PART
I
CAUTIONARY
STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
Certain
statements made in this Annual Report on Form 10-K are “forward-looking statements” (within the meaning of the Private
Securities Litigation Reform Act of 1995) regarding the plans and objectives of management for future operations. Such statements
involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements of
the Registrant to be materially different from any future results, performance or achievements expressed or implied by such forward-looking
statements. The forward-looking statements included herein are based on current expectations that involve numerous risks and uncertainties.
The Registrant’s plans and objectives are based, in part, on assumptions involving the continued expansion of business.
Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and
market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which
are beyond the control of the Registrant. Although the Registrant believes its assumptions underlying the forward-looking statements
are reasonable, any of the assumptions could prove to be inaccurate and, therefore, there can be no assurance the forward-looking
statements included in this Report will prove to be accurate. Considering the significant uncertainties inherent in the forward-looking
statements included herein, the inclusion of such information should not be regarded as a representation by the Registrant or
any other person that the objectives and plans of the Registrant will be achieved.
The
forward-looking statements included in this Form 10-K and referred to elsewhere are related to future events, our strategies or
future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may,”
“should,” “believe,” “anticipate,” “future,” “potential,” “estimate,”
“encourage,” “opportunity,” “growth,” “leader,” “expect,” “intend,”
“plan,” “expand,” “focus,” “through,” “strategy,” “provide,”
“offer,” “allow,” “commitment,” “implement,” “result,” “increase,”
“establish,” “perform,” “make,” “continue,” “can,” “ongoing,”
“include” or the negative of such terms or comparable terminology. All forward-looking statements included in this
Form 10-K are based on information available to us as of the filing date of this report, and the Company assumes no obligation
to update any such forward-looking statements, except as required by law. Our actual results could differ materially from the
forward-looking statements. Important factors that could cause actual results to differ materially from expectations reflected
in our forward-looking statements include those described in Item 1A, “Risk Factors.”
Rennova
Health, Inc. (together with its subsidiaries, “Rennova”, “we” or the “Company”) is a provider
of an expanding group of health care services for healthcare providers, patients and individuals. Beginning in 2018, the Company
intends to focus on and operate two synergistic divisions: 1) Clinical diagnostics through its clinical laboratories; and 2) Hospital
operations through its Big South Fork Medical Center, which opened on August 8, 2017, and a hospital in Jamestown Tennessee,
including a doctor’s practice, the assets of which we expect to acquire in the second quarter of 2018,
pursuant to the terms of a definitive asset purchase agreement that we entered into on January 31, 2018, as more fully discussed
below. We believe that our approach will produce a more sustainable business model and the capture of multiple revenue streams
from medical providers, patients and hospital services. Management determined that because Big South Fork Medical Center was
reopened after being closed and contracts with payers had to be negotiated and implemented during the first months of operation,
they would recognize a 20% collection rate for the period to December 31, 2017 until there was adequate collection history to
analyze and confirm anticipated collections. Jamestown is a fully operating facility.
On
July 12, 2017, the Company announced plans to spin off its Advanced Molecular Services Group (“AMSG”) and in the third
quarter 2017 the Company’s Board of Directors voted unanimously to spin off the Company’s wholly-owned subsidiary,
Health Technology Solutions, Inc. (“HTS”), as independent publicly traded companies by way of tax-free distributions
to the Company’s stockholders. Completion of these spinoffs is expected to occur in the third quarter of 2018. Our
Board of Directors is currently considering if AMSG and HTS would be better as one combined spinoff instead of two. The spinoffs
are subject to numerous conditions, including effectiveness of Registration Statements on Form 10 to be filed with the Securities
and Exchange Commission, and consents, including under various funding agreements previously entered into by the Company. A record
date to determine those stockholders entitled to receive shares in the spinoffs should be approximately 30 to 60 days prior to
the dates of the spinoffs. The strategic goal of the spinoffs is to create three (or two) public companies, each of which can
focus on its own strengths and operational plans. In addition, after the spinoffs, each company will provide a distinct and targeted
investment opportunity.
The
Company has reflected the amounts relating to AMSG and HTS as disposal groups classified as held for sale and included in discontinued
operations in the Company’s accompanying consolidated financial statements. Prior to being classified as held for sale,
AMSG had been included in the Decision Support and Informatics division, except for the Company’s subsidiary, Alethea Laboratories,
Inc., which had been included in the Clinical Laboratories division and HTS had been included in the Company’s Supportive
Software Solutions division. The Company believes it will be able to recognize the expenditures to date, which is in excess
of $20 million, as an investment after the spinoff(s) are complete
.
We
have received approximately $15.7 million in cash from the issuances of debentures and warrants during 2017 (see Note 8 to the
consolidated financial statements), $4.3 million from related parties (see Notes 7 and 8 to the consolidated financial statements)
and an additional $4.0 million of proceeds on October 30, 2017 from the issuance of our convertible preferred stock (see Note
12 to the consolidated financial statements). Subsequent to December 31, 2017, we received $2 million from the issuance of debentures
and $0.8 million from the sale of stock we owned (see Note 20).
The
protective covenants in the various agreements combined with the Company’s current inability to issue new shares and nonpayment
of certain liabilities means that $12.4 million that might otherwise be treated as equity have been treated as derivative liabilities
and had the relative effect applied to the Company’s financial statements including the profit and loss and balance sheet.
Our
net loss from continuing operations for the year ended December 31, 2017 was $50.9 million, as compared to $22.6 million for the
same period of a year ago. The change is primarily due to the decrease in operating expenses of $5.1 million and the increase
in revenue of $1.3 million offset by $12.4 million additional expense related to the value of derivative liabilities referred
to above, an increase of $15.2 million in interest expense, the decrease of $5.3 million in other income (expense), and additional
income tax expense of $1.8 million.
History
and Development of the Company
Medytox
Solutions, Inc. (“Medytox”) was organized on July 20, 2005 under the laws of the State of Nevada. In the first half
of 2011, Medytox’s management elected to reorganize as a holding company, and Medytox established and acquired a number
of companies in the medical service and software sector between 2011 and 2014.
On
November 2, 2015, pursuant to the terms of the Agreement and Plan of Merger, dated as of April 15, 2015, by and among CollabRx,
Inc. (“CollabRx”), CollabRx Merger Sub, Inc. (“Merger Sub”), a direct wholly-owned subsidiary of CollabRx
formed for the purpose of the merger, and Medytox, Merger Sub merged with and into Medytox, with Medytox as the surviving company
and a direct, wholly-owned subsidiary of CollabRx (the “Merger”). Prior to closing, the Company amended its certificate
of incorporation to effect a 1-for-10 reverse stock split and to change its name to Rennova Health, Inc. In connection with the
Merger, (i) each share of common stock of Medytox was converted into the right to receive 0.4096 shares of common stock of the
Company, (ii) each share of Series B Preferred Stock of Medytox was converted into the right to receive one share of a newly-authorized
Series B Convertible Preferred Stock of the Company, and (iii) each share of Series E Convertible Preferred Stock of Medytox was
converted into the right to receive one share of a newly-authorized Series E Convertible Preferred Stock of the Company. This
transaction was accounted for as a reverse merger in accordance with accounting principles generally accepted in the United States
of America (“U.S. GAAP”) and, as such, the historical financial statements of Medytox became the historical financial
statements of the Company.
Holders
of Company equity prior to the closing of the Merger (including all outstanding Company common stock and all restricted stock
units, options and warrants exercisable for shares of Company common stock) held 10% of the Company’s common stock immediately
following the closing of the Merger, and holders of Medytox equity prior to the closing of the Merger (including all outstanding
Medytox common stock and all outstanding options exercisable for shares of Medytox common stock, but less certain options that
were cancelled upon the closing pursuant to agreements between Medytox and such optionees) held 90% of the Company’s common
stock immediately following the closing of the Merger, in each case on a fully diluted basis, provided, however, outstanding shares
of Series B Convertible Preferred Stock and Series E Convertible Preferred Stock, certain outstanding convertible promissory notes
exercisable for Company common stock after the closing and certain option grants expected to be made following the closing of
the Merger were excluded from such ownership percentages.
Common
Stock Listing
On
November 3, 2015, the common stock of Rennova Health, Inc. commenced trading on The NASDAQ Capital Market under the symbol “RNVA.”
Prior to that date, our common stock was listed on The NASDAQ Capital Market under the symbol “CLRX.”
On
April 18, 2017, the Company was notified by NASDAQ that the stockholders’ equity balance reported on the Company’s
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”). In accordance with the Rule, the Company submitted
a plan to Nasdaq outlining how it intended to regain compliance. On August 17, 2017, Nasdaq notified the Company that its plan
to correct the stockholders’ equity deficiency did not contain sufficient evidence to support a correction being achieved
in the required time frame. The Company appealed this decision to a Hearing Panel which, on October 23, 2017, maintained this
position and denied the Company a continued listing. Effective October 25, 2017, the Company’s common stock (RNVA) and warrants
to purchase common stock (RNVAW) were no longer listed on The Nasdaq Capital Market but began trading on the OTCQB
instead.
Reverse
Stock Splits
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 and on September
21, 2017, the Company’s Board of Directors approved an amendment to the Company’s Certificate of Incorporation to
effect a 1-for-15 reverse stock split effective October 5, 2017 (the “Reverse Stock Splits”). The stockholders of
the Company had approved these amendments to the Company’s Certificate of Incorporation on December 22, 2016 for the February
22, 2017 reverse stock split and on September 20, 2017 for the October 5, 2017 reverse stock split. In both cases, the
Company’s stockholders had granted authorization to the Board of Directors to determine in its discretion the specific ratio,
subject to limitations, and the timing of the reverse splits within certain specified effective dates.
As
a result of the Reverse Stock Splits, 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, on February 22, 2017 and every
15 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, on October 5, 2017. In addition, the conversions and exercise prices
of all of the Company’s outstanding preferred stock, common stock purchase warrants, stock options, restricted stock, equity
incentive plans and convertible notes payable were proportionately adjusted at the 1:30 reverse split ratio and again at the 1:15
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 Splits, other than as a result of the rounding up of fractional
shares in the February reverse split and the payment of cash in lieu of fractional shares in the October reverse split, as no
fractional shares were issued in connection with the Reverse Stock Splits.
The
par value and other terms of the common stock were not affected by the Reverse Stock Splits. 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 Splits.
All share, per share and capital stock amounts as of and for the years ended December 31, 2017 and 2016 have been restated to
give effect to the Reverse Stock Splits.
Recent
Developments
Asset
Purchase Agreement to Acquire Acute Care Hospital
On
January 31, 2018, the Company entered into an asset purchase agreement (the “Purchase Agreement”) to acquire certain
assets related to an acute care hospital located in Jamestown, Tennessee. The hospital is known as Tennova Healthcare - Jamestown
and its associated assets, including a separately located doctor’s practice, are being acquired from
Community Health Systems, Inc. The transaction is expected to close in the second quarter of 2018, subject to customary regulatory
approvals and closing conditions. The purchase price is equal to the Net Working Capital (as defined in the Purchase Agreement),
plus $1.00.
Tennova
Healthcare – Jamestown is a fully-operational 85-bed facility including a 24/7 emergency department, radiology department,
surgical center, and a wound care and hyperbaric center. The purchase includes a 90,000-square foot hospital building on approximately
eight acres. Tennova Healthcare – Jamestown is located 38 miles from the Company’s existing hospital, the Big South
Fork Medical Center, which is located in Oneida Tennessee.
Proposals
Submitted to Stockholders
On
March 14, 2018, the Company gave notice of a special meeting of the stockholders of the Company to be held on May 2,
2018, at 11:00 a.m., local time, to, among other things:
1.
Approve an amendment to its Certificate of Incorporation, as amended, to effect a reverse stock split of all of the outstanding
shares of its common stock, par value $0.01 per share, at a specific ratio within a range from 1-for-50 to 1-for-300, and to grant
authorization to its Board of Directors to determine, in its discretion, the specific ratio and timing of the reverse stock split
any time before March 1, 2019, subject to the Board of Directors’ discretion to abandon such amendment;
2.
Approve an amendment to its Certificate of Incorporation, as amended, to increase the number of authorized shares of our common
stock from 500,000,000 to 3,000,000,000 shares; and
3.
Approve the Company’s new 2018 Incentive Award Plan.
The
Board of Directors fixed the close of business on March 12, 2018 as the record date for the determination of stockholders entitled
to notice of and to vote at the Special Meeting.
The
Company’s new 2018 Incentive Award Plan provides for the grant of incentive stock options, nonqualified stock options, restricted
stock, stock appreciation rights, performance shares, performance stock units, dividend equivalents, stock payments, deferred
stock, restricted stock units, other stock-based awards, and performance-based awards. An aggregate of 100,000,000 shares of the
Company’s common stock is proposed to be available for grant pursuant to the plan. No determination has been made as to
the types or amounts of awards that will be granted to specific individuals pursuant to the plan and no awards will be granted
under the plan until there are shares of authorized common stock available.
Accounts
Receivable Financing
As
previously announced, on March 31, 2016 the Company entered into an agreement to sell certain of its accounts receivable. The
agreement was originally scheduled to mature on March 31, 2017, which date was extended to March 31, 2018 by an amendment on March
24, 2017. On April 2, 2018, the Company, the purchaser and Christopher Diamantis, a Director of the Company, as guarantor, entered
into a second amendment to extend further the Company’s obligation to May 30, 2018. In connection with this further extension,
the purchaser received a fee of $100,000. To the extent the Company satisfies its obligations to the purchaser prior to May 30,
2018, the $100,000 fee will be reduced pro rata and the reduced portion shall be refunded to the Company.
Share
Issuances
On
March 6, 2018, the Board of Directors, based on the recommendation of the Compensation Committee, approved grants to employees
and directors of an aggregate of 71,333,331 shares of common stock, including the following to the directors of the Company:
Seamus
Lagan
|
26,666,667
shares
|
|
Dr.
Kamran Ajami
|
3,333,333
shares
|
|
John
Beach
|
3,333,333
shares
|
|
Gary
L. Blum
|
3,333,333
shares
|
|
Christopher
Diamantis
|
3,333,333
shares
|
|
Trevor
Langley
|
3,333,333
shares
|
|
The
shares were issued in reliance on the exemption from registration contained in Section 4(a)(2) of the Securities Act of 1933,
as amended (the “Securities Act”), as a transaction by an issuer not involving a public offering.
On
February 9, 2018, holders of the Company’s Senior Secured Original Issue Discount Convertible Debentures due September 19,
2019 exercised their right for the first time under exchange agreements (the “Exchange Agreements”) entered into with
the Company by electing to exchange an aggregate of $1,384,556 principal amount of such Debentures and the Company issued an aggregate
1,731 shares of its Series I-2 Convertible Preferred Stock.
Such
shares of Preferred Stock were issued in reliance on the exemption from registration contained in Section 3(a)(9) of the Securities
Act.
NanoVibronix
On
February 14, 2018, the Company entered into a Common Stock Purchase Agreement with two investors pursuant to which the Company
agreed to sell an aggregate of 200,000 shares of common stock of NanoVibronix, Inc. owned by the Company at a purchase price of
$4.00 per share. The Company had acquired the shares as a result of an investment originally made in 2011.
March
2018 Offering
On
March 5, 2018, the Company closed an offering of $2,480,000 aggregate principal amount of Senior Secured Original Issue Discount
Convertible Debentures due September 19, 2019. The Company received proceeds of $2,000,000 in the offering. The terms of these
Debentures are the same as those issued under the previously-announced Securities Purchase Agreement, dated as of August 31, 2017.
These Debentures may also be exchanged for shares of the Company’s Series I-2 Convertible Preferred Stock under the terms
of the Exchange Agreements.
The
Debentures were issued in reliance on the exemption from registration contained in Section 4(a)(2) of the Securities Act and by
Rule 506 of Registration D promulgated thereunder as a transaction by an issuer not involving a public offering.
Our
Services
We
are a healthcare enterprise that delivers products and services to healthcare providers, their patients and individuals. We operate
in two synergistic divisions: 1) Clinical diagnostics services through our clinical laboratories; and 2) Hospital operations through
our Big South Fork Medical Center and a hospital in Jamestown, Tennessee, the assets of which we expect to acquire in the
second quarter of 2018. We aspire to create a more sustainable relationship with our customers by offering needed and interoperable
solutions to capture multiple revenue streams from medical providers.
Clinical
Diagnostics
Our
principal line of business over the past few years has been clinical laboratory blood and urine testing services, with a particular
emphasis on the provision of urine drug toxicology testing to physicians, clinics and rehabilitation facilities in the United
States. As we expand our customer base to include pain management and other healthcare providers, testing services to rehabilitation
facilities represented approximately 51% of the Company’s revenues for the year ended December 31, 2017 and approximately
100% of the Company’s revenues for the year ended December 31, 2016. We believe that we are responding to the challenges
faced by today’s healthcare providers to adopt paper free and interoperable systems, and to market demand for solutions
by strategically expanding our offering of diagnostics services to include a full suite of clinical laboratory services. The drug
and alcohol rehabilitation and pain management sectors provide an existing and sizable target market, where the need for our services
already exists and opportunity is being created by a continued secular growth and need for compliance. This sector has been fraught
with difficulties over the past two years as payers reduce reimbursement and cover for diagnostics in this sector. The lack of
consistency between payer’s policies and their requirement for proof of medical necessity has created uncertainty for ordering
physicians and testing laboratories and their ability to receive payment. We have reduced the number of laboratories we operate
in first quarter 2018 to one facility in West Palm Beach, Florida.
The
Company owns and operates the following products and services to support its business objectives and to enable it to offer these
services to its customers:
Medytox
Diagnostics, Inc. (“MDI”)
Through
our CLIA certified laboratories, Rennova offers toxicology, clinical pharmacogenetics and esoteric testing. Rennova seeks to provide
these testing services with superior logistics and specimen integrity, competitive turn-around times and excellent customer service.
Clinical
Laboratory Operations
The
Company, through its wholly-owned MDI subsidiary, owns and operates the following clinical laboratory:
Laboratory
|
|
Location
|
EPIC
Reference Labs, Inc.
|
|
Riviera
Beach, FL
|
During
the year 2016 and year ended December 31, 2017, the Company experienced a substantial decline in the volume of samples processed
at its laboratories and continued difficulty in receiving reimbursement for certain diagnostics. As result, in an effort to reduce
costs, the Company is currently operating all of its Clinical Laboratory Operations business segment out of its EPIC Reference
Labs, Inc. (“EPIC”) laboratory, and cost reduction efforts are continuing in response to the operating losses incurred.
MDI formed EPIC as a wholly-owned subsidiary on January 29, 2013 to provide reference, confirmation and clinical testing services.
The Company acquired necessary equipment and licenses in order to allow EPIC to test urine for drugs and medication monitoring.
Operations at EPIC began in January 2014 using approximately 2,500 square feet and the premises has since been expanded to occupy
approximately 12,500 square feet.
The
Company’s Medytox Medical Marketing & Sales, Inc. subsidiary was formed on March 9, 2013 as a wholly-owned subsidiary
to provide marketing, sales, and customer service exclusively for our clinical laboratories.
Hospital
Operations
The
Company believes that the acquisition or development of rural hospitals will create a stable revenue base as a needed service
and believes that it can expand the sales of its products and services to surrounding medical providers and doctors’ groups.
On
January 13, 2017, we acquired the Hospital Assets in Oneida Tennessee, which include a 52,000-square foot hospital building and
6,300 square foot professional building on approximately 4.3 acres. Scott County Community Hospital, since renamed Big South Fork
Medical Center, is classified as a Critical Access Hospital (rural) with 25 beds, a 24/7 emergency department, operating rooms
and a laboratory that provides a range of diagnostic services. The hospital began operations on August 8, 2017, following the
receipt of the required licenses and regulatory approvals and generated revenues of approximately $1.8 million during the
period from August 8, 2017 to December 31, 2017.
The
hospital had unaudited annual revenues of approximately $12 million, and a normalized EBITDA of approximately $1.3 million for
Fiscal 2015, the last full year of the hospital’s operation. These revenues were attributable to the typical services of
a rural acute care hospital, including emergency room visits, outpatient procedures, diagnostic ancillary tests, physical therapy
and inpatient hospital stays. Based on the hospital’s historical information, we believe the hospital offers an established
patient and stable revenue base as it serves the general healthcare needs of its community and supports local physicians. Management
determined that because Big South Fork Medical Center was reopened after being closed and contracts with payers had to be negotiated
and implemented during the first months of operation, they would recognize a 20% collection rate for the period to December 31
,
2017 until there was adequate collection history to analyze and confirm anticipated collections.
On
January 31, 2018, we entered into an asset purchase agreement (the “Purchase Agreement”) to acquire certain assets
related to an acute care hospital and separate doctor’s practice located in Jamestown, Tennessee. The hospital is
known as Tennova Healthcare – Jamestown. The transaction is expected to close in the second quarter of 2018, subject to
customary regulatory approvals and closing conditions. Tennova Healthcare – Jamestown is a fully-operational 85-bed facility
including a 24/7 emergency department, radiology department, surgical center, and a wound care and hyperbaric center. The purchase
includes a 90,000-square foot hospital building on approximately eight acres. Tennova Healthcare – Jamestown is located
38 miles from the Company’s existing hospital, the Big South Fork Medical Center, which is located in Oneida Tennessee.
Marketing
Strategy
Rennova
provides a suite of products and services to the medical services sector. We endeavor to be a single source for multiple business
solutions that serve the medical services industry. The Company intends to expand, through its acquisition and subsequent integration
of businesses, into a robust business model providing an extensive range of services to medical providers that demonstrate improved
patient care and outcomes.
Competition
The
Company competes in a fragmented diagnostics industry split between independently-owned and physician-owned laboratories. There
are three predominant players in the industry that operate as full-service clinical laboratories (processing blood, urine and
other tissue). In addition, the competition ranges from smaller privately-owned laboratories (3-6 employees) to large publicly-traded
laboratories with significant market capitalizations. The healthcare industry is highly competitive among hospitals and other
healthcare providers for patients, affiliations with physicians and acquisitions. The most significant competition our hospital,
and any other hospitals we may acquire, face comes from hospitals that provide more complex services, other healthcare providers,
including outpatient surgery, orthopedic, oncology and diagnostic centers that also compete for patients. Our hospitals, our competitors,
and other healthcare industry participants are increasingly implementing physician alignment strategies, such as acquiring physician
practice groups, employing physicians and participating in ACOs or other clinical integration models, which may impact our competitive
position. In addition, increasing consolidation within the payor industry, vertical integration efforts involving payors and healthcare
providers, and cost-reduction strategies by large employer groups and their affiliates may impact our ability to contract with
payors on favorable terms and otherwise affect our competitive position.
Governmental
Regulation
General
The
healthcare industry is subject to significant governmental laws and regulations at the federal, state and local levels.
As described below, these laws and regulations concern licensure and operation of clinical laboratories and hospitals,
claim submission and payment for services, health care fraud and abuse, security, privacy and confidentiality of health information,
quality and environmental and occupational safety.
Regulation
of Clinical Laboratories
The
Clinical Laboratory Improvement Amendments (“CLIA”) are regulations that include federal standards applicable to all
U.S. facilities or sites that test human specimens for health assessment or to diagnose, prevent, or treat disease. The Centers
for Disease Control and Prevention (“CDC”), in partnership with the Centers for Medicare and Medicaid Services (“CMS”)
and the Food and Drug Administration (“FDA”), supports the CLIA program and clinical laboratory quality.
CLIA
requires that all clinical laboratories meet quality assurance, quality control and personnel standards. Laboratories also must
undergo proficiency testing and are subject to inspections.
Standards
for testing under CLIA are based on the complexity of the tests performed by the laboratory, with tests classified as “high
complexity,” “moderate complexity,” or “waived.” Laboratories performing high complexity testing
are required to meet more stringent requirements than moderate complexity laboratories. Laboratories performing only waived tests,
which are tests determined by the FDA to have a low potential for error and requiring little oversight, may apply for a certificate
of waiver exempting them from most of the requirements of CLIA. All Company laboratory facilities hold CLIA certificates
to perform high complexity testing. The sanctions for failure to comply with CLIA requirements include suspension, revocation
or limitation of a laboratory’s CLIA certificate, which is necessary to conduct business, cancellation or suspension of
the laboratory’s approval to receive Medicare and/or Medicaid reimbursement, as well as significant fines and/or criminal
penalties. The loss or suspension of a CLIA certification, imposition of a fine or other penalties, or future changes in the CLIA
law or regulations (or interpretation of the law or regulations) could have a material adverse effect on the Company.
In
addition to compliance with the federal regulations, the Company is also subject to state and local laboratory regulation. CLIA
provides that a state may adopt laboratory regulations different from or more stringent than those contained in Federal law and
a number of states have implemented their own laboratory requirements. State laws may require that laboratory personnel meet
certain qualifications, specify certain quality controls, or require maintenance of certain records. There are a number of states
that have even more stringent requirements with which lab personnel must comply to obtain state licensure or a certificate of
qualification.
The
Company believes that it is in compliance with all applicable laboratory requirements. The Company’s laboratories have continuing
programs to ensure that their operations meet all such regulatory requirements, but no assurances can be given that the Company’s
laboratories will pass all future licensure or certification inspections. We embrace compliance as an integral part of our culture
and we consistently promote that culture of ethics and integrity.
The
FDA has regulatory responsibility over instruments, test kits, reagents and other devices used by clinical laboratories. The FDA
has issued draft guidance regarding FDA regulation of laboratory-developed tests (“LDTs”), but if or how the draft
guidance will be implemented is uncertain. On November 18, 2016, the FDA announced it would not release final guidance at this
time and instead would continue to work with stakeholders, the new administration and Congress to determine the right approach,
and on January 3, 2017, the FDA released a discussion paper outlining a possible risk-based approach for FDA and CMS oversight
of LTDs. Later in 2017, the FDA indicated that Congress should enact legislation to address improved oversight of diagnostics,
including LTDs, rather than the FDA addressing the issue through administrative proposals. There are many other regulatory
and legislative proposals that would increase general FDA oversight of clinical laboratories and LDTs. The outcome and ultimate
impact of such proposals on the business is difficult to predict at this time. Our point of collection testing devices are regulated
by the FDA. The FDA has authority to take various administrative and legal actions for non-compliance, such as fines, product
suspension, warning letters, injunctions and other civil and criminal sanctions. We make every good faith effort to exercise proactive
monitoring and review of pending legislation and regulatory action.
Payment
for Services
In
each of 2017 and 2016, the Company’s laboratories derived 16% and 12%, respectively, of their net sales
directly from the Medicare and Medicaid programs. In addition, the Company’s other business depends significantly on continued
participation in these programs and in other government healthcare programs. In recent years, both governmental and private sector
payers have made efforts to contain or reduce health care costs, including reducing reimbursement for services.
Reimbursement
under the Medicare program for clinical diagnostic laboratory services is subject to a clinical laboratory fee schedule that sets
the maximum amount payable in each Medicare carrier’s jurisdiction. This clinical laboratory fee schedule is updated annually.
Laboratories bill the program directly for covered tests performed on behalf of Medicare beneficiaries. State Medicaid programs
are prohibited from paying more than the Medicare fee schedule limit for clinical laboratory services furnished to Medicaid recipients.
For
hospitals, the federal government similarly generally reviews payment rates under its various programs annually, and changes in
reimbursement rates under such programs, including Medicare and Medicaid, generally occur based on the fiscal year of the federal
government.
Medicare,
Medicaid and other government program payment reductions will not currently have a direct adverse effect on the Company’s
net earnings and cash flows, due to insignificant revenue earned, however, it is not currently possible to project what impact
will be had in future years.
In
addition to reimbursement rates, the Company is also impacted by changes in coverage policies. Congressional action in 1997 required
the Department of Health and Human Services (“HHS”) to adopt uniform coverage, administration and payment policies
for many of the most commonly performed lab tests using a negotiated rulemaking process. The negotiated rulemaking committee established
uniform policies limiting Medicare coverage for certain tests to patients with specified medical conditions or diagnoses, replacing
local Medicare coverage policies which varied around the country. The final rules generally became effective in 2002, and the
use of uniform policies improves the Company’s ability to obtain necessary billing information in some cases, but Medicare,
Medicaid and private payer diagnosis code requirements and payment policies continue to negatively impact the Company’s
ability to be paid for some of the tests it performs. Further, some payers require additional information to process claims
or have implemented prior authorization policies, which delay or prohibit payment. Due to the range of payers and policies,
the extent of this impact continues to be difficult to quantify.
Future
changes in federal, state and local laws and regulations (or in the interpretation of current regulations) affecting government
payment could have a material adverse effect on the Company. In March 2010, comprehensive healthcare legislation, the Patient
Protection and Affordable Care Act (“ACA”), was enacted. Numerous proposals continue to be discussed in Congress and
the administration to repeal, amend or replace the ACA. Based on currently available information, the Company is unable to predict
what type of changes in legislation or regulations, if any, will occur.
Standard
Electronic Transactions, Security and Confidentiality of Health Information and Other Personal Information
The
Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) was designed to address issues related to the
security and confidentiality of health insurance information. In an effort to improve the efficiency and effectiveness of the
health care system by facilitating the electronic exchange of information in certain financial and administrative transactions,
HIPAA regulations were promulgated. These regulations apply to health plans, health care providers that conduct standard transactions
electronically and health care clearinghouses (“covered entities”). Six such regulations include: (i)
the Transactions and Code Sets Rule; (ii) the Privacy Rule; (iii) the Security Rule; (iv) the Standard Unique Employer Identifier
Rule, which requires the use of a unique employer identifier in connection with certain electronic transactions; (v) the National
Provider Identifier Rule, which requires the use of a unique health care provider identifier in connection with certain electronic
transactions; and (vi) the Health Plan Identifier Rule, which requires the use of a unique health plan identifier in connection
with certain electronic transactions.
The
Privacy Rule regulates the use and disclosure of protected health information (“PHI”) by covered entities. It also
sets forth certain rights that an individual has with respect to his or her PHI maintained by a covered entity, such as the right
to access or amend certain records containing PHI or to request restrictions on the use or disclosure of PHI. The Privacy Rule
requires covered entities to contractually bind third parties, known as business associates, in the event that they perform an
activity or service for or on behalf of the covered entity that involves the creation, receipt, maintenance or transmission
of PHI. The Security Rule establishes requirements for safeguarding patient information that is electronically transmitted
or electronically stored. The Company believes that it is in compliance in all material respects with the requirements of the
HIPAA Privacy and Security Rules.
The
Federal Health Information Technology for Economic and Clinical Health Act (“HITECH”), which was enacted in February
2009, with regulations effective on September 23, 2013, strengthens and expands the HIPAA Privacy and Security Rules and their
restrictions on use and disclosure of PHI. HITECH includes, but is not limited to, prohibitions on exchanging PHI for remuneration,
and additional restrictions on the use of PHI for marketing. HITECH also fundamentally changes a business associate’s obligations
by imposing a number of Privacy Rule requirements and a majority of Security Rule provisions directly on business associates that
were previously only directly applicable to covered entities. Moreover, HITECH requires covered entities to provide notice to
individuals, HHS, and, as applicable, the media when PHI is breached, as that term is defined by HITECH. Business associates are
similarly required to notify covered entities of a breach. The Company believes its policies and procedures are fully compliant
with the HITECH requirements.
On
February 6, 2014, the CMS and HHS published final regulations that amended the HIPAA Privacy Rule to provide individuals (or their
personal representatives) with the right to receive copies of their test reports from laboratories subject to HIPAA, or to request
that copies of their test reports be transmitted to designated third parties. Previously, laboratories that were CLIA-certified
or CLIA-exempt were not subject to the provision in the Privacy Rule that provides individuals with the right of access to PHI.
The HIPAA Privacy Rule amendment resulted in the preemption of a number of state laws that prohibit a laboratory from releasing
a test report directly to the individual. The Company revised its policies and procedures to comply with these new access requirements
and has updated its privacy notice to reflect individuals’ new access rights under this final rule.
The
standard unique employer identifier regulations require that employers have standard national numbers that identify them on standard
transactions. The Employer Identification Number, also known as a Federal Tax Identification Number, issued by the Internal Revenue
Service, was selected as the identifier for employers and was adopted effective July 30, 2002. The Company believes it is in compliance
with these requirements.
The
administrative simplification provisions of HIPAA mandate the adoption of standard unique identifiers for health care providers.
The intent of these provisions is to improve the efficiency and effectiveness of the electronic transmission of health information.
The National Provider Identification Rule requires that all HIPAA-covered health care providers, whether they are individuals
or organizations, must obtain a National Provider Identifier (“NPI”) to identify themselves in standard HIPAA transactions.
NPI replaces the unique provider identification number - as well as other provider numbers previously assigned by payers and other
entities - for the purpose of identifying providers in standard electronic transactions. The Company believes that it is in compliance
with the HIPAA National Provider Identification Rule in all material respects.
The
Health Plan Identifier (HPID) is a unique identifier designed to furnish a standard way to identify health plans in electronic
transactions. CMS published the final rule adopting the HPID for health plans required by HIPAA on September 12, 2012. Effective
October 31, 2014, CMS announced a delay, until further notice, in the enforcement of regulations pertaining to health plan enumeration
and use of the HPID in HIPAA transactions adopted in the HPID final rule. The delay remains in effect. The Company will continue
to monitor future developments related to the HPID and respond accordingly.
Violations
of the HIPAA provisions could result in civil and/or criminal penalties, including significant fines and up to 10 years in prison.
HITECH also significantly strengthened HIPAA enforcement. It increased the civil penalty amounts that may be imposed, required
HHS to conduct periodic audits to confirm compliance and also authorized state attorneys general to bring civil actions seeking
either injunctions or damages in response to violations of the HIPAA privacy and security regulations that affect the privacy
of state residents.
The
total cost associated with the requirements of HIPAA and HITECH is not expected to be material to the Company’s operations
or cash flows. However, future regulations and interpretations of HIPAA and HITECH could impose significant costs on the Company.
In
addition to the HIPAA regulations described above, there are a number of other Federal and state laws regarding the confidentiality
and security of medical information, some of which apply to our business. These laws vary widely, but they most commonly
regulate or restrict the collection, use and disclosure of medical and financial information and other personal information. In
some cases, state laws are more restrictive than and therefore not preempted by HIPAA. Penalties for violation of these laws may
include sanctions against our licensure, as well as civil and/or criminal penalties. Additionally, numerous other countries
have or are developing similar laws governing the collection, use, disclosure and transmission of personal and/or patient information.
The
Company believes that it is in compliance in all material respects with the current Transactions and Code Sets Rule. The Company
implemented Version 5010 of the HIPAA Transaction Standards and believes it has fully adopted the ICD-10-CM code set. The compliance
date for ICD-10-CM was October 1, 2015. The costs associated with ICD-10-CM Code Set were substantial, and failure of the Company,
third party payers or physicians to apply the new code set could have an adverse impact on reimbursement, day’s sales outstanding
and cash collections. As a result of inconsistent application of transaction standards by payers or the Company’s inability
to obtain certain billing information not usually provided to the Company by physicians, the Company could face increased costs
and complexity, a temporary disruption in receipts and ongoing reductions in reimbursements and net revenues.
On
January 2, 2018, the Substance Abuse and Mental Health Services Administration (SAMHSA) announced the finalization of proposed
changes to the Confidentiality of Substance Use Disorder Patient Records regulation, 42 CFR Part 2. This regulation protects the
confidentiality of patient records relating to the identity, diagnosis, prognosis, or treatment that are maintained in connection
with the performance of any federally assisted program or activity relating to substance use disorder education, prevention, training,
treatment, rehabilitation, or research. Under the regulation, patient identifying information may only be released with the individual’s
written consent, subject to certain limited exceptions. The latest changes to this regulation seek to align its requirements more
closely with HIPAA, while maintaining more stringent confidentiality of substance use disorder information. The Company will adopt
such changes to its policies and procedures as may be necessary for compliance.
The
Company believes it is in compliance in all material respects with the Operating Rules for electronic funds transfers and remittance
advice transactions, for which the compliance date was January 1, 2014.
Fraud
and Abuse Laws and Regulations
Existing
federal laws governing federal health care programs, including Medicare and Medicaid, as well as similar state laws, impose a
variety of broadly described fraud and abuse prohibitions on health care providers. These laws are interpreted liberally and enforced
aggressively by multiple government agencies, including the U.S. Department of Justice, HHS’ Office of Inspector General
(“OIG”), and various state agencies. Historically, the clinical laboratory industry has been the focus of major governmental
enforcement initiatives. The federal government’s enforcement efforts regarding health care providers have been increasing
over the past decade, in part as a result of the enactment of HIPAA, which included several provisions related to fraud and abuse
enforcement, including the establishment of a program to coordinate and fund federal, state and local law enforcement efforts.
The Deficit Reduction Act of 2005 also included new requirements directed at Medicaid fraud, including increased spending on enforcement
and financial incentives for states to adopt false claims act provisions similar to the federal False Claims Act. Amendments
to the False Claims Act, as well as other enhancements to the federal fraud and abuse laws enacted as part of the ACA, have
further increased fraud and abuse enforcement efforts and compliance issues. For example, the ACA established
an obligation to report and refund overpayments from Medicare or Medicaid within 60 days of identification (whether or
not paid through any fault of the recipient); failure to comply with this new requirement can give rise to additional liability
under the False Claims Act and Civil Monetary Penalties statute. On February 11, 2016, CMS issued the final rule clarifying certain
aspects of the overpayment requirement for purposes of Medicare, effective on March 14, 2016.
The
federal health care programs’ anti-kickback law (the “Anti-Kickback Law”) prohibits knowingly providing anything
of value in return for, or to induce the referral of, Medicare, Medicaid or other federal health care program business. Violations
can result in imprisonment, fines, penalties, and/or exclusion from participation in federal health care programs. The OIG has
published “safe harbor” regulations which specify certain arrangements that are protected from prosecution under the
Anti-Kickback Law if all conditions of the relevant safe harbor are met. Failure to fit within a safe harbor does not necessarily
constitute a violation of the Anti-Kickback Law; rather, the arrangement would be subject to scrutiny by regulators and prosecutors
and would be evaluated on a case by case basis. Many states have their own Medicaid anti-kickback laws and several states also
have anti-kickback laws that apply to all payers (i.e., not just government health care programs).
From
time to time, the OIG issues alerts and other guidance on certain practices in the health care industry that implicate the Anti-Kickback
Law or other federal fraud and abuse laws. Examples of such guidance documents particularly relevant to the Company and its operations
follow.
In
October 1994, the OIG issued a Special Fraud Alert on arrangements for the provision of clinical laboratory services. The Fraud
Alert set forth a number of practices allegedly engaged in by some clinical laboratories and health care providers that raise
issues under the federal fraud and abuse laws, including the Anti-Kickback Law. These practices include: (i) providing employees
to furnish valuable services for physicians (other than collecting patient specimens for testing) that are typically the responsibility
of the physicians’ staff; (ii) offering certain laboratory services at prices below fair market value in return for referrals
of other tests which are billed to Medicare at higher rates; (iii) providing free testing to physicians’ managed care patients
in situations where the referring physicians benefit from such reduced laboratory utilization; (iv) providing free pick-up and
disposal of bio-hazardous waste for physicians for items unrelated to a laboratory’s testing services; (v) providing general-use
facsimile machines or computers to physicians that are not exclusively used in connection with the laboratory services; and (vi)
providing free testing for health care providers, their families and their employees (i.e., so-called “professional courtesy”
testing). The OIG emphasized in the Special Fraud Alert that when one purpose of such arrangements is to induce referrals of program-reimbursed
laboratory testing, both the clinical laboratory and the health care provider (e.g., physician) may be liable under the Anti-Kickback
Law, and may be subject to criminal prosecution and exclusion from participation in the Medicare and Medicaid programs. More recently,
in June 2014, the OIG issued another Special Fraud Alert addressing compensation paid by laboratories to referring physicians
for blood specimen processing and for submitting patient data to registries. This Special Fraud Alert reiterates the OIG’s
longstanding concerns about payments from laboratories to physicians in excess of the fair market value of the physician’s
services and payments that reflect the volume or value of referrals of federal healthcare program business.
Another
issue the OIG has expressed concern about involves the provision of discounts on laboratory services billed to customers in return
for the referral of federal health care program business. In a 1999 Advisory Opinion, the OIG concluded that a proposed arrangement
whereby a laboratory would offer physicians significant discounts on non-federal health care program laboratory tests might violate
the Anti-Kickback Law. The OIG reasoned that the laboratory could be viewed as providing such discounts to the physician in exchange
for referrals by the physician of business to be billed by the laboratory to Medicare at non-discounted rates. The OIG indicated
that the arrangement would not qualify for protection under the discount safe harbor to the Anti-Kickback Law because Medicare
and Medicaid would not get the benefit of the discount. Similarly, in a 1999 correspondence, the OIG stated that if any direct
or indirect link exists between a discount that a laboratory offers to a skilled nursing facility (“SNF”) for tests
covered under Medicare’s payments to the SNF and the referral of tests billable by the laboratory under Medicare Part B,
then the Anti-Kickback Law would be implicated.
The
OIG also has issued guidance regarding joint venture arrangements that may be viewed as suspect under the Anti-Kickback Law. These
documents have relevance to clinical laboratories that are part of (or are considering establishing) joint ventures with potential
sources of federal health care program business. The first guidance document, which focused on investor referrals to such ventures,
was issued in 1989 and another concerning contractual joint ventures was issued in April 2003. Some of the elements of joint ventures
that the OIG identified as “suspect” include: arrangements in which the capital invested by the physicians is disproportionately
small and the return on investment is disproportionately large when compared to a typical investment; specific selection of investors
who are in a position to make referrals to the venture; and arrangements in which one of the parties to the joint venture expands
into a line of business that is dependent on referrals from the other party (sometimes called “shell” joint ventures).
In a 2004 advisory opinion, the OIG expressed concern about a proposed joint venture in which a laboratory company would assist
physician groups in establishing off-site pathology laboratories. The OIG indicated that the physicians’ financial and business
risk in the venture was minimal and that the physicians would contract out substantially all laboratory operations, committing
very little in the way of financial, capital, or human resources. The OIG was unable to exclude the possibility that the arrangement
was designed to permit the laboratory to pay the physician groups for their referrals, and therefore was unwilling to find that
the arrangement fell within a safe harbor or had sufficient safeguards to protect against fraud or abuse.
Violations
of other fraud and abuse laws also can result in exclusion from participation in federal health care programs, including Medicare
and Medicaid. One basis for such exclusion is an individual’s or entity’s submission of claims to Medicare or Medicaid
that are substantially in excess of that individual’s or entity’s usual charges for like items or services. In 2003,
the OIG issued a notice of proposed rulemaking that would have defined the terms “usual charges” and “substantially
in excess” in ways that might have required providers, including the Company, to either lower their charges to Medicare
and Medicaid or increase charges to certain other payers to avoid the risk of exclusion. On June 18, 2007, however, the OIG withdrew
the proposed rule, saying it preferred to continue evaluating billing patterns on a case-by-case basis. In its withdrawal notice,
the OIG also said it “remains concerned about disparities in the amounts charged to Medicare and Medicaid when compared
to private payers,” that it continues to believe its exclusion authority for excess charges “provides useful backstop
protection for the public fisc from providers that routinely charge Medicare or Medicaid substantially more than their other customers,”
and that it will continue to use “all tools available … to address instances where Medicare or Medicaid are charged
substantially more than other payers.” An enforcement action by the OIG under this statutory exclusion basis or an enforcement
by Medicaid officials of similar state law restrictions could have a material adverse effect on the Company.
Under
another federal statute, known as the “Stark Law” or “self-referral” prohibition, physicians may not
refer Medicare and Medicaid patients to providers of a broad range of designated health services with which the physicians or
their immediate family members have ownership or certain other financial arrangements unless an exceptions applies, regardless
of the intent of the parties. Similarly, providers may not bill Medicare for services furnished pursuant to a prohibited
self-referral. There are several Stark Law exceptions, including: 1) fair market value compensation for the provision of items
or services; 2) payments by physicians to a laboratory for clinical laboratory services; 3) an exception for certain ancillary
services (including laboratory services) provided within the referring physician’s own office, if certain criteria are satisfied;
4) physician investment in a company whose stock is traded on a public exchange and has stockholder equity exceeding $75.0 million;
and 5) certain space and equipment rental arrangements that are set at a fair market value rate and satisfy other requirements.
All of the requirements of a Stark Law exception must be met to take advantage of the exception. Many states have their own self-referral
laws as well, which in some cases apply to all patient referrals, not just government reimbursement programs.
There
are a variety of other types of federal and state fraud and abuse laws, including laws prohibiting submission of false or fraudulent
claims. The Company seeks to conduct its business in compliance with all federal and state fraud and abuse laws. The Company is
unable to predict how these laws will be applied in the future, and no assurances can be given that its arrangements will not
be subject to scrutiny under such laws. Sanctions for violations of these laws may include exclusion from participation in Medicare,
Medicaid and other federal or state health care programs, significant criminal and civil fines and penalties, and loss
of licensure. Any exclusion from participation in a federal or state health care program, or any loss of licensure, arising from
any action by any federal or state regulatory or enforcement authority, would likely have a material adverse effect on the Company’s
business. In addition, any significant criminal or civil penalty resulting from such proceedings could have a material adverse
effect on the Company’s business.
Environmental,
Health and Safety
The
Company is subject to licensing and regulation under federal, state and local laws and regulations relating to the protection
of the environment and human health and safety laws and regulations relating to the handling, transportation and disposal of medical
specimens, infectious and hazardous waste and radioactive materials. All Company laboratories are subject to applicable laws and
regulations relating to biohazard disposal of all laboratory specimens and the Company generally utilizes outside vendors for
disposal of such specimens. In addition, the federal Occupational Safety and Health Administration (“OSHA”) has established
extensive requirements relating to workplace safety for health care employers, including clinical laboratories, whose workers
may be exposed to blood-borne pathogens such as HIV and the hepatitis B virus. These regulations, among other things, require
work practice controls, protective clothing and equipment, training, medical follow-up, vaccinations and other measures designed
to minimize exposure to, and transmission of, blood-borne pathogens.
On
November 6, 2000, Congress passed the Needle Stick Safety and Prevention Act, which required, among other things, that companies
include in their safety programs the evaluation and use of engineering controls such as safety needles if found to be effective
at reducing the risk of needle stick injuries in the workplace. The Company has implemented the use of safety needles at all of
its service locations, where applicable.
Although
the Company is not aware of any current material non-compliance with such federal, state and local laws and regulations, failure
to comply could subject the Company to denial of the right to conduct business, fines, criminal penalties and/or other enforcement
actions.
Drug
Testing
There
is no comprehensive federal law that regulates drug testing in the private sector. The Drug-Free Workplace Act does impose certain
employee education requirements on companies that do business with the government, but it does not require testing, nor does it
restrict testing in any way. Drug testing is allowed under the Americans with Disabilities Act (ADA) because the ADA does not
consider drug abuse a disability — but the law does not regulate or prohibit testing. Instead of a comprehensive regulatory
system, federal law provides for specific agencies to adopt drug testing regulations for employers under their jurisdiction. As
a general rule, testing is presumed to be lawful unless there is a specific restriction in state or federal law.
Controlled
Substances
The
use of controlled substances in testing for drugs of abuse is regulated by the Federal Drug Enforcement Administration. The
Company believes that it is in compliance
with these regulations
as applicable.
Compliance
Program
The
Company continuously evaluates and monitors its compliance with all Medicare, Medicaid and other rules and regulations. The objective
of the Company’s compliance program is to develop, implement, and update compliance safeguards as necessary. Emphasis is
placed on developing and implementing compliance policies and guidelines, personnel training programs and various monitoring and
audit procedures to attempt to achieve implementation of all applicable rules and regulations.
The
Company seeks to conduct its business in compliance with all statutes, regulations, and other requirements applicable to its operations.
The health care industry is, however, subject to extensive regulation, and many of these statutes and regulations have
not been interpreted by the courts. There can be no assurance that applicable statutes and regulations will not be interpreted
or applied by a prosecutorial, regulatory or judicial authority in a manner that would adversely affect the Company. Potential
sanctions for violation of these statutes and regulations include significant civil and criminal penalties, fines, exclusions
from participation in government health care programs and the loss of various licenses, certificates, and authorizations,
necessary to operate as well as potential liabilities from third-party claims, all of which could have a material adverse
effect on the Company’s business.
Certificate
of Need Requirements
A
number of states require approval for the purchase, construction or expansion of various healthcare facilities, such as hospitals,
including findings of need for additional or expanded healthcare facilities or services. Certificates of Need (“CONs”),
which are issued by governmental agencies with jurisdiction over applicable healthcare facilities, are at times required for capital
expenditures exceeding a prescribed amount, changes in bed capacity or the addition of services and certain other matters. Tennessee,
the state in which the Big South Fork Medical Center and Tennova Healthcare-Jamestown are located, has a CON law that applies
to such facilities. States periodically review, modify and revise their CON laws and related regulations.
The
Company is unable to predict whether its subsidiaries’ hospitals will be able to obtain any CONs that may be necessary to
accomplish their business objectives in any jurisdiction where such certificates of need are required. Violation of these state
laws may result in the imposition of civil sanctions or the revocation of licenses for such facilities. In addition, future healthcare
facility acquisitions also may occur in states that require CONs.
Future
healthcare facility acquisitions also may occur in states that do not require CONs or which have less stringent CON requirements
than the state in which
Rennova
currently operates a hospital. Any healthcare facility
operated by the Company in such states may face increased competition from new or expanding facilities operated by competitors,
including physicians.
Utilization
Review Compliance and Hospital Governance
Healthcare
facilities are subject to, and comply with, various forms of utilization review. In addition, under the Medicare prospective payment
system, each state must have a peer review organization to carry out a federally mandated system of review of Medicare patient
admissions, treatments and discharges in hospitals. Medical and surgical services and physician practices are supervised by committees
of staff doctors at each healthcare facility, are overseen by each healthcare facility’s local governing board, the primary
voting members of which are physicians and community members, and are reviewed by quality assurance personnel. The local governing
boards also help maintain standards for quality care, develop long-range plans, establish, review and enforce practices and procedures
and approve the credentials and disciplining of medical staff members.
Emergency
Medical Treatment and Active Labor Act
The
Emergency Medical Treatment and Active Labor Act (“EM
T
ALA”) is a federal
law that requires any hospital that participates in the Medicare program to conduct an appropriate medical screening examination
of every person who presents to the hospital’s emergency department for treatment and, if the patient is suffering from
an emergency medical condition or is in active labor, to either stabilize that condition or make an appropriate transfer of the
patient to a facility that can handle the condition. The obligation to screen and stabilize emergency medical conditions exists
regardless of a patient’s ability to pay for treatment. There are severe penalties under EM
T
ALA
if a hospital fails to screen or appropriately stabilize or transfer a patient or if the hospital delays appropriate treatment
in order to first inquire about the patient’s ability to pay. Penalties for violations of EM
T
ALA
include civil monetary penalties and exclusion from participation in the Medicare program, the Medicaid program or both. In addition,
an injured patient, the patient’s family or a medical facility that suffers a financial loss as a direct result of another
hospital’s violation of the law can bring a civil suit against that other hospital. Although we believe that we comply with
EM
T
ALA, we cannot predict whether CMS will implement new requirements in the future
and whether our subsidiaries’ hospitals will be able to comply with any new requirements.
Employees
As
of March 16, 2018, we have 155 employees for our continuing operations, of which 98 are full time. Of our total employees
from continuing operations, 7 are assigned to laboratory operations, 12 are assigned to sales and customer service, 4 are assigned
to corporate administration, and 132 are assigned to our Big South Fork Medical Center. In addition, we have 18 employees associated
with our discontinued operations. We continue to adjust our number of employees to achieve efficiencies and cost savings where
applicable. We currently expect to have a total of approximately 134 additional hospital employees when our Tennova Healthcare
- Jamestown hospital is acquired and is in full operation.
Available
Information
We
are required to file Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q with the Securities and Exchange Commission
(“SEC”) on a regular basis and are required to disclose certain material events in a Current Report on Form 8-K. All
reports of the Company filed with the SEC are available free of charge through the SEC’s Web site at http://www.sec.gov.
In addition, the public may read and copy materials filed by the Company at the SEC’s Public Reference Room located at 100
F Street, N.E., Washington, D.C. 20549. The public may also obtain additional information on the operation of the Public Reference
Room by calling the SEC at 1-800-SEC-0330.
An
investment in our securities is highly speculative and subject to numerous and substantial risks. These risks include those set
forth herein. You should carefully consider the risks and uncertainties described below and the other information in this Annual
Report before you decide to invest in our securities. If any of the following events actually occur, our business could be materially
harmed. In such case, the value of your investment may decline and you may lose all or part of your investment. You should not
invest in our securities unless you can afford the loss of your entire investment.
Although
our financial statements have been prepared on a going concern basis, we have recently accumulated significant losses and have
negative cash flows from operations that could adversely affect our ability to refinance existing indebtedness or raise additional
capital to fund our operations or limit our ability to react to changes in the economy or our industry. Restrictive covenants
in the agreements governing our indebtedness may adversely affect us. These or additional risks or uncertainties not presently
known to us, or that we currently deem immaterial, raise substantial doubt about our ability to continue as a going concern.
If
we are unable to improve our liquidity position we may not be able to continue as a going concern. The accompanying consolidated
financial statements do not include any adjustments that might result if we are unable to continue as a going concern and, therefore,
be required to realize our assets and discharge our liabilities other than in the normal course of business, which could cause
investors to suffer the loss of all or a substantial portion of their investment.
We
have accumulated significant losses and have negative cash flows from operations, and at December 31, 2017, we had a working capital
deficit and stockholders’ deficit of $21.5 million and $40.6 million, respectively. For the years ended December
31, 2017 and 2016, we incurred net losses attributable to common stockholders in the amount of $108.5 million and $32.6 million,
respectively. In addition, our cash position is critically deficient, critical payments are not being made in the ordinary course
of business, we have indebtedness for which we do not have the financial resources to satisfy, all of which raises substantial
doubt about our ability to continue as a going concern.
We
continue to consider efficiencies and are currently using one laboratory for the majority of our toxicology diagnostics thereby
reducing the number of employees and associated operating expenses, in order to reduce costs. In addition, we have received approximately
$15.7 million in cash from the issuances of debentures and warrants during 2017 (see Note 8 to the consolidated financial statements),
$4.3 million from related parties (see Notes 7 and 8 to the consolidated financial statements) and an additional $4.0 million
of proceeds on October 30, 2017 from the issuance of our convertible preferred stock (see Note 12 to the consolidated financial
statements). Subsequent to December 31, 2017, we received $2 million from the issuance of debentures and $0.8 million from
the sale of stock we owned (see Note 20).
On
July 12, 2017, the Company announced plans to spin off its Advanced Molecular Services Group (“AMSG”) and in the third
quarter 2017 the Company’s Board of Directors voted unanimously to spin off the Company’s wholly-owned subsidiary,
Health Technology Solutions, Inc. (“HTS”), as independent publicly traded companies by way of tax-free distributions
to the Company’s stockholders. Completion of these spinoffs is expected to occur in the third quarter of 2018. The
Board of Directors is currently considering if AMSG and HTS would be better as one combined spinoff instead of two. The
spinoffs are subject to numerous conditions, including effectiveness of Registration Statements on Form 10 to be filed with the
Securities and Exchange Commission, and consents, including under various funding agreements previously entered into by the Company.
A record date to determine those stockholders entitled to receive shares in the spinoffs should be approximately 30 to 60 days
prior to the dates of the spinoffs. The strategic goal of the spinoffs is to create three (or two) public companies, each of which
can focus on its own strengths and operational plans. In addition, after the spinoffs, each company will provide a distinct and
targeted investment opportunity.
In
accordance with ASC 205-20 and having met the criteria for “held for sale”, we have 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 17 to the consolidated financial statements.
We
also announced that the Big South Fork Medical Center received CMS regional office licensure approval and opened its doors on
August 8, 2017. The hospital provided services to over 3,747 patients and recognized approximately $2.0 million of gross
revenues during 2017. In addition, on January 31, 2018, we announced that we had entered into a definitive asset purchase agreement
to acquire an acute care hospital in Jamestown, Tennessee known as Tennova Healthcare – Jamestown. The transaction is expected
to close in the second quarter of 2018.
There
can be no assurance that we will be able to achieve our business plan, raise any additional capital or secure the additional financing
necessary to implement our current operating plan. Our ability to continue as a going concern is dependent upon our ability to
significantly reduce our operating costs, increase our revenues and eventually regain profitable operations. The accompanying
consolidated financial statements do not include any adjustments that might be necessary if we are unable to continue as a going
concern.
The
proposed spin offs of our Advanced Molecular Services Group and Health Technology Solutions are subject to various risks and uncertainties
and may not be completed on the terms or timeline currently contemplated, if at all, and will involve significant time and expense,
which could harm our business, results of operations and financial condition.
In
July 2017, we announced plans to separate our Advanced Molecular Services Group and Health Technology Solutions businesses as
independent, publicly-traded companies. The transactions are expected to be completed in the third quarter of 2018, subject to
satisfaction of certain conditions. Unanticipated developments could delay, prevent or otherwise adversely affect one or both
of these proposed spin offs, including but not limited to disruptions in general market conditions or potential problems, delays
or difficulties in satisfying conditions and obtaining approvals and clearances or litigation or other legal proceedings that
may arise as a result of the proposed spin offs. In addition, consummation of the spin offs will require final approval from our
Board of Directors. Therefore, we cannot assure that we will be able to complete the spin offs on the terms or on the timeline
that we announced, if at all.
We
will incur significant expenses in connection with the spin offs, and such costs and expenses may be greater than we anticipate.
In addition, completion of the spin offs will require a significant amount of management time and effort which may disrupt our
business or otherwise divert management’s attention from other aspects of our business operations. Any such difficulties
could adversely affect our business, results of operations and financial condition.
The
proposed spin offs may not achieve some or all of the anticipated benefits.
If
the spin offs are completed, there is uncertainty as to whether the anticipated operational, financial and strategic benefits
of the spin offs will be achieved. There can be no assurance that the combined value of the common stock of the publicly-traded
companies will be equal to or greater than what the value of our common stock would have been had the proposed separations not
occurred. The combined value of the common stock of the companies could be lower than anticipated for a variety of reasons, including,
but not limited to, the inability of the new spin off companies to operate and compete effectively as independent entities, and
the stock price of the common stock of each of the companies could experience periods of volatility. If we fail to achieve the
anticipated benefits of the spin offs, our stock price could decline.
If
either spin off does not qualify as a transaction that is generally tax-free for U.S. federal income tax purposes, we and our
stockholders could be subject to significant tax liabilities.
We
intend to obtain an opinion of outside counsel regarding the qualification of the distribution in each spin off, together with
certain related transactions, as a transaction that is generally tax-free for U.S. federal income tax purposes. The opinion will
be based on and rely on, among other things, certain facts and assumptions, as well as certain representations, statements and
undertakings of Rennova and the new spin off company, including those relating to the past and future conduct of Rennova and the
new spin off company. If any of these facts, assumptions, representations, statements or undertakings are, or become, inaccurate
or incomplete, or if we or the new spin off company breach any of their respective covenants in the separation documents, the
opinion of counsel may be invalid and the conclusions reached therein could be jeopardized. It is also possible that the U.S.
Internal Revenue Service, or the IRS, could determine that the distribution in the spin off, together with certain related transactions,
is taxable for U.S. federal income tax purposes if it determines that any of these facts, assumptions, representations, statements
or undertakings are incorrect or have been violated or if it disagrees with the conclusions in the opinion of counsel. An opinion
of counsel is not binding on the IRS or any court and there can be no assurance that the IRS will not challenge the conclusions
reached in the opinion. If the distribution in the spin off, together with certain related transactions, is ultimately determined
to be taxable, we and our stockholders that are subject to U.S. federal income tax could incur significant tax liabilities.
Our
common stock is no longer listed on the NASDAQ.
On
April 18, 2017, we were notified by NASDAQ that the stockholders’ equity balance reported on our 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”). In accordance with the Rule, we submitted a plan to Nasdaq outlining
how we intended to regain compliance. On August 17, 2017, Nasdaq notified us that our plan to correct the stockholders’
equity deficiency did not contain sufficient evidence to support a correction being achieved in the required time frame. We appealed
this decision to a Hearing Panel which, on October 23, 2017, maintained this position and denied us a continued listing. Effective
October 25, 2017, our common stock (RNVA) and warrants to purchase common stock (RNVAW) were no longer listed on The Nasdaq
Capital Market but began trading on the OTCQB instead. The OTCQB is an electronic quotation system that displays real-time
quotes, last sale prices, and volume information for many over the counter securities that are not listed on a national securities
exchange. OTCQB quotations for our common stock and common stock warrant prices may not represent the true market value of our
common stock.
Our
acquisition of the Big South Fork Medical Center and intended purchase of an additional hospital does not provide assurance that
the acquired operations will be accretive to our earnings or otherwise improve our results of operations.
Acquisitions,
such as that of the Hospital Assets of the Big South Fork Medical Center, which were acquired in January of 2017 and that began
operations on August 8, 2017, involve the integration of previously separate businesses into a common enterprise in which it is
envisioned that synergistic operations will be result in improved financial performance. However, realization of these envisioned
results is subject to numerous risks and uncertainties, including but not limited to:
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Diversion
of management time and attention from daily operations;
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Difficulties
integrating the acquired business, technologies and personnel into our business;
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Potential
loss of key employees, key contractual relationships or key customers of the acquired business; and
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Exposure
to unforeseen liabilities of the acquired business
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There
is no assurance that the acquisition of the Big South Fork Medical Center or the planned acquisition of Tennova Healthcare
- Jamestown will be accretive to our earnings or otherwise improve our results of operations.
We
have decided to alter our business model to include hospital acquisition and development which may not succeed if we are unable
to effectively compete for patients. Local residents could use other hospitals and healthcare providers.
The
healthcare industry is highly competitive among hospitals and other healthcare providers for patients, affiliations with physicians
and acquisitions. The most significant competition our hospital(s) face comes from hospitals that provide more complex services,
other healthcare providers, including outpatient surgery, orthopedic, oncology and diagnostic centers that also compete for patients.
Our hospitals, our competitors, and other healthcare industry participants are increasingly implementing physician alignment strategies,
such as acquiring physician practice groups, employing physicians and participating in ACOs or other clinical integration models,
which may impact our competitive position. In addition, increasing consolidation within the payor industry, vertical integration
efforts involving payors and healthcare providers, and cost-reduction strategies by large employer groups and their affiliates
may impact our ability to contract with payors on favorable terms and otherwise affect our competitive position.
Trends
toward clinical transparency and value-based purchasing may have an unanticipated impact on our competitive position and patient
volumes.
We
expect these competitive trends to continue. If we are unable to compete effectively with other hospitals and other healthcare
providers, local residents may seek healthcare services at providers other than our hospitals and affiliated businesses.
The
failure to obtain our medical supplies at favorable prices for our hospital division could cause our operating results to decline.
Higher costs could adversely impact our operating results.
Our
results of operations may be adversely affected if the ACA is repealed, replaced or otherwise changed.
The
ACA has increased the number of people with health care insurance. It also has reduced Medicare and Medicaid reimbursements. Numerous
proposals continue to be discussed in Congress and the administration to repeal, amend or replace the law. We cannot predict whether
any such repeal, amend or replace proposals, or any parts of them, will become law and, if they do, what their substance or timing
will be. Any of the foregoing, if they occur, could have a material adverse effect on our business and results of operations.
Our
business could be harmed from the loss or suspension of a license or imposition of a fine or penalties under, or future changes
or changing interpretations of, CLIA or state laboratory licensing laws to which we are subject.
The
clinical laboratory testing industry is subject to extensive federal and state regulation, and many of these statutes and regulations
have not been interpreted by the courts. The Clinical Laboratory Improvement Amendments of 1988, or CLIA, are federal regulatory
standards that apply to virtually all clinical laboratories (regardless of the location, size or type of laboratory), including
those operated by physicians in their offices, by requiring that they be certified by the federal government or by a federally
approved accreditation agency. CLIA does not preempt state law, which in some cases may be more stringent than federal law and
require additional personnel qualifications, quality control, record maintenance and proficiency testing. The sanction for failure
to comply with CLIA and state requirements may be suspension, revocation or limitation of a laboratory’s CLIA certificate,
which is necessary to conduct business, as well as significant fines and/or criminal penalties. Many other states have similar
laws and we may be subject to similar penalties.
We
cannot assure you that applicable statutes and regulations will not be interpreted or applied by a prosecutorial, regulatory or
judicial authority in a manner that would adversely affect our business. Potential sanctions for violation of these statutes and
regulations include significant fines and the suspension or loss of various licenses, certificates and authorizations, which could
have a material adverse effect on our business. In addition, compliance with future legislation could impose additional requirements
on us, which may be costly.
Healthcare
plans have taken steps to control the utilization and reimbursement of healthcare services.
We
also face efforts by non-governmental third-party payers, including healthcare plans, to reduce utilization and reimbursement
for healthcare services.
The
healthcare industry has experienced a trend of consolidation among healthcare insurance plans and payers, resulting in fewer but
larger insurance plans with significant bargaining power to negotiate fee arrangements with healthcare providers. These
healthcare plans, and independent physician associations, may demand that providers accept discounted fee structures or assume
all or a portion of the financial risk associated with providing services to their members through capped payment arrangements.
In addition, some healthcare plans have been willing to limit the PPO or Point of Service (“POS”) laboratory network
to only a single national laboratory to obtain improved fee-for-service pricing. There are also an increasing number of patients
enrolling in consumer driven products and high deductible plans that involve greater patient cost-sharing.
The
increased consolidation among healthcare plans and payers increases the potential adverse impact of ceasing to be a contracted
provider with any such insurer. The Health Care Reform Law includes provisions, including ones regarding the creation of healthcare
exchanges, which may encourage healthcare insurance plans to increase exclusive contracting.
We
expect continuing efforts to reduce reimbursements, to impose more stringent cost controls and to reduce utilization of services.
These efforts, including future changes in third-party payer rules, practices and policies or ceasing to be a contracted provider
to many healthcare plans, have had and may continue to have a material adverse effect on our business.
Unless
we raise sufficient funds, we will not be able to succeed in our business model.
During
the year ended December 31, 2017 and through the date of this report, we have relied on the sale of our equity securities, a loan
from a related party and convertible debentures to fund our operations. We generated negative cash flow from operating activities
for the years ended December 31, 2017 and 2016. If this trend were to continue and we are unable to raise sufficient capital to
fund our operations through other sources, our business will be adversely affected, and we may not be able to continue as a going
concern (see Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
, “Liquidity
and Capital Resources”). There can be no assurances that we will be able to raise sufficient funds on terms that are acceptable
to us, or at all, to fund our operations under our current business model.
Regulation
by the FDA of LDTs and clinical laboratories may result in significant change, and our business could be adversely impacted if
we fail to adapt.
High
complexity, CLIA-certified laboratories, such as ours, frequently develop testing procedures to provide diagnostic results to
customers. These tests have been traditionally offered by nearly all complex laboratories for the last few decades and LDTs are
subject to CMS oversight through its enforcement of CLIA. The FDA, which regulates the development and use of medical devices,
has claimed that it has regulatory authority over LDTs, but has not exercised enforcement with respect to most LDTs offered by
high complexity laboratories, and not sought to require these laboratories to comply with FDA regulations regarding medical devices.
During 2010, the FDA publicly announced that it has decided to exercise regulatory authority over these LDTs, and that it plans
to issue guidance to the industry regarding its regulatory approach. At that time, the FDA indicated that it would use a risk-based
approach to regulation and would direct more resources to tests with wider distribution and with the highest risk of injury, but
that it will be sensitive to the need to not adversely impact patient care or innovation. In September 2014, the FDA announced
its framework and timetable for implementing this guidance. On November 18, 2016, the FDA announced it would not release final
guidance at this time and instead would continue to work with stakeholders, the new administration and Congress to determine the
right approach, and on January 3, 2017, the FDA released a discussion paper outlining a possible risk-based approach for FDA and
CMS oversight of LDTs. Later in 2017, the FDA indicated that Congress should enact legislation to address improved oversight
of diagnostics, including LTDs, rather than the FDA addressing the issue through administrative proposals. We cannot predict
the ultimate timing or form of any such guidance or regulation or their potential impact. If adopted, such a regulatory approach
by the FDA may lead to an increased regulatory burden, including additional costs and delays in introducing new tests. While the
ultimate impact of the FDA’s approach is unknown, it may be extensive and may result in significant change. Our failure
to adapt to these changes could have a material adverse effect on our business.
Some
of our operations are subject to federal and state laws prohibiting “kickbacks” and other laws designed to prohibit
payments for referrals and eliminate healthcare fraud.
Federal
and state anti-kickback and similar laws prohibit payment, or offers of payment, in exchange for referrals of products and services
for which reimbursement may be made by Medicare or other federal and state healthcare programs. Some state laws contain similar
prohibitions that apply without regard to the payer of reimbursement for the services. Under a federal statute, known as the “Stark
Law” or “self-referral” prohibition, physicians, subject to certain exceptions, are prohibited from referring
their Medicare or Medicaid program patients to providers with which the physicians or their immediate family members have
a financial relationship, and the providers are prohibited from billing for services rendered in violation of Stark Law
referral prohibitions. Violations of the federal Anti-Kickback Law and Stark Law may be punished by civil and criminal penalties,
and/or exclusion from participation in federal health care programs, including Medicare and Medicaid. States may impose similar
penalties. The Health Care Reform Law significantly strengthened provisions of the Federal False Claims Act and Anti-Kickback
Law provisions, and other health care fraud provisions, leading to the possibility of greatly increased qui tam suits by private
citizen “relators” for perceived violations of these laws. There can be no assurance that our activities will not
come under the scrutiny of regulators and other government authorities or that our practices will not be found to violate applicable
laws, rules and regulations or prompt lawsuits by private citizen relators under federal or state false claims laws.
Federal
officials responsible for administering and enforcing the healthcare laws and regulations have made a priority of eliminating
healthcare fraud. For example, the Health Care Reform Law includes significant new fraud and abuse measures, including required
disclosures of financial arrangements with physician customers, lower thresholds for violations and increased potential penalties
for violations. Federal funding available for combating health care fraud and abuse generally has increased. While we seek to
conduct our business in compliance with all applicable laws and regulations, many of the laws and regulations applicable to our
business, particularly those relating to billing and reimbursement of services and those relating to relationships with
physicians, hospitals and patients, contain language that has not been interpreted by courts. We must rely on our interpretation
of these laws and regulations based on the advice of our counsel and regulatory or law enforcement authorities may not agree with
our interpretation of these laws and regulations and may seek to enforce legal remedies or penalties against us for violations.
From
time to time we may need to change our operations, particularly pricing or billing practices, in response to changing interpretations
of these laws and regulations, or regulatory or judicial determinations with respect to these laws and regulations. These occurrences,
regardless of their outcome, could damage our reputation and harm important business relationships that we have with healthcare
providers, payers and others. Furthermore, if a regulatory or judicial authority finds that we have not complied with applicable
laws and regulations, we would be required to refund amounts that were billed and collected in violation of such laws and regulations.
In addition, we may voluntarily refund amounts that were alleged to have been billed and collected in violation of applicable
laws and regulations. In either case, we could suffer civil and criminal damages, fines and penalties, exclusion from participation
in governmental healthcare programs and the loss of licenses, certificates and authorizations necessary to operate our business,
as well as incur liabilities from third-party claims, all of which could harm our operating results and financial condition.
Moreover,
regardless of the outcome, if we or physicians or other third parties with whom we do business are investigated by a regulatory
or law enforcement authority we could incur substantial costs, including legal fees, and our management may be required to divert
a substantial amount of time to an investigation.
To
enhance compliance with applicable health care laws, and mitigate potential liability in the event of noncompliance, regulatory
authorities, such as the OIG, have recommended the adoption and implementation of a comprehensive health care compliance program
that generally contains the elements of an effective compliance and ethics program described in Section 8B2.1 of the United States
Sentencing Commission Guidelines Manual, and for many years the OIG has made available a model compliance program. In addition,
certain states require that health care providers that engage in substantial business under the state Medicaid program have a
compliance program that generally adheres to the standards set forth in the Model Compliance Program. Also, under the Health Care
Reform Law, the U.S. Department of Health and Human Services, or HHS, will require suppliers, such as the Company, to adopt, as
a condition of Medicare participation, compliance programs that meet a core set of requirements. While we have adopted, or are
in the process of adopting, healthcare compliance and ethics programs that generally incorporate the OIG’s recommendations,
and training our applicable employees in such compliance, having such a program can be no assurance that we will avoid any compliance
issues.
We
conduct our business in a heavily regulated industry and changes in regulations or violations of regulations could, directly or
indirectly, harm our operating results and financial condition.
The
healthcare industry is highly regulated and there can be no assurance that the regulatory environment in which we operate
will not change significantly and adversely in the future. Areas of the regulatory environment that may affect our ability to
conduct business include, without limitation:
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federal
and state laws applicable to billing and claims payment;
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federal
and state laboratory anti-mark-up laws;
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federal
and state anti-kickback laws;
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federal
and state false claims laws;
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federal
and state self-referral and financial inducement laws, including the federal physician anti-self-referral law, or the Stark
Law;
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coverage
and reimbursement levels by Medicare and other governmental payors and private insurers;
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federal
and state laws governing laboratory licensing and testing, including CLIA;
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federal
and state laws governing the development, use and distribution of diagnostic medical tests known as laboratory developed tests
or “LDTs”;
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HIPAA,
along with the revisions to HIPAA as a result of the HITECH Act, and analogous state laws;
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federal,
state and foreign regulation of privacy, security, electronic transactions and identity theft;
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federal,
state and local laws governing the handling, transportation and disposal of medical and hazardous waste;
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Occupational
Safety and Health Administration rules and regulations;
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changes
to laws, regulations and rules as a result of the Health Care Reform Law; and
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changes
to other federal, state and local laws, regulations and rules, including tax laws.
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These
laws and regulations are extremely complex and in many instances, there are no significant regulatory or judicial interpretations
of these laws and regulations. Any determination that we have violated these laws or regulations, or the public announcement that
we are being investigated for possible violations of these laws or regulations, could harm our operating results and financial
condition. In addition, a significant change in any of these laws or regulations may require us to change our business model in
order to maintain compliance with these laws or regulations, which could harm our operating results and financial condition.
Failure
to comply with complex federal and state laws and regulations related to submission of claims for services can result in significant
monetary damages and penalties and exclusion from the Medicare and Medicaid Programs.
We
are subject to extensive federal and state laws and regulations relating to the submission of claims for payment for services,
including those that relate to coverage of our services under Medicare, Medicaid and other governmental health care programs,
the amounts that may be billed for our services and to whom claims for services may be submitted.
Our
failure to comply with applicable laws and regulations could result in our inability to receive payment for our services or result
in attempts by third-party payers, such as Medicare and Medicaid, to recover payments from us that have already been made. Submission
of claims in violation of certain statutory or regulatory requirements can result in penalties, including substantial civil money
penalties for each item or service billed to Medicare in violation of the legal requirement, and exclusion from participation
in Medicare and Medicaid. Government authorities may also assert that violations of laws and regulations related to submission
or causing the submission of claims violate the federal False Claims Act (“FCA”) or other laws related to fraud and
abuse, including submission of claims for services that were not medically necessary. Violations of the FCA could result in enormous
economic liability. The FCA provides that all damages are trebled. For example, we could be subject to FCA liability if it was
determined that the services we provided were not medically necessary and not reimbursable, particularly if it were asserted that
we contributed to the physician’s referrals of unnecessary services to us. It is also possible that the government could
attempt to hold us liable under fraud and abuse laws for improper claims submitted by an entity for services that we performed
if we were found to have knowingly participated in the arrangement that resulted in submission of the improper claims.
We
continuously conduct internal audits on current and historical billings to protect against errors related to any of the above.
One of these audits has led us to retain an independent consulting firm to assess if any violations to the foregoing regulations
have occurred in the historical billings by our laboratories. If the review determines that any overpayment was received, we will
inform the relative party and make arrangements to repay any overpayment. Medicare and Medicaid have continued to be a very small
percentage of our total business.
Changes
in regulation and policies, including increasing downward pressure on health care reimbursement, may adversely affect reimbursement
for our services and could have a material adverse impact on our business.
Reimbursement
levels for health care services are subject to continuous and often unexpected changes in policies, and we face a variety of efforts
by government payers to reduce utilization and reimbursement for our services. Changes in governmental reimbursement may
result from statutory and regulatory changes, retroactive rate adjustments, administrative rulings, competitive bidding initiatives,
and other policy changes.
The
U.S. Congress has considered, at least yearly in conjunction with budgetary legislation, changes to the Medicare fee schedules
under which we receive reimbursement. For example, currently there is no copayment or coinsurance required for clinical laboratory
services. However, Congress has periodically considered imposing a 20 percent coinsurance on laboratory services. If enacted,
this would require us to attempt to collect this amount from patients, although in many cases the costs of collection would exceed
the amount actually received.
The
CMS pays laboratories on the basis of a fee schedule that is reviewed and re-calculated on an annual basis. CMS may change the
fee schedule upward or downward on billing codes that we submit for reimbursement on a regular basis; our revenue and business
may be adversely affected if the reimbursement rates associated with such codes are reduced. Even when reimbursement rates are
not reduced, policy changes add to our costs by increasing the complexity and volume of administrative requirements. Medicaid
reimbursement, which varies by state, is also subject to administrative and billing requirements and budget pressures. Recently,
state budget pressures have caused states to consider several policy changes that may impact our financial condition and results
of operations, such as delaying payments, reducing reimbursement, restricting coverage eligibility and service coverage, and imposing
taxes on our services.
Failure
to timely or accurately bill for our services could have a material adverse effect on our business.
Billing
for medical services is extremely complicated and is subject to extensive and non-uniform rules and administrative requirements.
Depending on the billing arrangement and applicable law, we bill various payers, such as patients, insurance companies, Medicare,
Medicaid, physicians, hospitals and employer groups. Changes in laws and regulations could increase the complexity and cost of
our billing process. Additionally, auditing for compliance with applicable laws and regulations as well as internal compliance
policies and procedures adds further cost and complexity to the billing process. Further, our billing systems require significant
technology investment and, as a result of marketplace demands, we need to continually invest in our billing systems.
Missing,
incomplete, or incorrect information on requisitions adds complexity to and slows the billing process, creates backlogs of unbilled
requisitions, and generally increases the aging of accounts receivable and bad debt expense. Failure to timely or correctly bill
may lead to our not being reimbursed for our services or an increase in the aging of our accounts receivable, which could adversely
affect our results of operations and cash flows. Failure to comply with applicable laws relating to billing or even having to
pay back amounts incorrectly billed and collected could lead to various penalties, including: (1) exclusion from participation
in CMS and other government programs; (2) asset forfeitures; (3) civil and criminal fines and penalties; and (4) the loss of various
licenses, certificates and authorizations necessary to operate our business, any of which could have a material adverse effect
on our results of operations or cash flows.
There
have been times when our accounts receivable have increased at a greater rate than revenue growth and, therefore, have adversely
affected our cash flows from operations. We have taken steps to implement systems and processing changes intended to improve billing
procedures and related collection results. However, we cannot assure that our ongoing assessment of accounts receivable will not
result in the need for additional provisions. Such additional provisions, if implemented, could have a material adverse effect
on our operating results.
During
the last half of 2014 and the first three quarters of 2015, the Company experienced difficulty in delivering accurate electronic
submissions to third party payers. The difficulties arose from a variety of factors, including pressure, scrutiny and requirement
for additional information from payers related to toxicology services, difficulty complying with CMS’s new HCPCS codes for
toxicology services, difficulty in accurately billing for internal reference laboratory work, and complications arising from the
implementation of new billing technology. These difficulties have a significant impact on the time it takes the Company to collect
its receivables and consequently on its cash flow from operations. The Company believes that these difficulties were corrected
in the fourth quarter of 2015, but there can be no assurance that CMS and other third party payers will not change their requirements
resulting in further billing related difficulties.
Our
operations may be adversely impacted by the effects of extreme weather conditions, natural disasters such as hurricanes and earthquakes,
health pandemics, hostilities or acts of terrorism and other criminal activities.
Our
operations are always subject to adverse impacts resulting from extreme weather conditions, natural disasters, health pandemics,
hostilities or acts of terrorism or other criminal activities. Such events may result in a temporary decline in the number of
patients who seek our services or in our employees’ ability to perform their job duties. In addition, such events
may temporarily interrupt our ability to transport specimens, to receive materials from our suppliers or otherwise to provide
our services. The occurrence of any such event and/or a disruption of our operations as a result may adversely affect our results
of operations.
Increased
competition, including price competition, could have a material adverse impact on our net revenues and profitability.
We
operate in a business that is characterized by intense competition. Our major competitors include large national laboratories
and hospitals that possess greater name recognition, larger customer bases, and significantly greater financial resources
and employ substantially more personnel than we do. Many of our competitors have long established relationships. We cannot assure
you that we will be able to compete successfully with such entities in the future.
The
healthcare business is intensely competitive both in terms of price and service. Pricing of services is often one of the
most significant factors used by patients, health care providers and third-party payers in selecting a provider.
As a result of the healthcare industry undergoing significant consolidation, larger providers are able to increase cost
efficiencies. This consolidation results in greater price competition. We may be unable to increase cost efficiencies sufficiently,
if at all, and as a result, our net earnings and cash flows could be negatively impacted by such price competition. We may also
face competition from companies that do not comply with existing laws or regulations or otherwise disregard compliance standards
in the industry. Additionally, we may also face changes in fee schedules, competitive bidding for services or other actions or
pressures reducing payment schedules as a result of increased or additional competition. Additional competition, including price
competition, could have a material adverse impact on our net revenues and profitability.
Failure
to comply with environmental, health and safety laws and regulations, including the federal Occupational Safety and Health Administration
Act and the Needlestick Safety and Prevention Act, could result in fines and penalties and loss of licensure, and have a material
adverse effect upon the Company’s business.
The
Company is subject to licensing and regulation under federal, state and local laws and regulations relating to the protection
of the environment and human health and safety, including laws and regulations relating to the handling, transportation and disposal
of medical specimens, and infectious and hazardous waste materials, as well as regulations relating to the safety and health of
employees. All of the Company’s laboratories are subject to applicable federal and state laws and regulations relating to
biohazard disposal of all laboratory specimens, and they utilize outside vendors for disposal of such specimens. In addition,
the federal Occupational Safety and Health Administration has established extensive requirements relating to workplace safety
for health care employers, including clinical laboratories, whose workers may be exposed to blood-borne pathogens such as HIV
and the hepatitis B virus. These requirements, among other things, require work practice controls, protective clothing and equipment,
training, medical follow-up, vaccinations and other measures designed to minimize exposure to, and transmission of, blood-borne
pathogens. In addition, the Needlestick Safety and Prevention Act requires, among other things, that the Company include in its
safety programs the evaluation and use of emergency controls such as safety needles if found to be effective at reducing the risk
of needlestick injuries in the workplace.
Failure
to comply with federal, state and local laws and regulations could subject the Company to denial of the right to conduct business,
fines, criminal penalties and/or other enforcement actions which would have a material adverse effect on its business. In addition,
compliance with future legislation could impose additional requirements on the Company which may be costly.
Regulations
requiring the use of “standard transactions” for health care services issued under HIPAA may negatively impact the
Company’s profitability and cash flows.
Pursuant
to HIPAA, the Secretary of Health and Human Services has issued regulations designed to improve the efficiency and effectiveness
of the health care system by facilitating the electronic exchange of information in certain financial and administrative transactions
while protecting the privacy and security of the information exchanged.
The
HIPAA transaction standards are complex, and subject to differences in interpretation by payers. For instance, some payers may
interpret the standards to require the Company to provide certain types of information, including demographic information not
usually provided to the Company by physicians. As a result of inconsistent application of transaction standards by payers or the
Company’s inability to obtain certain billing information not usually provided to the Company by physicians, the Company
could face increased costs and complexity, a temporary disruption in receipts and ongoing reductions in reimbursements and net
revenues. In addition, new requirements for additional standard transactions, such as claims attachments and the ICD-10-CM Code
Set, could prove technically difficult, time-consuming or expensive to implement.
Failure
to maintain the security of customer-related information or compliance with security requirements could damage the Company’s
reputation with customers, and cause it to incur substantial additional costs and to become subject to litigation.
Pursuant
to HIPAA and certain similar state laws, we must comply with comprehensive privacy and security standards with respect to the
use and disclosure of protected health information. Under the HITECH amendments to HIPAA, HIPAA was expanded to require certain
data breach notifications, to extend certain HIPAA privacy and security standards directly to business associates, to heighten
penalties for noncompliance and to enhance enforcement efforts.
The
Company receives certain personal and financial information about its customers. In addition, the Company depends upon the secure
transmission of confidential information over public networks, including information permitting cashless payments. A compromise
in the Company’s security systems that results in customer personal information being obtained by unauthorized persons or
the Company’s failure to comply with security requirements for financial transactions could adversely affect the Company’s
reputation with its customers and others, as well as the Company’s results of operations, financial condition and liquidity.
It could also result in litigation against the Company or the imposition of penalties.
Failure
of the Company, third party payers or physicians to comply with the ICD-10-CM Code Set and our failure to comply with other emerging
electronic transmission standards could adversely affect our business.
The
Company believes that it is in compliance in all material respects with the current Transactions and Code Sets Rule. The Company
implemented Version 5010 of the HIPAA Transaction Standards, and believes it has fully adopted the ICD-10-CM code set. The compliance
date for ICD-10-CM was October 1, 2015. Clinical laboratories are typically required to submit health care claims with diagnosis
codes to third party payers. The diagnosis codes must be obtained from the ordering physician. The failure of the Company, third
party payers or physicians to transition within the required timeframe could have an adverse impact on reimbursement, day’s
sales outstanding and cash collections.
Also,
the failure of our IT systems to keep pace with technological advances may significantly reduce our revenues or increase our expenses.
Public and private initiatives to create healthcare information technology (“HCIT”) standards and to mandate standardized
clinical coding systems for the electronic exchange of clinical information, including test orders and test results, could require
costly modifications to our existing HCIT systems. While we do not expect HCIT standards to be adopted or implemented without
adequate time to comply, if we fail to adopt or delay in implementing HCIT standards, we could lose customers and business opportunities.
Compliance
with the HIPAA security regulations and privacy regulations may increase the Company’s costs.
The
HIPAA privacy and security regulations, including the expanded requirements under HITECH, establish comprehensive federal standards
with respect to the use and disclosure of protected health information by health plans, healthcare providers and healthcare clearinghouses,
in addition to setting standards to protect the confidentiality, integrity and security of protected health information. The regulations
establish a complex regulatory framework on a variety of subjects, including:
|
●
|
the
circumstances under which the use and disclosure of protected health information are permitted or required without a specific
authorization by the patient, including but not limited to treatment purposes, activities to obtain payments for the Company’s
services, and its healthcare operations activities;
|
|
●
|
a
patient’s rights to access, amend and receive an accounting of certain disclosures of protected health information;
|
|
●
|
the
content of notices of privacy practices for protected health information;
|
|
●
|
administrative,
technical and physical safeguards required of entities that use or receive protected health information; and
|
|
●
|
the
protection of computing systems maintaining Electronic Personal Health Information (“ePHI”).
|
The
Company has implemented policies and procedures related to compliance with the HIPAA privacy and security regulations, as required
by law. The privacy and security regulations establish a “floor” and do not supersede state laws that are more stringent.
Therefore, the Company is required to comply with both federal privacy and security regulations and varying state privacy and
security laws. In addition, for healthcare data transfers from other countries relating to citizens of those countries, the Company
may also be required to comply with the laws of those other countries. The federal privacy regulations restrict the Company’s
ability to use or disclose patient identifiable laboratory data, without patient authorization, for purposes other than payment,
treatment or healthcare operations (as defined by HIPAA), except for disclosures for various public policy purposes and other
permitted purposes outlined in the privacy regulations. HIPAA, as amended by HITECH, provides for significant fines and other
penalties for wrongful use or disclosure of protected health information in violation of the privacy and security regulations,
including potential civil and criminal fines and penalties. Due to the enactment of HITECH and an increase in the amount of monetary
financial penalties, government enforcement has also increased. It is not possible to predict what the extent of the impact on
business will be, other than heightened scrutiny and emphasis on compliance. If the Company does not comply with existing or new
laws and regulations related to protecting the privacy and security of health information it could be subject to significant monetary
fines, civil penalties or criminal sanctions. In addition, other federal and state laws that protect the privacy and security
of patient information may be subject to enforcement and interpretations by various governmental authorities and courts resulting
in complex compliance issues. For example, the Company could incur damages under state laws pursuant to an action brought by a
private party for the wrongful use or disclosure of confidential health information or other private personal information.
The
clinical laboratory industry is subject to changing technology and new product introductions.
Advances
in technology may lead to the development of more cost-effective technologies such as point-of-care testing equipment that can
be operated by physicians or other healthcare providers in their offices or by patients themselves without requiring the services
of freestanding clinical laboratories. Development of such technology and its use by the Company’s customers could reduce
the demand for its laboratory testing services and negatively impact its revenues.
Currently,
most clinical laboratory testing is categorized as “high” or “moderate” complexity, and thereby is subject
to extensive and costly regulation under CLIA. The cost of compliance with CLIA makes it impractical for most physicians to operate
clinical laboratories in their offices, and other laws limit the ability of physicians to have ownership in a laboratory and to
refer tests to such a laboratory. Manufacturers of laboratory equipment and test kits could seek to increase their sales by marketing
point-of-care laboratory equipment to physicians and by selling test kits approved for home or physician office use to both physicians
and patients. Diagnostic tests approved for home use are automatically deemed to be “waived” tests under CLIA and
may be performed in physician office laboratories as well as by patients in their homes with minimal regulatory oversight. Other
tests meeting certain FDA criteria also may be classified as “waived” for CLIA purposes. The FDA has regulatory responsibility
over instruments, test kits, reagents and other devices used by clinical laboratories and has taken responsibility from the CDC
for classifying the complexity of tests for CLIA purposes. Increased approval of “waived” test kits could lead to
increased testing by physicians in their offices or by patients at home, which could affect the Company’s market for laboratory
testing services and negatively impact its revenues.
Health
care reform and related programs (e.g. Health Insurance Exchanges), changes in government payment and reimbursement systems, or
changes in payer mix, including an increase in capitated reimbursement mechanisms and evolving delivery models, could have a material
adverse impact on the Company’s net revenues, profitability and cash flow.
Our
services are billed to private
patients, Medicare, Medicaid, commercial clients, managed care organizations (“MCOs”) and third-party insurance companies.
Bills may be sent to different payers depending on the medical insurance benefits of a particular patient. Most testing
services are billed to a party other than the physician or other authorized person that ordered the test. Increases in the percentage
of services billed to government and managed care payers could have an adverse impact on the Company’s net revenues.
The
various MCOs have different contracting philosophies, which are influenced by the design of the products they offer to their members.
Some MCOs contract with a limited number of clinical laboratories and engage in direct negotiation of the rates reimbursed to
participating laboratories. Other MCOs adopt broader networks with a largely uniform fee structure offered to all participating
clinical laboratories. In addition, some MCOs have used capitation in an effort to fix the cost of laboratory testing services
for their enrollees. Under a capitated reimbursement mechanism, the clinical laboratory and the managed care organization agree
to a per member, per month payment to pay for all authorized laboratory tests ordered during the month by the physician for the
members, regardless of the number or cost of the tests actually performed. Capitation shifts the risk of increased test utilization
(and the underlying mix of testing services) to the clinical laboratory provider.
A
portion of the third-party insurance fee-for-service revenues are collectible from patients in the form of deductibles, copayments
and coinsurance. As patient cost-sharing increases, collectability may be impacted.
In
addition, Medicare and Medicaid and private insurers have increased their efforts to control the cost, utilization and delivery
of health care services, including clinical laboratory services. Measures to regulate health care delivery in general, and clinical
laboratories in particular, have resulted in reduced prices, added costs and decreased test utilization for the clinical laboratory
industry by increasing complexity and adding new regulatory and administrative requirements. Pursuant to legislation passed in
late 2003, the percentage of Medicare beneficiaries enrolled in Medicare managed care plans has increased. The percentage of Medicaid
beneficiaries enrolled in Medicaid managed care plans has also increased, and is expected to continue to increase. Changes to,
or repeal of, the Health Care Reform Law, the health care reform legislation passed in 2010, also may continue to affect coverage,
reimbursement, and utilization of laboratory services, as well as administrative requirements, in ways that are currently unpredictable.
The
Company expects efforts to impose reduced reimbursement, more stringent payment policies and cost controls by government and other
payers to continue. If the Company cannot offset additional reductions in the payments it receives for its services by reducing
costs, increasing test volume or the volume of its other services and/or introducing new procedures, it could have a material
adverse impact on the Company’s net revenues, profitability and cash flows.
As
an employer, health care reform legislation also contains numerous regulations that will require the Company to implement significant
process and record keeping changes to be in compliance. These changes increase the cost of providing healthcare coverage to employees
and their families. Given the limited release of regulations to guide compliance, as well as potential changes to or repeal of
the Health Care Reform Law, the exact impact to employers including the Company is uncertain.
A
failure to obtain and retain new customers, a loss of existing customers or material contracts, a reduction in tests ordered or
specimens submitted by existing customers, or the inability to retain existing and create new relationships with health systems
could impact the Company’s ability to successfully grow its business.
To
offset efforts by payers to reduce the cost and utilization of clinical laboratory services and to otherwise grow its business,
the Company needs to obtain and retain new customers and business partners. In addition, a reduction in tests ordered or specimens
submitted by existing customers, without offsetting growth in its customer base, could impact the Company’s ability to successfully
grow its business and could have a material adverse impact on the Company’s net revenues and profitability. The Company
competes in its laboratory business primarily on the basis of the quality of testing, timeliness of test reporting, reporting
and information systems, reputation in the medical community, the pricing of services and ability to employ qualified personnel.
The Company’s failure to successfully compete on any of these factors could result in the loss of customers and a reduction
in the Company’s ability to expand its customer base.
In
addition, as the broader healthcare industry trend of consolidation continues, including the acquisition of physician practices
by health systems, relationships with hospital-based health systems and integrated delivery networks are becoming more important.
The Company’s inability to create relationships with those provider systems and networks could impact its ability to successfully
grow its business.
A
failure to identify and successfully close and integrate strategic acquisition targets could have a material adverse impact on
the Company’s business objectives and its net revenues and profitability.
Part
of the Company’s strategy involves deploying capital in investments that enhance the Company’s business, which includes
pursuing strategic acquisitions to strengthen the Company’s capabilities and increase its presence in key geographic areas.
Since January 1, 2013, the Company has acquired the Big South Fork Medical Center, clinical laboratories in California,
New Jersey and New Mexico in addition to Clinlab, Medical Mime and CollabRx. The acquisition of Tennova Healthcare - Jamestown
is expected to close in the second quarter of 2018. However, the Company cannot assure that it will be able to identify acquisition
targets that are attractive to the Company or that are of a large enough size to have a meaningful impact on the Company’s
operating results. Furthermore, the successful closing and integration of a strategic acquisition entails numerous risks, including,
among others:
|
●
|
failure
to obtain regulatory clearance;
|
|
●
|
loss
of key customers or employees;
|
|
●
|
difficulty
in consolidating redundant facilities and infrastructure and in standardizing information, including lack of complete integration;
|
|
●
|
unidentified
regulatory problems;
|
|
●
|
failure
to maintain the quality of services that such companies have historically provided;
|
|
●
|
coordination
of geographically-separated facilities and workforces; and
|
|
●
|
diversion
of management’s attention from the present core business of the Company.
|
The
Company cannot assure that current or future acquisitions, if any, or any related integration efforts will be successful, or that
the Company’s business will not be adversely affected by any future acquisitions, including with respect to net revenues
and profitability. Even if the Company is able to successfully integrate the operations of businesses that it may acquire in the
future, the Company may not be able to realize the benefits that it expects from such acquisitions.
Adverse
results in material litigation matters or governmental inquiries could have a material adverse effect upon the Company’s
business and financial condition.
The
Company may become subject in the ordinary course of business to material legal action related to, among other things, intellectual
property disputes, professional liability, contracts and employee-related matters, as well as inquiries and requests for information
from governmental agencies and bodies and Medicare or Medicaid carriers requesting comment and/or information on allegations of
billing irregularities, billing and pricing arrangements and other matters that are brought to their attention through billing
audits or third parties. The healthcare industry is subject to substantial Federal and state government regulation and audit.
Legal actions could result in substantial monetary damages as well as damage to the Company’s reputation with customers,
which could have a material adverse effect upon its business.
As
a company with limited capital and human resources, we anticipate that more of management’s time and attention will be diverted
from our business to ensure compliance with regulatory requirements than would be the case with a company that has well established
controls and procedures. This diversion of management’s time and attention may have a material adverse effect on our business,
financial condition and results of operations.
In
the event we identify significant deficiencies or material weaknesses in our internal control over financial reporting that we
cannot remediate in a timely manner, or if we are unable to receive a positive attestation from our independent registered public
accounting firm with respect to our internal control over financial reporting when we are required to do so, investors and others
may lose confidence in the reliability of our financial statements. If this occurs, the trading price of our common stock, if
any, and ability to obtain any necessary equity or debt financing could suffer. In addition, in the event that our independent
registered public accounting firm is unable to rely on our internal control over financial reporting in connection with its audit
of our financial statements, and in the further event that it is unable to devise alternative procedures in order to satisfy itself
as to the material accuracy of our financial statements and related disclosures, we may be unable to file our periodic reports
with the SEC. This would likely have an adverse effect on the trading price of our common stock, if any, and our ability to secure
any necessary additional financing, and could result in the delisting of our common stock. In such event, the liquidity of our
common stock would be severely limited and the market price of our common stock would likely decline significantly.
An
inability to attract and retain experienced and qualified personnel could adversely affect the Company’s business.
The
loss of key management personnel or the inability to attract and retain experienced and qualified employees at the Company’s
clinical laboratories and at the hospital could adversely affect the business. The success of the Company is dependent in part
on the efforts of key members of its management team.
In
addition, the success of the Company’s clinical laboratories also depends on employing and retaining qualified and experienced
laboratory professionals, including specialists, who perform clinical laboratory testing services. In the future, if competition
for the services of these professionals increases, the Company may not be able to continue to attract and retain individuals in
its markets. The Company’s revenues and earnings could be adversely affected if a significant number of professionals terminate
their relationship with the Company or become unable or unwilling to continue their employment.
Failure
in the Company’s information technology systems could significantly increase testing turn-around time or billing processes
and otherwise disrupt the Company’s operations or customer relationships.
The
Company’s business and customer relationships depend, in part, on the continued performance of its information technology
systems. Despite network security measures and other precautions, the Company’s information technology systems are potentially
vulnerable to physical or electronic break-ins, computer viruses and similar disruptions. Sustained system failures or interruption
of the Company’s systems in one or more of its operations could disrupt the Company’s ability to process laboratory
requisitions, perform testing, provide test results in a timely manner and/or bill the appropriate party. Breaches with respect
to protected health information could result in violations of HIPAA and analogous state laws, and risk the imposition of significant
fines and penalties. Failure of the Company’s information technology systems could adversely affect the Company’s
business, profitability and financial condition.
A
significant deterioration in the economy could negatively impact testing volumes, cash collections and the availability of credit.
The
Company’s operations are dependent upon ongoing demand for diagnostic testing and other services by patients, physicians,
hospitals, MCOs, and others. A significant downturn in the economy could negatively impact the demand for diagnostic testing and
other services as well as the ability of patients and other payers to pay for services ordered. In addition, uncertainty in
the credit markets could reduce the availability of credit and impact the Company’s ability to meet its financing needs
in the future.
Increasing
health insurance premiums and co-payments or high deductible health plans may cause individuals to forgo health insurance and
avoid medical attention, either of which may reduce demand for our products and services.
Health
insurance premiums, co-payments and deductibles have generally increased in recent years. These increases may cause individuals
to forgo health insurance, as well as medical attention. This behavior may reduce demand for testing by our laboratories and
for services at our hospital.
Our
business has substantial indebtedness.
We
currently have, and will likely continue to have, a substantial amount of indebtedness. Our indebtedness could, among other things,
make it more difficult for us to satisfy our debt and other obligations, require us to use a large portion of our cash flow from
operations to repay and service our debt or otherwise create liquidity problems, limit our flexibility to adjust to market conditions
and place us at a competitive disadvantage. As of December 31, 2017, we had total debt outstanding, excluding the effects of derivative
liabilities and unamortized discounts, of approximately $25.3 million, most of which is short term. In addition, our capital lease
obligations were approximately $2.1 million at December 31, 2017, of which certain payments are past due.
Our
ability to meet our obligations depends on our future performance and capital raising activities, which will be affected by financial,
business, economic and other factors, many of which are beyond our control. If our cash flow and capital resources prove inadequate
to allow us to pay the principal and interest on our debt, and meet our other obligations, we could face substantial liquidity
problems and might be required to dispose of material assets or operations, restructure or refinance our debt, which we may be
unable to do on acceptable terms, and forego attractive business opportunities. In addition, the terms of our existing or future
debt agreements may restrict us from pursuing any of these alternatives.
Failure
to achieve and maintain an effective system of internal control over financial reporting may result in our not being able to accurately
report our financial results. As a result, current and potential shareholders could lose confidence in our financial reporting,
which would harm our business and the trading price of our stock.
Our
management has determined that as of December 31, 2017, we did not maintain effective internal control over financial reporting
based on criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal
Control-Integrated Framework as a result of material weaknesses in our internal control over financial reporting. A material weakness
is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable
possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or
detected on a timely basis. If the results of our remediation efforts regarding our material weaknesses are not successful, or
if additional material weaknesses or significant deficiencies are identified in our internal control over financial reporting,
our management will be unable to report favorably as to the effectiveness of our internal control over financial reporting and/or
our disclosure controls and procedures, and we could be required to further implement expensive and time-consuming remedial measures
and potentially lose investor confidence in the accuracy and completeness of our financial reports, which could have an adverse
effect on our stock price and potentially subject us to litigation.
Hardware
and software failures, delays in the operation of computer and communications systems, the failure to implement system enhancements
or cyber security breaches may harm the Company.
The
Company’s success depends on the efficient and uninterrupted operation of its computer and communications systems. A failure
of the network or data gathering procedures could impede the processing of data, delivery of databases and services, client orders
and day-to-day management of the business and could result in the corruption or loss of data. While certain operations have appropriate
disaster recovery plans in place, we currently do not have sufficient redundant facilities to provide IT capacity in the event
of a system failure. Despite any precautions the Company may take, damage from fire, floods, hurricanes, power loss, telecommunications
failures, computer viruses, break-ins, cybersecurity breaches and similar events at our various computer facilities could result
in interruptions in the flow of data to the servers and from the servers to clients.
In
addition, any failure by the computer environment to provide required data communications capacity could result in interruptions
in service. In the event of a delay in the delivery of data, the Company could be required to transfer data collection operations
to an alternative provider of server hosting services. Such a transfer could result in delays in the ability to deliver products
and services to clients. Additionally, significant delays in the planned delivery of system enhancements, improvements and inadequate
performance of the systems once they are completed could damage the Company’s reputation and harm the business. Finally,
long-term disruptions in the infrastructure caused by events such as natural disasters, the outbreak of war, the escalation of
hostilities, acts of terrorism (particularly involving cities in which the Company has offices) and cybersecurity breaches could
adversely affect the business. Although the Company carries property and business interruption insurance, the coverage may not
be adequate to compensate for all losses that may occur.
Provisions
of Delaware law and our organizational documents may discourage takeovers and business combinations that our stockholders may
consider in their best interests, which could negatively affect our stock price.
Provisions
of Delaware law and our certificate of incorporation and bylaws may have the effect of delaying or preventing a change in control
of the Company or deterring tender offers for our common stock that other stockholders may consider in their best interests.
Our
certificate of incorporation authorizes us to issue up to 5,000,000 shares of preferred stock in one or more different series
with terms to be fixed by our board of directors. Stockholder approval is not necessary to issue preferred stock in this manner.
Issuance of these shares of preferred stock could have the effect of making it more difficult and more expensive for a person
or group to acquire control of us, and could effectively be used as an anti-takeover device.
Our
bylaws provide for an advance notice procedure for stockholders to nominate director candidates for election or to bring business
before an annual meeting of stockholders, including proposed nominations of persons for election to our board of directors, and
require that special meetings of stockholders be called only by our chairman of the board, chief executive officer, president
or the board pursuant to a resolution adopted by a majority of the board.
The
anti-takeover provisions of Delaware law and provisions in our organizational documents may prevent our stockholders from receiving
the benefit from any premium to the market price of our common stock offered by a bidder in a takeover context. Even in the absence
of a takeover attempt, the existence of these provisions may adversely affect the prevailing market price of our common stock
if they are viewed as discouraging takeover attempts in the future.
As
a public company, we incur significant administrative workload and expenses.
As
a public company with common stock listed on the OTCQB, we must comply with various laws, regulations and requirements, including
certain provisions of the Sarbanes-Oxley Act of 2002, as well as rules implemented by the SEC. Complying with these statutes,
regulations and requirements, including our public company reporting requirements, continues to occupy a significant amount of
the time of our board of directors and management and involves significant accounting, legal and other expenses. We will need
to hire additional accounting personnel to handle these responsibilities, which will increase our operating costs. Furthermore,
these laws, regulations and requirements could make it more difficult or more costly for us to obtain certain types of insurance,
including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur
substantially higher costs to obtain the same or similar coverage. The impact of these requirements could also make it more difficult
for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive officers.
New
laws and regulations as well as changes to existing laws and regulations affecting public companies, including the provisions
of the Sarbanes-Oxley Act of 2002 and rules adopted by the SEC, would likely result in increased costs to us as we respond to
their requirements. We are investing resources to comply with evolving laws and regulations, and this investment may result in
increased general and administrative expenses and a diversion of management’s time and attention from revenue-generating
activities to compliance activities.
We
do not intend to pay cash dividends on our common stock in the foreseeable future.
We
have never declared or paid cash dividends on our common stock and certain of our financing agreements, while outstanding, prohibit
us from declaring or paying cash dividends without approval which may not be granted. In addition, we anticipate that we will
retain our earnings, if any, for future growth and therefore do not anticipate paying any cash dividends in the foreseeable future.
Accordingly, our stockholders will not realize a return on their investment unless the trading price of our common stock appreciates,
which is uncertain and unpredictable.
We
may use our stock to pay, to a large extent, for future acquisitions or for the repayment of debt, which would be dilutive to
investors.
We
may choose to use additional stock to pay, to a large extent, for future acquisitions, and believe that doing so will enable us
to retain a greater percentage of our operating capital to pay for operations and marketing. Price and volume fluctuations in
our stock might negatively impact our ability to effectively use our stock to pay for acquisitions, or could cause us to offer
stock as consideration for acquisitions on terms that are not favorable to us and our stockholders. If we did resort to issuing
stock in lieu of cash for acquisitions under unfavorable circumstances, it would result in increased dilution to investors.
Our
common stock is subject to substantial dilution and we are requesting our stockholders’ approval to increase the
number of authorized shares of our common stock and to approve a discretionary reverse split of our common stock.
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 and debentures. 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.
The
following table presents the dilutive effect of our various potential common shares as of April 1, 2018:
|
|
April
1, 2018
|
|
Common
shares outstanding
|
|
|
500,000,000
|
|
Dilutive potential
shares:
|
|
|
|
|
Stock
options
|
|
|
38,478
|
|
Warrants
|
|
|
15,327,409,130
|
|
Convertible
debt
|
|
|
680,485,125
|
|
Convertible
preferred stock
|
|
|
787,212,324
|
|
Total
dilutive potential common shares
|
|
|
17,295,145,057
|
|
As
of April 1, 2018, the Company lacked a sufficient number of authorized shares of common stock to cover all potentially dilutive
common shares outstanding. On May 2, 2018, the Company intends to hold a special meeting of stockholders pursuant to a
proxy statement filed with the SEC on March 14, 2018 to, among other things, obtain stockholder approve to increase the number
of shares of its authorized common stock from 500,000,000 shares to 3,000,000,000 shares and to authorize its Board of Directors
to approve an amendment to its Certificate of Incorporation, as amended, to effect a reverse stock split of all of the outstanding
shares of the Company’s common stock at a specific ratio within a range from 1-for-50 to 1-for-300, and to grant authorization
to its Board of Directors to determine, in its discretion, the specific ratio and timing of the reverse stock split any time before
March 1, 2019, subject to the Board of Directors’ discretion to abandon such amendment.
If
the Company does not secure approval from its stockholders to increase the authorized number of shares of common stock and to
complete a reverse split of its common stock as is required to comply with the provisions of its outstanding agreements and to
have sufficient authorized shares necessary to obtain additional capital to fund its operations, its business, and its ability
to secure capital will be adversely affected, and it may not be able to continue as a going concern.
The
success of our hospital depends upon its ability to maintain good relationships with physicians and, if the hospital is unable
to successfully maintain good relationships with physicians, admissions and outpatient revenues may decrease and operating performance
could decline.
Because
physicians generally direct the majority of hospital admissions and outpatient services, a hospital’s success is, in part,
dependent upon the number and quality of physicians on the medical staffs, the admissions and referrals practices of the physicians
and the ability to maintain good relations with physicians. If the hospital is unable to successfully maintain good relationships
with physicians, admissions may decrease and operating performance could decline.
The
Big South Fork Medical Center is dependent on the local economy of Oneida, Tennessee and the surrounding area. A significant deterioration
in the economy could cause a material adverse effect on the hospital’s business.
The
hospital’s operations are dependent upon the local economy where it is located. A significant deterioration in that economy
would negatively impact the demand for the hospital’s services, as well as the ability of patients and other payers to pay
for service as rendered.
On
January 31, 2018, the Company entered into an asset purchase agreement to acquire certain assets related to an acute care hospital
located in Jamestown, Tennessee. This hospital is 38 miles from our existing hospital. Although the Company believes the synergies
of management and services in a close geographic location will create numerous efficiencies for the Company, if the proposed asset
purchase is consummated, it will expose the Company to a much greater degree to the effects of the economy in that one local area.
Item
1B.
|
Unresolved
Staff Comments
|
Not
applicable.
The
table below summarizes certain information as to our principal facilities as of April 1, 2018:
Location
|
|
Purpose
|
|
Type
of Occupancy
|
West
Palm Beach, Florida
|
|
Corporate
Headquarters
|
|
Leased
through February 28, 2021
|
Riviera
Beach, Florida(1)
|
|
Laboratory
|
|
Leased
through April 30, 2018
|
Oneida,
Tennessee
(2)
|
|
Medical
Facility and Laboratory
|
|
Owned
|
|
(1)
|
Clinical
Laboratory Operations segment.
|
|
(2)
|
Hospital
Operations segment.
|
In
addition, the table below summarizes certain information as to facilities used by our discontinued operations as of April
1, 2018:
Location
|
|
Purpose
|
|
Type
of Occupancy
|
Orange
City, Florida
(1)
|
|
Offices
|
|
Leased
through December 31, 2018
|
|
(1)
|
HTS
- Discontinued operations.
|
We
believe that each of our facilities as presently equipped has the production capacity for its currently foreseeable level of operations.
Item
3.
|
Legal
Proceedings
|
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.
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.
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 has accrued this amount in its condensed consolidated financial statements.
Additionally, the Company is seeking indemnification for these amounts from Epinex Diagnostics, Inc. (“EDI”), the
seller of Epinex Diagnostic Laboratories, Inc. (“EDL”), pursuant to a Stock Purchase Agreement entered into by and
among the parties.
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 on 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 on 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 2014 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 allows the Company to make monthly installment payments of $35,000 until February
2018 and negotiate a new payment agreement then, if the balance of $0.3 million cannot be satisfied in a lump sum. 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. $0.5 million remains outstanding
to the DOR at December 31, 2017.
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 11). 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. Payments commenced on May 1, 2017. $1.3 million monthly payments remain
outstanding to Tetra at December 31, 2017. The Company and Tetra have agreed to dispose of certain equipment and reduce
the balance owed by amounts received.
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 8). 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%. The Company is in default
of its payments to DeLage.
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 $0.4 million, including accrued interest. A request for entry of default judgment was
filed on January 24, 2017. These amounts remain outstanding at December 31, 2017.
In
November 2017
a former shareholder of Genomas filed
suit against the Company for payment of a Note payable by the subsidiary Genomas. This Note is recorded in the financial
statements of the subsidiary and is not payable directly from the Company. Other claims were included in the suit which
the Company believes to be frivolous and without merit. The Company has filed a motion to dismiss certain of the claims.
The Company does not deem this suit to be material.
The
Company and subsidiaries have been party to suits filed by landlords for late payment of rent and have either settled
these claims or are in process of agreeing to settlement. The Company does not deem these actions to be material.
Item
4.
|
Mine
Safety Disclosures
|
Not
applicable.
PART
II
Item
5.
|
Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
|
Since
October 25, 2017, our common stock has been traded on the OTCQB under the symbol “RNVA”. From November 3, 2015
to October 24, 2017, our common stock was listed on The NASDAQ Capital Market under the symbol “RNVA”. Prior
to that date our common stock was listed on The NASDAQ Capital Market under the symbol “CLRX”. The following
table sets forth the high and low sales prices per share of our common stock as reported on the OTCQB or The NASDAQ Capital Market,
as the case may be, for the periods indicated, as adjusted to reflect the Reverse Stock Splits. Such quotations represent inter-dealer
prices without retail markup, markdown or commission and may not necessarily represent actual transactions:
Quarter
Ended
|
|
High
|
|
|
Low
|
|
March
31, 2016
|
|
$
|
598.50
|
|
|
$
|
256.65
|
|
June 30, 2016
|
|
$
|
522.00
|
|
|
$
|
234.00
|
|
September
30, 2016
|
|
$
|
332.25
|
|
|
$
|
77.85
|
|
December 31,
2016
|
|
$
|
103.50
|
|
|
$
|
36.15
|
|
March 31,
2017
|
|
$
|
60.15
|
|
|
$
|
21.00
|
|
June 30, 2017
|
|
$
|
25.35
|
|
|
$
|
5.40
|
|
September
30, 2017
|
|
$
|
6.00
|
|
|
$
|
2.85
|
|
December 31,
2017
|
|
$
|
2.70
|
|
|
$
|
0.03
|
|
Holders
As
of April 1, 2018, there were 123 holders of record of the Company’s common stock which excludes stockholders whose shares
are held in nominee or street name by brokers.
Dividend
Distributions
We
have never declared or paid any cash dividends on our common stock, nor do we anticipate any cash dividends on our common stock
in the foreseeable future. Certain of our financing agreements prohibit the payment of cash dividends. The holders of our preferred
stock receive dividends at the same time any dividend is paid on shares of common stock in an amount equal to the amount such
holder would have received if such shares of preferred stock were converted into common stock.
The
Company intends to retain earnings, if any, to finance the development and expansion of its business. Future dividend policy will
be subject to the discretion of the Board of Directors and will be contingent upon future earnings, if any, the Company’s
financial condition, capital requirements, general business conditions, restrictions under the Company’s financing agreements
and other factors. Therefore, there can be no assurance that any dividends of any kind will ever be paid on the Company’s
common stock.
Equity
Compensation Plan Information
On
September 25, 2013, the Company’s board of directors approved and adopted the Medytox Solutions, Inc. 2013 Incentive Compensation
Plan (the “Plan”). The Plan was approved by the holders of a majority of the Company’s voting stock on November
22, 2013. The Plan provided for the grant of shares of common stock, options, performance shares, performance units, restricted
stock, stock appreciation rights and other awards. Options to purchase shares of common stock and restricted shares of common
stock were granted to the Company’s employees and consultants under the Plan. As a result of the Merger, this Plan was cancelled.
Any grants issued prior to the cancellation remain in force, as adjusted pursuant to the terms of the Merger.
2007
Incentive Award Plan
The
Company’s 2007 Equity Participation Plan (“2007 Equity Plan”), as amended, which became available upon the completion
of the Merger, authorized an aggregate of 50 million shares of common stock to be available for grant pursuant to the 2007 Equity
Plan. The 2007 Equity Plan provided for the grant of incentive stock options, nonqualified stock options, restricted stock, stock
appreciation rights, performance shares, performance stock units, dividend equivalents, stock payments, deferred stock, restricted
stock units, other stock-based awards, and performance-based awards. The option exercise price of all stock options granted pursuant
to the 2007 Equity Plan was not less than 100% of the fair market value of the common stock on the date of grant. Stock
options may be exercised as determined by the Board, but in no event after the tenth anniversary of the date of grant,
provided that a vested nonqualified stock option may be exercised up to 12 months after the optionee’s death. Awards granted
under the 2007 Equity Plan were generally subject to vesting at the discretion of the Compensation Committee of the Board of Directors.
The 2007 Equity Plan terminated pursuant to its terms in September 2017. Grants made prior to the date of termination will remain
outstanding until exercised, forfeited or expired pursuant to the terms of each grant.
The
following table provides information regarding the status of our existing equity compensation plans at December 31, 2017:
Plan
Category
|
|
(a)
Number of securities to be issued upon exercise of outstanding options, warrants and rights
|
|
|
(b)
Weighted average exercise price of outstanding options, warrants and rights
(1)
|
|
|
(c)
Number of shares remaining available for future issuances under equity compensation plans (excluding shares reflected in column
(a))
|
|
|
|
|
|
|
|
|
|
|
|
Equity
compensation plans approved by stockholders
|
|
|
38,478
|
|
|
$
|
2,072.75
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
compensation plans not approved by stockholders
|
|
|
–
|
|
|
|
–
|
|
|
|
n/a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
38,478
|
|
|
$
|
2,072.75
|
|
|
|
—
|
|
n/a
- not applicable.
(1)
See Note 13 of the consolidated financial statements for additional information about weighted average exercise prices.
Recent
Sales of Unregistered Securities
None.
Item
6.
|
Selected
Financial Data.
|
Not
applicable.
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of Operations.
|
The
following discussion of our financial condition and results of operations should be read together with our consolidated financial
statements and the notes thereto included elsewhere in this report. This discussion contains certain forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1996. Such statements consist of any statement other than
a recitation of historical fact and can be identified by the use of forward-looking terminology such as “may,” “expect,”
“anticipate,” “intend” or “estimate” or the negative thereof or other variations thereof or
comparable terminology. The reader is cautioned that all forward-looking statements are speculative, and there are certain risks
and uncertainties that could cause actual events or results to differ from those referred to in such forward-looking statements
(see Item 1A, “Risk Factors”).
COMPANY
OVERVIEW
Medytox
Solutions, Inc. (“Medytox”) was organized on July 20, 2005 under the laws of the State of Nevada. In the first half
of 2011, Medytox’s management elected to reorganize as a holding company, and Medytox established and acquired a number
of companies in the medical service and software sector between 2011 and 2014.
On
November 2, 2015, pursuant to the terms of the Agreement and Plan of Merger, dated as of April 15, 2015, by and among CollabRx,
Inc. (“CollabRx”), CollabRx Merger Sub, Inc. (“Merger Sub”), a direct wholly-owned subsidiary of CollabRx
formed for the purpose of the merger, and Medytox, Merger Sub merged with and into Medytox, with Medytox as the surviving company
and a direct, wholly-owned subsidiary of CollabRx (the “Merger”). Prior to closing, the Company amended its certificate
of incorporation to effect a 1-for-10 reverse stock split and to change its name to Rennova Health, Inc. In connection with the
Merger, (i) each share of common stock of Medytox was converted into the right to receive 0.4096 shares of common stock of the
Company, (ii) each share of Series B Preferred Stock of Medytox was converted into the right to receive one share of a newly-authorized
Series B Convertible Preferred Stock of the Company, and (iii) each share of Series E Convertible Preferred Stock of Medytox was
converted into the right to receive one share of a newly-authorized Series E Convertible Preferred Stock of the Company. This
transaction was accounted for as a reverse merger in accordance with accounting principles generally accepted in the United States
of America (“U.S. GAAP”) and, as such, the historical financial statements of Medytox became the historical financial
statements of the Company.
Holders
of Company equity prior to the closing of the Merger (including all outstanding Company common stock and all restricted stock
units, options and warrants exercisable for shares of Company common stock) held 10% of the Company’s common stock immediately
following the closing of the Merger, and holders of Medytox equity prior to the closing of the Merger (including all outstanding
Medytox common stock and all outstanding options exercisable for shares of Medytox common stock, but less certain options that
were cancelled upon the closing pursuant to agreements between Medytox and such optionees) held 90% of the Company’s common
stock immediately following the closing of the Merger, in each case on a fully diluted basis, provided, however, outstanding shares
of Series B Convertible Preferred Stock and Series E Convertible Preferred Stock, certain outstanding convertible promissory notes
exercisable for Company common stock after the closing and certain option grants expected to be made following the closing of
the Merger were excluded from such ownership percentages.
Rennova
Health is a healthcare enterprise that delivers products and services to
healthcare
providers, their patients and individuals. We operate in two synergistic divisions: 1) Clinical diagnostics through our clinical
laboratories; and 2) Hospital operations through our Big South Fork Medical Center located in Oneida Tennessee, which began operations
on August 8, 2017. In addition, we recently entered into an asset purchase agreement to acquire the assets of an acute care hospital
located in Jamestown Tennessee, which we expect to close on in the second quarter of 2018. We aspire to create a more sustainable
relationship with our customers by offering needed and interoperable solutions to capture multiple revenue streams from medical
providers.
Our
Services
We
are a healthcare enterprise that delivers products and services to healthcare providers, their patients and individuals. We operate
in two synergistic divisions: 1) Clinical diagnostics services through our clinical laboratories; and 2) Hospital operations.
During 2017, we decided to spin off two of our business divisions as more fully discussed below under the heading
“Discontinued
Operations.”
Our
principal line of business over the past few years has been clinical laboratory blood and urine testing services, with a particular
emphasis on the provision of urine drug toxicology testing to physicians, clinics and rehabilitation facilities in the United
States. Testing services to rehabilitation facilities represented approximately 51% of our revenues for the year ended December
31, 2017 and 100% of our revenues for the year ended December 31, 2016. Our Hospital Operations, which began on August 8, 2017,
as more fully discussed below, represented approximately 40% of our revenues for the year ended December 31, 2017.
On
January 13, 2017, we closed on 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 is classified as a Critical
Access Hospital (rural) with 25 beds, a 24/7 emergency department, operating rooms and a laboratory that provides a range of diagnostic
services. Scott County Community Hospital closed in July 2016 in connection with the bankruptcy filing of its parent company,
Pioneer Health Services, Inc. We acquired the Hospital Assets out of bankruptcy for a purchase price of $1.0 million. The hospital,
which has since been renamed Big South Fork Medical Center, became operational on August 8, 2017. Going forward, we expect the
hospital will provide us with a stable revenue base, as well as the potential for significant synergistic opportunities with our
Clinical Laboratory Operations business segment.
In
addition, on January 31, 2018, the Company entered into an asset purchase agreement (the “Purchase Agreement”) to
acquire certain assets related to an acute care hospital located in Jamestown, Tennessee. The hospital is known as Tennova Healthcare
- Jamestown and its associated assets, including a separately located doctor’s practice, are being
acquired from Community Health Systems, Inc. The transaction is expected to close in the second quarter of 2018, subject to customary
regulatory approvals and closing conditions. The purchase price is equal to the Net Working Capital (as defined in the Purchase
Agreement), plus $1.00.
Tennova
Healthcare – Jamestown is a fully-operational 85-bed facility including a 24/7 emergency department, radiology department,
surgical center, and a wound care and hyperbaric center. The purchase includes a 90,000-square foot hospital building on approximately
eight acres. Tennova Healthcare – Jamestown is located 38 miles from the Company’s existing hospital, the Big South
Fork Medical Center, which is located in Oneida Tennessee.
Discontinued
Operations
On
July 12, 2017, the Company announced plans to spin off its Advanced Molecular Services Group (“AMSG”) and in the third
quarter 2017 the Company’s Board of Directors voted unanimously to spin off the Company’s wholly-owned subsidiary,
Health Technology Solutions, Inc. (“HTS”), as independent publicly traded companies by way of tax-free distributions
to the Company’s stockholders. Completion of these spinoffs is expected to occur in the third quarter of 2018. The
Board of Directors is currently considering if AMSG and HTS would be better as one combined spinoff instead of two. The spinoffs
are subject to numerous conditions, including effectiveness of Registration Statements on Form 10 to be filed with the Securities
and Exchange Commission, and consents, including under various funding agreements previously entered into by the Company. A record
date to determine those stockholders entitled to receive shares in the spinoffs should be approximately 30 to 60 days prior to
the dates of the spinoffs. The strategic goal of the spinoffs is to create three (or two) public companies, each of which can
focus on its own strengths and operational plans. In addition, after the spinoffs, each company will provide a distinct and targeted
investment opportunity.
The
Company has reflected the amounts relating to AMSG and HTS as disposal groups classified as held for sale and included in discontinued
operations in the Company’s accompanying consolidated financial statements. Prior to being classified as held for sale,
AMSG had been included in the Decision Support and Informatics division, except for the Company’s subsidiary, Alethea Laboratories,
Inc., which had been included in the Clinical Laboratories division and HTS had been included in the Company’s Supportive
Software Solutions division. The segment disclosures included in our results of operations presented below no longer include amounts
relating to AMSG and HTS following the reclassification to discontinued operations.
Outlook
While
our Clinical Laboratory Operations continue to account for a substantial portion of our consolidated revenues, these revenues
have decreased significantly over the past one to two years. This decline in revenues has had a material adverse impact on our
liquidity, results of operations and financial condition, and is the result of lower third-party reimbursement and while we secured
numerous in-network contracts with payers our status in many cases is as an “out of network” service provider. These
trends have impacted our entire industry, and have been accompanied by allegations of irregularities in the practices of a number
our competitors and substance abuse facilities. In response, we have put in place a robust compliance program that we are implementing
in all facets of our business.
We
believe that our ability to grow our clinical laboratory revenues and return to the profitability is dependent on our ability
to secure additional “in-network” contracts with insurance companies and other third-party payers which will then
ensure adequate and timely payment for the toxicology, clinical pharmacogenetics and other testing services we perform. These
third-party payers are now generally unwilling to reimburse service providers who are not part of their network, a departure from
prior industry practices and a trend that has accelerated during the two years. While we have made some progress in securing “in
network” contracts with payers during the past two years, it has not been reflected in our revenues for the years ended
December 31, 2017 and 2016. However, we do anticipate that significant new opportunities to become credentialed with certain large
third-party payers will arise in fiscal 2018, which would have a significant positive impact on our future revenues. In addition,
we have made a number of changes to our onboarding policies and procedures to ensure that, on a going forward basis, substantially
all services that we performed will be reimbursable.
We
believe that the addition of Rural hospitals to our business model offers a more predictable and contracted stable revenue base,
as well as the potential for significant synergistic opportunities with our Clinical Laboratory Operations business segment. Rural
hospitals provide a much-needed service to their local community and reduce our reliance on commission based sales employees to
generate sales. We currently operate one hospital and the acquisition of the recently announced second, larger hospital in the
same geographic location should create numerous efficiencies in purchasing, staffing and provision of needed services to the local
community. We are confident that this is a sustainable model we can continue to grow through acquisition and development and believe
that we can benefit from the compliance and IT and software capabilities we already have in place.
We
believe that a successful spin off the Company’s wholly-owned subsidiaries, Advanced Molecular Services Group, Inc.
and Health Technology Solutions, Inc. as one or two independent publicly traded companies by way of tax-free distributions to
the Company’s stockholders would allow each to focus on its own strengths and operational plans. In addition, after the
spinoffs, each company will provide a distinct and targeted investment opportunity. The Company believes it will be able to recognize
the expenditures to date, which are in excess of $20 million, as an investment after the spinoff(s) are complete.
We
have received approximately $15.7 million in cash from the issuances of debentures and warrants during 2017 (see Note 8 to the
consolidated financial statements), $4.3 million from related parties (see Notes 7 and 8 to the consolidated financial statements)
and an additional $4.0 million of proceeds on October 30, 2017 from the issuance of our convertible preferred stock (see Note
12 to the consolidated financial statements). Subsequent to December 31, 2017, we received $2 million from the issuance of debentures
and $0.8 million from the sale of stock we owned (see Note 20).
The
protective covenants in the various agreements combined with the Company’s current inability to issue new shares and nonpayment
of certain liabilities means that $12.4 million that might otherwise be treated as equity have been treated as derivative liabilities
and had the relative effect applied to the Company’s financial statements including the profit and loss and balance sheet.
Our
net loss from continuing operations for the year ended December 31, 2017 was $50.9 million, as compared to $22.6 million for the
same period of a year ago. The change is primarily due to the decrease in operating expenses of $5.1 million and the increase
in revenue of $1.3 million offset by $12.4 million additional expense related to the value of derivative liabilities referred
to above, an increase of $15.2 million in interest expense, the decrease of $5.3 million in other income (expense), and additional
income tax expense of $1.8 million.
RESULTS
OF OPERATIONS
Critical
Accounting Policies and Estimates
Our
discussion and analysis of financial condition and results of operations are based on our consolidated financial statements, which
have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make a number of
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements. Such estimates and assumptions affect the reported amounts of revenues and expenses during
the reporting period. We base our estimates on historical experiences and on various other assumptions that we believe to be reasonable
under the circumstances. Actual results may differ materially from these estimates under different assumptions and conditions.
We continue to monitor significant estimates made during the preparation of our financial statements. On an ongoing basis, we
evaluate estimates and assumptions based upon historical experience and various other factors and circumstances. We believe our
estimates and assumptions are reasonable in the circumstances; however, actual results may differ from these estimates under different
future conditions.
We
have identified the policies and significant estimation processes discussed below as critical to our business and to the understanding
of our results of operations. For a detailed application of these and other accounting policies, see Note 2 to the accompanying
audited consolidated financial statements as of and for the year ended December 31, 2017.
Revenue
Recognition
Service
revenues are generated from laboratory testing services and hospital revenues.
Laboratory
testing services include chemical diagnostic tests such as blood analysis and urine analysis. Laboratory service revenues are
recognized at the time the testing services are performed and billed and are reported at their estimated net realizable amounts.
Net service revenues are determined utilizing gross service revenues net of contractual adjustments and discounts. Even though
it is the responsibility of the patient to pay for laboratory service bills, most individuals in the U.S. have an agreement with
a third-party payer such as a commercial insurance provider, Medicaid or Medicare to pay all or a portion of their healthcare
expenses; the majority of services provided by us are to patients covered under a third-party payer contract. In most cases, the
Company is provided the third-party billing information and seeks payment from the third party in accordance with the terms and
conditions of the third party payer for health service providers like us. Each of these third-party payers may differ not only
in terms of rates, but also with respect to terms and conditions of payment and providing coverage (reimbursement) for specific
tests. Estimated revenues are established based on a series of procedures and judgments that require industry specific healthcare
experience and an understanding of payer methods and trends. Despite follow up billing efforts, the Company does not currently
anticipate collection of a significant portion of self-pay billings, including the patient responsibility portion of the billing
for patients covered by third party payers. The Company currently does not have any capitated agreements.
For
hospital goods and or services, net revenues are determined utilizing gross revenues net of contractual adjustments and discounts
and are recognized when the goods and services are delivered. Even though it is the responsibility of the patient to pay for goods
and services rendered, most individuals have an agreement with a third-party payer such as a commercial insurance provider, Medicaid
or Medicare to pay all or a portion of their healthcare expenses.
In
May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).” The standard, including
subsequently issued amendments, will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective.
There is a five-step approach outlined in the standard. Entities are permitted to apply the new standard under the full retrospective
method, subject to certain practical expedients, or the modified retrospective method that requires the application of the guidance
only to contracts that are uncompleted on the date of initial application.
In
determining revenue, we first identify the contract according to the scope of ASC 606 with the following criteria:
|
●
|
The
parties have approved the contract either in writing through the acknowledgement or consent of the patient responsibility
or consent form; orally by acknowledgement or by scheduled appointment; or implicitly, based on the hospital’s customary
business practices (outpatient services, inpatient, emergency room visits, for example).
|
|
●
|
Each
party’s rights and the contract’s payment terms are identified.
|
|
●
|
The
contract has commercial substance.
|
|
●
|
Collection
is probable.
|
The
hospital ensures that it is probable and will collect substantially all of the consideration to which it is entitled. The
hospital has established the transaction price for providing goods or services to a patient through historical cash collection
and current data from each identified payer class. This may include the effects of variable consideration such as discounts and
price concessions and may be less than the stated contract price. With variable consideration, whether applied on a contract-by-contract
basis or by using a portfolio approach. The ultimate transaction price reflects explicit price concessions. The hospital has an
obligation to provide medically necessary or emergency services regardless of a patient’s intent or ability to pay.
In determining collectability, the evaluation is based on experience or the contract portfolio approach with either a specific
patient or a class of similar patients.
The
hospital practices the full retrospective approach of all the reporting periods presented under the new standard discloses
any adjustment to prior-period information.
This
includes but is not limited to Disaggregated revenue information, Contract asset and liability information, including significant
changes from prior year, and Judgements, and changes in judgement, that significantly affect the determination of the amount of
revenue and timing.
We
review our calculations for the realizability of gross service revenues on a monthly basis in order 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 on the basis of historical allowance rates for
the various specific payer groups on a monthly basis 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 on the basis
of actual allowances issued by payers and the actual payments made to determine what adjustments, if any, are needed.
Contractual
Allowances and 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.
Impairment
or Disposal of Long-Lived Assets
The
Company accounts for the impairment or disposal of long-lived assets according to the Financial Accounting Standards Board’s
(“FASB”) Accounting Standards Codification (“ASC”) Topic 360,
Property, Plant and Equipment
(“ASC
360”). ASC 360 clarifies the accounting for the impairment of long-lived assets and for long-lived assets to be disposed
of, including the disposal of business segments and major lines of business. Long-lived assets are reviewed when facts and circumstances
indicate that the carrying value of the asset may not be recoverable. When necessary, impaired assets are written down to estimated
fair value based on the best information available. Estimated fair value is generally based on either appraised value or measured
by discounting estimated future cash flows. Considerable management judgment is necessary to estimate discounted future cash flows.
Accordingly, actual results could vary significantly from such estimates.
At
December 31, 2016, we determined that a portion of our laboratory service equipment was impaired and we recorded an impairment
charge of $0.8 million, and we also recorded an impairment charge for our equity investment in Genomas, Inc. (“Genomas”)
in the amount of $0.2 million. At December 31, 2017, we recorded a goodwill impairment charge of $1.0 million related to Genomas
acquisition. Genomas is part of AMSG and is included in our discontinued operations.
Derivative
Financial Instruments and Fair Value
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 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 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).
The amendments in Part II of this Update recharacterize the indefinite deferral of certain provisions of Topic 480 that now are
presented as pending content in the Codification, to a scope exception. Those amendments do not have an accounting effect.
Under
current GAAP, an equity-linked financial instrument with a down round feature that otherwise is not required to be classified
as a liability under the guidance in Topic 480 is evaluated under the guidance in Topic 815, Derivatives and Hedging, to determine
whether it meets the definition of a derivative. If it meets that definition, the instrument (or embedded feature) is evaluated
to determine whether it is indexed to an entity’s own stock as part of the analysis of whether it qualifies for a scope
exception from derivative accounting. Generally, for warrants and conversion options embedded in financial instruments that are
deemed to have a debt host (assuming the underlying shares are readily convertible to cash or the contract provides for net settlement
such that the embedded conversion option meets the definition of a derivative), the existence of a down round feature results
in an instrument not being considered indexed to an entity’s own stock. This results in a reporting entity being required
to classify the freestanding financial instrument or the bifurcated conversion option as a liability, which the entity must measure
at fair value initially and at each subsequent reporting date.
The
amendments in this Update revise the guidance for instruments with down round features in Subtopic 815-40, Derivatives and Hedging—Contracts
in Entity’s Own Equity, which is considered in determining whether an equity-linked financial instrument qualifies for a
scope exception from derivative accounting. An entity still is required to determine whether instruments would be classified in
equity under the guidance in Subtopic 815-40 in determining whether they qualify for that scope exception. If they do qualify,
freestanding instruments with down round features are no longer classified as liabilities and embedded conversion options with
down round features are no longer bifurcated.
For
entities that present EPS in accordance with Topic 260, and 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. Convertible instruments are unaffected by the Topic 260 amendments in this Update.
Those
amendments in Part 1 of this Update are a cost savings relative to current GAAP. This is because, assuming the required criteria
for equity classification in Subtopic 815-40 are met, an entity that issued such an instrument no longer measures the instrument
at fair value at each reporting period (in the case of warrants) or separately accounts for a bifurcated derivative (in the case
of convertible instruments) on the basis of the existence of a down round feature. For convertible instruments with embedded conversion
options that have down round features, applying specialized guidance such as the model for contingent beneficial conversion features
rather than bifurcating an embedded derivative also reduces cost and complexity. Under that specialized guidance, the issuer recognizes
the intrinsic value of the feature only when the feature becomes beneficial instead of bifurcating the conversion option and measuring
it at fair value each reporting period.
The
amendments in Part II of this Update replace the indefinite deferral of certain guidance in Topic 480 with a scope exception.
This has the benefit of improving the readability of the Codification and reducing the complexity associated with navigating the
guidance in Topic 480.
For
public business entities, the amendments in Part I of this Update are effective for fiscal years, and interim periods within those
fiscal years, beginning after December 15, 2018. For all other entities, the amendments in Part I of this Update are effective
for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020.
Early adoption is permitted for all entities, including adoption in an interim period. If an entity early adopts the amendments
in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period.
The amendments in Part 1 of this Update should be applied in either of the following ways: 1. Retrospectively to outstanding financial
instruments with a down round feature by means of a cumulative-effect adjustment to the statement of financial position as of
the beginning of the first fiscal year and interim period(s) in which the pending content that links to this paragraph is effective;
or 2. Retrospectively to outstanding financial instruments with a down round feature for each prior reporting period presented
in accordance with the guidance on accounting changes in paragraphs 250-10-45-5 through 45-10.
The
amendments in Part II of this Update do not require any transition guidance because those amendments do not have an accounting
effect.
We
have determined that this amendment had a material impact on our consolidated financial statements and we have early adopted this
accounting standard update. The cumulative effect of the adoption of ASU 2017-11 resulted in the reclassification of the derivative
liability recorded of $56 million and the reversal of $41 million of interest expense recorded in our first fiscal quarter of
2017. The remaining $16 million was offset to additional paid in capital (discount on convertible debenture). Additionally, we
recognized a deemed dividend from the trigger of the down round provision feature of $53.3 million. A $51 million deemed dividend
was recorded retrospectively as of the beginning of the issuance of the debentures issued in March 2017 where the initial derivative
liability was recorded as a result of the down round provision feature.
In
accordance with ASC 820, “
Fair Value Measurements and Disclosures
,” the Company applies fair value accounting
for all financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value
in the financial statements on a recurring basis. Fair value is defined as the price that would be received from selling an asset
or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining
the fair value measurements for assets and liabilities which are required to be recorded at fair value, the Company considers
the principal or most advantageous market in which it would transact and the market-based risk measurements or assumptions that
market participants would use in pricing the asset or liability, such as risks inherent in valuation techniques, transfer restrictions
and credit risk. Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair
value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and
significant to the fair value measurement:
|
●
|
Level
1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities
that we have the ability to access at the measurement date.
|
|
|
|
|
●
|
Level
2 applies to assets or liabilities for which there are inputs other than quoted prices included in Level 1 that are observable
for the asset or liability, either directly or indirectly, such as quoted prices for similar assets or liabilities in active
markets; or quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions
(less active markets).
|
|
|
|
|
●
|
Level
3 applies to assets or liabilities for which fair value is derived from valuation techniques in which one or more significant
inputs are unobservable, including our own assumptions.
|
Stock
Based Compensation
We
account for Stock-Based Compensation under ASC 718 “
Compensation – Stock Compensation
”, which addresses
the accounting for transactions in which an entity exchanges its equity instruments for goods or services, with a primary focus
on transactions in which an entity obtains employee services in share-based payment transactions. ASC 718 requires measurement
of the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of
the award. Incremental compensation costs arising from subsequent modifications of awards after the grant date must be recognized.
The
Company accounts for stock-based compensation awards to non-employees in accordance with ASC 505-50, Equity-Based Payments to
Non-Employees. Under ASC 505-50, the Company determines the fair value of the options, warrants or stock-based compensation awards
granted as either the fair value of the consideration received or the fair value of the equity instruments issued, whichever is
more reliably measurable. Any stock options or warrants issued to non-employees are recorded in expense and additional paid-in
capital in stockholders’ equity/(deficit) over the applicable service periods using variable accounting through the vesting
dates based on the fair value of the options or warrants at the end of each period.
Year
ended December 31, 2017 compared to year ended December 31, 2016
The
following table summarizes the results of our consolidated continuing operations for the years ended December 31, 2017 and 2016:
|
|
Year
Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
Net
revenues
|
|
$
|
4,619,473
|
|
|
|
100.0
|
%
|
|
$
|
3,338,425
|
|
|
|
100.0
|
%
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
costs of revenue
|
|
|
948,838
|
|
|
|
20.5
|
%
|
|
|
1,245,304
|
|
|
|
37.3
|
%
|
General
and administrative expenses
|
|
|
15,757,527
|
|
|
|
341.1
|
%
|
|
|
17,318,026
|
|
|
|
518.7
|
%
|
Sales
and marketing expenses
|
|
|
742,637
|
|
|
|
16.1
|
%
|
|
|
1,758,667
|
|
|
|
52.7
|
%
|
Bad
debt expense
|
|
|
1,531,257
|
|
|
|
33.1
|
%
|
|
|
2,055,002
|
|
|
|
61.6
|
%
|
Impairment
charges
|
|
|
-
|
|
|
|
0.0
|
%
|
|
|
1,038,285
|
|
|
|
31.1
|
%
|
Depreciation
and amortization
|
|
|
1,715,321
|
|
|
|
37.1
|
%
|
|
|
2,415,048
|
|
|
|
72.3
|
%
|
Loss
from operations
|
|
|
(16,076,107
|
)
|
|
|
-348.0
|
%
|
|
|
(22,491,907
|
)
|
|
|
-673.7
|
%
|
Interest
expense
|
|
|
(21,432,285
|
)
|
|
|
-464.0
|
%
|
|
|
(6,308,347
|
)
|
|
|
-188.1
|
%
|
Other
income (expense), net
|
|
|
38,342
|
|
|
|
0.8
|
%
|
|
|
128,954
|
|
|
|
3.9
|
%
|
Loss
on disposal of property and equipment
|
|
|
-
|
|
|
|
0.0
|
%
|
|
|
(124,494
|
)
|
|
|
-4.6
|
%
|
Change
in fair value of derivative instruments
|
|
|
(42,702,815
|
)
|
|
|
-924.4
|
%
|
|
|
5,392,390
|
|
|
|
161.5
|
%
|
Gain
on extinguishment of debt
|
|
|
42,702,815
|
|
|
|
924.4
|
%
|
|
|
-
|
|
|
|
0.0
|
%
|
Value of derivative
liabilities
|
|
|
(12,435,250
|
)
|
|
|
-269.2
|
%
|
|
|
-
|
|
|
|
0.0
|
%
|
Provision
for income tax (benefit)
|
|
|
1,015,724
|
|
|
|
22.0
|
%
|
|
|
(778,756
|
)
|
|
|
-23.3
|
%
|
Net
loss from continuing operations
|
|
$
|
(50,921,024
|
)
|
|
|
-1102.3
|
%
|
|
$
|
(22,624,648
|
)
|
|
|
-677.7
|
%
|
Net
Revenues
Consolidated
net revenues were $4.6 million for the year ended December 31, 2017, as compared to $3.3 million for the year ended
December 31, 2016, an increase of $1.3 million, or 39%. The increase is mainly due to the $1.8 million of
net revenue in 2017 from our Big South Fork Medical Center, which began operating on August 8, 2017, partially offset by the $0.5
decline in Clinical Laboratory Operations revenue resulting from a decrease of 79.6% in insured test volume in 2017 as compared
to 2016, as a number of large third party payers are now generally unwilling to reimburse service providers who are not part of
their network, a departure from prior industry practices. Our focus on the provision of diagnostic services to the substance abuse
sector was a factor in this reduction of revenue. The third party payers have dramatically changed the way they reimburse for
this sector. The Company has made progress in expanding into a wider and more varied market place, including hospital operations,
and that combined with aggressive consolidation and cost cutting is expected to reduce the losses incurred in the future.
Direct
Cost of Revenue
Direct
costs of revenue from continuing operations decreased by 24%, from $1.2 million for the year ended December 31, 2016 to $0.9 million
for the year ended December 31, 2017. The decrease of $0.3 million is a result of a decrease in reagents and supplies at our laboratories,
partially offset by an increase of $0.1 million related to our Hospital Operations. The decrease is a result of the 16.7% decline
in total samples processed and the transition of a significant portion of our testing from external reference laboratories to
internal processing.
General
and Administrative Expenses
General
and administrative expenses decreased by $1.6 million, or 9%, for the year ended December 31, 2017, as compared to the same period
of a year ago. The decrease is mainly the result of a $3.3 million reduction in employee compensation and related costs, net of
Hospital Operations employee compensation of $2.2 million, as we significantly reduced our headcount throughout the latter half
of 2016 and 2017 in response to the decline in revenues in our Clinical Laboratory Operations, a $0.6 million decrease in consulting
fees, offset by $1.0 million of physician fees related to the Hospital Operations, $1.0 million loan extension fee and $0.8 million
decrease in stock compensation expense. In 2016, the Company also incurred $0.8 million related to the financial support of Epinex
Diagnostics, Inc. and $0.4 million related to Genomas.
Sales
and Marketing Expenses
The
decrease in sales and marketing expenses of $1.0 million for the year ended December 31, 2017, as compared to the year ended December
31, 2016 was primarily due to a reduction in sales employee and contractor compensation expenses in the amount of $1.0 million,
as well as reduced travel, advertising and commissionable collections related to the decline in net revenues.
Bad
Debt Expense
Bad
debt expense for the year ended December 31, 2017 was $1.5 million, as compared to $2.1 million for the year ended December 31,
2016. The decrease in 2017 is mainly due to the $3.5 million bad debt charge related to receivables in our Clinical Laboratory
Operations segment.
Impairment
Charges
During
the year ended December 31, 2016, we recognized an impairment charge of $0.8 million with respect to some of our idle laboratory
equipment, which was primarily due to the decrease in sample volume at our Clinical Laboratory Operations segment, and we also
recorded an impairment related to our equity investment in Genomas, Inc. in the amount of $0.2 million. In December 31,
2017, we recorded a goodwill impairment charge of $1.0 million related to the Genomas acquisition, reflected in discontinued operations.
Depreciation
and Amortization Expenses
Depreciation
and amortization expense decreased by $0.7 million during the year ended December 31, 2017, as compared with the year ended December
31, 2016, as some of our property and equipment became fully depreciated during 2016 and our capital expenditures have been minimal
due to the reduced sample volume at our laboratories.
Loss
from Operations
Our
operating loss decreased to $16.1 million for the year ended December 31, 2017 compared to $22.5 million for the year ended
December 31, 2016. The decrease is mainly due to decrease in bad debt charge of $0.5 million, a decrease in impairment charges
in the amount of $1.0 million, a decrease in general and administrative expenses of $1.6 million, a decrease in sales and marketing
expenses in the amount of $1.0 million, a decrease in direct costs of revenue in the amount of $0.3 million, and a decrease
in depreciation expenses of $0.7 million, partially offset by the $1.3 million increase in net revenues for the year.
Other
(Expense) Income, net
Other
expense, net, of $33.8 million for the year ended December 31, 2017 consists primarily of $8.8 million of non-cash interest charge
and $12.4 million value of derivative liabilities related to convertible debentures and warrants that were issued during
the period, $10.4 million for amortization of debt discount, $2.4 million for interest expense related to notes payable and capital
lease obligations. Other expense, net also includes a $43 million gain on the extinguishment of debt, fully offset by a loss of
$43 million due to the change in fair value of debt as a result of the adoption of ASU 2017-11, which is more fully discussed
in Note 2 to the consolidated financial statements. Other expense, net of $0.9 million for the year ended December 31, 2016 primarily
consists of $5.4 million in non-cash gains on the change in fair value of derivative financial instruments related to convertible
notes and warrants, which was more than offset by $6.3 million of interest expense. Interest expense for the year ended December
31, 2016 includes interest charges of $1.3 million related to a $5.0 million prepaid forward purchase contract, $0.8 million related
to capital lease obligations and $3.0 million of non-cash interest expense related to the accretion of debt discounts.
Net
loss from Continuing Operations
Our
net loss from continuing operations for the year ended December 31, 2017 was $50.9 million, as compared to $22.6 million for the
same period of a year ago. The change is primarily due to the decrease in operating expenses of $5.1 million and the increase
in revenue of $1.3 million offset by $12.4 million additional expense related to the value of derivative liabilities referred
to above, an increase of $15.2 million in interest expense, the decrease of $5.3 million in other income (expense), and additional
income tax expense of $1.8 million.
The
following table presents key financial and operating metrics for our Clinical Laboratory Operations segment:
|
|
Year
Ended December 31,
|
|
|
|
|
|
|
|
Clinical
Laboratory Operations
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenues
|
|
$
|
2,793,089
|
|
|
$
|
3,338,425
|
|
|
$
|
(545,336
|
)
|
|
|
-16.3
|
%
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
costs of revenue
|
|
|
821,535
|
|
|
|
1,054,455
|
|
|
|
(232,920
|
)
|
|
|
-22.1
|
%
|
Bad
debt expense
|
|
|
582,772
|
|
|
|
2,055,002
|
|
|
|
|
|
|
|
|
|
General
and administrative expenses
|
|
|
3,687,328
|
|
|
|
8,225,287
|
|
|
|
(4,537,959
|
)
|
|
|
-55.2
|
%
|
Sales
and marketing expenses
|
|
|
734,268
|
|
|
|
1,749,499
|
|
|
|
(1,015,231
|
)
|
|
|
-58.0
|
%
|
Impairment
charges
|
|
|
-
|
|
|
|
788,285
|
|
|
|
(788,285
|
)
|
|
|
-100.0
|
%
|
Depreciation
and amortization
|
|
|
1,639,954
|
|
|
|
2,412,041
|
|
|
|
(772,087
|
)
|
|
|
-32.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
income from operations
|
|
$
|
(4,672,768
|
)
|
|
$
|
(12,946,144
|
)
|
|
$
|
6,801,146
|
|
|
|
-52.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Key
Operating Measures - Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insured
tests performed
|
|
|
44,458
|
|
|
|
218,073
|
|
|
|
(173,615
|
)
|
|
|
-79.6
|
%
|
Net
revenue per insured test
|
|
$
|
62.83
|
|
|
$
|
15.31
|
|
|
$
|
47.52
|
|
|
|
310.4
|
%
|
Revenue
recognition percent of gross billings
|
|
|
15.0
|
%
|
|
|
11.0
|
%
|
|
|
4.0
|
%
|
|
|
|
|
The
reduction in insured tests performed in 2017 negatively impacted our revenues by $2.7 million, while the increase in net revenue
per insured test positively impacted our revenues by $2.1 million. The increase in direct costs per sample resulted in a $0.8
million increase in direct costs of revenue, while the decrease in the number of samples processed resulted in a $0.5 million
reduction in direct costs of revenue.
The
decrease in general and administrative expenses is primarily due to the reduction in employee compensation and related costs,
as we significantly reduced our headcount.
The
following table presents key financial metrics for our Hospital Operations segment:
|
|
Year
Ended December 31,
|
|
|
|
|
|
|
|
Hospital
Operations
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenues
|
|
$
|
1,826,383
|
|
|
$
|
-
|
|
|
$
|
1,826,383
|
|
|
|
NM
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
costs of revenue
1
|
|
|
84,808
|
|
|
|
-
|
|
|
|
84,808
|
|
|
|
NM
|
|
General
and administrative expenses
1
|
|
|
5,514,794
|
|
|
|
-
|
|
|
|
5,514,794
|
|
|
|
NM
|
|
Bad
debt
|
|
|
948,485
|
|
|
|
-
|
|
|
|
948,485
|
|
|
|
NM
|
|
Depreciation
and amortization
|
|
|
78,836
|
|
|
|
-
|
|
|
|
78,836
|
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
$
|
(4,800,540
|
)
|
|
$
|
-
|
|
|
$
|
(4,800,540
|
)
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of Patients Serviced
|
|
|
3,747
|
|
|
|
-
|
|
|
|
3,747
|
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Key
Operating Measures – Net Revenues per patient:
|
|
$
|
487.43
|
|
|
|
NM
|
|
|
|
NM
|
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Key
Operating Measures - Direct Costs of revenue per patient:
|
|
$
|
22.63
|
|
|
|
NM
|
|
|
|
NM
|
|
|
|
NM
|
|
Our
hospital operations began on August 8, 2017.
1
During our start up period the separation of direct costs per patient and general and administrative expenses has not been
completed. As this exercise is completed we expect to reduce the general and administration costs and increase our direct costs
of revenue per patient.
The
following table presents key financial metrics for our Corporate group:
|
|
Year
Ended December 31,
|
|
|
|
|
|
|
|
Corporate
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative expenses
|
|
$
|
5,550,553
|
|
|
$
|
9,227,383
|
|
|
$
|
(3,676,830
|
)
|
|
|
-39.8
|
%
|
Direct
costs of revenue
|
|
|
42,496
|
|
|
|
190,850
|
|
|
|
(148,354
|
)
|
|
|
-77.7
|
%
|
Sales
and marketing expenses
|
|
|
8,369
|
|
|
|
9,169
|
|
|
|
(800
|
)
|
|
|
-8.7
|
%
|
Impairment
charge
|
|
|
-
|
|
|
|
250,000
|
|
|
|
(250,000
|
)
|
|
|
-100.0
|
%
|
Depreciation
and amortization
|
|
|
1,382
|
|
|
|
131,639
|
|
|
|
133,021
|
|
|
|
-101.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
$
|
(5,602,800
|
)
|
|
$
|
(9,809,041
|
)
|
|
$
|
3,942,963
|
|
|
|
-41.3
|
%
|
The
decrease in general and administrative expenses is mainly the result of a $3.0 million reduction in employee compensation and
related costs, net of Hospital employee compensation of $1.6 million, as we significantly reduced our headcount throughout the
latter half of 2016 and 2017 in response to the decline in revenues in our Clinical and Supportive Software, and a $0.2 million
reduction in maintenance costs for our laboratory equipment and a $0.8 million decrease in stock compensation expense.
LIQUIDITY
AND CAPITAL RESOURCES
For
the years ended December 31, 2016 and 2017, we have financed our operations primarily from the sale of our equity securities,
the issuance of debentures, short-term advances from related parties, and the proceeds we received from pledging certain of our
accounts receivable as discussed below. Future cash needs for working capital, capital expenditures and potential acquisitions
will require management to seek additional equity or obtain additional credit facilities. The sale of additional equity will result
in additional dilution to our stockholders. A portion of our cash may be used to acquire or invest in complementary businesses
or products or to obtain the right to use complementary technologies. From time to time, in the ordinary course of business, we
evaluate potential acquisitions of such businesses, products or technologies.
At
December 31, 2017, we had no cash on hand from continuing operations, a working capital deficit of $21.5 million and a
stockholders’ deficit of $40.6 million. In addition, we incurred a loss from continuing operations of $50.9
million for the year ended December 31, 2017. As of the date of this report, our cash position is critically deficient and payments
critical to our ability to operate are not being made in the ordinary course. Our fixed operating expenses, including payroll,
rent, capital lease payments and other fixed expenses, including the costs required to operate Big South Fork Medical Center,
which began operations on August 8, 2017, are approximately $1.5-$2.0 million per month.
During
2017, we raised approximately $19.7 million from the sale of equity securities and debentures, including $4.0 million that we
raised on October 30, 2017 from the issuance of our Series I-1 Convertible Preferred Stock (the “Series I-1 Preferred Stock”)
as more fully discussed below. However, our failure to raise additional capital in the coming months will have a material adverse
effect on our ability to operate our business. In addition, we will be required to raise additional capital in order to fund our
operations for the next twelve months. There can be no assurances that we will be able to raise the necessary capital on terms
that are acceptable to us, or at all. If we are unable to secure the necessary funding as and when required, it will have a material
adverse effect on our business and we may be required to downsize, further reduce our workforce, sell some of our assets or possibly
curtail or even cease operations, raising substantial doubt about our ability to continue as a going concern.
In
July 2017, we announced that we plan to spin off AMSG and in the third quarter of 2017, our Board of Directors voted unanimously
to spin off our HTS, as independent publicly traded companies by way of tax-free distributions to our shareholders. Completion
of these spinoffs is expected to occur in the third quarter of 2018. Our Board of Directors is currently considering if
AMSG and HTS would be better off as one combined spinoff instead of two. The spinoffs are subject to numerous conditions, including
effectiveness of the required Registration Statements on Form 10s to be filed with the Securities and Exchange Commission and
consents, including under various funding agreements previously entered into by the Company. The intent of the spinoffs is to
create three (or two) public companies, each of which can focus on its own strengths and operational plans. On July 24, 2017,
we announced that the Big South Fork Medical Center, which opened in August 2017, received CMS regional office licensure approval.
On January 31, 2018, we announced that we had entered into a definitive asset purchase agreement to acquire an acute care hospital
in Jamestown, Tennessee known as Tennova Healthcare - Jamestown. The transaction is expected to close in the second quarter of
2018. Going forward, we expect that these two hospitals will provide us additional revenue and cash flow sources.
During
2017, we entered into financings as follows:
In
2017, we received short-term advances from Christopher Diamantis, a member of our Board of Directors, in the amount of $3.3 million.
On March 7, 2017, we issued a promissory note to Mr. Diamantis in the amount of $3.8 million (the “2017 Diamantis
Note”) in connection with the advances we received in 2017, plus accrued and unpaid interest reflecting the advances we
received in both fiscal 2016 and 2017, in the amount of $0.5 million.
On
February 2, 2017, we issued $1.59 million of convertible debentures (the “February Debentures”) and warrants to purchase
shares of our common stock and received cash proceeds of $1.5 million.
On
March 21, 2017, we issued $10.85 million aggregate principal amount of Senior Secured Original Issue Discount Convertible Debentures
due two years from the date of issuance (the “Convertible Debentures”) and three series of warrants to purchase shares
of our common stock to several accredited investors. We received net proceeds from this transaction in the approximate amount
of $8.4 million. We used $3.8 million of the net proceeds to repay the 2017 Diamantis Note and $0.75 million of the net proceeds
to make a partial repayment on the TCA Debenture (as defined below). The remainder of the net proceeds was used for general corporate
purposes. In conjunction with the issuance of the Convertible Debentures, the holder of the February Debentures exchanged these
debentures for $2.7 million of new debentures (the “Exchange Debentures” and, collectively with the Convertible Debentures,
the “March Debentures”) on the same terms as, and pari passu with, the Convertible Debentures and warrants. Additionally,
the holders of an aggregate of $2.2 million stated value of our Series H Convertible Preferred Stock (the “Series H Preferred
Stock”) exchanged such preferred stock into $2.5 million principal amount of Exchange Debentures and warrants. All of the
March Debentures contain a 24% original issue discount.
On
June 2, 2017 and June 22, 2017, we issued $1.9 million aggregate principal amount of Original Issue Discount Debentures due three
months from the date of issuance of these two issuances (collectively, the “June Debentures”) and warrants to purchase
shares of common stock to accredited investors for a purchase price of $1.8 million and cash proceeds of $1.5 million.
On
July 17, 2017, we closed an offering of $4,136,862 aggregate principal amount of Original Issue Discount Debentures due October
17, 2017 and warrants to purchase shares of common stock for consideration of $2,000,000 in cash and the exchange of the $1,902,700
aggregate principal amount of Original Issue Discount Debentures due September 22, 2017 that were issued by us on June 22, 2017.
On
September 19, 2017, we closed an offering of $2,604,000 principal amount of Senior Secured Original Issue Discount Convertible
Debentures due September 19, 2019 (the “New Debentures”), and three series of warrants to purchase shares of our common
stock. The offering was pursuant to the terms of a Securities Purchase Agreement, dated as of August 31, 2017, between us and
certain of our existing institutional investors. We received proceeds of $2,100,000 from the offering.
Also
on September 19, 2017, we closed exchanges by which the holders of our July Debentures exchanged $4,136,862 principal amount of
such debentures for $6,412,136 principal amount of new debentures and warrants on the same items as, and pari passu with, the
New Debentures (the “September Exchange Debentures” and, together with the New Debentures, the “September Debentures”).
All issuance amounts of the September Debentures reflect a 24% original issue discount.
On
October 30, 2017, we closed an offering of $4,960,000 stated value of our newly-authorized Series I-1 Preferred Stock. The offering
was pursuant to the terms of the Securities Purchase Agreement, dated as of October 30, 2017, between us and certain of our existing
institutional investors. We received proceeds of $4,000,000 from the offering.
During
the fourth quarter of 2017, holders of a portion of common stock warrants issued in March 2017 paid the Company $0.6 million upon
the exercise of 663,000 warrants.
Subsequent
to December 31, 2017, we received $2.0 million from the issuance of debentures and $0.8 million from the sale of stock we owned
as more fully discussed in Note 20 to the accompanying consolidated financial statements.
As
of December 31, 2017, we were party to the following legal matters:
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.
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 has accrued this amount in its condensed consolidated financial statements.
Additionally, the Company is seeking indemnification for these amounts from Epinex Diagnostics, Inc. (“EDI”), the
seller of Epinex Diagnostic Laboratories, Inc. (“EDL”), pursuant to a Stock Purchase Agreement entered into by and
among the parties.
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 on 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 on 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 2014 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 allows the Company to make monthly installment payments of $35,000 until February
2018 and negotiate a new payment agreement then, if the balance of $0.3 million cannot be satisfied in a lump sum. 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. $0.5 million remains outstanding
to the DOR at December 31, 2017.
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 11). 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. Payments commenced on May 1, 2017. $1.3 million monthly payments remain
outstanding to Tetra at December 31, 2017. The Company and Tetra have agreed to dispose of certain equipment and reduce
the balance owed by amounts received.
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 8). 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%. The Company is in default
of its payments to DeLage.
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 $0.4 million, including accrued interest. A request for entry of default judgment was
filed on January 24, 2017. These amounts remain outstanding at December 31, 2017.
In
November 2017 a former shareholder of Genomas filed suit against the Company for payment of a Note payable by the subsidiary
Genomas. This Note is recorded in the financial statements of the subsidiary and is not payable directly from the Company. Other
claims were included in the suit which the Company believes to be frivolous and without merit. The Company has filed a motion
to dismiss certain of the claims. The Company does not deem this suit to be material.
The
Company and subsidiaries have been party to suits filed by landlords for late payment of rent and have either settled these claims
or are in process of agreeing to settlement. The Company does not deem these actions to be material.
The
following table presents our capital resources as of December 31, 2017 and December 31, 2016:
|
|
December
31, 2017
|
|
|
December
31, 2016
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
-
|
|
|
$
|
70,173
|
|
|
$
|
(70,173
|
)
|
Working
capital
|
|
|
(21,496,044
|
)
|
|
|
(16,344,128
|
)
|
|
|
(5,151,916
|
)
|
Total
debt, excluding discounts and derivative liabilities
|
|
|
25,306,412
|
|
|
|
9,339,747
|
|
|
|
15,966,665
|
|
Capital
lease obligations
|
|
|
2,079,137
|
|
|
|
3,570,174
|
|
|
|
(1,491,037
|
)
|
Stockholders’
deficit
|
|
$
|
(40,613,461
|
)
|
|
$
|
(14,885,896
|
)
|
|
$
|
(25,727,565
|
)
|
The
following table presents the major sources and uses of cash for the years ended December 31, 2017 and 2016:
|
|
Year
Ended December 31,
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
Cash
used in operations
|
|
$
|
(17,713,547
|
)
|
|
$
|
(19,863,680
|
)
|
|
$
|
2,150,133
|
|
Cash
(used in) provided by investing activities
|
|
|
(492,537
|
)
|
|
|
63,272
|
|
|
|
(555,809
|
)
|
Cash
provided by financing activities
|
|
|
18,135,911
|
|
|
|
11,045,157
|
|
|
|
7,090,754
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
change in cash
|
|
|
(70,173
|
)
|
|
|
(8,755,251
|
)
|
|
|
8,685,078
|
|
Cash
and cash equivalents, beginning of the year
|
|
|
70,173
|
|
|
|
8,825,424
|
|
|
|
(8,755,251
|
)
|
Cash
and cash equivalents, end of the year
|
|
$
|
-
|
|
|
$
|
70,173
|
|
|
$
|
(70,173
|
)
|
The
components of cash used in operations for the years ended December 31, 2017 and 2016 is presented in the following table:
|
|
Year
Ended December 31,
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(50,921,024
|
)
|
|
$
|
(22,624,648
|
)
|
|
$
|
(28,296,376
|
)
|
Non-cash
adjustments to income
|
|
|
35,154,630
|
|
|
|
4,998,074
|
|
|
|
30,156,556
|
|
Accounts
receivable
|
|
|
(1,451,224
|
)
|
|
|
2,831,849
|
|
|
|
(4,283,073
|
)
|
Inventory
|
|
|
(236,914
|
)
|
|
|
-
|
|
|
|
(236,914
|
)
|
Accounts
payable and accrued expenses
|
|
|
2,920,134
|
|
|
|
94,658
|
|
|
|
2,825,476
|
|
Loss
from discontinued operations
|
|
|
(4,276,918
|
)
|
|
|
(9,989,039
|
)
|
|
|
5,712,121
|
|
Other
|
|
|
637,976
|
|
|
|
2,259,865
|
|
|
|
(1,621,889
|
)
|
Net
cash used in operating activities
|
|
|
(18,173,341
|
)
|
|
|
(22,429,241
|
)
|
|
|
4,255,900
|
|
Cash
used in discontinued operations
|
|
|
459,794
|
|
|
|
2,565,561
|
|
|
|
(2,105,767
|
)
|
Cash
used in operations
|
|
$
|
(17,713,547
|
)
|
|
$
|
(19,863,680
|
)
|
|
$
|
2,150,133
|
|
The
increase in cash used in investing activities for the year ended December 31, 2017 is due to the acquisition of Hospital assets.
Cash
provided by financing activities for the year ended December 31, 2017 consists of $4.0 million received from the issuance of preferred
stock, and $15.7 million from the issuance of debentures and warrants, partially offset by the $3.9 million of related
party payments, net of advances, and repayment of capital lease obligations in the amount of $1.7 million. During the year ended
December 31, 2016, we received proceeds from the issuance of equity securities of $19.3 million, partially offset by the redemption
of preferred stock in the amount of $8.3 million, received proceeds from the issuance of non-related party debt in the amount
of $5.4 million, made net repayments of related party debt in the amount of $4.4 million and made payments on capital leases of
$0.9 million.
We
need to raise additional funds immediately and continuing until we begin to realize cash flow from operations.
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 and debentures. In addition, the majority of these equity-based securities
contain prices that vary based upon the price of the Company’s common stock on the date of exercise/conversion (see Notes
8, 11 and 12 to the accompanying consolidated financial statements). 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. As a result of these
down round provisions, the potential common stock equivalents totaled 17.3 billion as of April1 1, 2018.
Proposals
Submitted to Stockholders
On
March 14, 2018, the Company gave notice of a special meeting of the stockholders of the Company to be held on May 2,
2018, at 11:00 a.m., local time, to, among other things:
1.
Approve an amendment to its Certificate of Incorporation, as amended, to effect a reverse stock split of all of the outstanding
shares of its common stock, par value $0.01 per share, at a specific ratio within a range from 1-for-50 to 1-for-300, and to grant
authorization to its Board of Directors to determine, in its discretion, the specific ratio and timing of the reverse stock split
any time before March 1, 2019, subject to the Board of Directors’ discretion to abandon such amendment; and
2.
Approve an amendment to its Certificate of Incorporation, as amended, to increase the number of authorized shares of our common
stock from 500,000,000 to 3,000,000,000 shares.
The
Board of Directors has fixed the close of business on March 12, 2018 as the record date for the determination of stockholders
entitled to notice of and to vote at the Special Meeting.
A
portion of the proposed increase in the number of authorized shares of the Company’s common stock and the proposal to approve
a discretionary reverse stock split are necessary primarily due to the recent declines in the Company’s stock price. The
declines have resulted in the number of shares of common stock issuable upon exercise of outstanding common stock warrants and
upon conversion of outstanding debentures and preferred stock to exceed the 500,000,000 shares of the Company’s common stock
that are currently authorized.
OTHER
MATTERS
Inflation
We
do not believe inflation has a significant effect on the Company’s operations at this time.
Off-Balance
Sheet Arrangements
Under
SEC regulations, we are required to disclose the Company’s off-balance sheet arrangements that have or are reasonably likely
to have a current or future effect on the Company’s financial condition, results of operations, liquidity, capital expenditures
or capital resources that are material to investors. Off-balance sheet arrangements consist of transactions, agreements or contractual
arrangements to which any entity that is not consolidated with us is a party, under which we have:
|
●
|
Any
obligation under certain guarantee contracts.
|
|
|
|
|
●
|
Any
retained or contingent interest in assets transferred to an unconsolidated entity or similar arrangement that serves as credit,
liquidity or market risk support to that entity for such assets.
|
|
|
|
|
●
|
Any
obligation under a contract that would be accounted for as a derivative instrument, except that it is both indexed to the
Company’s stock and classified in stockholder’s equity in the Company’s statement of financial position.
|
|
|
|
|
●
|
Any
obligation arising out of a material variable interest held by us in an unconsolidated entity that provides financing, liquidity,
market risk or credit risk support to us, or engages in leasing, hedging or research and development services with us.
|
As
of December 31, 2017, the Company had no off-balance sheet arrangements that have, or are reasonably likely to have, a current
or future effect on the Company’s financial condition, results of operations, liquidity, capital expenditures or capital
resources that is material to investors.
De-Listing
of the Company’s Common Stock
On
April 18, 2017, the Company was notified by Nasdaq that the stockholders’ equity balance reported on the Company’s
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”). In accordance with the Rule, the Company submitted
a plan to Nasdaq outlining how it intended to regain compliance. On August 17, 2017, Nasdaq notified the Company that its plan
to correct the stockholders’ equity deficiency did not contain sufficient evidence to support a correction being achieved
in the required time frame. The Company appealed this decision to a Hearing Panel which, on October 23, 2017, maintained this
position and denied the Company a continued listing. Effective October 25, 2017, the Company’s common stock (RNVA) and warrants
to purchase common stock (RNVAW) were no longer listed on The Nasdaq Captial Market but began trading on the OTCQB
instead.
Item
7A.
|
Quantitative
and Qualitative Disclosures about Market Risk.
|
Not
applicable.
Item
8.
|
Financial
Statements and Supplementary Data.
|
Index
to Financial Statements
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Shareholders and the Board of Directors of
Rennova
Health, Inc.
Opinion
on the Financial Statements
We
have audited the accompanying Consolidated Balance Sheets of Rennova Health, Inc. (the Company) as of December 31, 2017 and
2016, the related Consolidated Statements of Operations, Stockholders’ Deficit, and Cash Flows for the years ended December 31,
2017 and 2016, and the related notes (collectively referred to as the “Consolidated Financial Statements”). In our
opinion, the Consolidated Financial Statements present fairly, in all material respects, the financial position of the Company
as of December 31, 2017 and 2016, and the results of its operations and its cash flows for the years ended December 31,
2017 and 2016, in conformity with U.S. generally accepted accounting principles.
Basis
for Opinion
These
financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on
the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company
Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance
with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error
or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial
reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not
for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our
audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles
used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that our audits provide a reasonable basis for our opinion.
Going
Concern
The
accompanying Consolidated Financial Statements have been prepared assuming that the Company will continue as a going concern.
As shown in the accompanying Consolidated Financial Statements, the Company has significant net losses, cash flow deficiencies,
negative working capital and accumulated deficit. Those conditions raise substantial doubt about the Company’s ability to
continue as a going concern. Management’s plans regarding those matters are described in Note 1. The Consolidated Financial
Statements do not include any adjustments that might result from the outcome of this uncertainty.
/
s/
Green & Company, CPAs
Green &
Company, CPAs
We
have served as the Company’s auditor since 2015.
Tampa,
FL 33618
April
24, 2018
13907
N Dale Mabry Hwy, Suite 102
|
Tampa,
FL 33618
|
813.606.4388
|
RENNOVA
HEALTH, INC.
CONSOLIDATED
BALANCE SHEETS
|
|
December
31, 2017
|
|
|
December
31, 2016
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
-
|
|
|
$
|
70,173
|
|
Accounts
receivable, net
|
|
|
9
71,312
|
|
|
|
1,051,345
|
|
Inventory
|
|
|
236,914
|
|
|
|
-
|
|
Prepaid
expenses and other current assets
|
|
|
9,842
|
|
|
|
146,793
|
|
Income
tax refunds receivable
|
|
|
1,940,845
|
|
|
|
1,458,438
|
|
Current
assets of AMSG and HTS classified as held for sale
|
|
|
226,732
|
|
|
|
493,890
|
|
Total
current assets
|
|
|
3,385,645
|
|
|
|
3,220,639
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
2,695,440
|
|
|
|
2,799,049
|
|
Deposits
|
|
|
180,875
|
|
|
|
135,146
|
|
Non-current
assets of AMSG and HTS classified as held for sale
|
|
|
28,834
|
|
|
|
327,559
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
6
,290,794
|
|
|
$
|
6,482,393
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' DEFICIT
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable (includes related parties amount of $0.2 and $0.3 million, respectively)
|
|
$
|
4,188,678
|
|
|
$
|
2,513,710
|
|
Accrued
expenses (includes related parties amount of $0.1 and $0.1 million, respectively)
|
|
|
4,967,405
|
|
|
|
3,675,847
|
|
Income
taxes payable
|
|
|
1,971,592
|
|
|
|
942,433
|
|
Current
portion of notes payable
|
|
|
6,957,830
|
|
|
|
9,011,247
|
|
Current
portion of notes payable, related party
|
|
|
1,128,500
|
|
|
|
328,500
|
|
Current
portion of capital lease obligations
|
|
|
2,079,137
|
|
|
|
1,796,053
|
|
Current
portion of debentures
|
|
|
1,615,693
|
|
|
|
-
|
|
Current
liabilities of AMSG and HTS classified as held for sale
|
|
|
1,972,854
|
|
|
|
1,296,977
|
|
Total
current liabilities
|
|
|
24,881,689
|
|
|
|
19,564,767
|
|
|
|
|
|
|
|
|
|
|
Other
liabilities:
|
|
|
|
|
|
|
|
|
Debentures,
net of current portion
|
|
|
3,752,022
|
|
|
|
-
|
|
Capital
lease obligations, net of current portion
|
|
|
-
|
|
|
|
1,774,121
|
|
Derivative
liabilities
|
|
|
12,435,250
|
|
|
|
2,803
|
|
Non-current
liabilities of AMSG and HTS classified as held for sale
|
|
|
-
|
|
|
|
26,598
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
41,068,961
|
|
|
|
21,368,289
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable
Preferred Stock
|
|
|
5,835,294
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
deficit:
|
|
|
|
|
|
|
|
|
Series
G preferred stock, $0.01 par value, 14,000 shares authorized, 215 and 215 shares issued and outstanding
|
|
|
2
|
|
|
|
2
|
|
Series
H preferred stock, $0.01 par value, 14,202 shares authorized, 60 and 10,019 shares issued and outstanding
|
|
|
-
|
|
|
|
100
|
|
Series
F preferred stock, $0.01 par value, 1,750,000 shares authorized, 1,750,000 and 0 shares issued and outstanding
|
|
|
17,500
|
|
|
|
-
|
|
Common
stock, $0.01 par value, 500,000,000 shares authorized, 19,750,844 and 186,692 shares issued and outstanding
|
|
|
197,508
|
|
|
|
1,867
|
|
Additional
paid-in-capital
|
|
|
128,351,954
|
|
|
|
45,752,999
|
|
Accumulated
deficit
|
|
|
(169,180,425
|
)
|
|
|
(60,640,864
|
)
|
Total
stockholders’ deficit
|
|
|
(40,613,461
|
)
|
|
|
(14,885,896
|
)
|
Total
liabilities and stockholders’ deficit
|
|
$
|
6,290,794
|
|
|
$
|
6,482,393
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
RENNOVA
HEALTH, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
For
the Years Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Net
revenues
|
|
$
|
4
,619,473
|
|
|
$
|
3,338,425
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
Direct
costs of revenue
|
|
|
948,838
|
|
|
|
1,245,304
|
|
General
and administrative
|
|
|
15,757,527
|
|
|
|
17,318,026
|
|
Sales
and marketing expenses
|
|
|
742,637
|
|
|
|
1,758,667
|
|
Bad
debt
|
|
|
1,531,257
|
|
|
|
2,055,002
|
|
Impairment
|
|
|
-
|
|
|
|
1,038,285
|
|
Depreciation
and amortization
|
|
|
1,715,321
|
|
|
|
2,415,048
|
|
Total
operating expenses
|
|
|
20,695,580
|
|
|
|
25,830,332
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations before other income (expense) and income taxes
|
|
|
(16,076,107
|
)
|
|
|
(22,491,907
|
)
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
38,342
|
|
|
|
128,954
|
|
Change
in fair value of derivative instruments
|
|
|
(42,702,815
|
)
|
|
|
5,392,390
|
|
Gain
on extinguishment of debt
|
|
|
42,702,815
|
|
|
|
-
|
|
Value
of derivative liabilities
|
|
|
(12,435,250
|
)
|
|
|
-
|
|
(Loss)
on disposal of property and equipment
|
|
|
-
|
|
|
|
(124,494
|
)
|
Interest
expense
|
|
|
(21,432,285
|
)
|
|
|
(6,308,347
|
)
|
Total
other income (expense), net
|
|
|
(33,829,193
|
)
|
|
|
(911,497
|
)
|
|
|
|
|
|
|
|
|
|
Net
loss from continuing operations before income taxes
|
|
|
(49,905,300
|
)
|
|
|
(23,403,404
|
)
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes (benefit)
|
|
|
1,015,724
|
|
|
|
(778,756
|
)
|
|
|
|
|
|
|
|
|
|
Net
loss from continuing operations
|
|
|
(50,921,024
|
)
|
|
|
(22,624,648
|
)
|
|
|
|
|
|
|
|
|
|
Net
loss from discontinued operations
|
|
|
(4,276,918
|
)
|
|
|
(9,989,039
|
)
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
(55,197,942
|
)
|
|
|
(32,613,687
|
)
|
Deemed
dividend from trigger of down round provision feature
|
|
|
(53,341,619
|
)
|
|
|
-
|
|
Net
loss to common shareholders
|
|
$
|
(108,539,561
|
)
|
|
$
|
(32,613,687
|
)
|
|
|
|
|
|
|
|
|
|
Net
loss per common share:
|
|
|
|
|
|
|
|
|
Basic
and diluted: continuing operations
|
|
$
|
(45.17
|
)
|
|
$
|
(313.96
|
)
|
Basic
and diluted: discontinued operations
|
|
|
(1.85
|
)
|
|
|
(138.62
|
)
|
|
|
|
|
|
|
|
|
|
Total
Basic and diluted
|
|
$
|
(47.02
|
)
|
|
$
|
(452.58
|
)
|
Weighted
average number of common shares outstanding during the period:
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
2,308,090
|
|
|
|
72,062
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
RENNOVA
HEALTH, INC.
CONSOLIDATED
STATEMENT OF STOCKHOLDERS’ DEFICIT
For
the year ended December 31, 2017
|
|
Preferred
Stock (see Note 10)
|
|
|
Common
Stock
|
|
|
Additional
paid-in
|
|
|
Accumulated
|
|
|
Total
Stockholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
capital
|
|
|
Deficit
|
|
|
Deficit
|
|
Balance
at December 31, 2016
|
|
|
10,234
|
|
|
$
|
102
|
|
|
|
186,692
|
|
|
$
|
1,867
|
|
|
$
|
45,752,999
|
|
|
$
|
(60,640,864
|
)
|
|
$
|
(14,885,896
|
)
|
Conversion
of preferred stock into common stock
|
|
|
(7,785
|
)
|
|
|
(78
|
)
|
|
|
370,446
|
|
|
|
3,704
|
|
|
|
(3,626
|
)
|
|
|
-
|
|
|
|
-
|
|
Preferred
stock issued for business acquisition
|
|
|
1,750,000
|
|
|
$
|
17,500
|
|
|
|
-
|
|
|
|
-
|
|
|
|
156,597
|
|
|
|
-
|
|
|
|
174,097
|
|
Common
stock issued in exchange for warrants
|
|
|
|
|
|
|
|
|
|
|
665,056
|
|
|
|
6,651
|
|
|
|
690,834
|
|
|
|
-
|
|
|
|
697,485
|
|
Shares
issued in settlement of notes payable and warrants
|
|
|
|
|
|
|
|
|
|
|
26,667
|
|
|
|
267
|
|
|
|
439,733
|
|
|
|
-
|
|
|
|
440,000
|
|
Exchange
of preferred stock for convertible debentures
|
|
|
(2,174
|
)
|
|
$
|
(22
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,173,978
|
)
|
|
|
-
|
|
|
|
(2,174,000
|
)
|
Conversion
of debentures into common stock
|
|
|
|
|
|
|
|
|
|
|
18,285,517
|
|
|
|
182,855
|
|
|
|
7,123,459
|
|
|
|
-
|
|
|
|
7,306,314
|
|
Rounding
up of common shares in connection with reverse stock split
|
|
|
|
|
|
|
|
|
|
|
526
|
|
|
|
5
|
|
|
|
(5
|
)
|
|
|
-
|
|
|
|
-
|
|
Reduction
in common stock in connection with reverse stock split
|
|
|
|
|
|
|
|
|
|
|
(2,472
|
)
|
|
|
(25
|
)
|
|
|
(6,650
|
)
|
|
|
-
|
|
|
|
(6,675
|
)
|
Common
stock granted to employees
|
|
|
|
|
|
|
-
|
|
|
|
185
|
|
|
|
2
|
|
|
|
(2
|
)
|
|
|
-
|
|
|
|
-
|
|
Discount
on convertible debentures
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
252,143
|
|
|
|
-
|
|
|
|
252,143
|
|
Warrants
and beneficial conversion features related to the issuance of convertible notes
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
24,177,258
|
|
|
|
-
|
|
|
|
24,177,258
|
|
Stock
based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
58,278
|
|
|
|
-
|
|
|
|
58,278
|
|
Deemed
dividend from trigger of down round provision feature
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
53,341,619
|
|
|
|
(53,341,619
|
)
|
|
|
-
|
|
Restricted
stock issued to employees
|
|
|
|
|
|
|
-
|
|
|
|
181,933
|
|
|
|
1,819
|
|
|
|
242,949
|
|
|
|
-
|
|
|
|
244,768
|
|
Common
stock issued for services and severance
|
|
|
-
|
|
|
|
-
|
|
|
|
41,667
|
|
|
|
417
|
|
|
|
160,586
|
|
|
|
-
|
|
|
|
161,003
|
|
Shares
returned to treasury
|
|
|
|
|
|
|
|
|
|
|
(5,373
|
)
|
|
|
(54
|
)
|
|
|
54
|
|
|
|
-
|
|
|
|
-
|
|
Beneficial
conversion feature of Series I-1 preferred stock
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,860,294
|
)
|
|
|
-
|
|
|
|
(1,860,294
|
)
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(55,197,942
|
)
|
|
|
(55,197,942
|
)
|
Balance
at December 31, 2017
|
|
|
1,750,275
|
|
|
$
|
17,502
|
|
|
|
19,750,844
|
|
|
$
|
197,508
|
|
|
$
|
128,351,954
|
|
|
$
|
(169,180,425
|
)
|
|
$
|
(40,613,46
1
|
)
|
The
accompanying notes are an integral part of these consolidated financial statements.
RENNOVA
HEALTH, INC.
CONSOLIDATED
STATEMENT OF STOCKHOLDERS’ DEFICIT
For
the year ended December 31, 2016
|
|
Preferred
Stock
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Total
|
|
|
|
(see
Note 10)
|
|
|
Common
Stock
|
|
|
paid-in
|
|
|
Accumulated
|
|
|
Stockholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
capital
|
|
|
Deficit
|
|
|
Deficit
|
|
Balance
at December 31, 2015
|
|
|
59,000
|
|
|
$
|
590
|
|
|
|
32,560
|
|
|
$
|
326
|
|
|
$
|
26,832,462
|
|
|
$
|
(28,027,177
|
)
|
|
$
|
(1,193,799
|
)
|
Conversion
of Series C Preferred shares into common stock
|
|
|
(260
|
)
|
|
|
(3
|
)
|
|
|
372
|
|
|
|
4
|
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
-
|
|
Cashless exercise
of warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
108
|
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
-
|
|
Shares
issued in adjustment of prior conversion of preferred stock
|
|
|
-
|
|
|
|
-
|
|
|
|
112
|
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
-
|
|
Common shares
cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
(91
|
)
|
|
|
(1
|
)
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
Issuance of
shares for services
|
|
|
-
|
|
|
|
-
|
|
|
|
586
|
|
|
|
6
|
|
|
|
73,329
|
|
|
|
-
|
|
|
|
73,335
|
|
Exchange
of Series C Preferred Stock and warrants for Series G Preferred Stock and warrants
|
|
|
5,053
|
|
|
|
51
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(51
|
)
|
|
|
-
|
|
|
|
-
|
|
Conversion
of Series G Preferred Stock into common stock
|
|
|
(5,232
|
)
|
|
|
(53
|
)
|
|
|
25,836
|
|
|
|
258
|
|
|
|
(205
|
)
|
|
|
-
|
|
|
|
-
|
|
Common
stock and warrants issued for cash
|
|
|
-
|
|
|
|
-
|
|
|
|
42,478
|
|
|
|
425
|
|
|
|
7,520,611
|
|
|
|
-
|
|
|
|
7,521,036
|
|
Conversion
of related party liabilities into common stock
|
|
|
-
|
|
|
|
-
|
|
|
|
12,816
|
|
|
|
128
|
|
|
|
2,231,701
|
|
|
|
-
|
|
|
|
2,231,829
|
|
Common
stock granted to employees
|
|
|
-
|
|
|
|
-
|
|
|
|
1,618
|
|
|
|
16
|
|
|
|
248,603
|
|
|
|
-
|
|
|
|
248,619
|
|
Conversion
of Series B Preferred shares into common stock
|
|
|
(5,000
|
)
|
|
|
(50
|
)
|
|
|
12,742
|
|
|
|
127
|
|
|
|
(77
|
)
|
|
|
-
|
|
|
|
-
|
|
Cancellation
of Series E Preferred Stock
|
|
|
(45,000
|
)
|
|
|
(450
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
450
|
|
|
|
-
|
|
|
|
-
|
|
Cancellation
of warrants not qualifying for equity treatment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,854,546
|
|
|
|
-
|
|
|
|
1,854,546
|
|
Reclassification
of derivative liability
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,265,742
|
|
|
|
-
|
|
|
|
2,265,742
|
|
Warrants and
beneficial conversion features related to the issuance of convertible notes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
394,500
|
|
|
|
-
|
|
|
|
394,500
|
|
Stock-based
compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
858,868
|
|
|
|
|
|
|
|
858,868
|
|
Issuance
of Series H Preferred Stock for cash
|
|
|
12,350
|
|
|
|
124
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11,819,141
|
|
|
|
-
|
|
|
|
11,819,265
|
|
Redemption
of Series G Preferred Stock
|
|
|
(8,346
|
)
|
|
|
(83
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(8,346,067
|
)
|
|
|
-
|
|
|
|
(8,346,150
|
)
|
Conversion
of Series H Preferred Stock into common stock
|
|
|
(2,331
|
)
|
|
|
(24
|
)
|
|
|
57,555
|
|
|
|
575
|
|
|
|
(551
|
)
|
|
|
-
|
|
|
|
-
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(32,613,687
|
)
|
|
|
(32,613,687
|
)
|
Balance
at December 31, 2016
|
|
|
10,234
|
|
|
$
|
102
|
|
|
|
186,692
|
|
|
$
|
1,867
|
|
|
$
|
45,752,999
|
|
|
$
|
(60,640,864
|
)
|
|
$
|
(14,885,896
|
)
|
The
accompanying notes are an integral part of these consolidated financial statements.
RENNOVA
HEALTH, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
For
the Years Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Cash
flows used in operating activities:
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(50,921,024
|
)
|
|
$
|
(22,624,648
|
)
|
Adjustments
to reconcile net loss to net cash used in operations:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
1,715,321
|
|
|
|
2,415,048
|
|
Non-cash
gain on derivative instruments
|
|
|
(2,803
|
)
|
|
|
(5,392,390
|
)
|
Stock
issued for services
|
|
|
161,003
|
|
|
|
73,335
|
|
Stock-based
compensation
|
|
|
303,046
|
|
|
|
1,107,487
|
|
Bad
debts
|
|
|
1,531,257
|
|
|
|
2,055,002
|
|
Impairment
charges
|
|
|
-
|
|
|
|
1,038,285
|
|
Non-cash
interest expense
|
|
|
8,649,232
|
|
|
|
-
|
|
Amortization
of debt discount
|
|
|
10,412,324
|
|
|
|
2,951,023
|
|
Non-cash
charges related to capital leases
|
|
|
-
|
|
|
|
725,790
|
|
Non-cash
settlement of debt
|
|
|
(50,000
|
)
|
|
|
-
|
|
Gain
on extinguishment of debt
|
|
|
(42,702,815
|
)
|
|
|
(100,000
|
)
|
Change
in fair value of derivative instrument
|
|
|
42,702,815
|
|
|
|
-
|
|
Value
of derivative liabilities
|
|
|
12,435,250
|
|
|
|
-
|
|
Gain
on disposal of property and equipment
|
|
|
-
|
|
|
|
124,494
|
|
Loss
from discontinued operations
|
|
|
(4,276,918
|
)
|
|
|
(9,989,039
|
)
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(1,451,224
|
)
|
|
|
2,831,849
|
|
Prepaid
expenses and other current assets
|
|
|
136,951
|
|
|
|
975,365
|
|
Inventory
|
|
|
(236,914
|
)
|
|
|
-
|
|
Security
deposits
|
|
|
(45,728
|
)
|
|
|
(182,678
|
)
|
Accounts
payable
|
|
|
1,674,969
|
|
|
|
(1,024,137
|
)
|
Accrued
expenses
|
|
|
1,245,165
|
|
|
|
1,118,795
|
|
Income
tax assets and liabilities
|
|
|
546,752
|
|
|
|
1,467,178
|
|
Net
cash used in operating activities of continuing operations
|
|
|
(18,173,341
|
)
|
|
|
(22,429,241
|
)
|
Net
cash provided by operating activities of discontinued operations
|
|
|
459,794
|
|
|
|
2,565,561
|
|
Net
cash used in operating activities
|
|
|
(17,713,547
|
)
|
|
|
(19,863,680
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows provided by (used in) investing activities:
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(1,422,002
|
)
|
|
|
(14,123
|
)
|
Proceeds
from the sale of property and equipment
|
|
|
-
|
|
|
|
(3,940
|
)
|
Net
cash used in investing activities of continuing operations
|
|
|
(1,422,002
|
)
|
|
|
(18,063
|
)
|
Net
cash provided by investing activities of discontinued operations
|
|
|
929,465
|
|
|
|
81,335
|
|
Net
cash (used in) provided by investing activities
|
|
|
(492,537
|
)
|
|
|
63,272
|
|
|
|
|
|
|
|
|
|
|
Cash
flows provided by financing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of common stock and warrants
|
|
|
639,615
|
|
|
|
-
|
|
Proceeds
from the issuance of preferred stock, common stock and warrants, net of issuance costs of $1,614,485
|
|
|
-
|
|
|
|
19,340,302
|
|
Proceeds
from issuance of Series I-1 Preferred Stock
|
|
|
4,000,000
|
|
|
|
-
|
|
Redemption
of preferred stock
|
|
|
-
|
|
|
|
(8,346,150
|
)
|
Financing
fees
|
|
|
(25,000
|
)
|
|
|
-
|
|
Proceeds
from issuance of related party notes payable and advances
|
|
|
4,765,000
|
|
|
|
10,000,567
|
|
Proceeds
from issuance of notes payable and debentures
|
|
|
15,742,500
|
|
|
|
5,394,500
|
|
Payments
on related party notes payable and advances
|
|
|
(5,298,782
|
)
|
|
|
(14,470,567
|
)
|
Payments
on capital lease obligations
|
|
|
(1,680,747
|
)
|
|
|
(837,439
|
)
|
Cash
paid for fractional shares in connection with reverse stock split
|
|
|
(6,675
|
)
|
|
|
-
|
|
Net
cash provided by financing activities of continuing operations
|
|
|
18,135,911
|
|
|
|
11,081,213
|
|
Net
cash used in financing activities of discontinued operations
|
|
|
-
|
|
|
|
(36,056
|
)
|
Net
cash provided by financing activities
|
|
|
18,135,911
|
|
|
|
11,045,157
|
|
|
|
|
|
|
|
|
|
|
Net
decrease in cash
|
|
|
(70,173
|
)
|
|
|
(8,755,251
|
)
|
Cash
at beginning of period
|
|
|
70,173
|
|
|
|
8,825,424
|
|
|
|
|
|
|
|
|
|
|
Cash
at end of period
|
|
$
|
-
|
|
|
$
|
70,173
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
RENNOVA
HEALTH, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
1 – Description of Business and Basis of Presentation
Rennova
Health, Inc., together with its subsidiaries (the “Company”), is a vertically integrated provider of healthcare related
products and services. The Company’s principal lines of business are: (i) Clinical Laboratory Operations; and (ii) Hospital
Operations. The Company presents its financial results based upon these two business segments.
Merger
between the Company and Medytox Solutions, Inc.
On
November 2, 2015, pursuant to the terms of the Agreement and Plan of Merger, dated as of April 15, 2015, by and among CollabRx,
Inc. (“CollabRx”), CollabRx Merger Sub, Inc. (“Merger Sub”), a direct wholly-owned subsidiary of CollabRx
formed for the purpose of the merger, and Medytox Solutions, Inc. (“Medytox”), Merger Sub merged with and into Medytox,
with Medytox as the surviving company and a direct, wholly-owned subsidiary of CollabRx (the “Merger”). Prior to closing,
the Company amended its certificate of incorporation to effect a 1-for-10 reverse stock split and to change its name to Rennova
Health, Inc. In connection with the Merger, (i) each share of common stock of Medytox was converted into the right to receive
0.4096 shares of common stock of the Company, (ii) each share of Series B Preferred Stock of Medytox was converted into the right
to receive one share of a newly-authorized Series B Convertible Preferred Stock of the Company, and (iii) each share of Series
E Convertible Preferred Stock of Medytox was converted into the right to receive one share of a newly-authorized Series E Convertible
Preferred Stock of the Company. This transaction was accounted for as a reverse merger in accordance with accounting principles
generally accepted in the United States of America (“U.S. GAAP”) and, as such, the historical financial statements
of Medytox became the historical financial statements of the Company.
Holders
of Company equity prior to the closing of the Merger (including all outstanding Company common stock and all restricted stock
units, options and warrants exercisable for shares of Company common stock) held 10% of the Company’s common stock immediately
following the closing of the Merger, and holders of Medytox equity prior to the closing of the Merger (including all outstanding
Medytox common stock and all outstanding options exercisable for shares of Medytox common stock, but less certain options that
were cancelled upon the closing pursuant to agreements between Medytox and such optionees) held 90% of the Company’s common
stock immediately following the closing of the Merger, in each case on a fully diluted basis, provided, however, outstanding shares
of Series B Convertible Preferred Stock and Series E Convertible Preferred Stock, certain outstanding convertible promissory notes
exercisable for Company common stock after the closing and certain option grants expected to be made following the closing of
the Merger are excluded from such ownership percentages.
Common
Stock Listing
On
November 3, 2015, the common stock of Rennova Health, Inc. commenced trading on The NASDAQ Capital Market under the symbol “RNVA.”
Prior to that date, our common stock was listed on The NASDAQ Capital Market under the symbol “CLRX.”
On
April 18, 2017, the Company was notified by NASDAQ that the stockholders’ equity balance reported on the Company’s
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”). In accordance with the Rule, the Company submitted
a plan to Nasdaq outlining how it intended to regain compliance. On August 17, 2017, Nasdaq notified the Company that its plan
to correct the stockholders’ equity deficiency did not contain sufficient evidence to support a correction being achieved
in the required time frame. The Company appealed this decision to a Hearing Panel which, on October 23, 2017, maintained this
position and denied the Company a continued listing. Effective October 25, 2017, the Company’s common stock (RNVA) and warrants
to purchase common stock (RNVAW) were no longer listed on The Nasdaq Capital Market but began trading on the OTCQB instead.
Reverse
Stock Splits
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 and on September
21, 2017, the Company’s Board of Directors approved an amendment to the Company’s Certificate of Incorporation to
effect a 1-for-15 reverse stock split effective October 5, 2017 (the “Reverse Stock Splits”). The stockholders of
the Company had approved these amendments to the Company’s Certificate of Incorporation on December 22, 2016 for the February
22, 2017 reverse stock split and on September 20, 2017 for the October 5, 2017 reverse stock split. In both cases, the Company’s
stockholders had granted authorization to the Board of Directors to determine in its discretion the specific ratio, subject to
limitations, and the timing of the reverse splits within certain specified effective dates.
As
a result of the Reverse Stock Splits, 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, on February 22, 2017 and every
15 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, on October 5, 2017. In addition, the conversions and exercise prices
of all of the Company’s outstanding preferred stock, common stock purchase warrants, stock options, restricted stock, equity
incentive plans and convertible notes payable were proportionately adjusted at the 1:30 reverse split ratio and again at the 1:15
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 Splits, other than as a result of the rounding up of fractional
shares in the February reverse split and the payment of cash in lieu of fractional shares in the October reverse split, as no
fractional shares were issued in connection with the Reverse Stock Splits.
RENNOVA
HEALTH, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
par value and other terms of the common stock were not affected by the Reverse Stock Splits. 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 Splits.
All share, per share and capital stock amounts as of and for the years ended December 31, 2017 and 2016 have been restated to
give effect to the Reverse Stock Splits.
Going
Concern
The
Company’s consolidated financial statements are prepared using accounting principles generally accepted in the United States
of America (“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 recently accumulated significant losses and has negative cash
flows from operations, and at December 31, 2017, had a working capital deficit and stockholders’ deficit of $21.5
million and $40.6 million, respectively. In addition, the Company’s cash position as of the date of this report is
critically deficient, critical payments, including capital lease obligations are not being made in the ordinary course of business
and certain indebtedness, including accrued interest and extension fees, in the amount of $7.8 million matures on May 30,
2018, that the Company does not have the financial resources to satisfy (see Notes 7, 9 and 15), all of which raise substantial
doubt about the Company’s ability to continue as a going concern.
The
Company continues to consider efficiencies and is currently using one laboratory for the majority of its toxicology diagnostics
thereby reducing the number of employees and associated operating expenses, in order to reduce costs. In addition, the Company
received approximately $15.7 million in cash from the issuances of debentures and warrants during 2017 (see Note 8), $4.3 million
from related parties and an additional $4.0 million of proceeds on October 30, 2017 from the issuance of convertible preferred
stock (see Note 12).
In
July 2017, the Company announced that it plans to spin off its Advanced Molecular Services Group (“AMSG”) and in the
third quarter of 2017, the Company’s Board of Directors voted unanimously to spin off Health Technology Solutions, Inc.,
a wholly-owned subsidiary (“HTS”), as independent publicly traded companies by way of tax-free distributions to its
shareholders. Completion of these spinoffs is expected to occur during the third quarter of 2018. Our Board of Directors
is currently considering if AMSG and HTS would be better as one combined spinoff instead of two. The spin offs are subject to
numerous conditions, including effectiveness of Registration Statements on Form 10 to be filed with the Securities and Exchange
Commission and consents, including under various funding agreements previously entered into by the Company. The intent of the
spinoffs of AMSG and HTS is to create three (or two) 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 17.
The
Company also announced that the Big South Fork Medical Center received CMS regional office licensure approval and opened its doors
on August 8, 2017. The hospital provided services to over 3,747 patients and recognized approximately $1.8 million of net
revenues during the second half of 2017. In addition, on January 31, 2018, the Company announced that it had entered into a definitive
asset purchase agreement to acquire an acute care hospital in Jamestown, Tennessee known as Tennova Healthcare – Jamestown,
as more fully discussed in Note 20. The Company may amend its current revenue recognition policy and percentage for the hospitals
when payments are received to support amended revenue recognition methodologies. Therefore, the Company expects that these hospitals
will continue to provide additional revenue and cash flow sources.
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.
RENNOVA
HEALTH, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
2 – Summary of Significant Accounting Policies
Basis
of Presentation and Consolidation
The
consolidated financial statements have been prepared in accordance with U.S. GAAP and in accordance with Regulation S-X of the
SEC. The consolidated financial statements include the accounts of Rennova Health, Inc. and its wholly-owned subsidiaries. All
significant inter-company balances and transactions have been eliminated in consolidation.
Reclassifications
The
Company has reclassified certain amounts in the 2016 consolidated financial statements to be consistent with the 2017 presentation.
These principally relate to classification of certain revenues, cost of revenues and related segment data, as well as balance
sheet classifications to assets and liabilities held for sale. Reclassifications relating to the discontinued operations of AMGS
and HTS are described further in Note 17.
Comprehensive
Loss
During
the years ended December 31, 2017 and 2016, comprehensive loss was equal to the net loss amounts presented in the accompanying
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, the disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. Significant areas of estimation include
the allowance for bad debts, the lives and valuation of long-lived assets, impairment of assets and rates for amortization, accrued
liabilities, future income tax, in valuation models used in estimating the allocation of fair value of debentures, warrants, embedded
conversion options, deemed dividends and stock-based compensation and transactions and changes in the fair value of derivative
instruments, 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.
The Company had no cash equivalents at December 31, 2017 and 2016.
Revenue
Recognition
Service
revenues are generated from laboratory testing services and hospital revenues.
Laboratory
testing services include chemical diagnostic tests such as blood analysis and urine analysis. Laboratory service revenues are
recognized at the time the testing services are performed and billed and are reported at their estimated net realizable amounts.
Net service revenues are determined utilizing gross service revenues net of contractual adjustments and discounts. Even though
it is the responsibility of the patient to pay for laboratory service bills, most individuals in the U.S. have an agreement with
a third-party payer such as a commercial insurance provider, Medicaid or Medicare to pay all or a portion of their healthcare
expenses; the majority of services provided by us are to patients covered under a third-party payer contract. In most cases, the
Company is provided the third-party billing information and seeks payment from the third party in accordance with the terms and
conditions of the third party payer for health service providers like us. Each of these third-party payers may differ not only
in terms of rates, but also with respect to terms and conditions of payment and providing coverage (reimbursement) for specific
tests. Estimated revenues are established based on a series of procedures and judgments that require industry specific healthcare
experience and an understanding of payer methods and trends. Despite follow up billing efforts, the Company does not currently
anticipate collection of a significant portion of self-pay billings, including the patient responsibility portion of the billing
for patients covered by third party payers. The Company currently does not have any capitated agreements.
For
hospital goods and or services, net revenues are determined utilizing gross revenues net of contractual adjustments and discounts
and are recognized when goods and services are delivered. Even though it is the responsibility of the patient to pay for goods
and services rendered, most individuals have an agreement with a third-party payer such as a commercial insurance provider, Medicaid
or Medicare to pay all or a portion of their healthcare expenses.
In
May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).” The standard, including
subsequently issued amendments, will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective.
There is a five-step approach outlined in the standard. Entities are permitted to apply the new standard under the full retrospective
method, subject to certain practical expedients, or the modified retrospective method that requires the application of the guidance
only to contracts that are uncompleted on the date of initial application.
RENNOVA
HEALTH, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
In
determining revenue, we first identify the contract according to the scope of ASC 606 with the following criteria:
|
●
|
The
parties have approved the contract either in writing through the acknowledgement or consent of the patient responsibility
or consent form; orally by acknowledgement or by scheduled appointment; or implicitly, based on the hospital’s customary
business practices (outpatient services, inpatient, emergency room visits, for example).
|
|
●
|
Each
party’s rights and the contract’s payment terms are identified.
|
|
●
|
The
contract has commercial substance.
|
|
●
|
Collection
is probable.
|
The
hospital ensures that it is probable and will collect substantially all of the consideration to which it is entitled. The hospital
has established the transaction price for providing goods or services to a patient through historical cash collection and current
data from each identified payer class. This may include the effects of variable consideration such as discounts and price concessions
and may be less than the stated contract price. With variable consideration, whether applied on a contract-by-contract basis or
by using a portfolio approach. The ultimate transaction price reflects explicit price concessions. The hospital has an obligation
to provide medically necessary or emergency services regardless of a patient’s intent or ability to pay. In determining
collectability, the evaluation is based on experience or the contract portfolio approach with either a specific patient or a class
of similar patients.
The
hospital practices the full retrospective approach of all the reporting periods presented under the new standard discloses any
adjustment to prior-period information.
This
includes but is not limited to Disaggregated revenue information, Contract asset and liability information, including significant
changes from prior year, and Judgements, and changes in judgement, that significantly affect the determination of the amount of
revenue and timing.
We
review our calculations for the realizability of gross service revenues on a monthly basis in order 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 on the basis of historical allowance rates for
the various specific payer groups on a monthly basis 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 on the basis
of actual allowances issued by payers and the actual payments made to determine what adjustments, if any, are needed.
Contractual
Allowances and 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. See Note 4 – Accounts Receivable.
Impairment
or Disposal of Long-Lived Assets
The
Company accounts for the impairment or disposal of long-lived assets according to the Financial Accounting Standards Board’s
(“FASB”) Accounting Standards Codification (“ASC”) Topic 360,
Property, Plant and Equipment
(“ASC
360”). ASC 360 clarifies the accounting for the impairment of long-lived assets and for long-lived assets to be disposed
of, including the disposal of business segments and major lines of business. Long-lived assets are reviewed when facts and circumstances
indicate that the carrying value of the asset may not be recoverable. When necessary, impaired assets are written down to estimated
fair value based on the best information available. Estimated fair value is generally based on either appraised value or measured
by discounting estimated future cash flows. Considerable management judgment is necessary to estimate discounted future cash flows.
Accordingly, actual results could vary significantly from such estimates. The Company did not record an impairment charge during
the year ended December 31, 2017. During the year ended December 31, 2016, the Company recorded an impairment charge for certain
of the Company’s property and equipment in the amount of $1.0 million. In December 31, 2017, the Company recorded a goodwill
impairment charge of $1.0 million related to the Genomas acquisition. Genomas is part of AMSG and is included in the discontinued
operations – see Note 17.
RENNOVA
HEALTH, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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 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 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).
The amendments in Part II of this Update re-characterize the indefinite deferral of certain provisions of Topic 480 that now are
presented as pending content in the Codification, to a scope exception. Those amendments do not have an accounting effect.
Under
current GAAP, an equity-linked financial instrument with a down round feature that otherwise is not required to be classified
as a liability under the guidance in Topic 480 is evaluated under the guidance in Topic 815, Derivatives and Hedging, to determine
whether it meets the definition of a derivative. If it meets that definition, the instrument (or embedded feature) is evaluated
to determine whether it is indexed to an entity’s own stock as part of the analysis of whether it qualifies for a scope
exception from derivative accounting. Generally, for warrants and conversion options embedded in financial instruments that are
deemed to have a debt host (assuming the underlying shares are readily convertible to cash or the contract provides for net settlement
such that the embedded conversion option meets the definition of a derivative), the existence of a down round feature results
in an instrument not being considered indexed to an entity’s own stock. This results in a reporting entity being required
to classify the freestanding financial instrument or the bifurcated conversion option as a liability, which the entity must measure
at fair value initially and at each subsequent reporting date.
The
amendments in this Update revise the guidance for instruments with down round features in Subtopic 815-40, Derivatives and Hedging—Contracts
in Entity’s Own Equity, which is considered in determining whether an equity-linked financial instrument qualifies for a
scope exception from derivative accounting. An entity still is required to determine whether instruments would be classified in
equity under the guidance in Subtopic 815-40 in determining whether they qualify for that scope exception. If they do qualify,
freestanding instruments with down round features are no longer classified as liabilities and embedded conversion options with
down round features are no longer bifurcated.
For
entities that present EPS in accordance with Topic 260, and 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. Convertible instruments are unaffected by the Topic 260 amendments in this Update.
Those
amendments in Part 1 of this Update are a cost savings relative to current GAAP. This is because, assuming the required criteria
for equity classification in Subtopic 815-40 are met, an entity that issued such an instrument no longer measures the instrument
at fair value at each reporting period (in the case of warrants) or separately accounts for a bifurcated derivative (in the case
of convertible instruments) on the basis of the existence of a down round feature. For convertible instruments with embedded conversion
options that have down round features, applying specialized guidance such as the model for contingent beneficial conversion features
rather than bifurcating an embedded derivative also reduces cost and complexity. Under that specialized guidance, the issuer recognizes
the intrinsic value of the feature only when the feature becomes beneficial instead of bifurcating the conversion option and measuring
it at fair value each reporting period.
RENNOVA
HEALTH, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
amendments in Part II of this Update replace the indefinite deferral of certain guidance in Topic 480 with a scope exception.
This has the benefit of improving the readability of the Codification and reducing the complexity associated with navigating the
guidance in Topic 480.
For
public business entities, the amendments in Part I of this Update are effective for fiscal years, and interim periods within those
fiscal years, beginning after December 15, 2018. For all other entities, the amendments in Part I of this Update are effective
for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020.
Early adoption is permitted for all entities, including adoption in an interim period. If an entity early adopts the amendments
in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period.
The amendments in Part 1 of this Update should be applied in either of the following ways: 1. Retrospectively to outstanding financial
instruments with a down round feature by means of a cumulative-effect adjustment to the statement of financial position as of
the beginning of the first fiscal year and interim period(s) in which the pending content that links to this paragraph is effective;
or 2. Retrospectively to outstanding financial instruments with a down round feature for each prior reporting period presented
in accordance with the guidance on accounting changes in paragraphs 250-10-45-5 through 45-10.
The
amendments in Part II of this Update do not require any transition guidance because those amendments do not have an accounting
effect.
The
Company has determined that this amendment had a material impact on its consolidated financial statements and has early adopted
this accounting standard update. The cumulative effect of the adoption of ASU 2017-11 resulted in the reclassification of the
derivative liability recorded of $56 million and the reversal of $41 million of interest expense recorded in the Company’s
first fiscal quarter of 2017. The remaining $16 million was offset to additional paid in capital (discount on convertible debenture).
Additionally, the Company recognized a deemed dividend from the trigger of the down round provision feature of $53.3 million.
A $51 million deemed dividend was recorded retrospectively as of the beginning of the issuance of the debentures issued in March
2017 where the initial derivative liability was recorded as a result of the down round provision feature.
In
accordance with ASC 820, “
Fair Value Measurements and Disclosures
,” the Company applies fair value accounting
for all financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value
in the financial statements on a recurring basis. Fair value is defined as the price that would be received from selling an asset
or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining
the fair value measurements for assets and liabilities which are required to be recorded at fair value, the Company considers
the principal or most advantageous market in which it would transact and the market-based risk measurements or assumptions that
market participants would use in pricing the asset or liability, such as risks inherent in valuation techniques, transfer restrictions
and credit risk. Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair
value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and
significant to the fair value measurement:
|
●
|
Level
1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities
that the Company has the ability to access at the measurement date.
|
|
|
|
|
●
|
Level
2 applies to assets or liabilities for which there are inputs other than quoted prices included in Level 1 that are observable
for the asset or liability, either directly or indirectly, such as quoted prices for similar assets or liabilities in active
markets; or quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions
(less active markets).
|
|
|
|
|
●
|
Level
3 applies to assets or liabilities for which fair value is derived from valuation techniques in which one or more significant
inputs are unobservable, including the Company’s own assumptions.
|
The
estimated fair value of financial instruments is determined by the Company using available market information and valuation methodologies
considered to be appropriate. At December 31, 2017 and 2016, the carrying value of the Company’s accounts receivable, accounts
payable and accrued expenses approximate 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 December
31, 2017 and 2016:
RENNOVA
HEALTH, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
As
of December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beneficial
conversion features:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
payable
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
409,524
|
|
|
$
|
409,524
|
|
Variable
priced warrants:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,803
|
|
|
$
|
2,803
|
|
As
of December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
12,435,250
|
|
|
$
|
12,435,250
|
|
For
the year ended December 31, 2017, total loss realized on instruments valued using Level 3 valuations were $12.4 million. For the
year ended December 31, 2016, total realized and unrealized gains on instruments valued using Level 3 valuation methods were $7.0
million.
For
beneficial conversion features valued using Level 3 valuation methods, the Company determines the fair value as of each balance
sheet date by comparing the discounted conversion price per share multiplied by the number of shares issuable at that date to
the actual price per share multiplied by the number of shares issuable at that date. The difference is recorded as a liability.
For beneficial conversion features, all inputs are observable and therefore there is no sensitivity in the valuation to unobservable
inputs.
For
contingently issuable variable priced warrants and variable priced warrants, the Company determines the fair value as of each
balance sheet date by using the Black-Scholes option pricing model as though the exercise price of the warrants were reduced to
the last market closing price of its stock for the period, to the extent that it is less than the then current exercise price.
The value calculated is recorded as a liability. For contingently issuable variable priced warrants and variable priced warrants,
all inputs are observable and, therefore, there is no sensitivity in the valuation to unobservable inputs.
For
derivative liabilities: (i) for embedded conversion options valued at $1.6 million, the Company determines the fair value by comparing
the discounted conversion price per share (85% of market price) 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; and (ii) for warrants valued at $10.5 million, the Company determines the
fair value by comparing the fixed price per share (which was 85% of market price) 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; and (iii) for warrants valued at $0.3 million, the
Company determines the fair value using the Black-Scholes option pricing model. All inputs for the derivative liabilities are
observable and, therefore, there is no sensitivity in the valuation to unobservable inputs.
The
following table reconciles the changes in the liabilities categorized within Level 3 of the fair value hierarchy for the year
ended December 31, 2017:
Balance
at December 31, 2016
|
|
$
|
412,327
|
|
Gain
on change in fair value included in net loss
|
|
|
27,406
|
|
Reclassifications
to equity
|
|
|
(439,733
|
)
|
Derivative
liabilities
|
|
|
12,435,250
|
|
Balance
at December 31, 2017
|
|
$
|
12,435,250
|
|
Stock
Based Compensation
The
Company accounts for Stock-Based Compensation under ASC 718 “
Compensation – Stock Compensation
”, which
addresses the accounting for transactions in which an entity exchanges its equity instruments for goods or services, with a primary
focus on transactions in which an entity obtains employee services in share-based payment transactions. ASC 718-10 requires measurement
of the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of
the award. Incremental compensation costs arising from subsequent modifications of awards after the grant date must be recognized.
The
Company accounts for stock-based compensation awards to non-employees in accordance with ASC 505-50, “
Equity-Based Payments
to Non-Employees
.” Under ASC 505-50, the Company determines the fair value of the warrants or stock-based compensation
awards granted as either the fair value of the services provided or the fair value of the equity instruments issued, whichever
is more reliably measurable. Any stock options or warrants issued to non-employees are recorded in expense and additional paid-in
capital in stockholders’ equity over the applicable service periods using variable accounting through the vesting dates
based on the fair value of the options or warrants at the end of each period.
The
Company issues stock to consultants for various services. The value of the common stock is measured at the earlier of (i) the
date at which a firm commitment for performance by the counterparty to earn the equity instruments is reached or (ii) the date
at which the counterparty’s performance is complete. The Company recognizes consulting expense and a corresponding increase
to additional paid-in-capital related to stock issued for services.
RENNOVA
HEALTH, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Income
Taxes
Income
taxes are accounted for under the liability method of accounting for income taxes. Under the liability method, future tax liabilities
and assets are recognized for the estimated future tax consequences attributable to differences between the amounts reported in
the financial statement carrying amounts of assets and liabilities and their respective tax bases. Future tax assets and liabilities
are measured using enacted or substantially enacted income tax rates expected to apply when the asset is realized or the liability
settled. The effect of a change in income tax rates on future income tax liabilities and assets is recognized in income in the
period that the change occurs. Future income tax assets are recognized to the extent that they are considered more likely than
not to be realized. When projected future taxable income is insufficient to provide for the realization of deferred tax assets,
the Company recognizes a valuation allowance (see Note 14).
In
accordance with U.S. GAAP, the Company is required to determine whether a tax position of the Company is more likely than not
to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation
processes, based on the technical merits of the position. The tax benefit to be recognized is measured as the largest amount of
benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Derecognition of a tax benefit previously
recognized could result in the Company recording a tax liability that would reduce net assets. Based on its analysis, the Company
has determined that it has not incurred any liability for unrecognized tax benefits as of December 31, 2017 and 2016.
Segment
Information
In
accordance with the provisions of ASC 280-10, “
Disclosures about Segments of an Enterprise and Related Information
,”
the Company is required to report financial and descriptive information about its reportable operating segments. The Company has
two operating segments as of December 31, 2017: Clinical Laboratory Services and Hospital Operations (see Note 16).
Note
3 – Loss per Share
Basic
and diluted loss per share is computed by dividing (i) loss available to common stockholders, by (ii) the weighted-average number
of shares of common stock outstanding during the period.
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 years ended December 31, 2017 and 2016, basic loss per
share 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 years ended
December 31, 2017 and 2016:
|
|
Year
Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Numerator
|
|
|
|
|
|
|
|
|
Net
loss from continuing operations
|
|
$
|
(50,921,024
|
)
|
|
$
|
(22,624,648
|
)
|
Deemed
dividend from trigger of down round provision feature
|
|
|
(53,341,619
|
)
|
|
|
-
|
|
Net
loss attributable to common stockholders, continuing operations
|
|
$
|
(104,262,643
|
)
|
|
$
|
(22,624,648
|
)
|
Net
loss from discontinued operations
|
|
$
|
(4,276,918
|
)
|
|
$
|
(9,989,039
|
)
|
Net
loss
|
|
$
|
(108,539,561
|
)
|
|
$
|
(32,613,687
|
)
|
|
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
|
|
Basic
and diluted weighted average common shares outstanding
|
|
|
2,308,090
|
|
|
|
72,062
|
|
|
|
|
|
|
|
|
|
|
Loss
per share, basic and diluted
|
|
|
|
|
|
|
|
|
Basic
and diluted, continuing operations
|
|
$
|
(45.17
|
)
|
|
$
|
(313.96
|
)
|
Basic
and diluted, discontinued operations
|
|
$
|
(1.85
|
)
|
|
$
|
(138.62
|
)
|
Total
basic and diluted
|
|
$
|
(47.02
|
)
|
|
$
|
(452.58
|
)
|
Diluted
loss per share excludes all dilutive potential shares if their effect is anti-dilutive. As of December 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:
RENNOVA
HEALTH, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
Year
Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Warrants
|
|
|
2,176,403,218
|
|
|
|
93,843
|
|
Convertible
preferred stock
|
|
|
179,781,292
|
|
|
|
248,444
|
|
Convertible
debentures
|
|
|
326,919,506
|
|
|
|
95,198
|
|
Stock
options
|
|
|
38,478
|
|
|
|
47,268
|
|
|
|
|
2,683,142,494
|
|
|
|
484,753
|
|
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 and debentures. In addition, the majority of these equity-based securities
contain prices that vary based upon the price of the Company’s common stock on the date of exercise/conversion (see Notes
8, 11 and 12). 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. As a result of these down round provisions, the potential common stock
and common stock equivalents totaled 17.3 billion at April 1, 2018. See Note 13 regarding a discussion of the number of shares
of the Company’s authorized common stock.
Note
4 – Accounts Receivable
Accounts
receivable at December 31, 2017 and 2016 consisted of the following:
|
|
December
31,
|
|
|
|
2017
|
|
|
2016
|
|
Accounts
receivable - laboratory services
|
|
$
|
1,478,451
|
|
|
$
|
12,715,835
|
|
Accounts
receivable - hospital
|
|
|
8,593,747
|
|
|
|
-
|
|
Total
accounts receivable
|
|
|
10,072,198
|
|
|
|
12,715,835
|
|
Less:
|
|
|
|
|
|
|
|
|
Allowance
for discounts - laboratory services
|
|
|
(1,177,054
|
)
|
|
|
(11,664,490
|
)
|
Allowance
for discounts - hospital
|
|
|
(6,936,429
|
)
|
|
|
-
|
|
Allowance
for bad debts
|
|
|
(987,403
|
)
|
|
|
-
|
|
Accounts
receivable, net
|
|
$
|
971,312
|
|
|
$
|
1,051,345
|
|
For
the years ended December 31, 2017 and 2016, bad debt expense was $1.5 million and $2.1 million, respectively. During the years
ended December 31, 2017 and 2016, the Company identified certain accounts receivable related to its Clinical Laboratory Operations
business segment that were deemed uncollectible. The primary factors in rendering these receivables uncollectible were the Company’s
failure to obtain preauthorization from the third party payer prior to rendering services and the lack of an existing preferred
provider contract with the third party payer. As a result, the Company recorded a charge of $1.5 million and $3.5 million, respectively,
related to the Company’s inability to collect on these receivables, which is reflected in bad debt expense in the accompanying
consolidated statements of operations.
RENNOVA
HEALTH, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
5 – Property and Equipment
Property
and equipment at December 31, 2017 and 2016 consisted of the following:
|
|
December
31, 2017
|
|
|
December
31, 2016
|
|
|
|
|
|
|
|
|
Medical
equipment
|
|
$
|
696,195
|
|
|
$
|
696,195
|
|
Building
|
|
|
1,359,472
|
|
|
|
-
|
|
Equipment
|
|
|
476,548
|
|
|
|
437,029
|
|
Equipment
under capital leases
|
|
|
4,686,736
|
|
|
|
4,497,025
|
|
Furniture
|
|
|
222,824
|
|
|
|
222,824
|
|
Leasehold
improvements
|
|
|
1,303,131
|
|
|
|
1,303,131
|
|
Vehicles
|
|
|
196,534
|
|
|
|
196,534
|
|
Computer
equipment
|
|
|
226,441
|
|
|
|
203,442
|
|
Software
|
|
|
631,033
|
|
|
|
631,033
|
|
|
|
|
9,798,914
|
|
|
|
8,187,213
|
|
Less
accumulated depreciation
|
|
|
(7,103,474
|
)
|
|
|
(5,388,164
|
)
|
Property
and equipment, net
|
|
$
|
2,695,440
|
|
|
$
|
2,799,049
|
|
On
January 13, 2017, the Company completed an asset purchase agreement to acquire certain assets related to the Big South Fork Medical
Center, based in Oneida, Tennessee (the “Hospital Assets”). 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. The Company opened the hospital on August 8, 2017.
Depreciation
expense on property and equipment was $1.7 million and $2.4 million for the years ended December 31, 2017 and 2016, respectively.
During the year ended December 31, 2016, the Company determined that some of the equipment within the Clinical Laboratory Services
business segment was impaired and the Company recorded an impairment charge of $1.0 million.
Note
6 – Accrued Expenses
Accrued
expenses at December 31, 2017 and 2016 consisted of the following:
|
|
December
31, 2017
|
|
|
December
31, 2016
|
|
|
|
|
|
|
|
|
Commisions
payable
|
|
$
|
24,470
|
|
|
$
|
44,788
|
|
Accrued
payroll and related liabilities
|
|
|
897,088
|
|
|
|
1,324,438
|
|
Accrued
interest
|
|
|
2,636,057
|
|
|
|
1,471,191
|
|
Other
accrued expenses
|
|
|
1,409,790
|
|
|
|
835,430
|
|
Accrued
expenses
|
|
$
|
4,967,405
|
|
|
$
|
3,675,847
|
|
RENNOVA
HEALTH, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
7 – Notes Payable
The
Company and its subsidiaries are party to a number of loans with affiliates and unrelated parties. At December 31, 2017 and December
31, 2016, notes payable consisted of the following:
Notes
Payable – Third Parties
|
|
December
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 December 31, 2017
|
|
|
1,616,218
|
|
|
|
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
|
|
|
|
|
6,957,830
|
|
|
|
9,011,247
|
|
Less
current portion
|
|
|
(6,957,830
|
)
|
|
|
(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 $1.5 million on the Company’s balance sheet
as of December 31, 2016 and $0 as of December 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 had not
been paid $6.0 million, the Company was required to pay the difference. Christopher Diamantes, a director of the Company, guaranteed
the Company’s obligation. On March 24, 2017, the Company, the counterparty and Mr. Diamantis, as guarantor, entered into
an amendment (the “Amendment”) to extend the Company’s obligation to March 31, 2018. Also, what the counterparty
is to receive was amended to equal (a) the $5,000,000 purchase price plus a 20% per annum investment return thereon, plus (b)
$500,000, plus (c) the product of (i) the proceeds received from the accounts receivable, minus the amount set forth in clauses
(a) and (b), multiplied by (ii) 40%. In connection with the extension, the counterparty received a fee of $1,000,000. To date,
the Company has not recovered any payments against the accounts receivable. As of December 31, 2017, the Company has accrued $2.3
million for the counterparty’s required investment return, which is reflected in accrued expenses in the accompanying consolidated
balance sheet, and $7.3 million was due to the counterparty on December 31, 2017. Subsequent to December 31, 2017, the Company
entered into a second amendment to the terms of this agreement as more fully discussed in Note 20. 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) 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 is reflected in accrued expenses in the accompanying consolidated
balance sheet at December 31, 2017. In addition, TCA entered into an intercreditor 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
to December 31, 2017. The Company is past due on its payments.
RENNOVA
HEALTH, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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 15). To date, the Company has yet to repay this amount.
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”) that were convertible into shares
of the Company’s common stock at a conversion price of $112.50 per share. In conjunction with the sale of the September
2016 Notes, the Company issued warrants to purchase an aggregate of 4,444 shares of the Company’s common stock at an exercise
price of $180.00 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 26,667 shares of the Company’s common stock.
Notes
Payable – Related Parties
|
|
December
31, 2017
|
|
|
December
31, 2016
|
|
|
|
|
|
|
|
|
Loan
payable to Alcimede LLC, bearing interest at 6% per annum, with all principal and interest due on February 2, 2018
|
|
$
|
168,500
|
|
|
$
|
218,500
|
|
|
|
|
|
|
|
|
|
|
Loan
payable to Christopher Diamantis
|
|
|
960,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Other
advances from related parties
|
|
|
-
|
|
|
|
110,000
|
|
|
|
|
|
|
|
|
|
|
Total
current notes payable, related parties
|
|
$
|
1,128,500
|
|
|
$
|
328,500
|
|
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 later 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 2,223 shares of the Company’s common stock at an exercise price
of $1,125.00 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 Alcimede in the amount of $50,000 would be deducted from the outstanding balance
of the note. On August 2, 2017, the Company and Alcimede agreed to further extend the maturity date of the loan to February 2,
2018. As of April 1, 2018, the balance outstanding on the note was $168,500.
During
the year ended December 31, 2017, the Company repaid $110,000 that was outstanding to a former principal stockholder, and borrowed
an additional $75,000 from this same stockholder, which has been repaid as of December 31, 2017. In addition, the Company borrowed
$4.6 million from Mr. Diamantis, a director of the Company, of which $3.6 million was repaid (see Note 8).
Note
8 – Debentures
The
carrying amount of all outstanding debentures as of December 31, 2017 is as follows (there were no debentures outstanding as of
December 31, 2016):
|
|
December
31, 2017
|
|
Debentures
|
|
$
|
17,720,082
|
|
Discount
on Debentures
|
|
|
(12,127,634
|
)
|
Deferred
financing fees
|
|
|
(224,733
|
)
|
|
|
|
5,367,715
|
|
Less
current portion
|
|
|
(1,615,693
|
)
|
Debentures,
long term
|
|
$
|
3,752,022
|
|
RENNOVA
HEALTH, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
February
Offering
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 6,667
shares of common stock, which can be exercised at any time after August 17, 2017 at an exercise price of $38.70 per share (the
“February Warrants”), to an accredited investor for a purchase price of $1.5 million. On March 21, 2017, the February
Debentures were exchanged for $2.5 million of exchange debentures as more fully discussed below.
March
Offerings
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”). 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 7) and $0.75 million of the net proceeds to make the partial repayment on the TCA Debenture (see Note 7). The remaining
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 “March Debentures”) on the same terms as, and pari passu with,
the Convertible Debentures and warrants. 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. The March Debentures contained 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.
In
connection with the March Debentures the Company issued warrants to purchase shares of the Company’s common stock to several
accredited investors, As of December 31, 2017, the aggregate number of warrants outstanding was 1,919,749,817. The warrants were
issued to the investors in three tranches, Series A Warrants, Series B Warrants and Series C Warrants (collectively, the “March
Warrants”). At December 31, 2017, the Series A Warrants are exercisable for 681,421,283 shares of the Company’s common
stock. They are immediately exercisable and they have a term of exercise equal to five years. At December 31, 2017, the Series
B Warrants are exercisable for 556,907,251 shares of the Company’s common stock. They are exercisable for a period of 18
months commencing immediately. At December 31, 2017, the Series C Warrants are exercisable for 681,421,283 shares of the Company’s
common stock. They have a term of five years provided such warrants shall only vest if, when and to the extent that the holders
exercise the Series B Warrants. At December 31, 2017, the exercise price of the March Warrants was $0.0276 per share.
The
March Debentures are convertible into shares of the Company’s common stock, at a conversion price which has been adjusted
pursuant to their terms to $0.0276 per share as of December 31, 2017, due to prices at which the Company has subsequently issued
shares of common stock equivalents. The Convertible Debentures began to amortize monthly commencing on the 90th day following
the closing date. The Exchange Debentures 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 the March 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 March Debentures contain customary
affirmative and negative covenants. The conversion prices are 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.
On
October 30, 2017, the Company agreed to amend the March Debentures and March Warrants to remove the floor in the anti-dilution
provisions therein. The conversion price of the March Debentures and the exercise price of the March Warrants as of December 31,
2017 stated above reflect this amendment as well as other adjustment for dilutive issuances, which triggered the down round provisions
in the March Debentures and March Warrants.
The
March Debentures are secured by all of the Company’s assets and are guaranteed by substantially all of the Company’s
subsidiaries. Between March 22, 2017 and December 31, 2017, holders of the March Debentures converted an aggregate of approximately
$7.3 million of these debentures into 18,285,517 shares of the Company’s common stock and received 663,000 shares of common
stock upon exercise of 663,000 March Warrants for an aggregate exercise price of approximately $0.6 million.
The
exercise prices of the March Warrants issued in connection with the March Debentures are 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 March Debentures and the March Warrants were deemed
to be not indexed to the Company’s common stock, and the Company recognized derivative liabilities for the embedded conversion
feature of the March Debentures and the March Warrants in the original amount of $15.3 million and $41.3 million, respectively.
The Company recognized a discount for 100% of the principal value of the March Debentures and non-cash interest expense in the
amount of $43.7 million in connection with the recognition of these derivative liabilities. As a result of the adoption of ASU
2017-11 in the second quarter of 2017, the interest expense and derivative liability originally recognized were adjusted and extinguished
during the three months ended June 30, 2017. See Note 2 for the adoption of ASU 2017-11 and for the retrospective adjustments
made to the Company’s consolidated financial statements with respect to the derivative liabilities associated with these
debentures and warrants.
RENNOVA
HEALTH, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
June
Offerings
In
June 2017, the Company issued debentures due three months from the date of issuance in two issuances (collectively, the “June
Debentures”) and warrants to purchase an aggregate of 100,000 shares of common stock (33,333 warrants in the June 2, 2017
transaction and 66,667 in the June 22, 2017 transaction), which can be exercised at any time after nine months at an exercise
price of $5.85 per share for the June 2, 2017 warrants and $5.70 per share for the June 22, 2017 warrants (collectively, the “June
Warrants”), to accredited investors for a purchase price of $1,902,700 and proceeds to the Company of $1.5 million. The
Company recorded a discount on the debentures of $107,700 which has been fully amortized. As more fully discussed below, on July
17, 2017, the June Debentures were exchanged.
July
Offerings
On
July 17, 2017, the Company closed an offering of $4,136,862 aggregate principal amount of Original Issue Discount Debentures due
October 17, 2017 (the “July Debentures”) and warrants to purchase an aggregate of 141,333 shares of common stock (the
“July Warrants”) for consideration of $2,000,000 in cash and the exchange of the full $1,902,700 aggregate principal
amount of the June Debentures. Under the Purchase Agreement, the Company was required to hold a stockholders’ meeting to
obtain stockholder approval for at least a 1-for-8 reverse split of the Company’s common stock on or before September 20,
2017. Accordingly, the Company’s stockholders approved a reverse stock split on September 20, 2017 and the Company effected
a 1-for-15 reverse stock split of its common stock on October 5, 2017, as further discussed in Note 1. The July Debentures were
guaranteed by substantially all of the subsidiaries of the Company pursuant to a Subsidiary Guarantee in favor of the holders
of the July Debentures. As more fully discussed below, on September 19, 2017, the July Debentures were exchanged for $6.4 million
of exchange debentures.
The
July Warrants are exercisable into shares of the Company’s common stock at any time from and after six months from the closing
date at an exercise price of $5.63 per common share (subject to adjustment). The July Warrants will terminate five years after
they become exercisable.
September
Offerings
On
September 19, 2017, the Company closed an offering of $2,604,000 principal amount of Senior Secured Original Issue Discount Convertible
Debentures due September 19, 2019 (the “New Debentures”) and three series of warrants to purchase an aggregate of
34,677,585 shares of the Company’s common stock (the “Series A Warrants,” the “Series B Warrants,”
and the “Series C Warrants,” and collectively, the “September Warrants”). The offering was pursuant to
the terms of a Securities Purchase Agreement, dated as of August 31, 2017 (the “Purchase Agreement”), between the
Company and certain existing institutional investors of the Company. The Company received proceeds of $2,100,000 from the offering.
Also
on September 19, 2017, the Company closed exchanges by which the holders of the Company’s July Debentures exchanged $4,136,862
principal amount of such debentures for $6,412,136 principal amount of new debentures on the same items as, and pari passu with,
the New Debentures (the “September Exchange Debentures” and, together with the New Debentures, the “September
Debentures”). The Company recorded non-cash interest expense in the amount of $1.0 million as a result of this exchange.
All issuance amounts of the September Debentures reflect a 24% original issue discount.
The
September Debentures contain customary affirmative and negative covenants. The conversion price is subject to “full ratchet”
and other customary anti-dilution protections as more fully described in the debentures. The September Debentures may be converted
at any time into shares of the Company’s common stock. Originally, the September Debentures begin to amortize monthly commencing
on October 1, 2017, and for the first three amortization dates, the amortization amount was $100,000. On October 19, 2017, the
September Debentures were amended so that they began to amortize immediately. On each monthly amortization date, the Company may
elect to repay 5% of the original principal amount of September Debentures in cash or, in lieu thereof, the conversion price of
such September Debentures shall thereafter be 85% of the volume weighted average price at the time of conversion, but not less
than the floor of $0.78 per share. 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. On October 30, 2017, the Company entered into exchange agreements with the holders of the September Debentures
to provide that the holders may, from time to time, exchange their September Debentures for shares of a newly-authorized Series
I-2 Convertible Preferred Stock of the Company (the “Series I-2 Preferred Stock”), which is more fully discussed in
Note 12. Subsequent to December 31, 2017, $1,384,556 of the September Debentures were exchanged for 1,730.1 shares of Series I-2
Preferred Stock as more fully discussed in Note 20.
RENNOVA
HEALTH, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
At
December 31, 2017, the Series A Warrants are exercisable for an aggregate of 11,559,145 shares of the Company’s common stock.
They are immediately exercisable and have a term of exercise equal to five years. The Series B Warrants are exercisable for an
aggregate of 11,559,295 shares of the Company’s common stock and are exercisable for a period of 18 months commencing immediately.
The Series C Warrants are exercisable for an aggregate of 11,559,145 shares of the Company’s common stock, and have a term
of five years provided such Series C Warrants shall only vest if, when and to the extent that the holders exercise the Series
B Warrants. The September Warrants have a fixed exercise price, subject to a floor of $0.78 per share. At December 31, 2017, the
exercise price was $0.78 per share, which reflects adjustments made pursuant to their terms due to the down round provisions in
the September Warrants. The September Warrants are subject to “full ratchet” and other customary anti-dilution protections.
The
Company’s obligations under the September Debentures are secured by a security interest in all of the Company’s and
its subsidiaries’ assets, pursuant to the terms of the Security Agreement, dated as of March 20, 2017.
During
the year ended December 31, 2017, the Company realized approximately $15.7 million in proceeds from the issuances of these debentures
and warrants. At December 31, 2017, the unamortized discounts were approximately $12.1 million. These discounts represent original
issue discounts, the relative fair value of the warrants issued with the debentures and the relative fair value of the beneficial
conversion features of the debentures. During the year ended December 31, 2017, the Company recorded approximately $8.6 million
and approximately $10.4 million, respectively of non-cash interest and amortization of debt discount expense primarily in connection
with the debentures and warrants.
See
Note 13 for summarized information related to warrants issued and the activity during the years ended December 31, 2017 and 2016.
See
Notes 3 and 13 for a discussion of the dilutive effect of the outstanding debentures and warrants as of December 31, 2017 and
at April 1, 2018.
Note
9 – Related Party Transactions
In
addition to the transactions discussed in Notes 7, 8 and 15, the Company had related party transactions during the years ended
December 31, 2017 and 2016 as follows:
The
Company has a consulting agreement with Alcimede pursuant to which Mr. Lagan provides services as the Company’s Chief Executive
Officer. Alcimede was paid $0.4 million and $0.6 million in consulting fees for the years ended December 31, 2017 and 2016, respectively.
During
the second quarter of 2016, the Company received a short-term advance from Jason Adams, the Company’s then Chief Financial
Officer, in the amount of $50,000, all of which was repaid during the second quarter.
On
August 1, 2015, Medytox entered into a non-exclusive consulting agreement with Monarch Capital, LLC (“Monarch”). Michael
Goldberg, at the time a director of Medytox and a director of the Company until his resignation on April 24, 2017, is the Managing
Director of Monarch. Under this agreement, Monarch provided business and financial advice. The agreement expired on August 31,
2017. Monarch was paid approximately $139,000 and $150,000 for consulting fees pursuant to this agreement for the years
ended December 31, 2017 and 2016, respectively.
Dr.
Thomas Mendolia, the former Chief Executive Officer of the Company’s laboratories and at the time a principal stockholder,
was reimbursed $26,765 for certain operating expenses and asset purchases paid by Dr. Mendolia on the Company’s behalf in
the year ended December 31, 2016.
The
terms of the foregoing transactions, including those discussed in Notes 7, 8, 12 and 14, are not necessarily indicative of those
that would have been agreed to with unrelated parties for similar transactions.
Note
10 – Derivative Liabilities
Derivatives
liabilities were $12,435,250
and $2,803 at December 31, 2017 and 2016, respectively. The derivative liabilities consist of the fair value
of: (i) conversion option features of debentures; and (ii) the fair value of warrants. As of December 31, 2017, the Company does
not have enough authorized shares of its common stock to satisfy its obligations under the terms of its debentures and warrants.
Accordingly, the Company recorded the fair value of the conversion option features of outstanding debentures and the fair value
of warrants as derivative liabilities. The total common stock and common stock equivalents outstanding as of December 31,
2017 are presented in Note 3. The total common stock and common stock equivalents outstanding as of April 1, 2018 are presented
in Note 13.
RENNOVA
HEALTH, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
11 – Capital Lease Obligations
The
Company leases various assets under capital leases expiring in 2019 and 2020 as follows:
|
|
December
31, 2017
|
|
|
December
31, 2016
|
|
|
|
|
|
|
|
|
Medical
equipment
|
|
$
|
4,686,736
|
|
|
$
|
4,497,025
|
|
Less
accumulated depreciation
|
|
|
(3,842,443
|
)
|
|
|
(2,809,511
|
)
|
|
|
|
|
|
|
|
|
|
Net
|
|
$
|
844,293
|
|
|
$
|
1,687,514
|
|
Depreciation
expense on assets under capital leases was $1.0 million and $1.3 million for the years ended December 31, 2017 and 2016, respectively.
During
the fourth quarter of 2016, the Company did not meet its payment obligations under two of its capital lease agreements, which
comprise substantially all of the Company’s aggregate capital lease obligations. In December 2016, the two counterparties
to these lease agreements filed separate lawsuits against the Company and in January of 2017 default judgments were issued against
the Company in the aggregate amount of $3.5 million, which includes default interest, late fees, penalties and other fees (see
Note 15). As a result, the Company recognized additional interest expense of $0.6 million to recognize the additional obligations
under these leases. As of December 31, 2017, the Company did not meet its obligations under these two capital leases, therefore,
the aggregate future minimum rentals under capital leases are deemed to be current.
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 stockholder’s 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
On
October 30, 2017, the Company closed an offering of $4,960,000 stated value of its 4,960 shares of newly-authorized Series I-1
Convertible Preferred Stock (the “Series I-1 Preferred Stock”). Each share of Series I-1 Preferred Stock has 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. The Purchase Agreement gives the investors the right to participate in up
to 50% of any offering of common stock or common stock equivalents by the Company. In the event of any such offering, the investors
may also exchange all or some of their Series I-1 Preferred Stock for such new securities on an $0.80 stated value of Series I-1
Preferred Stock for $1.00 of new subscription amount basis. Each share of Series I-1 Preferred Stock is convertible into shares
of the Company’s common stock at any time at the option of the holder at a conversion price equal to the lesser of (i) $1.00,
subject to adjustment, and (ii) 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 is subject to “full ratchet” and other customary anti-dilution
protections as more fully described in the Certificate of Designation of the Series I-1 Preferred Stock. Upon the occurrence of
certain Triggering Events, as defined in the Certificate of Designation of the Series I-1 Preferred Stock, the holder shall, in
addition to any other right it may have, have the right, at its option, to require the Company to either redeem the Series I-1
Preferred Stock in cash or in certain circumstance in shares of common stock at the redemption prices set forth in the Certificate
of Designation.
Series
I-2 Convertible Preferred Stock
On
October 30, 2017, the Company entered into exchange agreements with the holders of the September Debentures to provide that the
holders may, from time to time, exchange their September Debentures for shares of a newly-authorized Series I-2 Preferred Stock.
The exchange agreements permit the holders of the September Debentures to exchange specified principal amounts of the September
Debentures on various closing dates starting on December 2, 2017. Any exchange is at the option of the holders. Each holder may
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 does choose to exchange less principal amount of September Debentures, or no
September Debentures at all, it can 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 September Debenture surrendered
to the Company at any closing date, the Company will issue the holder a share of Series I-2 Preferred Stock with a stated value
of $1.00. Each share of Series I-2 Preferred Stock is convertible into shares of the Company’s common stock at any time
at the option of the holder at a conversion price equal to the lesser of (i) $1.00, subject to adjustment, and (ii) 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 is subject to “full ratchet” and other customary anti-dilution protections as more fully described
in the Certificate of Designation of the Series I-2 Preferred Stock.
RENNOVA
HEALTH, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
Company’s board of directors has designated up to 11,271 shares of the 5,000,000 authorized shares of preferred stock as
the Series I-2 Preferred Stock. Each share of Series I-2 Preferred Stock has a stated value of $1,000. Upon the occurrence of
certain Triggering Events (as defined in the Certificate of Designation of the Series I-2 Preferred Stock), the holder shall,
in addition to any other right it may have, have the right, at its option, to require the Company to either redeem the Series
I-2 Preferred Stock in cash or in certain circumstance in shares of common stock at the redemption prices set forth in the Certificate
of Designation.
As
more fully discussed in Note 20, on February 9, 2018, the holders exercised their right to exchange a portion of the September
Debentures for shares of the Series I-2 Preferred Stock for the first time. On that date, the holders elected to exchange an aggregate
of $1,384,556 principal amount of September Debentures and the Company issued an aggregate 1,730.7 shares of its Series I-2 Preferred
Stock.
See
Notes 3 and 13 for a discussion of the dilutive effect of the Series I-1 Preferred Stock and the Series I-2 Preferred Stock as
of December 31, 2017 and April 1, 2018.
Note
13 – Stockholders’ Deficit
Authorized
Capital
The
Company has 500,000,000 authorized shares of Common Stock at $0.01 par value and 5,000,000 authorized shares of Preferred Stock
at a par value of $0.01.
Preferred
Stock
In
conjunction with the Merger, all outstanding Medytox Series B preferred shares were cancelled in exchange for shares of Rennova
Series B Convertible Preferred Stock (the “Series B Preferred Stock”), which were not entitled to receive dividends
unless dividends were declared on the Company’s common stock. On September 6, 2016, all of the outstanding shares of Series
B Preferred Stock were converted into an aggregate of 12,742 shares of the Company’s common stock, in accordance with the
terms of the Series B Preferred Stock.
Between
January 1, 2016 and July 10, 2016, holders of the Company’s Series C Preferred Stock converted a total of 260 shares of
Series C Preferred Stock into 373 shares of common stock. On July 11, 2016, the Company entered into Exchange Agreements with
the holders of the Series C Preferred Stock and the holders of the Company’s 14,337 warrants to purchase shares of common
stock issued December 30, 2015 (the “December 2015 Warrants”), to exchange such securities for shares of newly-authorized
Series G Convertible Preferred Stock with a stated value of $1,000 per share (the “Series G Preferred Stock”) and
new warrants to purchase shares of common stock (the “Exchange”). The Exchange closed on July 19, 2016 in conjunction
with the public offering discussed below, and the outstanding 8,740 shares of Series C Preferred Stock and the December 2015 Warrants
were exchanged for 13,793 shares of Series G Preferred Stock and new warrants to purchase 167,555,446 shares of the Company’s
common stock (the “Exchange Warrants”). On July 6, 2016, stockholders representing approximately 74% of the voting
power of the Company approved the Exchange. The Exchange was made in reliance upon the exemption from the registration requirements
of the Securities Act of 1933, as amended, pursuant to Section 3(a)(9) thereof based on the representations of the holders. No
commission or other remuneration was paid or given directly or indirectly for soliciting the Exchange.
The
Series G Preferred Stock is convertible into common stock at the stated value divided by $13.50. The exercise price of the Exchange
Warrants is $0.0038 per share, which reflects adjustments for the down round provisions. No gain or loss was recognized by the
Company as result of the Exchange, however the Company did record a gain on the change in fair value of the December 2015 Warrants
of $1.7 million in July 2016. Subsequent to the closing of the Exchange through December 31, 2016, 5,232 shares of Series G Preferred
Stock were converted into 25,836 shares of the Company’s common stock.
On
August 26, 2016, in accordance with the terms of a stock purchase agreement between the Company and Epinex Diagnostics, Inc. (“Epinex
Diagnostics”), the Company cancelled the 45,000 shares of its Series E Preferred Stock that had previously been issued to
Epinex Diagnostics.
On
December 20, 2016, the Company completed a public offering whereby the Company issued 12,350 shares of its newly designated Series
H Convertible Preferred Stock (the “Series H Preferred Stock”) and received net proceeds of $11.8 million, net of
offering costs of $0.5 million. The underwriters to the offering also received warrants to purchase an aggregate of 15,247 shares
of common stock at an exercise price of $50.70 per share. 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 $2.70 per share. A total of $8.3 million
of the net proceeds received from this offering was used to redeem 8,346 shares of Series G Preferred Stock. Subsequent to the
closing of the offering and prior to December 31, 2016, 2,331 shares of Series H Preferred Stock were converted into 57,555 shares
of common stock.
RENNOVA
HEALTH, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
During
the year ended December 31, 2017, 7,785 shares of Series H Preferred Stock were converted into 370,446 shares of common stock
in accordance with the terms of the Series H Preferred Stock. Also during the year ended December 31, 2017, 2,174 shares of Series
H Preferred Stock with a stated value of $2.2 million were exchanged for Exchange Debentures with an aggregate principal amount
of $2.7 million and warrants (see Note 8).
In
connection with the acquisition of Genomas, Inc., on September 27, 2017, which is more fully discussed in Note 17, the Company
issued 1,750,000 shares of its Series F Preferred Stock valued at $174,097. Each share of the Series F Preferred Stock is convertible
into shares of our common stock (subject to adjustment as provided in the related certificate of designation of preferences, rights
and limitations) at any time after the first anniversary of the issuance date at the option of the holder at a conversion price
equal to the greater of $29.25 or the average closing price of the Company’s common stock for the 10 trading days immediately
preceding the conversion. The maximum number of shares of common stock issuable upon the conversion of the Series F Preferred
Stock is 59,829. 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. At any time, from time to time after the first anniversary
of the issuance date, the Company has the right to redeem all or any portion of the outstanding Series F Preferred Stock at a
price per share equal to $1.95 plus any accrued but unpaid dividends. 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.
The
following table summarizes the activity in the Company’s various classes of Preferred Stock included in Stockholders’
Deficit for the years ended December 31, 2017 and 2016:
RENNOVA
HEALTH, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
Series
B
|
|
|
Series
C
|
|
|
Series
E
|
|
|
Series
G
|
|
|
Series
H
|
|
|
Total
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
Balance
at December 31, 2015
|
|
|
5,000
|
|
|
$
|
50
|
|
|
|
9,000
|
|
|
$
|
90
|
|
|
|
45,000
|
|
|
$
|
450
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
59,000
|
|
|
$
|
590
|
|
Conversion
of Series C Preferred shares into common stock
|
|
|
|
|
|
|
|
|
|
|
(260
|
)
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(260
|
)
|
|
|
(3
|
)
|
Exchange
of Series C Preferred Stock and warrants for Series G Preferred Stock and warrants
|
|
|
|
|
|
|
|
|
|
|
(8,740
|
)
|
|
|
(87
|
)
|
|
|
|
|
|
|
|
|
|
|
13,793
|
|
|
|
138
|
|
|
|
|
|
|
|
|
|
|
|
5,053
|
|
|
|
51
|
|
Conversion
of Series G Preferred Stock into common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,232
|
)
|
|
|
(53
|
)
|
|
|
|
|
|
|
|
|
|
|
(5,232
|
)
|
|
|
(53
|
)
|
Conversion
of Series B Preferred shares into common stock
|
|
|
(5,000
|
)
|
|
|
(50
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,000
|
)
|
|
|
(50
|
)
|
Cancellation
of Series E Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(45,000
|
)
|
|
|
(450
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(45,000
|
)
|
|
|
(450
|
)
|
Issuance
of Series H Preferred Stock for cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,350
|
|
|
|
124
|
|
|
|
12,350
|
|
|
|
124
|
|
Redemption
of Series G Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,346
|
)
|
|
|
(83
|
)
|
|
|
|
|
|
|
|
|
|
|
(8,346
|
)
|
|
|
(83
|
)
|
Conversion
of Series H Preferred Stock into common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,331
|
)
|
|
|
(24
|
)
|
|
|
(2,331
|
)
|
|
|
(24
|
)
|
Balance
at December 31, 2016
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
215
|
|
|
$
|
2
|
|
|
|
10,019
|
|
|
$
|
100
|
|
|
|
10,234
|
|
|
$
|
102
|
|
|
|
Series
G
|
|
|
Series
H
|
|
|
Series
F
|
|
|
Total
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
Balance
at December 31, 2016
|
|
|
215
|
|
|
$
|
2
|
|
|
|
10,019
|
|
|
$
|
100
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
10,234
|
|
|
$
|
102
|
|
Conversion
of Series H Preferred shares into common stock
|
|
|
|
|
|
|
|
|
|
|
(7,785
|
)
|
|
|
(78
|
)
|
|
|
|
|
|
|
|
|
|
|
(7,785
|
)
|
|
|
(78
|
)
|
Issuance
of Series F for business acquisition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,750,000
|
|
|
|
17,500
|
|
|
|
1,750,000
|
|
|
|
17,500
|
|
Exchange
of Series H Preferred Stock for convertible debentures
|
|
|
|
|
|
|
|
|
|
|
(2,174
|
)
|
|
|
(22
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,174
|
)
|
|
|
(22
|
)
|
Issuance
of Series I-1 Stock into common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
Balance
at December 31, 2017
|
|
|
215
|
|
|
$
|
2
|
|
|
|
60
|
|
|
$
|
-
|
|
|
|
1,750,000
|
|
|
$
|
17,500
|
|
|
|
1,750,275
|
|
|
$
|
17,502
|
|
Common
Stock
The
Company had 19,750,844 and 186,692 shares of common stock outstanding at December 31, 2017 and 2016, respectively. The Company
issued shares of its common stock during the years ended December 31, 2017 and 2016 as follows:
During
the year ended December 31, 2016, the Company issued an aggregate of 586 shares of its common stock to consultants for services
valued at approximately $73,000. Also during the year ended December 31, 2016, the Company issued 108 shares of common stock for
the cashless exercise of outstanding warrants, issued 112 shares of common stock as an adjustment to previously converted preferred
stock and cancelled 91 shares of common stock previously issued to an employee.
In
2016, the Company issued an aggregate of 1,618 shares of its common stock under the 2007 Equity Plan, as defined below, to: (i)
three of its executive officers as compensation; (ii) one employee in connection with an employment agreement; (iii) an employee
in conjunction with a separation agreement; and (iv) shares of restricted common stock to an employee which vested in January
of 2017. The Company recognized compensation cost in the amount of $0.3 million in connection with the foregoing grants.
RENNOVA
HEALTH, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
On
July 19, 2016, the Company closed a public offering of its equity securities whereby the Company issued 42,478 shares of its common
stock and warrants to purchase an additional 42,478 shares of its common stock and received net proceeds of $7.5 million. In conjunction
with this offering, the Company also issued an additional 675 warrants to cover over-allotments.
During
the year ended December 31, 2016, the Company exchanged an aggregate of $2.23 million of indebtedness and other obligations to
various related parties for an aggregate of 12,815 shares of common stock and warrants to purchase 55,092,381 shares of the Company’s
common stock. At December 31, 2017, these warrants have an exercise price of $0.276 per share, which reflects the effect of dilutive
issuances made during 2017. The exercise price is subject to additional adjustment for future dilutive issuances. The warrants
were immediately exercisable and have a five-year term. The issuance of the shares of common stock and warrants was exempt from
the registration requirements of the Securities Act of 1933, as amended, in accordance with Section 4(a)(2) thereof, as a transaction
by an issuer not involving any public offering.
The
February 22, 2017 reverse stock split, which is more fully described in Note 1, resulted in the issuance of 526 shares of common
stock due to the rounding up of fractional shares.
On
March 13, 2017, the Company issued 26,667 shares of common stock in settlement of $0.4 million of outstanding notes and warrants
(see Note 7).
On
March 15, 2017, the Company agreed to issue 2,056 shares of common stock to the holders of a like number of warrants to purchase
the Company’s common stock in exchange for the warrants valued at $57,868.
During
the year ended December 31, 2017, the Company issued 18,285,517 shares of its common stock upon conversion of $7.3 million principal
amount of the March Debentures and issued 663,000 shares of its common stock for $0.6 million upon exercise of 663,000 March Warrants
(see Note 8).
On
July 25, 2017, the Company issued 8,333 shares of its common stock valued at $42,510 for severance owed to a former employee under
the terms of the Company’s 2007 Equity Plan, which is more fully described below.
On
August 14, 2017, the Company issued 181,933 shares of restricted stock to employees and directors, and later returned 5,373 shares
of this stock to treasury, as more fully discussed under the heading
Restricted Stock
below.
On
August 23, 2017, the Company issued 33,334 shares of its common stock in payment of professional service fees valued at $118,493.
Restricted
Stock
On
August 14, 2017, the Board of Directors, based on the recommendation of the Compensation Committee of the Board and in accordance
with the provisions of the 2007 Equity Plan, approved grants to employees and directors of the Company of an aggregate of 181,933
shares of restricted common stock of the Company. The grants fully vest on the first anniversary of the date of grant, subject
to the grantee’s continued status as an employee or director, as the case may be, on the vesting date. During the year ended
December 31, 2017, 5,373 shares of the restricted stock were forfeited by their terms and cancelled and the shares were returned
to treasury.
During
the year ended December 31, 2017, the Company recognized stock-based compensation in the amount of $244,768 for the grant of the
restricted stock based on a valuation of $3.75 per share. At December 31, 2017, the Company had approximately $0.4 million of
unrecognized compensation cost related to the restricted stock.
Common
Stock and 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 and debentures. 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.
RENNOVA
HEALTH, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
following table presents the dilutive effect of our various potential common shares as of April 1, 2018:
|
|
April
1, 2018
|
|
Common
shares outstanding
|
|
|
500,000,000
|
|
Dilutive potential
shares:
|
|
|
|
|
Stock
options
|
|
|
38,478
|
|
Warrants
|
|
|
15,327,409,130
|
|
Convertible
debt
|
|
|
680,485,125
|
|
Convertible
preferred stock
|
|
|
787,212,324
|
|
Total
dilutive potential common shares
|
|
|
17,295,145,057
|
|
As
of April 1, 2018, the Company lacked a sufficient number of authorized shares of its common stock to cover all potentially dilutive
common shares outstanding. Pursuant to a proxy statement filed with the Securities and Exchange Commission on March 14, 2018,
the Company intends to hold a special meeting of stockholders on May 2, 2018 to approve an increase in the number of shares
of its authorized common stock from 500,000,000 shares to 3,000,000,000 shares and to authorize its Board of Directors to effect
a discretionary reverse stock split as more fully discussed in Note 20.
Stock
Options
The
Company maintained and sponsored the Tegal Corporation 2007 Incentive Award Equity Plan (the “2007 Equity Plan”).
Tegal Corporation is the predecessor entity to 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. The following table summarizes the stock option activity for the years ended December
31, 2017 and 2016:
|
|
Number
of options
|
|
|
Weighted-average
exercise
price
|
|
|
Weighted-average
contractual term
|
|
Outstanding
at December 31, 2015
|
|
|
3,557
|
|
|
$
|
3,479.40
|
|
|
|
2.90
|
|
Granted
|
|
|
46,219
|
|
|
$
|
1,778.25
|
|
|
|
|
|
Expired
|
|
|
(286
|
)
|
|
$
|
430.35
|
|
|
|
|
|
Forfeit
|
|
|
(2,222
|
)
|
|
$
|
324.00
|
|
|
|
|
|
Outstanding
at December 31, 2016
|
|
|
47,268
|
|
|
$
|
1,941.45
|
|
|
|
8.93
|
|
Granted
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Forfeit
|
|
|
(8,790
|
)
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2017
|
|
|
38,478
|
|
|
$
|
2,072.75
|
|
|
|
8.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at December 31, 2017
|
|
|
32,922
|
|
|
$
|
2,373.16
|
|
|
|
|
|
The
Company recognized stock option expense of approximately $0.2 million and $0.9 million for the years ended December 31, 2017 and
2016, respectively. Stock options granted during the year ended 2016 were recorded at their grant date fair value using a binomial
model with the following assumptions: (i) dividend yield 0%; (ii) expected volatility 168%; and (iii) risk free rate of interest
1.88%. The following table summarizes information with respect to stock options outstanding and exercisable by employees and directors
at December 31, 2017:
|
Options
outstanding
|
|
|
|
Options
vested and exercisable
|
|
|
Exercise
price
|
|
|
|
Number
outstanding
|
|
|
|
Weighted
average remaining contractual life (years)
|
|
|
|
Weighted
average exercise
|
|
|
|
Aggregate
intrinsic value
|
|
|
|
Number
vested
|
|
|
|
Weighted
average exercise
|
|
|
|
Aggregate
intrinsic value
|
|
$
|
4,500.00
|
|
|
|
11,111
|
|
|
|
8.25
|
|
|
$
|
4,500.00
|
|
|
$
|
–
|
|
|
|
11,111
|
|
|
$
|
4,500.00
|
|
|
$
|
-
|
|
$
|
2,250,00
|
|
|
|
11,111
|
|
|
|
8.25
|
|
|
$
|
2,250.00
|
|
|
|
-
|
|
|
|
11,111
|
|
|
$
|
2,250.00
|
|
|
|
-
|
|
$
|
450.00
|
|
|
|
8,128
|
|
|
|
8.33
|
|
|
$
|
450.00
|
|
|
|
-
|
|
|
|
5,350
|
|
|
$
|
450.00
|
|
|
|
-
|
|
$
|
135.00
|
|
|
|
8,128
|
|
|
|
8.54
|
|
|
$
|
135.00
|
|
|
|
–
|
|
|
|
5,350
|
|
|
$
|
135.00
|
|
|
|
–
|
|
|
|
|
|
|
38,478
|
|
|
|
|
|
|
$
|
2,072.75
|
|
|
$
|
–
|
|
|
|
32,922
|
|
|
$
|
2,373.16
|
|
|
$
|
–
|
|
RENNOVA
HEALTH, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
As
of December 31, 2017, there was unrecognized compensation cost of $0.4 million related to stock options. The Company expects to
recognize those costs over a weighted average period of 1.08 years as of December 31, 2017.
The
Company is seeking approval of its 2018 Incentive Plan pursuant to a proxy statement filed with the Securities and Exchange Commission
on March 14, 2018, as more fully discussed in Note 20.
Warrants
The
Company, as part of various debt and equity financing transactions, has issued warrants to purchase shares of the Company’s
common stock.
During
the year ended December 31, 2017, the Company issued 1,955,338,400 warrants with a weighted average exercise price of $0.0418
per share at December 31, 2017 in connection with the issuances of debentures as more fully discussed in Note 8. The terms of
the debenture warrants are more fully discussed in Note 8.
The
number of warrants issued, converted 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 of December 31, 2017. 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 exercises prices of the warrants will result in increases
in the number of warrants issued and decreases in the exercise prices.
The
following summarizes the information related to warrants issued and the activity during the years ended December 31, 2017
and 2016:
|
|
Number
of warrants
|
|
|
Weighted
average exercise price
|
|
Balance
at December 31, 2015
|
|
|
15,330
|
|
|
$
|
27.4500
|
|
Cashless
exercises
|
|
|
(205
|
)
|
|
$
|
103.5000
|
|
Exchange of
December 30, 2015 warrants
|
|
|
(14,337
|
)
|
|
$
|
871.9500
|
|
Exchange
Warrants issued
|
|
|
22,777
|
|
|
$
|
202.5000
|
|
Warrants
issued during the period
|
|
|
70,278
|
|
|
$
|
168.1500
|
|
Balance at
December 31, 2016
|
|
|
93,843
|
|
|
$
|
175.5000
|
|
Warrants
issued during the period
|
|
|
2,176,978,875
|
|
|
$
|
0.0376
|
|
Warrants
exchanged/exercised during the period
|
|
|
(6,500
|
)
|
|
$
|
184.3770
|
|
March
Warrants exercised during the period
|
|
|
(663,000
|
)
|
|
$
|
0.9600
|
|
Balance
at December 31, 2017
|
|
|
2,176,403,218
|
|
|
$
|
0.0444
|
|
See
above and Note 3 for a discussion of the dilutive effect of the outstanding warrants as of April 1, 2018.
Note
14 – Income Taxes
The
income tax (expense) benefit for the years ended December 31, 2017 and 2016 consists of the following:
|
|
|
2017
|
|
|
|
2016
|
|
Current
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
1,015,724
|
|
|
$
|
(778,756
|
)
|
State
|
|
|
---
|
|
|
|
---
|
|
|
|
|
1,015,724
|
|
|
|
(778,756
|
)
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
Federal
|
|
|
---
|
|
|
|
---
|
|
State
|
|
|
---
|
|
|
|
---
|
|
|
|
|
---
|
|
|
|
---
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense (benefit)
|
|
$
|
1,015,724
|
|
|
$
|
(778,756
|
)
|
RENNOVA
HEALTH, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
following reconciles the Federal statutory income tax rate to the Company’s effective tax rate for the years ended December
31, 2017 and 2016:
|
|
2017
|
|
|
2016
|
|
|
|
%
|
|
|
%
|
|
Federal
statutory rate
|
|
|
34.0
|
|
|
|
34.0
|
|
Permanent
and other items
|
|
|
(0.06
|
)
|
|
|
5.4
|
|
Beneficial
conversion feature
|
|
|
(20.05
|
)
|
|
|
--
|
|
Other
|
|
|
--
|
|
|
|
(25.0
|
)
|
Rate
change
|
|
|
(10.40
|
)
|
|
|
--
|
|
Change
in valuation allowance
|
|
|
(1.49
|
)
|
|
|
(12.0
|
)
|
|
|
|
2.0
|
|
|
|
2.4
|
|
Deferred
income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. In assessing the realizability of deferred tax assets, Management
evaluates whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those
temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future
taxable income and tax planning strategies in making this assessment. Based on Management’s evaluation, it is more likely
than not that the deferred tax asset will not be realized and as such a valuation allowance has been recorded as of December 31,
2017 and 2016. Deferred tax assets and liabilities are comprised of the following at December 31, 2017 and 2016:
|
|
|
2017
|
|
|
|
2016
|
|
Deferred
income tax assets:
|
|
|
|
|
|
|
|
|
Amortization
|
|
$
|
978,688
|
|
|
$
|
--
|
|
Net
operating loss carryforward
|
|
|
5,244,000
|
|
|
|
11,752,815
|
|
Goodwill
and intangible assets
|
|
|
(112,742
|
)
|
|
|
1,477,448
|
|
Allowance
for doubtful accounts
|
|
|
259,110
|
|
|
|
130,580
|
|
Charitable
contributions
|
|
|
618
|
|
|
|
891
|
|
Stock
options
|
|
|
700,745
|
|
|
|
1,010,164
|
|
Accrued
liabilities
|
|
|
121,993
|
|
|
|
254,165
|
|
Deferred
state tax asset
|
|
|
595,531
|
|
|
|
--
|
|
|
|
|
7,787,943
|
|
|
|
14,626,063
|
|
Deferred
income tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
(406,310
|
)
|
|
|
(969,933
|
)
|
|
|
|
(406,310
|
)
|
|
|
(969,933
|
)
|
Deferred
tax asset, net
|
|
|
7,381,633
|
|
|
|
13,656,130
|
|
|
|
|
|
|
|
|
|
|
Less:
valuation allowance
|
|
|
(7,381,633
|
)
|
|
|
(13,656,130
|
)
|
|
|
|
|
|
|
|
|
|
Net
deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
On
December 22, 2017, the Tax Cuts and Jobs Act (the “TCJA”) was signed into law. The TCJA includes a number of
provisions impacting us, including the lowering of the U.S. corporate tax rate from 35% to 21%, effective January 1, 2018
and 100% bonus depreciation for qualifying capital expenditures acquired and placed into service after September 27, 2017,
among others.
The
TCJA’s reduction in the U.S. corporate tax rate from 35% to 21% (effective for Fiscal 2018) and increased allowance for
bonus depreciation will have a favorable impact on our future after tax net income and cash flows. While we were able to make
provisional estimates for the impact of the TJCA, the actual results may differ from these estimates, due to, among other things,
changes in our interpretations and assumptions relating to the changes made by the TCJA and additional guidance that is anticipated
to be issued by the U.S. Treasury and Internal Revenue Service.
Management
has reviewed the provisions regarding assessment of their valuation allowance on deferred tax assets and based on that criteria
determined that it should record a valuation allowance of $7.4 million and $13.7 million against its deferred tax assets as of
December 31, 2017 and 2016, respectively. The Company has federal net operating loss carryforwards totaling $21.85 million generated
in 2017 and 2016. It also has various state net operating loss carryforwards that begin to expire in 2031. In November of 2016,
the IRS commenced an audit of the Company’s 2015 Federal tax return (see Note 15).
The
Company recognizes the consolidated financial statement impact of a tax position only after determining that the relevant tax
authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than–not
threshold, the amount recognized in the consolidated financial statements is the largest benefit that has a greater than 50 percent
likelihood of being realized upon ultimate settlement with the relevant tax authority.
The
Company is subject to income taxes in the U.S. federal jurisdiction and the states of Florida, North Carolina, New Mexico, New
Jersey, California and Tennessee. The tax regulations within each jurisdiction are subject to interpretation of related tax laws
and regulations and require significant judgment to apply.
RENNOVA
HEALTH, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
15 – Commitments and Contingencies
Operating
Lease Commitments
The
Company leases office space and business equipment for its corporate office and subsidiaries under multiple year non-cancelable
operating leases that expire through 2021. The office lease agreements have certain escalation clauses and renewal options. Additionally,
the Company has lease agreements for computer equipment, office copiers and fax machines.
The
office space lease agreements include escalating rents over the lease term. The Company expenses rent on a straight-line basis
over the lease term which commences on the date the Company has the right to control the property. The cumulative expense recognized
on a straight-line basis in excess of the cumulative payments is included in Accrued Expenses in the accompanying Consolidated
Balance Sheets.
At
December 31, 2017, future minimum lease payments under these leases are as follows:
Year
ending December 31,
|
|
|
|
2018
|
|
$
|
295,629
|
|
2019
|
|
|
256,564
|
|
2020
|
|
|
174,220
|
|
2021
|
|
|
21,858
|
|
Total
minimum future lease payments
|
|
$
|
748,271
|
|
Rent
expense for the years ended December 31, 2017 and 2016 was $0.9 million and $0.9 million, respectively.
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.
The Company does have significant receivable balances with government payers and various insurance carriers. Generally, the Company
does not require collateral or other security to support customer receivables. However, the Company continually monitors and evaluates
its client acceptance and collection procedures to minimize potential credit risks associated with 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 clinical laboratories. 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. 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.
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 has accrued this amount in its condensed consolidated financial statements.
Additionally, the Company is seeking indemnification for these amounts from Epinex Diagnostics, Inc. (“EDI”), the
seller of Epinex Diagnostic Laboratories, Inc. (“EDL”), pursuant to a Stock Purchase Agreement entered into by and
among the parties.
RENNOVA
HEALTH, INC.
NOTES
TO 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 on 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 on 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 2014 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 allows the Company to make monthly installment payments of $35,000 until February
2018 and negotiate a new payment agreement then, if the balance of $0.3 million cannot be satisfied in a lump sum. 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. $0.5 million remains outstanding
to the DOR at December 31, 2017.
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 11). 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. Payments commenced on May 1, 2017. $1.3 million monthly payments remain
outstanding to Tetra at December 31, 2017. The Company and Tetra have agreed to dispose of certain equipment and reduce
the balance owed by amounts received.
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 8). 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%. The Company is in default
of its payments to DeLage.
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 $0.4 million, including accrued interest. A request for entry of default judgment was
filed on January 24, 2017. These amounts remain outstanding at December 31, 2017
In
November 2017,
a former
shareholder of Genomas filed suit against the Company for payment of a Note payable by the subsidiary Genomas. This
Note is recorded in the financial statements of the subsidiary and is not payable directly from the Company. Other claims
were included in the suit which the Company believes to be frivolous and without merit. The Company has filed a motion
to dismiss certain of these claims. The Company does not deem this suit to be material.
The
Company and subsidiaries have been party to suits filed by landlords for late payment of rent and have either settled
these claims or are in process of agreeing to settlement. The Company does not deem these actions to be material.
Note
16– Segment Reporting
Operating
segments are defined under U.S. GAAP as components of an enterprise for which discrete financial information is available and,
which are evaluated regularly by the enterprise’s chief operating decision maker in determining how to allocate resources
and assess performance. The Company operates in two 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; and
|
|
|
|
|
●
|
Hospital
Operations
, which reflects the purchase of the Hospital Assets (see Note 1) and the operations of the Big South Fork Medical
Center.
|
RENNOVA
HEALTH, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
Company’s Corporate expenses reflect consolidated company wide support services such as finance, legal counsel, human resources,
and payroll.
The
Company’s Decision Support and Informatics segment and its Supportive Software Solutions segment are now included in discontinued
operations as they have been classified as held for sale as of December 31, 2017. The accounting policies of the reportable segments
are the same as those described in Note 2.
Selected
financial information for the Company’s operating segments is as follows:
|
|
Year
Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Net
revenues - External
|
|
|
|
|
|
|
|
|
Clinical
Laboratory Operations
|
|
$
|
2,793,089
|
|
|
$
|
3,338,425
|
|
Hospital
Operations
|
|
|
1
,826,384
|
|
|
|
-
|
|
|
|
$
|
4,619,473
|
|
|
$
|
3,338,425
|
|
(Loss)
income from operations
|
|
|
|
|
|
|
|
|
Clinical
Laboratory Operations
|
|
$
|
(4,672,768
|
)
|
|
$
|
(12,946,144
|
)
|
Hospital
Operations
|
|
|
(4,800,539
|
)
|
|
|
-
|
|
Corporate
|
|
|
(6,602,800
|
)
|
|
|
(9,545,763
|
)
|
|
|
$
|
(16,076,107
|
)
|
|
$
|
(22,491,907
|
)
|
Depreciation
and amortization
|
|
|
|
|
|
|
|
|
Clinical
Laboratory Operations
|
|
$
|
1,639,954
|
|
|
$
|
2,412,040
|
|
Hospital
Operations
|
|
|
73,985
|
|
|
|
-
|
|
Corporate
|
|
|
1,382
|
|
|
|
3,008
|
|
|
|
$
|
1,715,321
|
|
|
$
|
2,415,048
|
|
Capital
expenditures
|
|
|
|
|
|
|
|
|
Clinical
Laboratory Operations
|
|
$
|
-
|
|
|
$
|
14,123
|
|
Hospital
Operations
|
|
|
1,422,002
|
|
|
|
-
|
|
|
|
$
|
1,422,002
|
|
|
$
|
14,123
|
|
|
|
Year
Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Total
assets
|
|
|
|
|
|
|
|
|
Clinical
Laboratory Operations
|
|
$
|
1,503,520
|
|
|
$
|
4,637,984
|
|
Hospital
Operations
|
|
|
2
,549,504
|
|
|
|
-
|
|
Corporate
|
|
|
3,436,773
|
|
|
|
2,130,191
|
|
Assets
of AMSG and HTS classified as held for sale
|
|
|
255,566
|
|
|
|
821,449
|
|
Eliminations
|
|
|
(1,454,570
|
)
|
|
|
(1,107,231
|
)
|
|
|
$
|
6,290,794
|
|
|
$
|
6,482,393
|
|
Note
17 – Discontinued Operations
On
July 12, 2017, the Company announced plans to spin off AMSG and in third quarter of 2017, the Company’s Board of Directors
voted unanimously to spin off the Company’s wholly-owned subsidiary, Health Technology Solutions, Inc. (“HTS”),
as independent publicly traded companies by way of tax-free distributions to the Company’s stockholders. Completion of these
spinoffs is expected to occur in the third quarter of 2018. The Company’s Board of Directors is currently considering if
AMSG and HTS would be better as one combined spinoff instead of two. The spinoffs are subject to numerous conditions, including
effectiveness of Registration Statements on Form 10 to be filed with the Securities and Exchange Commission, and consents, including
under various funding agreements previously entered into by the Company. A record date to determine those stockholders entitled
to receive shares in the spinoffs should be approximately 30 to 60 days prior to the dates of the spinoffs. The strategic goal
of the spinoffs is to create three (or two) public companies, each of which can focus on its own strengths and operational plans.
RENNOVA
HEALTH, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
In
accordance with ASC 205-20 and having met the criteria for “held for sale”, as the Company reached this decision prior
to December 31, 2017, 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. Prior to being classified as “held for sale,” AMSG had been the Company’s
Decision Support and Informatics segment, except for the Company’s subsidiary, Alethea Laboratories, Inc., which had been
included in the Clinical Laboratory Operations segment and now is part of AMSG, and HTS had been the Company’s Supportive
Software Solutions segment. Segment disclosures in Note 16 no longer include amounts relating to AMSG and HTS following the reclassification
to discontinued operations.
Carrying
amounts of major classes of assets and liabilities classified as held for sale and included as part of discontinued operations
in the consolidated balance sheets as of December 31, 2017 and 2016 consisted of the following:
AMSG
Assets and Liabilities:
|
|
December
31, 2017
|
|
|
December
31, 2016
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
9,273
|
|
|
$
|
2,962
|
|
Accounts
receivable, net
|
|
|
19,022
|
|
|
|
267,681
|
|
Prepaid
expenses and other current assets
|
|
|
25,477
|
|
|
|
67,257
|
|
Current
assets classified as held for sale
|
|
$
|
53,772
|
|
|
$
|
337,900
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
$
|
-
|
|
|
$
|
53,012
|
|
Deposits
|
|
|
-
|
|
|
|
23,750
|
|
Non-current
assets classified as held for sale
|
|
$
|
-
|
|
|
$
|
76,762
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable (includes related parties)
|
|
$
|
671,561
|
|
|
$
|
422,864
|
|
Accrued
expenses
|
|
|
375,165
|
|
|
|
274,636
|
|
Current
portion of notes payable
|
|
|
249,589
|
|
|
|
-
|
|
Current
liabilities classified as held for sale
|
|
$
|
1,296,315
|
|
|
$
|
697,500
|
|
|
|
|
|
|
|
|
|
|
Non-current
liabilities classified as held for sale
|
|
$
|
-
|
|
|
$
|
26,598
|
|
RENNOVA
HEALTH, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
HTS
Assets and Liabilities:
|
|
December
31, 2017
|
|
|
December
31, 2016
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
8,281
|
|
|
$
|
4,844
|
|
Accounts
receivable, net
|
|
|
160,715
|
|
|
|
148,554
|
|
Prepaid
expenses and other current assets
|
|
|
3,964
|
|
|
|
2,592
|
|
Current
assets classified as held for sale
|
|
$
|
172,960
|
|
|
$
|
155,990
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
$
|
21,078
|
|
|
$
|
244,541
|
|
Deposits
|
|
|
7,756
|
|
|
|
6,256
|
|
Non-current
assets classified as held for sale
|
|
$
|
28,834
|
|
|
$
|
250,797
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable (includes related parties)
|
|
$
|
407,404
|
|
|
$
|
414,813
|
|
Accrued
expenses
|
|
|
269,135
|
|
|
|
184,664
|
|
Current
liabilities classified as held for sale
|
|
$
|
676,539
|
|
|
$
|
599,477
|
|
Consolidated
Discontinued Operations Assets and Liabilities:
|
|
December
31, 2017
|
|
|
December
31, 2016
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
17,554
|
|
|
$
|
7,806
|
|
Accounts
receivable, net
|
|
|
179,737
|
|
|
|
416,235
|
|
Prepaid
expenses and other current assets
|
|
|
29,441
|
|
|
|
69,849
|
|
Current
assets classified as held for sale
|
|
$
|
226,732
|
|
|
$
|
493,890
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
$
|
21,078
|
|
|
$
|
297,553
|
|
Deposits
|
|
|
7,756
|
|
|
|
30,006
|
|
Non-current
assets classified as held for sale
|
|
$
|
28,834
|
|
|
$
|
327,559
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable (includes related parties)
|
|
$
|
1,078,965
|
|
|
$
|
837,677
|
|
Accrued
expenses
|
|
|
644,300
|
|
|
|
459,300
|
|
Current
portion of notes payable
|
|
|
249,589
|
|
|
|
-
|
|
Current
liabilities classified as held for sale
|
|
$
|
1,972,854
|
|
|
$
|
1,296,977
|
|
|
|
|
|
|
|
|
|
|
Non-current
liabilities classified as held for sale
|
|
$
|
-
|
|
|
$
|
26,598
|
|
Major
line items constituting loss from discontinued operations in the consolidated statements of operations for the years ended December
31, 2017 and 2016 consisted of the following:
AMSG
Loss from Discontinued Operations:
|
|
Year
Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Revenue
from services
|
|
$
|
283,460
|
|
|
$
|
1,072,528
|
|
Cost
of services
|
|
|
12,575
|
|
|
|
156,795
|
|
Gross
profit
|
|
|
270,885
|
|
|
|
915,733
|
|
Operating
expenses
|
|
|
2,525,110
|
|
|
|
6,464,758
|
|
Other
expense
|
|
|
46,859
|
|
|
|
13,220
|
|
Loss
from Discontinued Operations:
|
|
$
|
(2,301,084
|
)
|
|
$
|
(5,562,245
|
)
|
HTS
Loss from Discontinued Operations:
|
|
Year
Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Revenue
from services (**)
|
|
$
|
1,650,109
|
|
|
$
|
2,088,496
|
|
Cost
of services
|
|
|
168,274
|
|
|
|
293,134
|
|
Gross
profit
|
|
|
1,481,835
|
|
|
|
1,795,362
|
|
Operating
expenses
|
|
|
3,402,860
|
|
|
|
6,219,784
|
|
Other
expense
|
|
|
54,809
|
|
|
|
2,371
|
|
Loss
from Discontinued Operations:
|
|
$
|
(1,975,834
|
)
|
|
$
|
(4,426,793
|
)
|
**Revenue
from services, includes related party revenue of $0.7 million and $1.3 million, respectively
RENNOVA
HEALTH, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated
Loss from Discontinued Operations:
|
|
Year
Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Revenue
from services
|
|
$
|
1,933,569
|
|
|
$
|
3,161,024
|
|
Cost
of services
|
|
|
180,849
|
|
|
|
449,929
|
|
Gross
profit
|
|
|
1,752,720
|
|
|
|
2,711,095
|
|
Operating
expenses
|
|
|
5,927,970
|
|
|
|
12,612,076
|
|
Other
expense
|
|
|
101,668
|
|
|
|
88,058
|
|
Loss
from Discontinued Operations:
|
|
$
|
(4,276,918
|
)
|
|
$
|
(9,989,039
|
)
|
Acquisition
of Genomas, Inc. on September 27, 2017
On
September 29, 2016, the Company announced that it had entered into a Stock Purchase Agreement (the “Purchase Agreement”)
to acquire the remaining outstanding equity securities of Genomas, Inc. (“Genomas”) that the Company did not already
own, representing approximately 85% of the outstanding equity interests in Genomas, for 1,750,000 shares of the Company’s
newly - designated Series F Preferred Stock. (The Series F Preferred Stock is more fully described in Note 13 and below.) Genomas
is a biomedical company that develops PhyzioType Systems for DNA-guided management and prescription of drugs used to treat mental
illness, pain, heart disease, and diabetes. The Company had previously announced that on July 19, 2016 it acquired approximately
15% of the outstanding equity of Genomas from Hartford Healthcare Corporation (“Hartford”), along with approximately
$1.5 million of notes payable to Hartford and certain rights to and license participation in technology that is used by Genomas,
for $250,000 in cash. The closing of this acquisition under the Purchase Agreement, which was subject to, among other things,
receipt of regulatory and licensure approvals as well as other customary closing conditions, did not occur until September 27,
2017. As a result of delays in the closing of the transaction, the Company expensed all amounts previously paid to the company
aggregating $1.0 million during the fourth quarter of 2016, including outstanding advances to Genomas in the amount of $0.4 million.
Genomas will be spun-off as part of AMSG, so it is presented here in discontinued operations.
The
Series F Preferred Stock issued effective September 27, 2017 has an aggregate stated value of $1,750,000, and is convertible into
shares of the Company’s common stock at any time after the one-year anniversary of the closing date at a conversion price
per common share equal to the greater of $29.25 or the average closing sales price of the Company’s common stock for the
10 trading days immediately preceding the conversion. The maximum number of common shares issuable upon the conversion of the
Series F Preferred Stock is 59,829. The Company valued the Series F Preferred Stock based on the value of the common stock issuable
upon conversion on the date of the acquisition, which was $174,097.
The
following table summarizes the (preliminary) fair values of assets acquired and liabilities assumed at the acquisition date of
Genomas. The Fair Market Value appears to equal cost. The Company has one year to revalue goodwill and other intangible assets
in accordance with U.S. GAAP per ASC 850-10-25-14. See the discussion below regarding the impairment of the goodwill acquired.
Cash
|
|
$
|
7,990
|
|
Accounts
receivable, net
|
|
|
6,503
|
|
Accounts
payable and accrued expenses
|
|
|
(458,736
|
)
|
Deferred
revenue
|
|
|
(20,000
|
)
|
Loans
payable short-term
|
|
|
(142,514
|
)
|
Note
payable long-term
|
|
|
(134,118
|
)
|
Total
identifiable net liabilities
|
|
|
(740,875
|
)
|
Goodwill
|
|
|
914,972
|
|
Total
consideration
|
|
$
|
174,097
|
|
During
the fourth quarter of 2017, the Company determined that the goodwill acquired in the Genomas acquisition was impaired and, accordingly,
it recorded an impairment charge of $914,972 in the discontinued operations of AMSG for the year ended December 31, 2017.
The
acquisition of Genomas was accounted for under the purchase method of accounting and, accordingly, the unaudited condensed consolidated
financial statements reflect, in discontinued operations, the results of operations of Genomas from the date of acquisition. Unaudited
pro forma results of operations for the years ended December 31, 2017 and 2016 are included below. Such pro forma information
assumes that the Genomas acquisition had occurred as of January 1, 2017 and 2016, respectively, and revenue is presented in accordance
with our accounting policies. These unaudited pro forma statements have been prepared for comparative purposes only and are not
intended to be indicative of what our results would have been had the acquisition occurred at the beginning of the periods presented
or the results which may occur in the future.
RENNOVA
HEALTH, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
Year
Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Net
revenue
|
|
$
|
5,572,637
|
|
|
$
|
3,728,997
|
|
Loss
from discontinued operations
|
|
|
(4,294,067
|
)
|
|
|
(9,017,890
|
)
|
Net
loss
|
|
|
(52,397,725
|
)
|
|
|
(31,642,538
|
)
|
Deemed
dividend from trigger of
|
|
|
|
|
|
|
|
|
Down
round provision feature
|
|
|
(53,341,619
|
)
|
|
|
-
|
|
Net
loss to common shareholders
|
|
$
|
(105,739,344
|
)
|
|
$
|
(31,642,538
|
)
|
Loss
per share basic and diluted:
|
|
|
|
|
|
|
|
|
Loss
per share – discontinued operations
|
|
$
|
(6.28
|
)
|
|
$
|
(172.13
|
)
|
Net
loss per common share
|
|
$
|
(154.72
|
)
|
|
$
|
(604.00
|
)
|
Note
18 – Supplemental Disclosure of Cash Flow Information
|
|
Year
Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Cash
paid for interest
|
|
$
|
1,200,759
|
|
|
$
|
1,441,160
|
|
Cash
paid for income taxes
|
|
$
|
541,313
|
|
|
$
|
157,346
|
|
|
|
|
|
|
|
|
|
|
Non-cash
investing and financing activities:
|
|
|
|
|
|
|
|
|
Accrued
liabilities settled through the issuance of common stock and warrants
|
|
$
|
-
|
|
|
$
|
2,231,829
|
|
Services
and severance settled through the issuances of common stock
|
|
$
|
161,003
|
|
|
$
|
-
|
|
Exchange
of convertible debentures for convertible debentures and warrants
|
|
$
|
10,734,336
|
|
|
$
|
-
|
|
Series
F Preferred Stock issued for business acquisition;
|
|
$
|
174,097
|
|
|
$
|
-
|
|
Notes
payable and warrants settled through issuance of common stock
|
|
$
|
440,000
|
|
|
$
|
-
|
|
Conversions
of preferred stock into common stock
|
|
$
|
-
|
|
|
$
|
37,823,000
|
|
Convertible
debentures issued in exchange for Series H Preferred Stock
|
|
$
|
2,695,760
|
|
|
$
|
-
|
|
Debentures
converted into common stock
|
|
$
|
7,306,314
|
|
|
$
|
-
|
|
Deemed
dividend for trigger of down round provision feature
|
|
$
|
53,341,620
|
|
|
$
|
-
|
|
Conversions
of preferred stock into common stock
|
|
$
|
7,785,000
|
|
|
$
|
-
|
|
Value
of derivative liabilities
|
|
$
|
12,435,250
|
|
|
$
|
-
|
|
RENNOVA
HEALTH, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
19 – Recent Accounting Pronouncements
The
following table provides a brief description of recently issued accounting standards:
Title
and reference
|
|
Prescribed
Effective Date
|
|
Commentary
|
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.
|
ASU
No. 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes”
|
|
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.
|
RENNOVA
HEALTH, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Accounting
Standards Update (“ASU”) No. 2016-02, “Leases (Topic 842)”
|
|
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.
|
ASU
No. 2016-15, “Statement of Cash Flows” (Topic 230)
|
|
Annual
and interim periods within the annual period beginning after December 15, 2017.
|
|
This
amendment reduces diversity in practice in how certain transactions are classified in the statement of cash flows. Current
GAAP either is unclear or does not include specific guidance on eight cash flow classification issues addressed in this amendment,
including (i) debt prepayment or debt extinguishment costs; (ii) proceeds from the settlement of insurance claims; (iii) separately
identifiable cash flows and application of the predominance principle; and (iv) contingent consideration payments made after
a business combination. The Company does not expect the adoption of this update to have a significant impact on its consolidated
financial statements.
|
ASU
No. 2017-01, “Clarifying the Definition of a Business” (Topic 805)
|
|
Annual
and interim periods within the annual period beginning on January 1, 2017.
|
|
The
amendments in this update clarify the definition of a business to assist entities with evaluating whether transactions should
be accounted for as acquisitions or disposals of assets or businesses. The definition of a business affects many areas of
accounting, including acquisitions, disposals, goodwill and consolidation. The Company does not expect the adoption of this
update to have a significant impact on its consolidated financial statements.
|
ASU
No. 2017-11, “Earnings Per Share (Topic 260) Distinguishing Liabilities from Equity (Topic 480) Derivatives and Hedging
(Topic 815)” (“ASU 2017-11”)
|
|
Fiscal
years beginning on or after December 15, 2018, with early adoption permitted.
|
|
The
Company adopted this amendment as of its period ended June 30, 2017 (see Note 2)
|
ASU
No. 2017-12, “Derivatives and Hedging (Topic 815) (“ASU 2017-12”)
|
|
For
public business entities, the amendments in this ASU 2017-12 are effective for fiscal years beginning after December 15, 2018,
and interim periods within those fiscal years. Early adoption permitted in any interim period after issuance of this ASU.
|
|
The
amendments in ASU 2017-12 provide recognition and presentation guidance for qualifying hedges. The amendments in this Update
more closely align the results of cash flow and fair value hedge accounting with risk management activities through changes
to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results
in the financial statements. The amendments address specific limitations in current U.S. GAAP by expanding hedge accounting
for both nonfinancial and financial risk components and by refining the measurement of hedge results to better reflect an
entity’s hedging strategies. Thus, the amendments will enable an entity to report more faithfully the economic results
of hedging activities for certain fair value and cash flow hedges and will avoid mismatches in earnings by allowing for greater
precision when measuring change in fair value of the hedged item for certain fair value hedges. Additionally, by aligning
the timing of recognition of hedge results with the earnings effect of the hedged item for cash flow and net investment hedges,
and by including the earnings effect of the hedging instrument in the same income statement line item in which the earnings
effect of the hedged item is presented, the results of an entity’s hedging program and the cost of executing that program
will be more visible to users of financial statements. Additionally, the amendments in this Update should ease the operational
burden of applying hedge accounting by allowing more time to prepare hedge documentation and allowing effectiveness assessments
to be performed on a qualitative basis after hedge inception. The Company has not yet determined the impact that adoption
of ASU 2017-12 will have on its consolidated financial statements.
|
RENNOVA
HEALTH, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
20 – Subsequent Events
Acquisition
of Acute Care Hospital Under Asset Purchase Agreement
On
January 31, 2018, the Company entered into an asset purchase agreement (the “Purchase Agreement”) to acquire certain
assets related to an acute care hospital located in Jamestown, Tennessee. The hospital is known as Tennova Healthcare - Jamestown
and its associated assets are being acquired from Community Health Systems, Inc. The transaction is expected to close in the second
quarter of 2018, subject to customary regulatory approvals and closing conditions. The purchase price is equal to the Net Working
Capital (as defined in the Purchase Agreement), plus $1.00.
Tennova
Healthcare – Jamestown is a fully-operational 85-bed facility including a 24/7 emergency department, radiology department,
surgical center, and a wound care and hyperbaric center. The purchase includes a 90,000 square foot hospital building on approximately
eight acres. Tennova Healthcare – Jamestown is located 38 miles from the Company’s existing hospital, the Big South
Fork Medical Center in Oneida Tennessee.
Sale
of NanoVibronix, Inc. Common Stock
On
February 14, 2018, the Company entered into a Common Stock Purchase Agreement with two investors pursuant to which the Company
agreed to sell an aggregate of 200,000 shares of common stock of NanoVibronix, Inc. owned by the Company (the “Shares”).
The purchase price was $4.00 per Share and the Company received the $800,000 of proceeds on February 15, 2018. The Shares were
acquired by the Company as the result of an investment originally made in 2011.
Exchange
of Convertible Debentures for Shares of Series I-2 Convertible Preferred Stock
As
previously announced, on October 30, 2017 the Company entered into Exchange Agreements with the holders of the Company’s
$9,016,136 aggregate principal amount of September Debentures. The Exchange Agreements provide that the holders may, from time
to time, exchange their September Debentures for shares of a newly-authorized Series I-2 Preferred Stock. The terms of the Series
I-2 Preferred Stock are discussed in Note 13. The Exchange Agreements permit the holders of the September Debentures to exchange
specific principal amounts of the September Debentures on various dates beginning December 2, 2017. Any exchange is at the option
of the holders.
On
March 5, 2018, the Company closed an offering of $2,480,000 aggregate principal amount of Senior Secured Original Issue Discount
Convertible Debentures due September 19, 2019 (the “Additional Debentures”). The offering was pursuant to the terms
of an Additional Issuance Agreement, dated as of March 5, 2018 (the “Issuance Agreement”), between the Company and
certain existing institutional investors of the Company. The Company received proceeds of $2,000,000 in the offering. The terms
of the Additional Debentures are the same as the New Debentures, which are more fully described in Note 8. The Additional Debentures
may also be exchanged for shares of the Company’s Series I-2 Convertible Preferred Stock under the terms of the Exchange
Agreements.
The
holders exercised their right to exchange a portion of the September Debentures for shares of the Company’s Series I-2 Preferred
Stock for the first time on February 9, 2018. On that date, the holders elected to exchange an aggregate of $1,384,556 principal
amount of September Debentures and the Company issued an aggregate 1,731 shares of its Series I-2 Preferred Stock.
RENNOVA
HEALTH, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Second
Amendment to Accounts Receivable Sale Agreement
On
April 2, 2018, the Company, the counterparty, and Mr. Diamantis, as guarantor, entered into a second amendment (the “Second
Amendment”) to extend further the Company’s obligation to May 30, 2018. In connection with this further extension,
the counterparty received a fee of $100,000. To the extent the Company satisfies its obligation to the counterparty prior
to May 30, 2018, the $100,000 fee will be reduced pro rata and the reduced portion shall be refunded to the Company. No funds
have been paid to date to the counterparty in connection with the accounts receivable.
Stock
Grants to Employees and Directors
On
March 6, 2018, the Board of Directors (the “Board”) of the Company, based on the recommendation of the Compensation
Committee of the Board, approved grants to employees and directors of an aggregate of 71,333,331 shares of common stock, including
the following to the directors of the Company:
Seamus
Lagan
|
|
|
26,666,667
|
|
|
|
Shares
|
|
Dr.
Kamran Ajami
|
|
|
3,333,333
|
|
|
|
Shares
|
|
John
Beach
|
|
|
3,333,333
|
|
|
|
Shares
|
|
Gary
L. Blum
|
|
|
3,333,333
|
|
|
|
Shares
|
|
Christopher
Diamantis
|
|
|
3,333,333
|
|
|
|
Shares
|
|
Trevor
Langley
|
|
|
3,333,333
|
|
|
|
Shares
|
|
The
shares were issued in reliance on the exemption from registration contained in Section 4(a)(2) of the Securities Act of 1933,
as amended, as a transaction by an issuer not involving a public offering.
Proposals
Submitted to Stockholders
On
March 14, 2018, the Company gave notice of a special meeting of the stockholders of the Company to be held on May 2, 2018,
at 11:00 a.m., local time, to, among other things:
1.
Approve an amendment to its Certificate of Incorporation, as amended, to effect a reverse stock split of all of the outstanding
shares of its common stock, par value $0.01 per share, at a specific ratio within a range from 1-for-50 to 1-for-300, and to grant
authorization to its Board of Directors to determine, in its discretion, the specific ratio and timing of the reverse stock split
any time before March 1, 2019, subject to the Board of Directors’ discretion to abandon such amendment;
2.
Approve an amendment to its Certificate of Incorporation, as amended, to increase the number of authorized shares of our common
stock from 500,000,000 to 3,000,000,000 shares; and
3.
Approve the Company’s new 2018 Incentive Award Plan.
The
Board of Directors has fixed the close of business on March 12, 2018 as the record date for the determination of stockholders
entitled to notice of and to vote at the Special Meeting.
The
Company’s new 2018 Incentive Award Plan provides for the grant of incentive stock options, nonqualified stock options, restricted
stock, stock appreciation rights, performance shares, performance stock units, dividend equivalents, stock payments, deferred
stock, restricted stock units, other stock-based awards, and performance-based awards. An aggregate of 100,000,000 shares of the
Company’s common stock is proposed to be available for grant pursuant to the plan. No determination has been made as to
the types or amounts of awards that will be granted to specific individuals pursuant to the plan and no awards will be granted
under the plan until there are shares of authorized common stock available.
Issuance
of Common Stock
Subsequent
to December 31, 2017 and through April 1, 2018, the Company issued an aggregate of 480,249,156 shares of common stock for
conversions of debentures, warrant exercises and the issuance of restricted stock to employees and directors.
Item
9.
|
Changes
in and Disagreements With Accountants on Accounting and Financial Disclosure.
|
None.
Item
9A.
|
Controls
and Procedures.
|
Evaluation
of Disclosure Controls and Procedures
In
connection with the preparation of this Annual Report on Form 10-K, an evaluation was carried out by the Company’s management,
with the participation of the chief executive officer, who also functions as our interim chief financial officer, of the effectiveness
of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange
Act of 1934 (the “Exchange Act”)) as of December 31, 2017. Disclosure controls and procedures are designed to ensure
that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized,
and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such
information is accumulated and communicated to management, including the chief executive officer, to allow timely decisions regarding
required disclosures.
Based
on that evaluation, the Company’s management concluded, as of the end of the period covered by this report, that the Company’s
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were not effective as
of December 31, 2017 because of the material weaknesses in internal control over financial reporting discussed in Management’s
Annual Report on Internal Control over Financial Reporting, presented below.
Management’s
Annual Report on Internal Control over Financial Reporting
The
management of the Company is responsible for the preparation of the financial statements and related financial information appearing
in this Annual Report on Form 10-K. The financial statements and notes have been prepared in conformity with U.S. GAAP. The management
of the Company is also responsible for establishing and maintaining adequate internal control over financial reporting, as defined
in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. A company’s internal control over financial reporting is defined
as a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with U.S. GAAP. Our internal control over financial reporting includes
those policies and procedures that:
|
●
|
Pertain
to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of
the assets of the Company;
|
|
|
|
|
●
|
Provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with U.S. GAAP, and that receipts and expenditures of the issuer are being made only in accordance with authorizations of
management and directors of the Company; and
|
|
|
|
|
●
|
Provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s
assets that could have a material effect on the financial statements.
|
Management,
including the chief executive officer, does not expect that the Company’s disclosure controls and internal controls will
prevent all error and all fraud. Because of its inherent limitations, a system of internal control over financial reporting can
provide only reasonable, not absolute, assurance that the objectives of the control system are met and may not prevent or detect
misstatements. Further, over time, control may become inadequate because of changes in conditions or the degree of compliance
with the policies or procedures may deteriorate.
With
the participation of the chief executive officer who also functions as our interim chief financial officer, our management evaluated
the effectiveness of the Company’s internal control over financial reporting as of December 31, 2017 based upon the framework
in Internal Control –Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
In connection with such evaluation, management identified material weaknesses in internal control over financial reporting. Insufficient
staffing, accounting processes and procedures led to a lack of contemporaneous documentation supporting the accounting for certain
transactions and the approval of certain cash disbursements. Based on these material weaknesses in internal control over financial
reporting, management concluded the Company did not maintain effective internal control over financial reporting as of December
31, 2017. The Company is in the process of taking the following steps to remediate these material weaknesses: (i) increasing the
staffing of its internal accounting department, including the addition of a full time Chief Financial Officer; (ii) beginning
the process of converting to a new integrated accounting system to enhance controls and procedures for recording accounting transactions;
and (iii) implementing enhanced documentation procedures to be followed by the internal accounting department, including independent
review of material cash disbursements.
This
annual report does not include an attestation report of our independent registered public accounting firm regarding internal control
over financial reporting. We were not required to have, nor have we, engaged our independent registered public accounting firm
to perform an audit of internal control over financial reporting pursuant to the rules of the Commission that permit us to provide
only management’s report in this Annual Report on Form 10-K.
Changes
in Internal Control over Financial Reporting
During
the three months ended December 31, 2017, there was no material change in our internal control over financial reporting that materially
affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item
9B.
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Other
Information.
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None