The accompanying notes are an integral part
of these condensed consolidated financial statements.
The accompanying notes are an integral part
of these condensed consolidated financial statements.
The accompanying notes are an integral part
of these condensed consolidated financial statements.
The accompanying notes are an integral part
of these condensed consolidated financial statements.
Notes to Condensed Consolidated Financial
Statements
(unaudited)
Note 1 – Organization and Basis of Presentation
Rennova Health, Inc. (“Rennova”),
together with its subsidiaries (the “Company”, “we”, “us” or “our”), is a vertically
integrated provider of healthcare related products and services. The Company’s principal lines of business are (i) clinical
laboratory operations; (ii) supportive software solutions to healthcare providers including Electronic Health Records (“EHR”),
Medical Billing Services and Laboratory Information Services; (iii) decision support and interpretation of cancer and genomic diagnostics;
and (iv) the recent addition of a rural critical access hospital.
Basis of Presentation
The accompanying unaudited condensed consolidated
interim financial statements should be read in conjunction with the 2016 audited financial statements included in the Company’s
Annual Report on Form 10-K, filed with the U.S. Securities and Exchange Commission (the “SEC”) on April 10, 2017. These
condensed consolidated interim financial statements have been prepared in accordance with the instructions to Form 10-Q and Article
8 of Regulation S-X of the SEC, and therefore omit or condense certain footnotes and other information normally included in consolidated
interim financial statements prepared in accordance with U.S. GAAP. All material intercompany balances and transactions have been
eliminated in consolidation. In the opinion of the Company’s management, the unaudited interim condensed consolidated financial
statements contain all adjustments (consisting only of normal recurring accruals) considered necessary for the fair presentation
of the financial position and results of operations and cash flows for the interim periods reported herein. The results of operations
presented are not necessarily indicative of the results to be expected for any other interim period or for the entire year.
During the three months ended March 31,
2017 and 2016, comprehensive loss was equal to the net loss amounts presented in the accompanying condensed consolidated statements
of operations. In addition, certain prior year balances have been reclassified to conform to the current presentation.
Reverse Stock Split
On February 7, 2017, the Company’s
Board of Directors approved an amendment to the Company’s Certificate of Incorporation to effect a 1-for-30 reverse stock
split of the Company’s shares of common stock effective on February 22, 2017 (the “Reverse Stock Split”). The
stockholders of the Company had approved an amendment to the Company’s Certificate of Incorporation on December 22, 2016
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-10
to 1-for-30, and granted authorization to the Board of Directors to determine in its discretion the specific ratio and timing of
the reverse split prior to December 31, 2017.
As a result of the Reverse Stock Split,
every 30 shares of the Company’s then outstanding common stock was combined and automatically converted into one share of
the Company’s common stock, par value $0.01 per share. In addition, the conversion and exercise prices of all of the Company’s
outstanding preferred stock, common stock purchase warrants, stock options and convertible notes payable were proportionately adjusted
at the 1:30 reverse split ratio in accordance with the terms of such instruments. Proportionate voting rights and other rights
of common stockholders were not affected by the Reverse Stock Split, other than as a result of the rounding up of fractional shares,
as no fractional shares were issued in connection with the Reverse Stock Split.
The reverse stock split became effective
at the close of business on February 22, 2017 and the Company’s common stock began trading on The NASDAQ Capital Market on
a post-split basis on February 23, 2017. The par value and other terms of the common stock were not affected by the Reverse Stock
Split. The authorized capital of the Company of 500,000,000 shares of common stock and 5,000,000 shares of preferred stock were
also unaffected by the Reverse Stock Split. All share, per share and capital stock amounts for all periods presented have been
restated to give effect to the Reverse Stock Split.
Going Concern
The Company’s consolidated financial
statements are prepared using U.S. GAAP applicable to a going concern that contemplates the realization of assets and liquidation
of liabilities in the normal course of business. The Company has accumulated significant losses and has negative cash flows from
operations, and at March 31, 2017 had a working capital deficit and stockholders’ deficit of $11.9 million and $65.3 million,
respectively, which raise substantial doubt about its ability to continue as a going concern. In addition, the Company’s
cash position is critically deficient, critical payments are not being made in the ordinary course and certain indebtedness in
the amount of $6.0 million matured on March 31, 2017, which the Company does not have the financial resources to satisfy (see note
4), all of which raises substantial doubt about the Company’s ability to continue as a going concern.
The Company is currently executing on a
plan of action to reduce the number of laboratory facilities it operates from five such facilities into one, with a corresponding
reduction in the number of employees and associated operating expenses, in order to reduce costs. In addition, the Company issued
$12.4 million of convertible debentures in the first three months of 2017, for which it received net proceeds of $9.9 million (see
note 5), and intends to seek additional financing on similar terms within the next few months. There are currently no commitments
for any such funding.
RENNOVA HEALTH, INC.
Notes to Condensed Consolidated Financial
Statements
(unaudited)
There can be no
assurance that the Company will be able to achieve its business plan, 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 significantly reduce its operating costs, increase its revenues and eventually regain profitable operations.
The accompanying consolidated financial statements do not include any adjustments that might be necessary if the Company is unable
to continue as a going concern.
Note 2 – Accounts Receivable
Accounts receivable at March 31, 2017 and
December 31, 2016 consisted of the following:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Accounts receivable - laboratory services
|
|
$
|
6,998,918
|
|
|
$
|
13,220,498
|
|
Accounts receivable - all others
|
|
|
732,888
|
|
|
|
701,583
|
|
Total accounts receivable
|
|
|
7,731,806
|
|
|
|
13,922,081
|
|
Less:
|
|
|
|
|
|
|
|
|
Allowance for discounts
|
|
|
(6,089,059
|
)
|
|
|
(12,103,547
|
)
|
Allowance for bad debts
|
|
|
(345,162
|
)
|
|
|
(350,954
|
)
|
Accounts receivable, net
|
|
$
|
1,297,585
|
|
|
$
|
1,467,580
|
|
Note 3 – Property
and Equipment
Property and equipment at March 31, 2017 and December 31, 2016
consisted of the following:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Medical equipment
|
|
$
|
696,195
|
|
|
$
|
696,195
|
|
Buiding
|
|
|
1,056,000
|
|
|
|
–
|
|
Equipment
|
|
|
490,746
|
|
|
|
490,746
|
|
Equipment under capital leases
|
|
|
4,497,025
|
|
|
|
4,497,025
|
|
Furniture
|
|
|
525,689
|
|
|
|
525,689
|
|
Leasehold improvements
|
|
|
1,335,971
|
|
|
|
1,335,971
|
|
Vehicles
|
|
|
196,534
|
|
|
|
196,534
|
|
Computer equipment
|
|
|
634,237
|
|
|
|
634,237
|
|
Software
|
|
|
1,774,269
|
|
|
|
1,739,348
|
|
|
|
|
11,206,666
|
|
|
|
10,115,745
|
|
Less accumulated depreciation
|
|
|
(7,612,087
|
)
|
|
|
(7,019,143
|
)
|
Property and equipment, net
|
|
$
|
3,594,579
|
|
|
$
|
3,096,602
|
|
On January 13, 2017, the Company completed
an asset purchase agreement to acquire certain assets related to Scott County Community Hospital, based in Oneida, Tennessee (the
“Hospital Assets”). The Hospital Assets include a 52,000 square foot hospital building and 6,300 square foot professional
building on approximately 4.3 acres. Scott County Community Hospital, which has since been renamed as Big South Fork Medical Center,
is classified as a Critical Access Hospital (rural). The Company acquired the Hospital Assets out of bankruptcy for a purchase
price of $1.0 million, and the purchase price has been recorded as property and equipment in the Company’s consolidated balance
sheet. The Company intends to reopen the hospital during the third quarter of 2017, subject to the receipt of the necessary licenses
and regulatory approvals.
Depreciation expense on property and equipment
was $0.6 million and $0.7 million for the three months ended March 31, 2017 and 2016, respectively. Management periodically reviews
the valuation of long-lived assets, including property and equipment, for potential impairment. Management did not recognize any
impairment of these assets during the three months ended March 31, 2017 and 2016.
RENNOVA HEALTH, INC.
Notes to Condensed Consolidated Financial
Statements
(unaudited)
Note 4 – Notes
Payable
The Company and its
subsidiaries are party to a number of loans with affiliates and unrelated parties. At March 31, 2017 and December 31, 2016,
notes payable consisted of the following:
Notes Payable – Third Parties
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
Loan payable under prepaid forward purchase contract
|
|
$
|
5,000,000
|
|
|
$
|
5,000,000
|
|
|
|
|
|
|
|
|
|
|
Loan payable to TCA Global 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 September 17, 2017.
|
|
|
2,383,002
|
|
|
|
3,000,000
|
|
|
|
|
|
|
|
|
|
|
Notes payable to CommerceNet and Jay Tenenbaum in the original principal amount of $500,000, bearing interest at 6% per annum (the "Tegal Notes"). Prinicpal and interest payments are due annually from July 12, 2015 through July 12, 2017
|
|
|
341,612
|
|
|
|
341,612
|
|
|
|
|
|
|
|
|
|
|
Other convertible notes payable
|
|
|
–
|
|
|
|
440,000
|
|
|
|
|
|
|
|
|
|
|
Unamortized discount on other convertible notes
|
|
|
–
|
|
|
|
(179,889
|
)
|
Derivative liability associated with the TCA Debenture, at fair value
|
|
|
–
|
|
|
|
409,524
|
|
|
|
|
7,724,614
|
|
|
|
9,011,247
|
|
Less current portion
|
|
|
(7,724,614
|
)
|
|
|
(9,011,247
|
)
|
Notes payable - third parties, net of current portion
|
|
$
|
–
|
|
|
$
|
–
|
|
On March 31, 2016, the Company entered
into an agreement to pledge certain of its accounts receivable as collateral against a prepaid forward purchase contract whereby
the Company received consideration in the amount of $5.0 million. The receivables had an estimated collectable value of $8.7 million
which had been adjusted down to approximately $4.3 million on the Company’s balance sheet as of March 31, 2016 and $0 as
of March 31, 2017. In exchange for the consideration received, the counterparty received the right to: (i) a 20% per annum investment
return from the Company on the consideration, with a minimum repayment term of six months and minimum return of $0.5 million, (ii)
all payments recovered from the accounts receivable up to $5.25 million, if paid in full within six months, or $5.5 million, if
not paid in full within six months, and (iii) 20% of all payments of the accounts receivable in excess of amounts received in (i)
and (ii). On March 31, 2017, to the extent that the counterparty has not been paid $6.0 million, the Company was required
to pay the difference. To date, the Company has not recovered any payments against the accounts receivable. As of March 31, 2017,
the Company has accrued $1.0 million for the counterparty’s required investment return, which is reflected in accrued expenses
in the accompanying consolidated balance sheet, and $6.0 million was due to the counterparty on March 31, 2017. The Company does
not have the financial resources to repay this obligation.
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 in accordance with the terms of
the TCA Debenture. Also on March 21, 2017, the Company entered into a letter agreement with TCA, which (i) waives any payment defaults
through March 21, 2017; (ii) provides for the $0.75 million payment discussed above; (iii) sets forth a revised repayment schedule
whereby the remaining principal plus interest aggregating to approximately $2.6 million is repaid in various monthly installments
from April of 2017 through September of 2017; and (iv) provides for payment of an additional service fee in the amount of $150,000,
which is due upon the earlier of September 20, 2017 or the date on which a previously filed registration statement filed by the
Company is declared effective by the SEC, and is reflected in accrued expenses in the accompanying consolidated balance sheet at
March 31, 2017. In addition, TCA entered into an intercreditor agreement with the purchasers of the convertible debentures (see
note 5) which sets forth rights, preferences and priorities with respect to the security interests in the Company’s assets.
RENNOVA HEALTH, INC.
Notes to Condensed Consolidated Financial
Statements
(unaudited)
On September 15, 2016, the Company entered
into an agreement with two investors whereby the Company sold to the investors convertible notes in the aggregate principal amount
of $0.4 million (the “September 2016 Notes”). The September 2016 Notes were convertible into shares of the Company’s
common stock at a conversion price of $7.50 per share. In conjunction with the sale of the September 2016 Notes, the Company issued
warrants to purchase an aggregate of 66,667 shares of the Company’s common stock at an exercise price of $12.00 per share.
Based on the allocation of the net proceeds from the September 2016 Notes to the fair value of the warrants, and the resulting
beneficial conversion features, the Company recognized a discount for the entire face value of the September 2016 Notes, which
was accreted through the notes’ maturity date of March 15, 2017. On March 13, 2017, the September 2016 Notes, along with
the accompanying warrants, were exchanged for 400,000 shares of the Company’s common stock.
The Company did not make the principal
payments under the Tegal Notes that were 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 and accrued interest aggregating to $0.4
million. On December 7, 2016 the Company received a breach of contract complaint with a request for entry of a default judgment
(see note 13). To date, the Company has yet to repay this amount.
Notes Payable – Related Parties
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
Loan payable to Alcimede LLC, bearing interest at 6% per annum, with all principal and interest due on August 2, 2017
|
|
$
|
168,500
|
|
|
$
|
218,500
|
|
|
|
|
|
|
|
|
|
|
Other advances from related parties
|
|
|
75,000
|
|
|
|
110,000
|
|
|
|
|
243,500
|
|
|
|
328,500
|
|
Less current portion
|
|
|
(243,500
|
)
|
|
|
(328,500
|
)
|
Total notes payable, related parties
|
|
$
|
–
|
|
|
$
|
–
|
|
On February 3, 2015, the Company borrowed
$3.0 million from Alcimede LLC (“Alcimede”). Seamus Lagan, the Company’s President and Chief Executive Officer,
is the sole manager of Alcimede. The note has an interest rate of 6% and was originally due on February 2, 2016. Alcimede has since
agreed to extend the maturity date of the loan to August 2, 2017. On June 29, 2015, Alcimede exercised options granted in October
2012 to purchase one million shares of the Company’s common stock at an exercise price of $2.50 per share, and the loan outstanding
was reduced in satisfaction of the aggregate exercise price of $2.5 million. In August of 2016, $0.3 million was repaid by the
Company through the issuance of shares of common stock. In March of 2017, the Company and Mr. Lagan agreed that a payment made
to Mr. Lagan in the amount of $50,000 would be deducted from the outstanding balance of the note, and the remaining balance due
on this loan as of March 31, 2017 was $0.2 million.
During the three months ended March 31,
2017, the Company repaid $0.1 million that was outstanding to a former principal stockholder, and borrowed an additional $75,000
from this same stockholder.
Note 5 – Convertible Debentures
On February 2, 2017, the Company issued
$1.6 million aggregate principal amount of Original Issue Discount Convertible Debentures due three months from the date of issuance
(the “February Debentures”) and warrants to purchase an aggregate of 100,000 shares of common stock, which can be exercised
at any time after August 17, 2017 at an exercise price of $2.58 per share (the “Warrants”), to an accredited investor
for a purchase price of $1.5 million. The February Debentures were convertible at a conversion price of $2.58 per share (subject
to adjustment).
On March 21, 2017, the Company issued $10.85
million aggregate principal amount of Senior Secured Original Issue Discount Convertible Debentures due March 21, 2019 (the “Convertible
Debentures”) and three series of warrants to purchase an aggregate of 19,608,426 shares of the Company’s common stock
to several accredited investors. The Company received net proceeds from this transaction in the approximate amount of $8.4 million.
The Company used $3.8 million of the net proceeds to repay the 2017 Diamantis Note (see note 6) and $0.75 million of the net proceeds
to make the partial repayment on the TCA Debenture (see note 4). The remainder of the net proceeds were used for general corporate
purposes. In conjunction with the issuance of the Convertible Debentures, the holder of the February Debentures exchanged these
debentures for $2.5 million of new debentures (the “Exchange Debentures” and, collectively with the Convertible Debentures,
the “Debentures”) on the same terms as, and pari passu with, the Convertible Debentures, and warrants to purchase 4,453,917
shares of the Company’s common stock. The Company recorded non-cash interest expense in the amount of $0.4 million as a result
of this exchange. Additionally, the holders of an aggregate of $2.2 million stated value of the Company’s Series H Convertible
Preferred Stock (the “Series H Preferred Stock”) exchanged such preferred stock into $2.7 million principal amount
of Exchange Debentures and warrants to purchase 4,871,853 shares of the Company’s common stock. All of the Debentures contain
a 24% original issue discount, have no regularly scheduled interest payments except in the event of a default and have a maturity
date of March 21, 2019. The warrants issued with the Convertible Debentures and the Exchange Debentures are collectively referred
to as the “Debenture Warrants.”
RENNOVA HEALTH, INC.
Notes to Condensed Consolidated Financial
Statements
(unaudited)
The Debentures are convertible into shares
of the Company’s common stock at an initial conversion price of $1.66 per share, subject to adjustment as more fully described
in the Debentures. The Debentures will begin to amortize monthly commencing on the 90
th
day following the closing date,
except for the Exchange Debentures related to the Series H Preferred Stock, which began to amortize monthly on the closing date.
On each monthly amortization date, the Company may elect to repay 5% of the original principal amount of Debentures in cash or,
in lieu thereof, the conversion price of such Debentures will thereafter be 85% of the volume weighted average price at the time
of conversion. In the event the Company does not elect to pay such amortization amounts in cash, each investor, in their sole discretion,
may increase the conversion amount subject to the alternative conversion price by up to four times the amortization amount. The
Debentures contain customary affirmative and negative covenants. The conversion price is subject to reset in the event of offerings
or other issuances of common stock, or rights to purchase common stock, at a price below the then conversion price, as well as
other customary anti-dilution protections as more fully described in the Debentures. The Debentures are secured by all of the Company’s
assets and are guaranteed by all of the Company’s subsidiaries. Between March 22, 2017 and March 31, 2017, holders of the
Exchange Debentures converted an aggregate of $0.5 million of debentures into 315,171 shares of common stock.
The exercise price of the
Debenture Warrants is subject to reset in the event of offerings or other issuances of common stock, or rights to purchase
common stock, at a price below the then exercise price, as well as other customary anti-dilution protections. As a result of
these provisions, both the Debentures and the Debenture Warrants are deemed to be not indexed to the Company’s common
stock, and the Company recognized derivative liabilities for the embedded conversion feature of the Debentures and the
Debenture Warrants in the amount of $15.3 million and $41.3 million, respectively. The Company recognized a discount for 100%
of the principal value of the Debentures and non-cash interest expense in the amount of $43.7 million in connection with
the recognition of these derivative liabilities. The fair value of these derivative liabilities were obtained using Monte
Carlo simulations and a binomial lattice model, and the aggregate fair value of these derivative liabilities as of March 31,
2017 was $56.0 million. As a result, the Company recorded a gain on the change in fair value of derivative liabilities of
$0.6 million for the three months ended March 31, 2017. The carrying amount of the Debentures, which is reflected in other
assets in the accompanying consolidated balance sheet as of March 31, 2017, is as follows:
|
|
March 31, 2017
|
|
Convertible Debentures
|
|
$
|
10,850,000
|
|
Exchange Debentures
|
|
|
4,671,076
|
|
Discount on Debentures
|
|
|
(15,356,925
|
)
|
Deferred financing fees
|
|
|
(395,419
|
)
|
|
|
|
(231,268
|
)
|
Less current portion
|
|
|
–
|
|
Convertible Debentures
|
|
$
|
(231,268
|
)
|
Note 6 – Related Party Transactions
In addition to the transactions discussed
in note 4, the Company had the following related party transactions during the three months ended March 31, 2017 and 2016:
In January and February of 2017, the Company
received advances aggregating $3.3 million from Christopher Diamantis, a director of the Company. The advances, along with $0.5
million of previously accrued but unpaid interest, were due on demand, bearing interest at 10% per annum. The Company used the
advances to pay the purchase price for the Hospital Assets and for general corporate purposes. On March 7, 2017, the Company issued
a promissory note to Mr. Diamantis in the amount of $3.8 million (the “2017 Diamantis Note”) in connection with these
advances received in 2017, plus accrued and unpaid interest of $0.5 million. In conjunction with the issuance of the 2017 Diamantis
Note, the Company also issued to Mr. Diamantis warrants to purchase 250,000 shares of the Company’s common stock. The 2017
Diamantis Note was repaid on March 21, 2017 with the proceeds received from the issuance of the Convertible Debentures (see note
5).
Alcimede billed the Company $0.1 million
for consulting fees pursuant to a consulting agreement for each of the three months ended March 31, 2017 and 2016.
RENNOVA HEALTH, INC.
Notes to Condensed Consolidated Financial
Statements
(unaudited)
Monarch Capital, LLC ("Monarch")
billed the Company for consulting fees pursuant to a consulting agreement in the amount of $60,000 and $50,000 for the three months
ended March 31, 2017 and 2016, respectively. Michael Goldberg, a director of the Company up until his resignation effective April
24, 2017, is the Managing Director of Monarch.
Note 7 – Capital
Lease Obligations
The Company leases various assets under
capital leases expiring through 2020 as follows:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Medical equipment
|
|
$
|
4,497,025
|
|
|
$
|
4,497,025
|
|
Less accumulated depreciation
|
|
|
(3,069,139
|
)
|
|
|
(2,809,511
|
)
|
|
|
|
|
|
|
|
|
|
Net
|
|
$
|
1,427,886
|
|
|
$
|
1,687,514
|
|
Aggregate future minimum rentals under
capital leases are as follows:
Year ended December 31,
|
|
|
|
2017 (April through December)
|
|
$
|
965,811
|
|
2018
|
|
|
1,427,375
|
|
2019
|
|
|
377,919
|
|
2020
|
|
|
32,611
|
|
Total
|
|
|
2,803,716
|
|
|
|
|
|
|
Less interest
|
|
|
144,584
|
|
Present value of minimum lease payments
|
|
|
2,659,132
|
|
|
|
|
|
|
Less current portion of capital lease obligations
|
|
|
1,271,860
|
|
Capital lease obligations, net of current portion
|
|
$
|
1,387,272
|
|
Note 8 – Stockholders’ Equity
Preferred Stock
During the three months ended March 31,
2017, 6,280 shares of Series H Preferred Stock were converted into 2,325,929 shares of common stock in accordance with the terms
of the Series H Preferred Stock. Also during the three months ended March 31, 2017, 2,174 shares of Series H Preferred Stock were
exchanged for Exchange Debentures with an aggregate principal amount of $2.7 million and warrants (see note 5).
Common Stock
On January 17,
2017, 2,778 shares of common stock were issued to an employee.
On February 22,
2017, the Reverse Stock Split became effective (see note 1). The Reverse Stock Split resulted in the issuance of 7,897 shares of
common stock due to the rounding up of fractional shares.
On March 13, 2017,
the Company issued 400,000 shares of common stock in settlement of $0.4 million of outstanding notes and warrants (see note 4).
On March 15, 2017,
the Company agreed to issue 29,518 shares of common stock to a holder of a like number of warrants to purchase the Company’s
common stock in exchange for the warrants.
During the three
months ended March 31, 2017, Exchange Debentures with a principal amount of $0.5 million were converted into 315,171 shares of
common stock (see note 5).
RENNOVA HEALTH, INC.
Notes to Condensed Consolidated Financial
Statements
(unaudited)
Stock Options
The Company currently
maintains and sponsors the Tegal Corporation 2007 Incentive Award Plan (the “2007 Equity Plan”). Tegal Corporation
is the predecessor entity to CollabRx. The 2007 Equity Plan, as amended, provides for the issuance of stock options and other equity
awards to the Company’s officers, directors, employees and consultants. During the three months ended March 31, 2017 and
2016, the Company recognized stock-based compensation in the amount of $35,215 and $0, respectively, for the vesting of outstanding
stock options. The following table summarizes the Company’s stock option activity for the three months ended March 31, 2017:
|
|
Number of options
|
|
|
Weighted-average exercise price
|
|
|
Weighted-average contractual term
|
|
Outstanding at December 31, 2016
|
|
|
709,025
|
|
|
$
|
129.43
|
|
|
|
8.93
|
|
Granted
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
Expired
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
Forfeit
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
Exercised
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
Outstanding at March 31, 2017
|
|
|
709,025
|
|
|
$
|
129.43
|
|
|
|
8.68
|
|
Exercisable at March 31, 2017
|
|
|
642,357
|
|
|
$
|
144.53
|
|
|
|
|
|
As of March 31, 2017, the Company had approximately
$0.3 million of unrecognized compensation cost related to stock options granted under the Company’s 2007 Equity Plan, which
is expected to be recognized over a weighted-average period of 1.12 years.
Warrants
The Company, as part of various debt and
equity financing transactions, has issued warrants to purchase shares of the Company’s common stock. The following summarizes
the information related to warrants issued and the activity during the three months ended March 31, 2017:
|
|
Number of warrants
|
|
|
Weighted average exercise price
|
|
Balance at December 31, 2016
|
|
|
1,407,647
|
|
|
$
|
11.70
|
|
Warrants issued during the period
|
|
|
29,284,193
|
|
|
$
|
1.66
|
|
Warrants exchanged for other securities
|
|
|
(96,185
|
)
|
|
$
|
12.46
|
|
Warrants exercised during the period
|
|
|
–
|
|
|
$
|
–
|
|
Warrants expired during the period
|
|
|
–
|
|
|
$
|
–
|
|
Balance at March 31, 2017
|
|
|
30,595,655
|
|
|
$
|
2.09
|
|
Basic and Diluted Loss per Share
Basic loss per share excludes dilution
and is computed by dividing loss attributable to common stockholders by the weighted-average number of common shares outstanding
during the period. 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 the three months ended March 31, 2017 and 2016, basic loss per share is the same as diluted loss
per share.
Diluted loss per share excludes all dilutive
potential shares if their effect is anti-dilutive. As of March 31, 2017 and 2016, the following potential common stock equivalents
were excluded from the calculation of diluted loss per share as their effect was anti-dilutive:
|
|
For the Three Months Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Warrants
|
|
|
30,595,665
|
|
|
|
229,952
|
|
Convertible preferred stock
|
|
|
595,556
|
|
|
|
380,766
|
|
Convertible debt
|
|
|
10,007,141
|
|
|
|
293,045
|
|
Stock options
|
|
|
709,025
|
|
|
|
60,756
|
|
|
|
|
41,907,387
|
|
|
|
964,519
|
|
RENNOVA HEALTH, INC.
Notes to Condensed Consolidated Financial
Statements
(unaudited)
Note 9 – Supplemental Disclosure
of Cash Flow Information
|
|
Three Months Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Cash paid for interest
|
|
$
|
881,457
|
|
|
$
|
520,000
|
|
Cash paid for income taxes
|
|
$
|
296,313
|
|
|
$
|
–
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Exchange of preferred stock for convertible debentures and warrants
|
|
$
|
2,695,760
|
|
|
$
|
–
|
|
Exchange of convertible debentures for convertible debentures and warrants
|
|
$
|
2,464,500
|
|
|
|
|
|
Notes payable settled through issuance of common stock
|
|
$
|
440,000
|
|
|
$
|
–
|
|
Debentures converted into common stock
|
|
$
|
486,032
|
|
|
$
|
–
|
|
Conversions of preferred stock into common stock
|
|
$
|
6,280,000
|
|
|
$
|
–
|
|
Note 10 – Commitments and
Contingencies
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. Management, in consultation with legal counsel, has addressed known assertions and predicted unasserted
claims below.
The Company’s Epinex Diagnostics
Laboratories, Inc. subsidiary had been 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 has accrued this amount in its consolidated financial statements.
In February 2016, the Company received
notice that the Internal Revenue Service (the “IRS”) had 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. The Company is currently unable to predict the outcome of the audit or any liability
to the Company that may result from the audit.
On September 27, 2016, a tax warrant was
issued against the Company by the Florida Department of Revenue (the “DOR”) for unpaid state income taxes in the approximate
amount of $0.9 million, including penalties and interest. On January 25, 2017, the Company paid the DOR $250,000 as partial payment
on this liability, and in February 2017 the Company entered into a Stipulation Agreement with the DOR which will allow the Company
to pay the remainder of the amount due to the DOR over a period of 12 months. If at any time during the Stipulation period the
Company fails to timely file any required tax returns with the DOR or does not meet the payment obligations under the Stipulation
Agreement, the entire amount due will be accelerated.
RENNOVA HEALTH, INC.
Notes to Condensed Consolidated Financial
Statements
(unaudited)
In December of 2016, TCS-Florida, L.P.
(“Tetra”), filed suit against the Company for failure to make the required payments under an equipment leasing contract
that the Company had with Tetra (see note 9). On January 3, 2017, Tetra received a Default Judgment against the Company in the
amount of $2.6 million, representing the balance owed on the leases, as well as additional interest, penalties and fees. The Company
has recognized this amount in its consolidated financial statements as of December 31, 2016. In January and February of 2017, the
Company made payments to Tetra in connection with this judgment aggregating to $0.7 million, and on February 15, 2017 the Company
entered into a forbearance agreement with Tetra whereby the remaining $1.9 million due will be paid in 24 equal monthly installments,
commencing on May 1, 2017.
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 9). 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 has 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 will be paid in variable monthly installments
through January of 2019, with an implicit interest rate of 4.97%.
On December 7, 2016, the holders of the
Tegal Notes (see note 4) filed suit against the Company seeking payment for the amounts due under the notes in the aggregate of
$0.4 million, including accrued interest. A request for entry of default judgment was filed on January 24, 2017. The Company has
attempted to work out a payment arrangement with the plaintiffs, but to date has not been able to consummate such an arrangement.
A Case Management Conference is scheduled for September 5, 2017.
Potential De-Listing of the Company’s
Stock
On April 18, 2017, the Company was notified by Nasdaq that the
stockholders’ equity balance reported on its Form 10-K for the year ended December 31, 2016 fell below the $2.5 million minimum
requirement for continued listing under the Nasdaq Capital Market’s Listing Rule 5550(b)(1) (the “Rule”). As
of December 31, 2016, the Company’s stockholders’ deficit balance was $14.9 million. In accordance with the Rule, the
Company has until June 2, 2017 to prepare and submit a plan to Nasdaq outlining how it intends to regain compliance. If the plan
is accepted, the Company can be granted up to 180 calendar days from April 18, 2017 to evidence compliance. There can be no guarantee
that the Company will be able to regain compliance with the continued listing requirement of Nasdaq Marketplace Rule 5550(b)(1)
or that its plan will be accepted by Nasdaq.
The Company is currently evaluating its available options to
resolve the deficiency and regain compliance with the Nasdaq minimum stockholders’ equity requirement.
Note 11 – Segment Information
Operating segments are defined under U.S.
GAAP as components of an enterprise for which discrete financial information is available and are evaluated regularly by the enterprise’s
chief operating decision maker in determining how to allocate resources and assess performance. The Company operates in four reportable
business segments:
|
·
|
Clinical Laboratory Operations
, which specializes in providing urine and blood toxicology
and pain medication testing to physicians, clinics and rehabilitation facilities in the United States.
|
|
·
|
Supportive Software Solutions
, including EHR and medical billing and laboratory information
management systems.
|
|
·
|
Decision Support and Informatics
, which develops and markets medical information and clinical
support products and services intended to set a standard for the clinical interpretation of genomics-based precision medicine.
|
|
·
|
Hospital Operations
, which reflects the purchase of the Hospital Assets (see note 3) and
the operations of Scott County Community Hospital, which has since been renamed as Big South Fork Medical Center.
|
RENNOVA HEALTH, INC.
Notes to Condensed Consolidated Financial
Statements
(unaudited)
The accounting policies of the reportable
segments are the same as those described in Note 2, Summary of Significant Accounting Policies, of the Company’s audited
consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.
Selected financial information for the Company’s operating segments is as follows:
|
|
Three Months Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Net revenues - External
|
|
|
|
|
|
|
|
|
Clinical Laboratory Operations
|
|
$
|
767,010
|
|
|
$
|
1,465,137
|
|
Supportive Software Solutions
|
|
|
236,945
|
|
|
|
230,026
|
|
Decision Support and Informatics
|
|
|
172,158
|
|
|
|
183,650
|
|
|
|
$
|
1,176,113
|
|
|
$
|
1,878,813
|
|
Net revenues - Intersegment
|
|
|
|
|
|
|
|
|
Supportive Software Solutions
|
|
$
|
78,326
|
|
|
$
|
296,348
|
|
|
|
$
|
78,326
|
|
|
$
|
296,348
|
|
(Loss) income from operations
|
|
|
|
|
|
|
|
|
Clinical Laboratory Operations
|
|
$
|
(1,341,998
|
)
|
|
$
|
(2,650,540
|
)
|
Supportive Software Solutions
|
|
|
(718,546
|
)
|
|
|
(1,313,313
|
)
|
Decision Support and Informatics
|
|
|
(301,001
|
)
|
|
|
(881,566
|
)
|
Hospital Operations
|
|
|
(467,316
|
)
|
|
|
–
|
|
Corporate
|
|
|
(1,804,517
|
)
|
|
|
(1,952,437
|
)
|
Eliminations
|
|
|
7,851
|
|
|
|
33,660
|
|
|
|
$
|
(4,625,527
|
)
|
|
$
|
(6,764,196
|
)
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
Clinical Laboratory Operations
|
|
$
|
434,468
|
|
|
$
|
581,101
|
|
Supportive Software Solutions
|
|
|
157,563
|
|
|
|
164,428
|
|
Decision Support and Informatics
|
|
|
8,453
|
|
|
|
14,527
|
|
Corporate
|
|
|
312
|
|
|
|
875
|
|
Eliminations
|
|
|
(7,851
|
)
|
|
|
(33,661
|
)
|
|
|
$
|
592,945
|
|
|
$
|
727,270
|
|
Capital expenditures
|
|
|
|
|
|
|
|
|
Clinical Laboratory Operations
|
|
$
|
–
|
|
|
$
|
16,885
|
|
Supportive Software Solutions
|
|
|
–
|
|
|
|
2,117
|
|
Hospital Operations
|
|
|
1,090,922
|
|
|
|
–
|
|
|
|
$
|
1,090,922
|
|
|
$
|
19,002
|
|
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
Total assets
|
|
|
|
|
|
|
|
|
Clinical Laboratory Operations
|
|
$
|
3,568,569
|
|
|
$
|
4,081,136
|
|
Supportive Software Solutions
|
|
|
1,870,578
|
|
|
|
2,602,428
|
|
Decision Support and Informatics
|
|
|
246,930
|
|
|
|
379,652
|
|
Hospital Operations
|
|
|
1,342,804
|
|
|
|
–
|
|
Corporate
|
|
|
3,839,108
|
|
|
|
2,130,191
|
|
Eliminations
|
|
|
(2,786,333
|
)
|
|
|
(2,711,014
|
)
|
|
|
$
|
8,081,656
|
|
|
$
|
6,482,393
|
|
RENNOVA HEALTH, INC.
Notes to Condensed Consolidated Financial
Statements
(unaudited)
Note 12 – Recently Issued Accounting
Standards
The following table provides a brief description
of recently issued accounting standards:
Title and reference
|
|
Prescribed
|
|
Commentary
|
Effective Date
|
Accounting Standard Update (“ASU”) No. 2015-11, “Inventory” (Topic 330): Simplifying the Measurement of Inventory.
|
|
Fiscal years beginning after December 15, 2016 and for interim periods therein.
|
|
In July 2015, the FASB issued ASU No. 2015-11, “Inventory” (Topic 330): Simplifying the Measurement of Inventory (“ASU 2015-11”). ASU 2015-11 simplifies the measurement of inventory by requiring certain inventory to be subsequently measured at the lower of cost and net realizable value. The amendments in this guidance are effective for fiscal years beginning after December 15, 2016 and for interim periods therein and did not have a significant impact on the Company’s consolidated financial statements upon adoption.
|
ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”
|
|
Fiscal years beginning after December 15, 2017 and for interim periods therein.
|
|
In May 2014, the FASB issued guidance that outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most recent current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also specifies the accounting for certain incremental costs of obtaining a contract and costs to fulfill a contract with a customer. Entities have the option of applying either a full retrospective approach to all periods presented or a modified approach that reflects differences prior to the date of adoption as an adjustment to equity. In April 2015, FASB deferred the effective date of this guidance until January 1, 2018 and the Company is currently assessing the impact of this guidance on its consolidated financial statements.
|
ASU No. 2014-15, “Presentation of Financial Statements - Going Concern” (Subtopic 205-40): Disclosure of Uncertainty about an Entity's Ability to Continue as a Going Concern.
|
|
Fiscal years, and interim periods within those years, beginning on or after December 15, 2016, with early adoption permitted.
|
|
In August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements - Going Concern” (Subtopic 205-40): Disclosure of Uncertainty about an Entity's Ability to Continue as a Going Concern (“ASU 2014-15”). ASU 2014-15 provides guidance that establishes management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and setting rules for how this information should be disclosed in the financial statements. Adoption of this new standard did not have a significant impact on the Company’s consolidated financial statements. See note 1 regarding management’s current disclosures regarding the Company’s ability to continue as a going concern.
|
RENNOVA HEALTH, INC.
Notes to Condensed Consolidated Financial
Statements
(unaudited)
ASU No. 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes” (“ASU 2015-17”)
|
|
Fiscal years beginning on or after December 15, 2016, with early adoption permitted.
|
|
In November 2015, the FASB issued ASU No. 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes” (“ASU 2015-17”). Topic 740, Income Taxes, requires an entity to separate deferred income tax liabilities and assets into current and noncurrent amounts in a classified statement of financial position. Deferred tax liabilities and assets are classified as current or noncurrent based on the classification of the related asset or liability for financial reporting. Deferred tax liabilities and assets that are not related to an asset or liability for financial reporting are classified according to the expected reversal date of the temporary difference. To simplify the presentation of deferred income taxes, the amendments in ASU 2015-17 require that deferred income tax liabilities and assets be classified as noncurrent in a classified statement of financial position. For public business entities, the amendments in this update are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Adoption of ASU 2015-17 did not have a material impact on the Company’s consolidated financial statements.
|
Accounting Standards Update (“ASU”) No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”)
|
|
Annual and interim periods within the annual period beginning after December 15, 2018.
|
|
In February 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). The amendments in this update create Topic 842, Leases, and supersede the leases requirements in Topic 840, Leases. Topic 842 specifies the accounting for leases. The objective of Topic 842 is to establish the principles that lessees and lessors shall apply to report useful information to users of financial statements about the amount, timing, and uncertainty of cash flows arising from a lease. The main difference between Topic 842 and Topic 840 is the recognition of lease assets and lease liabilities for those leases classified as operating leases under Topic 840. Topic 842 retains a distinction between finance leases and operating leases. The classification criteria for distinguishing between finance leases and operating leases are substantially similar to the classification criteria for distinguishing between capital leases and operating leases in the previous leases guidance. The result of retaining a distinction between finance leases and operating leases is that under the lessee accounting model in Topic 842, the effect of leases in the statement of comprehensive income and the statement of cash flows is largely unchanged from previous GAAP. The amendments in ASU 2016-02 are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years for public business entities. Early application of the amendments in ASU 2016-02 is permitted. The Company has not yet determined the impact that adoption of ASU 2016-02 will have on its consolidated financial statements.
|
Note 13 – Subsequent Events
Between April 5, 2017 and April 13, 2017,
an additional $0.8 million of Exchange Debentures were converted into 722,126 shares of common stock. Between April 21, 2017 and
April 26, 2017, 440 shares of Series H Preferred Stock were converted into 500,000 shares of common stock in accordance with the
terms of the Series H Preferred Stock.