the Tegal Notes received a judgment against the Company.
As of September 30, 2020, the Company has repaid $44,544 of these notes.
Two
former employees of the Company’s CollabRx, Inc. subsidiary filed suits in a California state court in connection with amounts
claimed to be owed under their respective employment agreements with the subsidiary. One former employee received a judgment in
October 2018 for approximately $253,000. The other former employee received a judgment in December 2018 for approximately $173,000.
While the Company has accrued these amounts claimed, it is considering its options to refute these matters and believes the claims
against the Company to be frivolous and outside of entitlement and contractual agreements.
The
Company, as well as many of our subsidiaries, are defendants in a case filed in Broward County Circuit Court by TCA Global Credit
Master Fund, L.P. The plaintiff alleges a breach by Medytox Solutions, Inc. of its obligations under a debenture and claims damages
of approximately $2,030,000 plus interest, costs and fees. The Company and the other subsidiaries are sued as alleged guarantors
of the debenture. The complaint was filed on August 1, 2018. The Company has recorded the principal balance and interest owed
under the debenture agreement for the period ended September 30, 2020 (see Note 7). The Company and all defendants have filed
a motion to dismiss the complaint, but have not recorded any potential liability related to any further damages. In May 2020,
the SEC appointed a Receiver to close down the TCA Global Credit Master Fund, LP over allegations of accounting fraud.
The amount recorded by the Company as being owed to TCA was based on TCA’s application of prior payments made by the Company.
The Company believes that prior payments of principal and interest may have been applied to unenforceable investment banking and
other fees and charges. It is the Company’s position that the amount owed to TCA is less than what is set forth in Note
7 above.
On
September 13, 2018, Laboratory Corporation of America sued EPIC Reference Labs, Inc., a subsidiary of the Company, in Palm Beach
County Circuit Court for amounts claimed to be owed. The court awarded a judgment against EPIC Reference Labs, Inc. in May 2019
for approximately $155,000. The Company has recorded the amount owed as a liability as of September 30, 2020.
In
July 2019, Roche Diagnostics Corporation sued EPIC Reference Labs, Inc. in the Circuit Court for Palm Beach County claiming approximately
$240,000 under an agreement to lease equipment and purchase supplies. The amount of the settlement in this case of $110,000 was
accrued in 2019 and paid in full during the nine months ended September 30, 2020.
In
August 2019, EPIC Reference Labs, Inc., Medytox Diagnostics, Inc. and Medytox Solutions, Inc. were sued by Beckman
Coulter, Inc. in the same court under an agreement to purchase laboratory supplies. The plaintiff claims damages of approximately
$124,000. The Company has disputed the amount owed, and has entered settlement discussions to settle the matter, but has recorded
this liability as of September 30, 2020.
In
July 2019, the landlord of Medytox Solutions, Inc. received a judgment in the amount of approximately $413,000 in connection with
failure to pay under an office lease in West Palm Beach, Florida. The Company reached a settlement in May 2020 to resolve the
judgment in the amount of $300,000, which is being paid under a payment plan.
In
February 2020, Anthony O. Killough sued the Company and Mr. Diamantis, as guarantor, in New York State Court for the County of
New York, for approximately $2.0 million relating to the promissory note issued by the Company in September 2019. In May 2020,
the parties entered into a Stipulation providing for a payment of a total of $2,158,168 (which includes accrued interest) in installments
through November 1, 2020. (See Note 7).
Following
the Company’s decision to suspend operations at Jamestown Regional Medical Center in June 2019 a number of vendors remain
unpaid. A number have initiated or threatened legal actions. The Company believes it will come to satisfactory arrangements with
these parties as it works toward reopening the hospital. The Company has taken steps to re-enter the Medicare program and is currently
planning the reopening of the hospital. Plans and timing have been disrupted by the current pandemic.
Two employees of Jamestown Regional Medical
Center have filed suit alleging violations of the federal Worker Adjustment and Retraining Notification Act (“WARN”).
This case is in the early stages.
In
June 2019, CHSPSC, the former owners of Jamestown Regional Medical Center, obtained a judgment against the Company in the
amount of $592,650. The Company believes that a number of insurance payments were made to CHSPCS after the change of ownership
and will likely offset the majority of the claim made by CHSPCS.
In
August 2019, Morrison Management Specialists, Inc. obtained a judgment against Jamestown Regional Medical Center and the Company
in Fentress County, Tennessee in the amount of $194,455 in connection with housekeeping and dietary services. The Company
has recorded this liability as of September 30, 2020.
In
November 2019, Newstat, PLLC obtained a judgment against Big South Fork Medical Center in Knox County, Tennessee in the amount
of $190,600 in connection with the provision of medical services. The Company has recorded this liability as of September 30,
2020.
Note
16 – Discontinued Operations
On
July 12, 2017, the Company announced plans to spin off AMSG and in the third quarter 2017 our Board of Directors voted unanimously
to spin off the Company’s wholly-owned subsidiary, HTS, as independent publicly traded companies by way of tax-free distributions
to the Company’s stockholders. On June 10, 2020, the Company signed an agreement for the separation of these divisions into
a public company. The agreement is with TPT Global Tech, Inc. (OTC: TPTW), a California-based public company, to merge HTS and
AMSG into a public company after TPT completes a merger of its wholly-owned subsidiary, InnovaQor, Inc. with this public company.
The public company will be known as InnovaQor going forward. Completion of the agreement is subject to a number of approvals and
consents which need to be secured to complete the transaction. Subject to closing and the relevant SEC approvals it is intended
that Rennova will receive approximately $22 million of preferred shares in the transaction, $5 million of which will be converted
to common shares in the public company, and distributed to Rennova shareholders upon completion of the relevant registration/approvals
with the SEC. The remaining approximately $17 million of preferred shares held by Rennova as an investment in InnovaQor will be
convertible to common shares on achievement of certain milestones going forward. There can be no assurance that the transaction
as described will be consummated or that terms including numbers or values for consideration shares will not change significantly
before closing. In accordance with ASC 205-20 and having met the criteria for “held for sale, the Company has reflected
amounts relating to AMSG and HTS (referred to below as the AMSG & HTS Group) as a disposal group classified as held for sale
and included as part of discontinued operations.
During
the three months ended September 30, 2020, the Company announced that it had reached an agreement to sell its last clinical
laboratory, EPIC Reference Labs, Inc., and as a result, EPIC Reference Labs, Inc.’s operations have been classified as held
for sale and included in discontinued operations for all periods presented.
Carrying
amounts of major classes of assets and liabilities classified as held for sale and included as part of discontinued operations
in the condensed consolidated balance sheets consisted of the following:
AMSG
& HTS Group Assets and Liabilities:
|
|
September 30, 2020
|
|
|
December 31, 2019
|
|
|
|
(unaudited)
|
|
|
|
|
Cash
|
|
$
|
9,066
|
|
|
$
|
17,767
|
|
Accounts receivable, net
|
|
|
174,641
|
|
|
|
482,472
|
|
Prepaid expenses and other current assets
|
|
|
2,575
|
|
|
|
5,150
|
|
Current assets classified as held for sale
|
|
$
|
186,282
|
|
|
$
|
505,389
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
1,168
|
|
|
$
|
3,354
|
|
Deposits
|
|
|
-
|
|
|
|
6,029
|
|
Right-of-use assets
|
|
|
-
|
|
|
|
-
|
|
Non-current assets classified as held for sale
|
|
$
|
1,168
|
|
|
$
|
9,383
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
946,161
|
|
|
$
|
1,160,101
|
|
Accrued expenses
|
|
|
1,286,326
|
|
|
|
1,376,127
|
|
Current portion of right-of-use operating lease obligations
|
|
|
-
|
|
|
|
-
|
|
Current portion of notes payable
|
|
|
238,018
|
|
|
|
256,274
|
|
Current liabilities classified as held for sale
|
|
$
|
2,470,505
|
|
|
$
|
2,792,502
|
|
EPIC
Reference Labs, Inc. Assets and Liabilities
|
|
September 30, 2020
|
|
|
December 31, 2019
|
|
|
|
(unaudited)
|
|
|
|
|
Cash
|
|
$
|
9,057
|
|
|
$
|
-
|
|
Accounts receivable, net
|
|
|
174,641
|
|
|
|
-
|
|
Prepaid expenses and other current assets
|
|
|
2,575
|
|
|
|
-
|
|
Current assets classified as held for sale
|
|
$
|
186,273
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
-
|
|
|
$
|
-
|
|
Deposits
|
|
|
100,014
|
|
|
|
100,014
|
|
Right-of-use assets
|
|
|
122,898
|
|
|
|
185,842
|
|
Non-current assets classified as held for sale
|
|
$
|
222,912
|
|
|
$
|
285,856
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
818,912
|
|
|
$
|
881,527
|
|
Accrued expenses
|
|
|
283,368
|
|
|
|
338,662
|
|
Current portion of right-of-use operating lease obligations
|
|
|
96,334
|
|
|
|
85,726
|
|
Current portion of notes payable
|
|
|
-
|
|
|
|
-
|
|
Current liabilities classified as held for sale
|
|
$
|
1,198,614
|
|
|
$
|
1,305,915
|
|
|
|
|
|
|
|
|
|
|
Right-of-use
operating lease obligations
|
|
|
26,564
|
|
|
|
100,116
|
|
Liabilities classified as held for sale
|
|
$
|
26,564
|
|
|
$
|
100,116
|
|
Consolidated
Discontinued Operations Assets and Liabilities:
|
|
September 30, 2020
|
|
|
December 31, 2019
|
|
|
|
(unaudited)
|
|
|
|
|
Cash
|
|
$
|
9,066
|
|
|
$
|
17,767
|
|
Accounts receivable, net
|
|
|
174,641
|
|
|
|
482,472
|
|
Prepaid expenses and other current assets
|
|
|
2,575
|
|
|
|
5,150
|
|
Current assets classified as held for sale
|
|
$
|
186,282
|
|
|
$
|
505,389
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
1,168
|
|
|
$
|
3,354
|
|
Deposits
|
|
|
100,014
|
|
|
|
106,043
|
|
Right-of-use assets
|
|
|
122,898
|
|
|
|
185,842
|
|
Non-current assets classified as held for sale
|
|
$
|
224,080
|
|
|
$
|
295,239
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,765,073
|
|
|
$
|
2,041,628
|
|
Accrued expenses
|
|
|
1,569,694
|
|
|
|
1,714,789
|
|
Current portion of right-of-use operating lease obligations
|
|
|
96,334
|
|
|
|
85,726
|
|
Current portion of notes payable
|
|
|
238,018
|
|
|
|
256,274
|
|
Current liabilities classified as held for sale
|
|
$
|
3,669,119
|
|
|
$
|
4,098,417
|
|
|
|
|
|
|
|
|
|
|
Right-of-use
operating lease obligations
|
|
|
26,564
|
|
|
|
100,116
|
|
Liabilities classified as held for sale
|
|
$
|
26,564
|
|
|
$
|
100,116
|
|
Major
line items constituting loss from discontinued operations in the unaudited condensed consolidated statements of operations for
the three months ended September 30, 2020 and 2019 consisted of the following:
AMSG
& HTS Group Loss from Discontinued Operations:
|
|
Three Months Ended
|
|
|
|
September 30, 2020
|
|
|
September 30, 2019
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Revenue from services
|
|
$
|
174,941
|
|
|
$
|
246,676
|
|
Cost of services
|
|
|
390
|
|
|
|
26,012
|
|
Gross profit
|
|
|
174,551
|
|
|
|
220,664
|
|
Operating expenses
|
|
|
258,789
|
|
|
|
355,828
|
|
Other expense
|
|
|
37,476
|
|
|
|
2,912
|
|
Provision for income taxes
|
|
|
-
|
|
|
|
-
|
|
Loss from discontinued operations
|
|
$
|
(121,714
|
)
|
|
$
|
(138,076
|
)
|
EPIC
Reference Labs, Inc. Loss from Discontinued Operations
|
|
Three Months Ended
|
|
|
|
September 30, 2020
|
|
|
September 30, 2019
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Revenue from services (1)
|
|
$
|
-
|
|
|
$
|
(34,630
|
)
|
Cost of services
|
|
|
-
|
|
|
|
|
|
Gross profit
|
|
|
-
|
|
|
|
(34,630
|
)
|
Operating expenses
|
|
|
41,360
|
|
|
|
89,102
|
|
Other expense
|
|
|
3,106
|
|
|
|
-
|
|
Provision for income taxes
|
|
|
-
|
|
|
|
-
|
|
Loss from discontinued operations
|
|
$
|
(41,360
|
)
|
|
$
|
(123,732
|
)
|
|
(1)
|
The
Company recorded bad debts in excess of gross revenues in the three months ended September
30, 2019.
|
Consolidated
Loss from Discontinued Operations:
|
|
Three Months Ended
|
|
|
|
September 30, 2020
|
|
|
September 30, 2019
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Revenue from services
|
|
$
|
174,941
|
|
|
$
|
212,046
|
|
Cost of services
|
|
|
390
|
|
|
|
26,012
|
|
Gross profit
|
|
|
174,551
|
|
|
|
186,034
|
|
Operating expenses
|
|
|
300,149
|
|
|
|
444,930
|
|
Other expense
|
|
|
40,582
|
|
|
|
2,912
|
|
Provision for income taxes
|
|
|
-
|
|
|
|
-
|
|
Loss from discontinued operations
|
|
$
|
(166,180
|
)
|
|
$
|
(261,808
|
)
|
Major
line items constituting loss from discontinued operations in the unaudited condensed consolidated statements of operations for
the nine months ended September 30, 2020 and 2019 consisted of the following:
AMSG
& HTS Group Loss from Discontinued Operations:
|
|
Nine Months Ended
|
|
|
|
September 30, 2020
|
|
|
September 30, 2019
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Revenue from services
|
|
$
|
437,119
|
|
|
$
|
766,627
|
|
Cost of services
|
|
|
11,379
|
|
|
|
113,266
|
|
Gross profit
|
|
|
425,740
|
|
|
|
653,361
|
|
Operating expenses
|
|
|
509,989
|
|
|
|
1,413,423
|
|
Other expense
|
|
|
61,067
|
|
|
|
31,874
|
|
Provision for income taxes
|
|
|
-
|
|
|
|
-
|
|
Loss from discontinued operations
|
|
$
|
(145,316
|
)
|
|
$
|
(791,936
|
)
|
EPIC
Reference Labs, Inc. Loss from Discontinued Operations:
|
|
Nine Months Ended
|
|
|
|
September 30, 2020
|
|
|
September 30, 2019
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Revenue from services (1)
|
|
$
|
441
|
|
|
$
|
(18,066
|
)
|
Cost of services
|
|
|
-
|
|
|
|
3,982
|
|
Gross profit
|
|
|
441
|
|
|
|
(22,048
|
)
|
Operating expenses
|
|
|
106,704
|
|
|
|
453,280
|
|
Other income
|
|
|
(87,286
|
)
|
|
|
(500
|
)
|
Provision for income taxes
|
|
|
-
|
|
|
|
-
|
|
Loss from discontinued operations
|
|
$
|
(18,977
|
)
|
|
$
|
(474,828
|
)
|
|
(1)
|
The
Company recorded bad debts in excess of gross revenues in the nine months ended September
30, 2019.
|
Consolidated
Loss from Discontinued Operations:
|
|
Nine Months Ended
|
|
|
|
September 30, 2020
|
|
|
September 30, 2019
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Revenue from services
|
|
$
|
437,560
|
|
|
$
|
748,561
|
|
Cost of services
|
|
|
11,379
|
|
|
|
117,248
|
|
Gross profit
|
|
|
426,181
|
|
|
|
631,313
|
|
Operating expenses
|
|
|
616,693
|
|
|
|
1,866,703
|
|
Other expense (income)
|
|
|
(26,219
|
)
|
|
|
31,374
|
|
Provision for income taxes
|
|
|
-
|
|
|
|
-
|
|
Loss from discontinued operations
|
|
$
|
(164,293
|
)
|
|
$
|
(1,266,764
|
)
|
Note
17 – Recent Accounting Pronouncements
In
August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure
Requirements for Fair Value Measurement. This standard will require entities to disclose the amount of total gains or losses
for the period recognized in other comprehensive income that is attributable to fair value changes in assets and liabilities held
as of the balance sheet date and categorized within Level 3 of the fair value hierarchy. This ASU will be effective for us for
annual and interim periods beginning after December 31, 2020. Early adoption of this standard is permitted. We have not yet determined
the impact of the adoption of this ASU on our results of operations, financial position and cash flows.
In
August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s
Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. Under this standard
customers will apply the same criteria for capitalizing implementation costs as they would for an arrangement that has a software
license. The adoption of this new guidance prescribes the balance sheet, income statement, and cash flow classification of the
capitalized implementation costs and related amortization expense, and additional quantitative and qualitative disclosures. This
ASU will be effective for us for annual and interim periods beginning after December 30, 2020. Early adoption of this standard
is permitted and may be applied either prospectively to eligible costs incurred on or after the date of the new guidance or retrospectively.
We have not yet determined the impact of the adoption of this ASU on our results of operations, financial position and cash flows.
In
December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The
new guidance simplifies the accounting for income taxes by removing certain exceptions to the general principles and also simplifies areas
such as franchise taxes, step-up in tax basis goodwill, separate entity financial statements and interim recognition of
enactment of tax laws or rate changes. This standard will be effective for us for annual periods beginning on January 1,
2021, including interim periods within those fiscal years. Early adoption of this standard is permitted, including adoption
of all amendments in any interim period for which financial statements have not yet been issued. We are evaluating the impact
of adopting this new accounting guidance on our consolidated financial statements.
In
August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives
and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40).The new guidance provides accounting for convertible
instruments and contracts in an entity’s own equity. The FASB issued this Update to address issues identified as a result
of the complexity associated with applying U.S. GAAP for certain financial instruments with characteristics of liabilities
and equity. The Board focused on amending the guidance on convertible instruments and the guidance on the derivatives scope exception
for contracts in an entity’s own equity. This standard will be effective for us for annual periods beginning on January
1, 2024, including interim periods within those fiscal years. Early adoption of this standard is not permitted for us because
we have already adopted ASU 2017-11 “Earnings Per Share (Topic 260) Distinguishing Liabilities from Equity (Topic 480) Derivatives
and Hedging (Topic 815).” We have not yet determined the impact of adopting this new accounting guidance on our consolidated
financial statements.
Other
recent accounting standards issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified
Public Accountants, and the SEC did not, or are not, believed by management to have a material impact on the Company’s present
or future consolidated financial statements.
Note
18 – Subsequent Events
HHS
Provider Relief Funds
In
comparison to the September 19, 2020 Notice on which the Company’s estimate of HHS Provider Relief Funds as of September
30, 2020 is based, the October 22, 2020 Notice discussed in Note 1 includes two primary changes: (1) the definition of lost revenue
is changed to refer to the negative year-over-year difference in 2019 and 2020 actual revenue from patient care related sources
as opposed to the negative year-over-year change in net patient care operating income, and (2) the definition of reporting entities
is broadened to include the parent of one or more subsidiary tax identification numbers that received general distribution payments,
entities having providers associated with it that provide diagnoses, testing or treatment for cases of COVID-19, or entities that
can otherwise attest to the terms and conditions. While now codified in the October 22, 2020 Notice, guidance permitting parent
companies to allocate general fund distributions to subsidiaries was previously set forth in FAQs published by HHS and as such,
the Company’s estimate of pandemic relief funds as of September 30, 2020 includes the allocation of certain general funds
among subsidiaries. Regarding the amended definition of lost revenues, such change serves to increase amounts eligible to be recognized
as income, as compared to the September 19, 2020 Notice. The Company’s evaluation of the October 22, 2020 Notice is ongoing
and the amount by which the approximately $4.4 million of deferred Provider Relief Funds as of September 30, 2020 may be recognized
as a result of the October 22, 2020 Notice is not yet known. U.S. GAAP does not permit amounts recognized as of September 30,
2020 to be updated on the basis of new information in the October 22, 2020 Notice.
Issuance
of Common Stock
Subsequent
to September 30, 2020 and through November 12, 2020, the Company issued an aggregate of 2,076,750 shares of common
stock for conversions of preferred stock.
The
following table presents the dilutive effect of our various potential common shares as of November 12, 2020.
|
|
November 12, 2020
|
|
Common shares outstanding
|
|
|
3,943,679
|
|
Dilutive potential shares:
|
|
|
|
|
Stock options
|
|
|
26
|
Warrants
|
|
|
987,961,512
|
|
Convertible debentures
|
|
|
150,590,476
|
|
Convertible preferred stock
|
|
|
888,763,212
|
|
Total dilutive potential common shares, including outstanding common stock
|
|
|
2,031,258,905
|
|