Notes
Payable – Third Parties
|
|
March
31, 2018
|
|
|
December
31, 2017
|
|
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
|
|
|
|
1,616,218
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
6,957,830
|
|
|
|
6,957,830
|
|
Less
current portion
|
|
|
(6,957,830
|
)
|
|
|
(6,957,830
|
)
|
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
Diamantis, 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 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 40%. In connection with this extension, the counterparty received a fee of $1,000,000. On
April 2, 2018, the Company, the counterparty and Mr. Diamantis, 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 counterparty received a fee of
$100,000. To date, the Company has not recovered any payments against the accounts recievable.
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 condensed
consolidated balance sheet at December 31, 2017. In addition, TCA entered into an inter-creditor agreement with the purchasers
of the convertible debentures (see Note 6) which sets forth rights, preferences and priorities with respect to the security interests
in the Company’s assets. On September 19, 2017, the Company entered into a new agreement with TCA, which extended the
repayment schedule through December 31,2017. The debt to TCA remains outstanding and the parties are currently working to
amend the Note to extend the maturity.
RENNOVA
HEALTH, INC.
Notes
to Condensed Consolidated Financial Statements
(unaudited)
On
September 15, 2016, the Company entered into an agreement with two investors whereby the Company sold to the investors convertible
notes in the aggregate principal amount of $0.4 million (the “September 2016 Notes”). The September 2016 Notes were
convertible into shares of the Company’s common stock at a conversion price of $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.
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 12). To date, the Company has yet to repay this amount.
Notes
Payable – Related Parties
|
|
March
31, 2018
|
|
|
December
31, 2017
|
|
Loan
payable to Alcimede LLC, bearing interest at 6% per annum, with all principal and interest due on August 2, 2018
|
|
$
|
168,500
|
|
|
$
|
168,500
|
|
|
|
|
|
|
|
|
|
|
Loan
Payable to Christopher Diamantis
|
|
|
900,000
|
|
|
|
960,000
|
|
|
|
|
1,068,500
|
|
|
|
1,068,500
|
|
Less
current portion
|
|
|
(1,068,500
|
)
|
|
|
(1,068,500
|
)
|
Total
notes payable - related parties, net of current portion
|
|
$
|
0
|
|
|
$
|
0
|
|
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 66,667 shares of the Company’s common stock at an exercise price of
$37.50 per share, and the loan outstanding was reduced in satisfaction of the aggregate exercise price of $2.5 million. In August
of 2016, $0.3 million was repaid by the Company through the issuance of shares of common stock. In March of 2017, the Company
and Mr. Lagan agreed that a payment made to 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 August 2, 2018.
The remaining balance due on this loan as of March 31, 2018 was $168,500, including accrued interest.
Note
6 – Debentures
The
carrying amount of all outstanding debentures as of March 31, 2018 (unaudited), and December 31, 2017 is as follows:
|
|
March
31, 2018
|
|
|
December
31, 2017
|
|
Debentures
|
|
$
|
15,758,851
|
|
|
$
|
17,720,082
|
|
Discount
on Debentures
|
|
|
(8,424,756
|
)
|
|
|
(12,127,634
|
)
|
Deferred
financing fees
|
|
|
(94,175
|
)
|
|
|
(224,733
|
)
|
|
|
|
7,239,921
|
|
|
|
5,367,715
|
|
Less
current portion
|
|
|
(3,445,841
|
)
|
|
|
(1,615,693
|
)
|
Debentures
|
|
$
|
3,794,079
|
|
|
$
|
3,752,022
|
|
RENNOVA
HEALTH, INC.
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Payment
on all outstanding debentures as of March 31, 2018 are due as follows:
Period
ended December 31,
|
|
|
|
2018
|
|
$
|
5,647,271
|
|
2019
|
|
$
|
10,111,580
|
|
|
|
$
|
15,758,851
|
|
February
2017 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
2017 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. The remainder of
the net proceeds were used for general corporate purposes. In conjunction with the issuance of the Convertible Debentures, the
holder of the February Debentures exchanged these debentures for $2.5 million of new debentures (the “Exchange Debentures”
and, collectively with the Convertible Debentures, the “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 contain a 24% original issue discount, have no regularly scheduled interest
payments except in the event of a default and have a maturity date of March 21, 2019.
In
connection with the March Debentures the Company issued warrants to purchase shares of the Company’s common stock to several
accredited investors. At March 31, 2018, these warrants were exercisable into an aggregate of 13,823,699,256 shares of
common stock. 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 March 31, 2018, the Series A Warrants are exercisable for 4,949,270,368 shares
of the Company’s common stock. They are immediately exercisable and have a term of exercise equal to five years. At March
31, 2018, the Series B Warrants are exercisable for 3,925,158,519 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 4,949,270,368 shares of the Company’s
common stock and 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 March 31, 2018, the Series A, Series B and Series C Warrants each have an exercise price of
$0.0038 per share, which reflects adjustments pursuant to their terms. The Series A, Series B and Series C Warrants are subject
to “full ratchet” and other customary anti-dilution protections.
The
March Debentures are convertible into shares of the Company’s common stock, at a conversion price which has been adjusted
pursuant to the terms of the March Debentures to $0.0038 per share as of March 31, 2018, due to prices at which the Company has
subsequently issued shares of common stock. 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.
RENNOVA
HEALTH, INC.
Notes
to Condensed Consolidated Financial Statements
(unaudited)
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 March 31,
2018 stated above reflect the amendment as well as other adjustments 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 March 31, 2018,
holders of the March Debentures converted an aggregate of $10,362,989 of these debentures into 359,281,017 shares of common stock.
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 1 for the adoption of ASU 2017-11 for the retrospective adjustments made
to the Company’s condensed consolidated financial statements with respect to the derivative liabilities associated with
these debentures and warrants.
June
2017 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
2017 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
2017 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.
RENNOVA
HEALTH, INC.
Notes
to Condensed Consolidated Financial Statements
(unaudited)
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 9. On February 8, 2018, $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 9.
At
March 31, 2018, the Series A Warrants are exercisable for an aggregate of 11,559,195 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 11,559,195 shares of the Company’s common stock and are exercisable for a period of 18 months commencing immediately.
At March 31, 2018, the Series C Warrants are exercisable for an aggregate of 11,559,195 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 $16.4 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 three and nine months ended December 31, 2017, the Company recorded approximately
$4.8 million and approximately $14.7 million of non-cash interest and amortization of debt discount expense primarily in connection
with the debentures and warrants. See Note 9 for summarized information related to warrants issued and the activity during the
twelve months ended December 31, 2017
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.
See
Note 10 for summarized information related to warrants issued and the activity during the three months ended March 31,
2018 and 2017.
See
Note 10 for a discussion of the dilutive effect of the outstanding debentures and warrants as of March 31, 2018.
Note
7 – Related Party Transactions
In
addition to the transactions discussed in Note 5, the Company had the following related party transactions during
the three months ended March 31, 2018 and 2017:
In
January and February of 2017, the Company received advances aggregating $3.6 million from Christopher Diamantis, a director of
the Company. The advances, along with $0.5 million of previously accrued but unpaid interest, were due on demand, bearing interest
at 10% per annum. The Company used the advances to pay the purchase price for the Hospital Assets and for general corporate purposes.
On March 7, 2017, the Company issued a promissory note to Mr. Diamantis in the amount of $0.5 million (the “2017 Diamantis
Note”) in connection with these advances received in 2017, plus accrued and unpaid interest of $0.5 million. In conjunction
with the issuance of the 2017 Diamantis Note, the Company also issued to Mr. Diamantis warrants to purchase 27,667 shares of the
Company’s common stock, exercisable at $15.00. the 2017 Diamantis Note was repaid on March 21, 2017 with the proceeds received
from the issuance of the Convertible Debentures (see Note 6).
Alcimede
billed the Company $0.1 million for consulting fees pursuant to a consulting agreement for each of the three months ended March
31, 2018 and 2017, respectively.
RENNOVA
HEALTH, INC.
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Monarch
Capital, LLC (“Monarch”) billed the Company for consulting fees pursuant to a consulting agreement in the amount of
$0.1 million for the three months ended March 31, 2017. The agreement expired on August 31, 2017. Michael Goldberg, a director
of the Company up until his resignation effective April 24, 2017, is the Managing Director of Monarch.
Note
8 – Capital Lease Obligations
The
Company leases various assets under capital leases expiring through 2020 as follows. At March 31, 2018 (unaudited) and December
31, 2017, capital lease obligations consisted of the following:
|
|
March
31, 2018
|
|
|
December
31, 2017
|
|
Medical
equipment
|
|
$
|
4,686,736
|
|
|
$
|
4,686,736
|
|
Less
accumulated depreciation
|
|
|
(4,010,259
|
)
|
|
|
(3,842,443
|
)
|
|
|
|
|
|
|
|
|
|
Net
|
|
$
|
676,477
|
|
|
$
|
844,293
|
|
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 12). As a result, the Company recognized additional interest expense of $0.6 million to recognize the additional obligations
under these leases. As of March 31, 2018 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
9 – Redeemable Preferred Stock
The
Company has 5,000,000 authorized shares of Preferred Stock at a par value of $0.01. Issuances of the Company’s Preferred
Stock included as part of stockholders’ deficit are discussed in Note 10. 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.
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.
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.
RENNOVA
HEALTH, INC.
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note
10 – Stockholders’ Deficit
Preferred
Stock
The
Company has 5,000,000 shares, par value $0.01, of preferred stock authorized. As of March 31, 2018, the Company had outstanding
shares of preferred stock consisting of shares of its Series I-1 Preferred Stock, shares of Series I-2 Preferred Stock,
215 shares of its Series G Preferred Stock, 60 shares of its Series H Preferred Stock and 1,750,000 shares of its Series F Convertible
Preferred Stock.
The
rights of Preferred F, G, H, I-1 and I-2 shares are disclosed in the 2017 10K. There are no changes in these
rights.
Common
Stock
The
Company had 499,992,133 and 19,750,844 shares of common stock issued and outstanding at March 31, 2018 and December 31, 2017,
respectively. The Company issued 480,249,156 shares of its common stock during the three months ended March 31, 2018 as follows:
During
the three months ended March 31, 2018, the Company issued an aggregate of 333,315,823 shares of its common stock upon conversion
of $3.1 million of the principal amount of the March 2017 Debentures.
During
the three months ended March 31, 2018, the Company issued 75,600,000 shares of common stock upon exercise of 119,746,776
March 2017 Series B Warrants, on a cashless basis.
During
the three months ended March 31, 2018 the Company issued an aggregate of 71,333,333 shares of restricted stock as described below.
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 three
months ended March 31, 2018, 2,493 shares of the restricted stock were forfeited by their terms and returned to treasury.
On
March 6, 2018, the Company issued an aggregate of 71,333,333 shares of restricted stock to employees and directors, based upon
the recommendation of the Compensation Committee of the Board. The grants fully vested immediately. The Company recognized stock-based
compensation in the amount of $477,933 for the grant of such restricted stock based on a valuation of $.0067 per share.
Stock
Options
The
following table summarizes the Company’s stock option activity for the three months ended March 31, 2018:
|
|
Number
of
options
|
|
|
Weighted-
average
exercise
price
|
|
|
Weighted-
average contractual
term (Yrs.)
|
|
Outstanding
at December 31, 2017
|
|
|
38,478
|
|
|
$
|
2,072.75
|
|
|
|
8.33
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Forfeit
|
|
|
|
|
|
|
-
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Outstanding
at March 31, 2018
|
|
|
38,478
|
|
|
$
|
2,072.75
|
|
|
|
8.33
|
|
Exercisable
at March 31, 2018
|
|
|
32,922
|
|
|
$
|
2,373.16
|
|
|
|
|
|
As
of March 31, 2018, the Company had approximately $0.1 million of unrecognized compensation cost related to stock options granted
under the Company’s 2007 Equity Plan, which is expected to be recognized over a weighted-average period of 0.94 years.
Warrants
The
Company, as part of various debt and equity financing transactions, has issued warrants to purchase shares of the Company’s
common stock. The following summarizes the information related to warrants issued and the activity during the three months ended
March 31, 2018:
|
|
Number
of warrants
|
|
|
Weighted
average
exercise price
|
|
Balance
at December 31, 2017
|
|
|
2,176,403,218
|
|
|
$
|
0.0444
|
|
Warrants
issued during the period
|
|
|
-
|
|
|
$
|
-
|
|
Increases
due to dilution
|
|
|
13,411,976,939
|
|
|
$
|
-
|
|
Warrants
exercised during the period
|
|
|
(119,746,776
|
)
|
|
$
|
0.0038
|
|
Warrants
expired during the period
|
|
|
-
|
|
|
$
|
-
|
|
Balance
at March 31, 2018
|
|
|
15,468,633,381
|
|
|
$
|
0.0062
|
|
RENNOVA
HEALTH, INC.
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Basic
and Diluted Loss per Share
Basic
loss per share excludes dilution and is computed by dividing loss attributable to common stockholders by the weighted-average
number of common shares outstanding during the period. Diluted loss per share reflects the potential dilution that could occur
if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance
of common stock that then shared in the income of the Company. For the three months ended March 31, 2018 and 2017, basic loss
per share is the same as diluted loss per share.
Diluted
loss per share excludes all dilutive potential shares if their effect is anti-dilutive. As of March 31, 2018 and 2017, the following
potential common stock equivalents were excluded from the calculation of diluted loss per share as their effect was anti-dilutive:
|
|
As
of March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Warrants
|
|
|
15,468,633,381
|
|
|
|
30,595,665
|
|
Convertible
preferred stock
|
|
|
893,098,291
|
|
|
|
595,556
|
|
Convertible
debt
|
|
|
781,485,502
|
|
|
|
10,007,141
|
|
Stock
options
|
|
|
38,478
|
|
|
|
709,025
|
|
|
|
|
17,143,255,652
|
|
|
|
41,907,387
|
|
Note
11 – Supplemental Disclosure of Cash Flow Information
The
supplemental cash flow information for the three months ended March 31, 2018 and 2017 (unaudited) is as follows:
|
|
Three
Months Ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Cash
paid for interest
|
|
$
|
24,791
|
|
|
$
|
881,457
|
|
Cash
paid for income taxes
|
|
$
|
-
|
|
|
$
|
296,313
|
|
|
|
|
|
|
|
|
|
|
Non-cash
investing and financing activities:
|
|
|
|
|
|
|
|
|
Exchange
of I-2 preferred stock for convertible debentures
|
|
$
|
1,384,556
|
|
|
$
|
2,695,760
|
|
Exchange
of convertible debentures for convertible debentures and warrants
|
|
$
|
-
|
|
|
$
|
2,464,500
|
|
Note
payable and warrants settled through issuance of common stock
|
|
$
|
-
|
|
|
$
|
440,000
|
|
Debentures
converted into common stock
|
|
$
|
3,056,675
|
|
|
$
|
486,032
|
|
Conversions
of preferred stock into common stock
|
|
$
|
-
|
|
|
$
|
6,280,000
|
|
Common
stock issued in cashless excercise of warrants
|
|
$
|
756,000
|
|
|
$
|
-
|
|
Note
12 – Commitments and Contingencies
Legal
Matters
From
time to time, the Company may be involved in a variety of claims, lawsuits, investigations and proceedings related to contractual
disputes, employment matters, regulatory and compliance matters, intellectual property rights and other litigation arising in
the ordinary course of business. The Company operates in a highly regulated industry which may inherently lend itself to legal
matters. Management is aware that litigation has associated costs and that results of adverse litigation verdicts could have a
material effect on the Company’s financial position or results of operations. Management, in consultation with legal counsel,
has addressed known assertions and predicted unasserted claims below.
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.
RENNOVA
HEALTH, INC.
Notes
to Condensed Consolidated Financial Statements
(unaudited)
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. The Company has managed to pay some but not all of
the required payments and
$0.5 million remains outstanding to the DOR
at March 31, 2018.
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 8). 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 and a total of $1.1 million remains
outstanding to Tetra at March 31, 2018. The Company and Tetra have agreed to dispose of certain equipment and proceeds from the
sale of surplus equipment have been applied to the outstanding balance.
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 and DeLage
have now disposed of certain equipment and reduced the balance owed to DeLage. The reduced balance remains outstanding at
March 31, 2018.
On
December 7, 2016, the holders of the Tegal Notes (see Note 5) 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. A judgment was entered against the Company on April 23, 2018. These amounts remain outstanding at March
31, 2018.
In
November 2017 a former shareholder of Genomas filed suit against the Company for payment of a $200,000 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 has made a $100,000 payment and agreed to a schedule of payments to discharge
the remaining balance of the Note. The parties have agreed to dismiss the legal action.
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.
RENNOVA
HEALTH, INC.
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note
13 – Segment Information
Operating
segments are defined under U.S. GAAP as components of an enterprise for which discrete financial information is available and
are evaluated regularly by the enterprise’s chief operating decision maker in determining how to allocate resources and
assess performance. The Company operates in 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.
|
|
|
|
|
●
|
Hospital
Operations
, which reflects the purchase of the Hospital Assets (see Note 3) and the operations of Scott County Community
Hospital, which has since been renamed as Big South Fork Medical Center.
|
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 March 31, 2018. The accounting policies of the reportable segments
are the same as those described in Note 1. Selected financial information for the Company’s operating segments is as follows:
RENNOVA
HEALTH, INC.
Notes
to Condensed Consolidated Financial Statements
(unaudited)
|
|
Three
Months Ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Net
revenues – External
|
|
|
|
|
|
|
|
|
Clinical
Laboratory Operations
|
|
$
|
45,586
|
|
|
$
|
684,265
|
|
Hospital
Operations
|
|
|
1,556,075
|
|
|
|
-
|
|
|
|
$
|
1,601,661
|
|
|
$
|
684,265
|
|
|
|
|
|
|
|
|
|
|
(Loss)
income from operations
|
|
|
|
|
|
|
|
|
Clinical
Laboratory Operations
|
|
$
|
(756,083
|
)
|
|
$
|
(1,292,275
|
)
|
Hospital
Operations
|
|
|
(1,472,600
|
)
|
|
|
(467,316
|
)
|
Corporate
|
|
|
(1,483,341
|
)
|
|
|
(1,804,517
|
)
|
Eliminations
|
|
|
-
|
|
|
|
7,851
|
|
|
|
$
|
(3,712,024
|
)
|
|
$
|
(3,556,257
|
)
|
Depreciation
and amortization
|
|
|
|
|
|
|
|
|
Clinical
Laboratory Operations
|
|
$
|
295,474
|
|
|
$
|
434,468
|
|
Hospital
Operations
|
|
|
37,728
|
|
|
|
-
|
|
Corporate
|
|
|
314
|
|
|
|
312
|
|
Eliminations
|
|
|
-
|
|
|
|
(7,851
|
)
|
|
|
$
|
333,515
|
|
|
$
|
426,929
|
|
Capital
expenditures
|
|
|
|
|
|
|
|
|
Clinical
Laboratory Operations
|
|
$
|
-
|
|
|
$
|
(100,382
|
)
|
Hospital
Operations
|
|
|
-
|
|
|
|
1,090,922
|
|
|
|
$
|
-
|
|
|
$
|
990,540
|
|
***`
Intersegment revenues are eliminated in consolidation.
|
|
March
31, 2018
|
|
|
December
31, 2017
|
|
Total
assets
|
|
|
|
|
|
|
|
|
Clinical
Laboratory Operations
|
|
$
|
1,019,946
|
|
|
$
|
1,503,520
|
|
Hospital
Operations
|
|
|
2,788,059
|
|
|
|
2,549,504
|
|
Corporate
|
|
|
3,510,297
|
|
|
|
3,436,773
|
|
Assets
of AMSG and HTS classified as held for sale
|
|
|
243,963
|
|
|
|
255,566
|
|
Eliminations
|
|
|
(1,424,496
|
)
|
|
|
(1,454,570
|
)
|
|
|
$
|
6,137,769
|
|
|
$
|
6,290,794
|
|
RENNOVA
HEALTH, INC.
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note
14 – Recently Issued Accounting Standards
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. The Company has adopted this guidance for this financial statement.
|
|
|
|
|
|
ASU
No. 2014-15, “Presentation of Financial Statements - Going Concern” (Subtopic 205-40): Disclosure of Uncertainty
about an Entity’s Ability to Continue as a Going Concern.
|
|
Fiscal
years, and interim periods within those years, beginning on or after December 15, 2016, with early adoption permitted.
|
|
In
August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements - Going Concern” (Subtopic
205-40): Disclosure of Uncertainty about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”).
ASU 2014-15 provides guidance that establishes management’s responsibility to evaluate whether there is substantial
doubt about an entity’s ability to continue as a going concern and setting rules for how this information should be
disclosed in the financial statements. Adoption of this new standard did not have a significant impact on the Company’s
consolidated financial statements. See Note 1 regarding management’s current disclosures regarding the Company’s
ability to continue as a going concern.
|
RENNOVA
HEALTH, INC.
Notes
to Condensed Consolidated Financial Statements
(unaudited)
ASU
No. 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes”
|
|
Fiscal
years beginning on or after December 15, 2016, with early adoption permitted.
|
|
In
November 2015, the FASB issued ASU No. 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred
Taxes” (“ASU 2015-17”). Topic 740, Income Taxes, requires an entity to separate deferred income tax liabilities
and assets into current and noncurrent amounts in a classified statement of financial position. Deferred tax liabilities and
assets are classified as current or noncurrent based on the classification of the related asset or liability for financial
reporting. Deferred tax liabilities and assets that are not related to an asset or liability for financial reporting are classified
according to the expected reversal date of the temporary difference. To simplify the presentation of deferred income taxes,
the amendments in ASU 2015-17 require that deferred income tax liabilities and assets be classified as noncurrent in a classified
statement of financial position. For public business entities, the amendments in this update are effective for financial statements
issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Adoption of
ASU 2015-17 did not have a material impact on the Company’s consolidated financial statements.
|
|
|
|
|
|
Accounting
Standards Update (“ASU”) No. 2016-02, “Leases (Topic 842)”
|
|
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.
|
|
|
|
|
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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 1)
|
RENNOVA
HEALTH, INC.
Notes
to Condensed Consolidated Financial Statements
(unaudited)
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 (“Update”) 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.
|
Note
15 – Discontinued Operations
On
July 12, 2017, the Company announced 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 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 second half of 2018. The
Board of Directors is currently considering if AMSG and HTS would be better as one combined spinoff instead off 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 no longer include amounts relating
to AMSG and HTS following the reclassification to discontinued operations except that the inter-company debt from HTS to
the Company of $14,461,338 and from AMSG of $7,181,685 has not been separated. The Company hopes to complete the
spin off(s) in a manner to permit it to recognize these amounts as investment in the divisions.
Carrying
amounts of major classes of assets and liabilities classified as held for sale and included as part of discontinued operations
in the condensed consolidated balance sheets consisted of the following:
AMSG
Assets and Liabilities:
|
|
March
31, 2018
|
|
|
December
31, 2017
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Cash
|
|
$
|
5,314
|
|
|
$
|
9,273
|
|
Accounts
receivable, net
|
|
|
576
|
|
|
|
19,022
|
|
Prepaid
expenses and other current assets
|
|
|
25,477
|
|
|
|
25,477
|
|
Current
assets classified as held for sale
|
|
$
|
31,367
|
|
|
$
|
53,772
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
$
|
-
|
|
|
$
|
-
|
|
Deposits
|
|
|
-
|
|
|
|
-
|
|
Non-current
assets classified as held for sale
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable (includes related parties)
|
|
$
|
674,425
|
|
|
$
|
671,561
|
|
Accrued
expenses
|
|
|
388,666
|
|
|
|
375,165
|
|
Current
portion of notes payable
|
|
|
228,421
|
|
|
|
249,589
|
|
Current
liabilities classified as held for sale
|
|
$
|
1,291,512
|
|
|
$
|
1,296,315
|
|
|
|
|
|
|
|
|
|
|
Non-current
liabilities classified as held for sale
|
|
$
|
-
|
|
|
$
|
-
|
|
RENNOVA
HEALTH, INC.
Notes
to Condensed Consolidated Financial Statements
(unaudited)
HTS
Assets and Liabilities:
|
|
March
31, 2018
|
|
|
December
31, 2017
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Cash
|
|
$
|
1,727
|
|
|
$
|
8,281
|
|
Accounts
receivable, net
|
|
|
166,774
|
|
|
|
160,715
|
|
Prepaid
expenses and other current assets
|
|
|
22,183
|
|
|
|
3,964
|
|
Current
assets classified as held for sale
|
|
$
|
190,684
|
|
|
$
|
172,960
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
$
|
15,883
|
|
|
$
|
21,078
|
|
Deposits
|
|
|
6,029
|
|
|
|
7,756
|
|
Non-current
assets classified as held for sale
|
|
$
|
21,912
|
|
|
$
|
28,834
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable (includes related parties)
|
|
$
|
500,235
|
|
|
$
|
407,404
|
|
Accrued
expenses
|
|
|
271,245
|
|
|
|
269,135
|
|
Current
liabilities classified as held for sale
|
|
$
|
771,480
|
|
|
$
|
676,539
|
|
|
|
|
|
|
|
|
|
|
Non-current
liabilities classified as held for sale
|
|
$
|
-
|
|
|
$
|
-
|
|
Consolidated
Discontinued Operations Assets and Liabilities:
|
|
March
31, 2018
|
|
|
December
31, 2017
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Cash
|
|
$
|
7,041
|
|
|
$
|
17,554
|
|
Accounts
receivable, net
|
|
|
167,350
|
|
|
|
179,737
|
|
Prepaid
expenses and other current assets
|
|
|
47,660
|
|
|
|
29,441
|
|
Current
assets classified as held for sale
|
|
$
|
222,051
|
|
|
$
|
226,732
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
$
|
15,883
|
|
|
$
|
21,078
|
|
Deposits
|
|
|
6,029
|
|
|
|
7,756
|
|
Non-current
assets classified as held for sale
|
|
$
|
21,912
|
|
|
$
|
28,834
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable (includes related parties)
|
|
$
|
1,174,660
|
|
|
$
|
1,078,965
|
|
Accrued
expenses
|
|
|
659,911
|
|
|
|
644,300
|
|
Current
portion of notes payable
|
|
|
228,421
|
|
|
|
249,589
|
|
Current
liabilities classified as held for sale
|
|
$
|
2,062,992
|
|
|
$
|
1,972,854
|
|
|
|
|
|
|
|
|
|
|
Non-current
liabilities classified as held for sale
|
|
$
|
-
|
|
|
$
|
-
|
|
RENNOVA
HEALTH, INC.
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Major
line items constituting loss from discontinued operations in the consolidated statements of operations for the three months ended
March 31, 2018 and 2017 consisted of the following:
AMSG
Income (Loss) from Discontinued Operations:
|
|
Three
Months Ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Revenue
from services
|
|
$
|
33,685
|
|
|
$
|
176,578
|
|
Cost
of services
|
|
|
16,138
|
|
|
|
769
|
|
Gross
profit
|
|
|
17,547
|
|
|
|
175,809
|
|
Operating
expenses
|
|
|
176,202
|
|
|
|
526,533
|
|
Other
income/expenses
|
|
|
(800,197
|
)
|
|
|
(2,978
|
)
|
Income/(Loss)
from discontinued operations
|
|
$
|
641,542
|
|
|
$
|
(347,746
|
)
|
HTS
Income (Loss) from Discontinued Operations:
|
|
Three
Months Ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Revenue
from services
|
|
$
|
355,147
|
|
|
$
|
315,270
|
|
Cost
of services
|
|
|
34,218
|
|
|
|
46,704
|
|
Gross
profit
|
|
|
320,929
|
|
|
|
268,566
|
|
Operating
expenses
|
|
|
538,199
|
|
|
|
987,111
|
|
Other
income/expenses
|
|
|
2,478
|
|
|
|
-
|
|
Income/(Loss)
from discontinued operations
|
|
$
|
(219,748
|
)
|
|
$
|
(718,545
|
)
|
Consolidated
Income/(Loss) from Discontinued Operations:
|
|
Three
Months Ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Revenue
from services
|
|
$
|
388,832
|
|
|
$
|
491,848
|
|
Cost
of services
|
|
|
50,356
|
|
|
|
47,473
|
|
Gross
profit
|
|
|
338,476
|
|
|
|
444,375
|
|
Operating
expenses
|
|
|
714,402
|
|
|
|
1,513,645
|
|
Other
income (expenses)
|
|
|
(797,719
|
)
|
|
|
(2,978
|
)
|
Income/(Loss)
from discontinued operations
|
|
$
|
421,793
|
|
|
$
|
(1,066,292
|
)
|
Note
16 –
Derivative Financial Instruments and Fair Value
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.
|
RENNOVA
HEALTH, INC.
Notes
to Condensed Consolidated Financial Statements
(unaudited)
The
estimated fair value of financial instruments is determined by the Company using available market information and valuation methodologies
considered to be appropriate. At March 31, 2018 and December 31, 2017, 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 March 31, 2018:
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
As
of December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Embedded
conversion options
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,577,025
|
|
|
$
|
1,577,025
|
|
Common
stock warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
10,858,225
|
|
|
|
10,858,225
|
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
12,435,250
|
|
|
$
|
12,435,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of March 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Embedded
conversion options
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,005,188
|
|
|
$
|
1,005,188
|
|
Common
stock warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
151,418,187
|
|
|
|
151,418,187
|
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
152,423,375
|
|
|
$
|
152,423,375
|
|
For
the three months ended March 31, 2018, total loss realized on instruments valued using Level 3 valuations was $140.0 million.
The
Company utilized the following methods to value its derivative liabilities for the three months ended March 31, 2018: (i) for
embedded conversion options valued at $1.0 million, the Company determined 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; (ii) for warrants valued at $151.4 million, the Company determined the fair value by using a binomial
model and monte carlo simulations; and (iii) for warrants valued at $0.1 million and embedded conversion options valued at $0.2
million, the Company determined 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 three
months ended March 31, 2018:
Balance
at December 31, 2017
|
|
$
|
12,435,250
|
|
Loss
on change in fair value included in net loss
|
|
|
139,779,232
|
|
Issuance
of convertible debt
|
|
|
208,893
|
|
Balance
at March 31, 2018
|
|
$
|
152,423,375
|
|
The
increase in the fair value of the derivative liabilities is primarily due to the increase in the Company’s quoted trading
price from $0.003 on December 31, 2017 to $0.009 on March 31, 2018. Because the exercise price of a significant portion
of the Company’s outstanding warrants are currently exercisable at $0.0038 per share, and subject to further reduction in
their exercise price in the event of further issuances at lower than $0.0038 per share, the fair value of the warrants increased
significantly during the three months ended March 31, 2018.
Note
17 – Subsequent Events
Common
Stock
Outstanding
shares as of June 18, 2018: 1,110,232,133
Since
the period ended March 31, 2018, the Company has issued 610,240,000 shares of common stock through June 18, 2018
as follows:
The
Company has issued 324,000,000 shares of its common stock upon conversion of $1,643,175 of the principal amount of the
March 2017 Debentures.
The
Company issued 286,240,000 shares of common stock to the holders of 381,405,434 March 2017 Series B warrants that
were exercised on a cashless basis.
On
May 9, 2018, the Company held a Special Meeting of Stockholders, in part, to approve an amendment to the Company’s Certificate
of Incorporation, as amended, to increase the number of authorized shares of common stock from 500,000,000 to 3,000,000,000 shares.
The proposal was approved and on May 9, 2018 the Company filed an amendment to its Certificate of Incorporation to increase its
authorized common stock to 3,000,000,000 shares.
RENNOVA
HEALTH, INC.