Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note
1 – Organization and Summary of Significant Accounting Policies
Description
of Business
Rennova
Health, Inc. (“Rennova”), together with its subsidiaries (the “Company”, “we”, “us”
or “our”), is a 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, which are more fully discussed in Note 16.
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
7, 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 conversion 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. On May 9, 2018, the Company amended its Certificate of Incorporation to increase its authorized common stock to 3,000,000,000
shares.
All
share, per share and capital stock amounts for all periods presented have been restated to give effect to the Reverse Stock Splits.
Basis
of Presentation
The
accompanying unaudited condensed consolidated financial statements were prepared using generally accepted accounting principles
for interim financial information and the instructions to Form 10-Q and Regulation S-X. Accordingly, these financial statements
do not include all information or notes required by generally accepted accounting principles for annual financial statements and
should be read in conjunction with the consolidated financial statements as filed on the Company’s Annual Report on Form
10-K for the year ended December 31, 2017, filed with the Securities and Exchange Commission on April 24, 2018. In the opinion
of management, the unaudited condensed consolidated financial statements included herein contain all adjustments necessary to
present fairly the Company’s consolidated financial position as of June 30, 2018, and the results of its operations
and cash flows for the interim periods presented. Such adjustments are of a normal recurring nature. The results of operations
for the three and six months ended June 30, 2018 may not be indicative of results for the year ending December 31, 2018.
RENNOVA
HEALTH, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Principles
of Consolidation
The
accompanying condensed consolidated financial statements which have been prepared in accordance with accounting principles generally
accepted in the United States of America (“U.S. GAAP”) include the accounts of Rennova and its wholly-owned subsidiaries.
All intercompany transactions and balances have been eliminated in the consolidation.
Reclassification
The
Company has reclassified certain amounts in the 2017 condensed consolidated financial statements to be consistent with the 2018
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 AMSG and HTS are described further in Note 18. The reclassifications had no impact on operations or cash flows for the three
and six months ended June 30, 2017. The Company also reclassified derivative liability previously reported at December
31, 2017 as long term to current liability. In addition, certain prior year balances have been reclassified to conform to the
current period presentation.
Comprehensive
Income (Loss)
During
the three and six months ended June 30, 2018 and 2017, comprehensive income (loss) was equal to the net income (loss) amounts
presented in the accompanying condensed consolidated statements of operations.
Current
Events
Purchase
Agreement to Acquire Acute Care Hospital
On
January 31, 2018, the Company entered into a purchase agreement to acquire a business engaging in acute hospital care located
in Jamestown, Tennessee, referred to as Jamestown Regional Medical Center. The purchase was completed on June 1, 2018. The hospital
was acquired by a newly formed subsidiary, Jamestown TN Medical Center, Inc., and is an 85-bed facility of approximately 90,000
square feet on over eight acres of land, which offers a 24-hour Emergency Department with two spacious trauma bays and seven private
exam rooms, inpatient and outpatient medical services and a Progressive Care Unit which provides telemetry services. The acquisition
also included a separate physician practice which will now operate under Rennova as Mountain View Physician Practice, Inc.
Net
annual revenues in recent years have been approximately $15 million with government payers including Medicare and Medicaid accounting
for in excess of 60% of the payor mix. Rennova does not expect this payor mix to change significantly in the near future.
The hospital was acquired for $635,096 from Community Health Systems, Inc. Diligence, legal and other costs associated with the
acquisition are estimated to be approximately $500,000 meaning the total cost of acquisition to the Company is expected to be
approximately $1,100,000.
Jamestown,
Tennessee is located 38 miles from the Company’s other hospital, the Big South Fork Medical Center, which is
located in Oneida, Tennessee. The acquisition of Jamestown Regional Medical Center is more fully discussed in Note 6.
Proposals
Submitted to Stockholders
On
May 9, 2018, the Company held a Special Meeting of Stockholders to (1) 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,
(2) approve the Company’s new 2018 Incentive Award Plan, and (3) authorize an adjournment of the Special Meeting if necessary.
Proposal
1 was approved while proposal 2 was rejected. Proposal 3 was not voted on.
RENNOVA
HEALTH, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(unaudited)
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 relating to the sale of the accounts receivable,
to May 30, 2018. In connection with this further extension, the purchaser received a fee of $100,000. As of August 13,
2018, the Company has not made a payment under this agreement and the full balance is now payable. The counterparty has filed
a demand for arbitration under the agreement with regard to the outstanding balance. The Company does not have the financial resources
to satisfy this amount.
Use
of Estimates
Management
makes estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of
contingent liabilities at the date of the condensed consolidated financial statements, and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates and
assumptions include the estimates of fair values of assets acquired and liabilities assumed in business combinations,
reserves and write-downs related to receivables and inventories, the recoverability of long-lived assets, the valuation
allowance relating to the Company’s deferred tax assets, valuation of equity and derivative instruments, and debt
discounts and the valuation of the assets and liabilities acquired in the acquisition of hospitals.
Revenue
Recognition
In
May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2014-09, “
Revenue from Contracts with Customers (Topic 606),”
including subsequently issued updates. This series
of comprehensive guidance has replaced all existing revenue recognition guidance and became effective for us beginning January
1, 2018. 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 Accounting Standard Codification (“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.
|
Based
on new rules for revenue recognition, bad debts are now treated similar to contractual adjustments and directly reduce sales revenue.
In an abundance of caution through the startup period of our Oneida hospital, which began operations in August 2017, and Jamestown
Regional Medical Center, which we acquired on June 1, 2018, we have reserved bad debt totaling $895,000 as of June 30, 2018, which
when set against sales revenues of $5.8 million results in the Company reporting net revenues for the three and six months ended
June 30, 2018 of $3.3 million and $4.9 million, respectively. The Company continues to review its provision for bad debt.
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; most of the 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.
RENNOVA
HEALTH, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(unaudited)
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.
The
hospitals ensure that it is probable and will collect substantially all the consideration to which it is entitled. The hospitals
have 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, whether applied on a contract-by-contract basis or by using a portfolio approach.
The ultimate transaction price reflects explicit price concessions. The hospitals have 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
hospitals practice the full retrospective approach of all the reporting periods presented under the new standard and disclose
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 monthly to make certain that we are properly allowing
for the uncollectable portion of our gross billings and that our estimates remain sensitive to variances and changes within our
payer groups. The contractual allowance calculation is made based on historical allowance rates for the various specific payer
groups monthly with a greater weight being given to the most recent trends; this process is adjusted based on recent changes in
underlying contract provisions. This calculation is routinely analyzed by us based on actual allowances issued by payers and the
actual payments made to determine what adjustments, if any, are needed.
Derivative
Liabilities
The
Company applies ASC Topic 815-40,
“Derivatives and Hedging,”
which provides a two-step model to determine whether
a financial instrument or an embedded feature is indexed to an issuer’s own stock and thus able to qualify for the scope
exception in ASC 815-10-15-74. This standard triggers liability accounting on all instruments and embedded features exercisable
at strike prices based on future equity-linked instruments issued at a lower rate. Using the criteria in ASC 815, the Company
determines which instruments or embedded features that require liability accounting and records the fair values as a derivative
liability. The changes in the values of the derivative liabilities are shown in the accompanying consolidated statements of operations
as “Change in Fair Value of Derivative Instruments.”
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.
RENNOVA
HEALTH, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(unaudited)
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) based on 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.
RENNOVA
HEALTH, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(unaudited)
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 because of the down round provision
feature.
Earnings
(Loss) Per Share
The
Company reports earnings (loss) per share in accordance with ASC Topic 260, “Earnings Per Share,” which establishes
standards for computing and presenting earnings per share. Basic earnings (loss) per share of common stock is calculated by dividing
net earnings (loss) allocable to common stockholders by the weighted-average shares of common stock outstanding during
the period, without consideration of common stock equivalents. Diluted earnings (loss) per share is calculated by adjusting the
weighted-average shares of common stock outstanding for the dilutive effect of common stock equivalents, including stock options
and warrants outstanding for the period as determined using the treasury stock method. For purposes of the diluted net loss per
share calculation, common stock equivalents are excluded from the calculation when their effect would be anti-dilutive. Therefore,
basic and diluted net loss per share applicable to common stockholders is the same for periods with a net loss. See Note 3 for
the computation of earnings (loss) per share for the three and six months ended June 30, 2018 and 2017.
Note
2 – Liquidity and Financial Condition
Under
ASU, 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40) (“ASC 205-40”), the Company
has the responsibility to evaluate whether conditions and/or events raise substantial doubt about its ability to meet its future
financial obligations as they become due within one year after the date that the financial statements are issued. As required
by ASC 205-40, this evaluation shall initially not take into consideration the potential mitigating effects of plans that have
not been fully implemented as of the date the financial statements are issued. Management has assessed the Company’s ability
to continue as a going concern in accordance with the requirement of ASC 205-40.
As
reflected in the condensed consolidated financial statements, the Company had a working capital deficit and an accumulated deficit
of $123.9 million and $270.2 million, respectively, at June 30, 2018. In addition, the Company had a loss from operations
of approximately $101.0 million and cash used in operating activities of $5.8 million for the six months ended June 30,
2018. The loss from operations was primarily driven by a change in fair value of derivative instruments in the amount of $95.6
million. See Note 17. These factors raise substantial doubt about the Company’s ability to continue as a going concern for
twelve months from the date of this report.
The
Company’s condensed consolidated financial statements are prepared assuming the Company can continue as a going concern,
which contemplates continuity of operations through realization of assets, and the settling of liabilities in the normal course
of business. Initial cost savings were realized by reducing the number of laboratory facilities to one for most of its toxicology
diagnostics, thereby reducing the number of employees and associated operating expenses. During 2017, the Company’s Board of Directors voted unanimously to spin off Advanced Molecular Services Group (“AMSG”)
and Health Technology Solutions, Inc. (“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 second half 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 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 18.
During
the six months ended June 30, 2018, the Company completed several private placement offerings with institutional investors for
an aggregate of $6.8 million in principal less original issue discounts of $1.3 million and received proceeds totaling
$5.5 million. As more fully discussed in Note 20, from July 1, 2018 to August 10, 2018, the Company completed additional private
placement offerings for $1.8 million in principal and received $1.5 million in total proceeds. Previously, the Company announced
that its Big South Fork Medical Center received CMS regional office licensure approval and opened on August 8, 2017. On June 1,
2018, the Company purchased and began operating the Jamestown Regional Medical Center, which is located in Jamestown, Tennessee.
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.
RENNOVA
HEALTH, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(unaudited)
There
can be no assurance that the Company will be able to achieve its business plan, raise any additional capital or secure the additional
financing necessary to implement its current operating plan. The ability of the Company to continue as a going concern is dependent
upon its ability to significantly reduce its operating costs, increase its revenues and eventually regain profitable operations.
The accompanying consolidated financial statements do not include any adjustments that might be necessary if the Company is unable
to continue as a going concern.
Note
3 – Earnings (Loss) Per Share
The
following table sets forth basic and diluted earnings (loss) per share for the periods presented:
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations
|
|
$
|
45,464,498
|
|
|
$
|
(10,000,288
|
)
|
|
$
|
(101,321,877
|
)
|
|
$
|
(18,602,657
|
)
|
Deduct change in fair value of derivative liabilities to the extent effect is dilutive
|
|
|
(44,091,731
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Amortize discounts associated with conversion of dilutive convertible debentures
|
|
|
(7,354,747
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Adjusted net loss from continuing operations
|
|
$
|
(5,981,980
|
)
|
|
$
|
(10,000,288
|
)
|
|
$
|
(
101,321,877
|
)
|
|
$
|
(18,602,657
|
)
|
Net income (loss) from discontinued operations
|
|
|
(146,577
|
)
|
|
|
(677,921
|
)
|
|
|
275,216
|
|
|
|
(1,744,209
|
)
|
Dividends
|
|
|
-
|
|
|
|
(3,508,587
|
)
|
|
|
-
|
|
|
|
(51,061,339
|
)
|
Net loss to common shareholders
|
|
$
|
(6,128,557
|
)
|
|
$
|
(14,186,796
|
)
|
|
$
|
(101,046,661
|
)
|
|
$
|
(71,408,205
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding during the period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
810,165,997
|
|
|
|
506,288
|
|
|
|
517,679,176
|
|
|
|
415,760
|
|
Common stock equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
8,737,863,005
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Convertible preferred stock
|
|
|
946,457,265
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Convertible debentures
|
|
|
1,405,619,963
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Diluted
|
|
|
11,900,106,250
|
|
|
|
506,288
|
|
|
|
517,679,176
|
|
|
|
415,760
|
|
Net income (loss) per common share- continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.06
|
|
|
$
|
(19.75
|
)
|
|
$
|
(0.20
|
)
|
|
$
|
(44.74
|
)
|
Diluted
|
|
$
|
(0.00
|
)
|
|
$
|
(19.75
|
)
|
|
$
|
(0.20
|
)
|
|
$
|
(44.74
|
)
|
Net income (loss) per common share- discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.00
|
)
|
|
$
|
(1.34
|
)
|
|
$
|
0.00
|
|
|
$
|
(4.20
|
)
|
Diluted
|
|
$
|
(0.00
|
)
|
|
$
|
(1.34
|
)
|
|
$
|
0.00
|
|
|
$
|
(4.20
|
)
|
Total per share net income (loss) to common shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.06
|
|
|
$
|
(28.02
|
)
|
|
$
|
(0.20
|
)
|
|
$
|
(171.75
|
)
|
Diluted
|
|
$
|
(0.00
|
)
|
|
$
|
(28.02
|
)
|
|
$
|
(0.20
|
)
|
|
$
|
(171.75
|
)
|
Diluted
loss per share as reflected in the table above excludes all dilutive potential shares if their effect is anti-dilutive. For the
six months ended June 30, 2018 and 2017, the following table sets forth the computation of the following potential common stock
equivalents excluded from the calculation of diluted loss per share as their effect was anti-dilutive:
RENNOVA
HEALTH, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(unaudited)
|
|
Six
Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
Warrants
|
|
|
31,707,431,064
|
|
|
|
10,416,216
|
|
Convertible
preferred stock
|
|
|
3,842,115,385
|
|
|
|
10,256
|
|
Convertible
debentures
|
|
|
1,738,235,193
|
|
|
|
783,241
|
|
Stock
options
|
|
|
38,478
|
|
|
|
38,744
|
|
|
|
|
37,287,820,120
|
|
|
|
11,248,457
|
|
Note
4 – Accounts Receivable
Accounts
receivable at June 30, 2018 (unaudited) and December 31, 2017 consisted of the following:
|
|
June
30, 2018
|
|
|
December
31, 2017
|
|
Accounts
receivable - laboratory services
|
|
$
|
2,122,918
|
|
|
$
|
1,478,451
|
|
Accounts
receivable - hospital operations
|
|
|
17,247,474
|
|
|
|
8,593,747
|
|
Total
accounts receivable
|
|
|
19,370,392
|
|
|
|
10,072,198
|
|
Less:
|
|
|
|
|
|
|
|
|
Allowance
for discounts – laboratory services
|
|
|
(1,916,577
|
)
|
|
|
(1,177,054
|
)
|
Allowance
for discounts - hospital operations
|
|
|
(13,638,967
|
)
|
|
|
(6,936,429
|
)
|
Allowance
for bad debts
|
|
|
(894,748
|
)
|
|
|
(987,403
|
)
|
Accounts
receivable, net
|
|
$
|
2,920,100
|
|
|
$
|
971,312
|
|
Note
5 – Property and Equipment
Property
and equipment at June 30, 2018 (unaudited) and December 31, 2017 consisted of the following:
|
|
June
30, 2018
|
|
|
December
31, 2017
|
|
Medical
equipment
|
|
$
|
2,173,488
|
|
|
$
|
696,195
|
|
Land
|
|
|
550,700
|
|
|
|
-
|
|
Building
|
|
|
6,478,284
|
|
|
|
1,359,472
|
|
Equipment
|
|
|
437,029
|
|
|
|
476,548
|
|
Equipment
under capital leases
|
|
|
4,253,123
|
|
|
|
4,686,736
|
|
Furniture
|
|
|
244,829
|
|
|
|
222,824
|
|
Leasehold
improvements
|
|
|
1,303,131
|
|
|
|
1,303,131
|
|
Vehicles
|
|
|
56,625
|
|
|
|
196,534
|
|
Computer
equipment
|
|
|
224,447
|
|
|
|
226,441
|
|
Software
|
|
|
724,126
|
|
|
|
631,033
|
|
|
|
|
16,445,782
|
|
|
|
9,798,914
|
|
Less
accumulated depreciation
|
|
|
(7,008,958
|
)
|
|
|
(7,103,474
|
)
|
Property
and equipment, net
|
|
$
|
9,436,824
|
|
|
$
|
2,695,440
|
|
On
January 13, 2017, the Company completed an asset purchase agreement to acquire certain assets related to Scott County Community
Hospital, based in Oneida, Tennessee (the “Hospital Assets”). The Hospital Assets include a 52,000 square foot hospital
building and 6,300 square foot professional building on approximately 4.3 acres. Scott County Community Hospital, which has since
been renamed as Big South Fork Medical Center, is classified as a Critical Access Hospital (rural). The Company acquired the Hospital
Assets out of bankruptcy for a purchase price of $1.0 million, and the purchase price has been recorded as property and equipment
in the Company’s condensed consolidated balance sheet. The Company opened the hospital on August 8, 2017.
On
January 31, 2018, the Company entered into a purchase agreement to acquire certain assets and liabilities related to Jamestown
Regional Medical Center. The purchase was completed on June 1, 2018. The Company has valued the net assets acquired, subject to
completion of a valuation study, at approximately $7.1 million, of which $6.5 million was recorded as property and equipment.
The purchase is more fully discussed in Notes 1 and 6.
RENNOVA
HEALTH, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Depreciation
expense on property and equipment was $0.3 million and $0.4 million for the three months ended June 30, 2018 and 2017, respectively,
and $0.6 million and $0.8 million for the six months ended June 30, 2018 and 2017, respectively.
Management
periodically reviews the valuation of long-lived assets, including property and equipment, for potential impairment. Management
did not recognize any impairment of these assets during the three and six months ended June 30, 2018 and 2017.
Note
6 – Acquisitions
Purchase
Agreement Re Jamestown Regional Medical Center
On
June 1, 2018, the Company acquired a business engaging in acute hospital care located in Jamestown, Tennessee under an asset purchase
agreement. The hospital, known as Jamestown Regional Medical Center, is a fully operational 85-bed facility of approximately 90,000
square feet on over eight acres of land, and offers a 24-hour emergency department with two spacious trauma bays and seven private
exam rooms, inpatient and outpatient medical services and a progressive care unit which provides telemetry services. The acquisition
also included a separate physician practice which will now operate under the Company as Mountain View Physician Practice, Inc.
Pursuant
to the asset purchase agreement, by and among the Company and Jamestown
TN Medical Center, Inc., and HMA Fentress County Hospital, LLC, Jamestown HMA Physician Management, LLC and CHS/Community Health
Systems, Inc. (the “Sellers”), the purchase price paid for the transaction was an aggregate of $635,096 which includes
closing costs of $35,735 paid for in cash consideration to the Sellers.
The
preliminary fair value of the purchase consideration paid to the Sellers was allocated to the net tangible and intangible assets
acquired. The Company accounted for the acquisition as a business combination under U.S. GAAP In accordance with the acquisition
method of accounting under ASC Topic 805,
“Business Combinations,”
(“ASC 805”) the assets acquired
and liabilities assumed were recorded as of the acquisition date, at their respective fair values and consolidated with those
of the Company.
The Company is currently undertaking a valuation
study to determine the fair value of the assets acquired. The preliminary estimated fair value of the net assets acquired, and
liabilities assumed is approximately $8.4 million. The excess of the aggregate fair value of the net tangible assets acquired
over the purchase price is currently estimated to be $7.7 million and has been treated as a gain on bargain purchase in
accordance with ASC 805. In addition, during the measurement period or until the valuation study is complete, the provisional
amounts used for the purchase price allocation are subject to adjustments for a period not to exceed one year from the acquisition
date. As a result, upon completion of the valuation study, the gain on bargain purchase presented below may be increased or decreased.
The preliminary purchase price allocation was based, in part, on management’s knowledge of HMA Fentress County General Hospital
and Jamestown HMA Physician Management, LLC.
The
Company acquired the Jamestown Hospital as a synergistic opportunity to expand our operations in proximity to our already existing
hospital in Oneida.
The
following table shows the preliminary allocation of the purchase price of Jamestown Regional Medical Center to the acquired identifiable
assets acquired, and liabilities assumed:
Total
purchase price
|
|
$
|
635,096
|
|
|
|
|
|
|
Tangible
and Intangible assets acquired, and liabilities assumed at estimated fair value:
|
|
|
|
|
Cash
|
|
$
|
375
|
|
Inventories
|
|
|
450,682
|
|
Prepaids
and deposits
|
|
|
310,384
|
|
Property
and equipment
|
|
|
7,347,467
|
|
Intangible Assets
|
|
|
452,455
|
|
Accrued
expenses
|
|
|
(193,966
|
)
|
Net
tangible and intangible assets acquired
|
|
$
|
8,367,397
|
|
|
|
|
|
|
Gain
on bargain purchase
|
|
$
|
7,732,302
|
|
RENNOVA
HEALTH, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(unaudited)
The total cost relating to the acquisition
was approximately $1,100,000. This includes $635,096, which was paid in cash consideration to the sellers, closing costs of $35,735,
legal costs of approximately $115,000, and other diligence related costs, which were expensed as of June 30, 2018.
The
following presents the unaudited pro-forma combined results of operations of the Company and Jamestown Regional Medical Center
as if the acquisition had occurred on January 1, 2017.
|
|
Three-Months Ended
|
|
|
Six-Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Net Revenue
|
|
$
|
5,093,024
|
|
|
$
|
3,839,250
|
|
|
$
|
10,328,453
|
|
|
$
|
8,436,051
|
|
Income (Loss) from continuing operations
|
|
|
43,529,741
|
|
|
|
(11,610,404
|
)
|
|
|
(106,503,432
|
)
|
|
|
(21,707,605
|
)
|
Net income (loss)
|
|
|
44,423,543
|
|
|
|
(11,373,767
|
)
|
|
|
(104,095,132
|
)
|
|
|
(21,681,965
|
)
|
Deemed dividend from trigger of down round provision feature
|
|
|
-
|
|
|
|
(3,508,587
|
)
|
|
|
-
|
|
|
|
(51,061,339
|
)
|
Net Income (loss) to common shareholders
|
|
$
|
44,423,543
|
|
|
$
|
(14,882,354
|
)
|
|
$
|
(104,095,132
|
)
|
|
$
|
(72,743,304
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) per share of common:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) continuing operations
|
|
$
|
0.05
|
|
|
$
|
(22.93
|
)
|
|
$
|
(0.21
|
)
|
|
$
|
(52.21
|
)
|
Diluted net loss continuing operations
|
|
$
|
(0.00
|
)
|
|
$
|
(22.93
|
)
|
|
$
|
(0.21
|
)
|
|
$
|
(52.21
|
)
|
Basic net income (loss) to common shareholders
|
|
$
|
0.05
|
|
|
$
|
(29.40
|
)
|
|
$
|
(0.20
|
)
|
|
$
|
(174.96
|
)
|
Diluted net loss to common shareholders
|
|
$
|
(0.00
|
)
|
|
$
|
(29.40
|
)
|
|
$
|
(0.20
|
)
|
|
$
|
(174.96
|
)
|
Weighted average number of common shares outstanding during the period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
810,165,997
|
|
|
|
506,288
|
|
|
|
517,679,176
|
|
|
|
415,760
|
|
Diluted
|
|
|
11,900,106,250
|
|
|
|
506,288
|
|
|
|
517,679,176
|
|
|
|
415,760
|
|
The
unaudited pro-forma results of operations are presented for information purposes only. The unaudited pro-forma results of operations
are not intended to present actual results that would have been attained had the acquisition been completed as of January 1, 2017
or to project potential operating results as of any future date or for any future periods.
Asset
Purchase Agreement for Big South Fork Medical Center
On
January 13, 2017, the Company completed an asset purchase agreement to acquire certain assets related to its Big South Fork Medical
Center for a purchase price of $1.0 million. The Big South Fork Medical Center began operations on August 8, 2017. See Note 5
for a discussion of the assets acquired.
RENNOVA
HEALTH, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note
7 – Accrued Expenses
Accrued
expenses at June 30, 2018 (unaudited) and December 31, 2017 consisted of the following:
|
|
June
30, 2018
|
|
|
December
31, 2017
|
|
Commissions
payable
|
|
$
|
13,345
|
|
|
$
|
24,470
|
|
Accrued
payroll and related liabilities
|
|
|
2,137,495
|
|
|
|
897,088
|
|
Accrued
interest
|
|
|
3,080,380
|
|
|
|
2,636,057
|
|
Other
accrued expenses
|
|
|
1,468,778
|
|
|
|
1,409,790
|
|
Total
accrued expenses
|
|
$
|
6,699,998
|
|
|
$
|
4,967,405
|
|
Note
8 – Notes Payable
The
Company and its subsidiaries are party to a number of loans with affiliates and unrelated parties. At June 30, 2018 (unaudited)
and December 31, 2017, notes payable consisted of the following:
Notes
Payable – Third Parties
|
|
June
30, 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.
|
|
|
1,359,737
|
|
|
|
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”). Principal and interest payments due annually from July 12, 2015 through July 12,
2017.
|
|
|
341,612
|
|
|
|
341,612
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,701,349
|
|
|
|
6,957,830
|
|
Less
current portion
|
|
|
(6,701,349
|
)
|
|
|
(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 receivable and the full balance is now payable.
The counterparty has filed a demand for arbitration under the agreement with regard to the outstanding balance. The Company does
not have the financial resources to satisfy this amount.
RENNOVA
HEALTH, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(unaudited)
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 9) 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 principal balance as of June 30, 2018, was reduced from $1.6 million to $1.4 million,
with interest accrued of approximately $125,000. The remaining debt to TCA remains outstanding and TCA has made a demand for
payment. The parties are currently working to amend the Note to extend the maturity although there can be no assurance
that the parties will agree to any such extension.
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 of $341,612 and accrued interest of $43,000.
On December 7, 2016, the Company received a breach of contract complaint with a request for the entry of a default judgment
(see Note 15). On April 23, 2018, the holders of the Tegal Notes received a judgment against the Company. To date, the
Company has yet to repay this amount.
Notes
Payable – Related Parties
|
|
June 30, 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
|
|
|
1,550,000
|
|
|
|
960,000
|
|
|
|
|
1,718,500
|
|
|
|
1,128,500
|
|
Less current portion
|
|
|
(1,718,500
|
)
|
|
|
(1,128,500
|
)
|
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 shares of the Company’s common stock, 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. On July 23, 2018, the Company issued preferred stock to Alcimede and part of the consideration
was full settlement of this loan as more fully discussed in Note 20.
During the six months ended June 30,
2018, the Company borrowed $3.1 million from Christopher Diamantis and repaid $2.5 million. The increase in the loan payable balance
from December 31, 2017 was $0.6 million.
RENNOVA
HEALTH, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note
9 – Debentures
The
carrying amount of all outstanding debentures as of June 30, 2018 (unaudited), and December 31, 2017 is as follows:
|
|
June
30, 2018
|
|
|
December
31, 2017
|
|
Debentures
|
|
$
|
17,317,061
|
|
|
$
|
17,720,082
|
|
Discount
on Debentures
|
|
|
(7,324,327
|
)
|
|
|
(12,127,634
|
)
|
Deferred
financing fees
|
|
|
(30,422
|
)
|
|
|
(224,733
|
)
|
|
|
|
9,962,312
|
|
|
|
5,367,715
|
|
Less
current portion
|
|
|
(1,833,705
|
)
|
|
|
(1,615,693
|
)
|
Debentures
|
|
$
|
8,128,607
|
|
|
$
|
3,752,022
|
|
Payment
on all outstanding debentures as of June 30, 2018 is due as follows:
Period
ended December 31,
|
|
|
|
2018
|
|
$
|
2,875,481
|
|
2019
|
|
$
|
14,441,580
|
|
|
|
$
|
17,317,061
|
|
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 a loan from Mr. Diamantis
as more fully discussed in Note 10 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 June 30, 2018, these warrants were exercisable into an aggregate of approximately 28.3 billion 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 June 30, 2018, the Series A Warrants are exercisable for 10.4
billion shares of the Company’s common stock. They are immediately exercisable and have a term of exercise equal to five
years. At June 30, 2018, the Series B Warrants are immediately exercisable for 7.5 billion shares of the Company’s common
stock and were initially exercisable for a period of 18 months. During the three months ended June 30, 2018, the Company extended
the exercise period for 90 days and recorded an additional discount on the March Debentures of approximately $0.3 million as a
result of the extension. The Series C Warrants are exercisable for 10.4 billion 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 June 30, 2018, the Series A, Series B and Series C Warrants each have an exercise price of $0.0018 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.
RENNOVA
HEALTH, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(unaudited)
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 $0.0018 per share as of June 30, 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.
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 June 30, 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 the Company’s assets and are guaranteed
by substantially all of the Company’s subsidiaries. Between March 22, 2017 and June 30, 2018, holders of the March Debentures
converted an aggregate of $13,134,779 of these debentures into 1,137,095,969 shares of common stock.
The
exercise prices of the March Warrants issued relating to 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. Because 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 regarding the recognition of these derivative liabilities. Because 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 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.
RENNOVA
HEALTH, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(unaudited)
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 number 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 because 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 (“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”).
On February 8, 2018, $1,384,556 of the September Debentures were exchanged for 1,730.1 shares of Series I-2 Preferred Stock and
the Company recorded a loss on the exchange of $651,562. The Series I-2 Preferred Stock is more fully discussed in Note
13.
At
June 30, 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 June 30, 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 June 30,
2018, 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.
2018
Offerings
On
March 5, 2018, May 14, 2018, May 21, 2018 and June 28, 2018, the Company closed offerings of $6,810,000 aggregate principal amount
of Senior Secured Original Issue Discount Convertible Debentures due September 19, 2019. The Company received proceeds of $5,500,000
in the offerings
net of the original issue discount of $1,310,000. The terms of these debentures are the same as
those issued in September 2017 under the Purchase Agreement, dated as of August 31, 2017, as more fully described above, with
the exception of the floor conversion price, which is $0.052 per share. These debentures may also be exchanged for shares of the
Company’s Series I-2 Preferred Stock under the terms of the Exchange Agreements.
During
the year ended December 31, 2017 and the six months ended June 30, 2018, the Company realized approximately $21.2 million in proceeds
from the issuances of the debentures and warrants. At June 30, 2018, the unamortized discounts were $7.3 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 six months ended June 30, 2018 and 2017, the Company recorded
approximately $7.1 million and approximately $9.9 million of non-cash interest and amortization of debt discount expense primarily
in connection with the debentures and warrants.
RENNOVA
HEALTH, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(unaudited)
See
Note 13 for summarized information related to warrants issued and the activity during the six months ended June 30, 2018 and 2017.
See
Notes 3 and 13 for a discussion of the dilutive effect of the outstanding debentures and warrants as of June 30, 2018.
Note
10 – Related Party Transactions
In
addition to the transactions discussed in Note 8, the Company had the following related party transactions during the six months
ended June 30, 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 relating to these advances
received in 2017, plus accrued and unpaid interest of $0.5 million (and together with the advances and accrued interest the “2017
Diamantis Note”). 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 9).
Monarch
Capital, LLC (“Monarch”) billed the Company for consulting fees pursuant to a consulting agreement in the amount of
$0.1 million for the six months ended June 30, 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.
Alcimede
billed the Company $0.2 million and $0.1 million for consulting fees pursuant to a consulting agreement for the six months ended
June 30, 2018 and 2017, respectively. Seamus Lagan, the Company’s President and Chief Executive Officer, is the sole
manager of Alcimede (see Note 8).
Note
11 – Capital Lease Obligations
The
Company leases various assets under capital leases expiring through 2020 as follows. At June 30, 2018 (unaudited) and December
31, 2017, capital lease equipment consisted of the following:
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
Medical equipment
|
|
$
|
4,253,123
|
|
|
$
|
4,686,736
|
|
Less accumulated depreciation
|
|
|
(3,879,729
|
)
|
|
|
(3,842,443
|
)
|
|
|
|
|
|
|
|
|
|
Net
|
|
$
|
373,394
|
|
|
$
|
844,293
|
|
As
of June 30, 2018, the Company is in default of substantially all its lease obligations, therefore the aggregate future minimum
rentals under capital leases in the amount of $1,246,853 are deemed to be current.
In
December 2016, several lawsuits were filed for past due lease payment obligations. In January 2017, default judgements were issued
against the Company aggregating to $3.5 million, including default interest, late fees, penalties and other fees (see Note 15).
Additionally, the Company recognized additional interest expense of $0.6 million to recognize the additional obligations under
these leases.
Note
12 – Redeemable Preferred Stock
The
Company has 5,000,000 authorized shares of Preferred Stock at a par value of $0.01. Issuances of the Company’s Preferred
Stock included as part of stockholders’ deficit are discussed in Note 13. The following is a summary of the issuances of
the Company’s Redeemable Preferred Stock.
RENNOVA
HEALTH, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Series
I-1 Convertible Preferred Stock
On
October 30, 2017, the Company closed an offering of $4,960,000 stated value of 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 permitted the holders of the September Debentures to exchange specified principal amounts of the September
Debentures on various closing dates starting on December 2, 2017, as more fully discussed in Note 9. At the holder’s option
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. From December 2, 2017 through March
1, 2018, any exchange under the Exchange Agreements was at the option of the holder. Subsequent to March 2018, any exchange is
at the option of the Company.
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. The Company recorded
a loss of $651,560 on the exchange.
On
July 16, 2018, the Company issued an additional of 2,176.975 shares of its Series I-2 Preferred Stock in exchange for $1,741,580
principal amount of debentures and during July 2018, the holder converted 421.94233 shares of Series I-2 Preferred Stock into
482,643,330 shares of the Company’s common stock. These subsequent events are more fully discussed in Note 20.
Series
J Convertible Preferred Stock
On
July 23, 2018, the Company issued to a related party 250,000 shares of the newly created Series J Convertible Preferred Stock
as more fully discussed in Note 20.
RENNOVA
HEALTH, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note
13 – Stockholders’ Deficit
Preferred
Stock
The
Company has 5,000,000 shares, par value $0.01, of preferred stock authorized. As of June 30, 2018, the Company had outstanding
shares of preferred stock consisting of shares of its Series I-1 Preferred Stock and shares of Series I-2 Preferred Stock (both
of which are more fully discussed in Note 12), 215 shares of its Series G Preferred Stock, 10 shares of its Series H Preferred
Stock and 1,750,000 shares of its Series F Convertible Preferred Stock. During the three months ended June 30, 2018, 50 shares
of the Series H Preferred Stock were converted into 20,000,000 shares of the Company’s common stock.
The
rights of Preferred F, G, and H are disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31,
2017. The Series G and H preferred stock are convertible into shares of the Company’s common stock at a price equal to 85%
of the volume weighted average price of the Company’s common stock at the time of conversion. The Series F Preferred Stock
is convertible into shares of the Company’s common stock at a fixed price of $29.25 per share.
Common
Stock
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.
The
Company had 1,591,673,800 and 19,750,844 shares of common stock issued and outstanding at June 30, 2018 and December 31, 2017,
respectively. During the six months ended June 30, 2018, the Company:
|
●
|
issued
an aggregate of 1,118,810,452 shares of its common stock upon conversion of $5.8 million of the principal amount of the March
2017 Debentures. The value of the common stock issued was based on the fair value of the stock at the time of issuance;
|
|
|
|
|
●
|
issued
361,840,000 shares of common stock upon exercise of 550,652,213 warrants, on a cashless basis; and
|
|
|
|
|
●
|
issued
20,000,000 shares of common stock upon the conversion of 50 shares of its Series H Preferred stock as discussed above.
|
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 on the vesting date.
During
the six months ended June 30, 2018:
|
●
|
60,827
shares of the restricted stock were forfeited by their terms and returned to treasury.
|
|
|
|
|
●
|
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. In addition, the
Company recorded $134,960 of compensation expense related to restricted stock issued in 2017. The value of the common stock
issued was based on the fair value of the stock at the time of issuance.
|
RENNOVA
HEALTH, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Stock
Options
During
the six months ended June 30, 2018 and 2017, the Company recorded approximately $48,393 and $69,230, respectively, as stock compensation
expense from the amortization of stock options issued in prior periods. As of June 30, 2018, the weighted average remaining contractual
life was 8.0 years for options outstanding and exercisable. The intrinsic value of options exercisable at June 30, 2018 and 2017
was $0. As of June 30, 2018, the remaining expense is approximately $82,993 over the remaining amortization period which
is 0.79 years under the Company’s 2007 Equity Plan. The Company estimates forfeiture and volatility using historical information.
The risk-free interest rate is based on the implied yield available on U.S. Treasury zero-coupon issues over the equivalent lives
of the options. The expected life of the options represents the estimated period using the simplified method. The Company has
not paid cash dividends on its common stock and no assumption of dividend payment(s) is made in the model.
The
following table summarizes the Company’s stock option activity for the six months ended June 30, 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 June 30, 2018
|
|
|
38,478
|
|
|
$
|
2,072.75
|
|
|
|
7.73
|
|
Exercisable
at June 30, 2018
|
|
|
32,922
|
|
|
$
|
2,373.16
|
|
|
|
|
|
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 six months ended
June 30, 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
|
|
|
30,081,680,059
|
|
|
$
|
-
|
|
Warrants
exercised during the period
|
|
|
(550,652,213
|
)
|
|
$
|
0.0038
|
|
Warrants
expired during the period
|
|
|
-
|
|
|
$
|
-
|
|
Balance
at June 30, 2018
|
|
|
31,707,431,064
|
|
|
$
|
0.0030
|
|
RENNOVA
HEALTH, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(unaudited)
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.
The
following table presents the dilutive effect of our various potential common shares as of August 1, 2018:
|
|
August 1, 2018
|
|
Common shares outstanding
|
|
|
3,000,000,000
|
|
Dilutive potential shares:
|
|
|
|
|
Stock options
|
|
|
38,478
|
|
Warrants
|
|
|
81,566,002,020
|
|
Convertible debt
|
|
|
3,205,778,378
|
|
Convertible preferred stock
|
|
|
13,063,630,114
|
|
Total dilutive potential common shares, including outstanding common stock
|
|
|
100,835,448,990
|
|
As
of August 1, 2018, the Company lacked a sufficient number of authorized shares of its common stock to cover all potentially dilutive
common shares outstanding.
Note
14 – Supplemental Disclosure of Cash Flow Information
The
supplemental cash flow information for the six months ended June 30, 2018 and 2017 (unaudited) is as follows:
|
|
Six Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
Cash paid for interest
|
|
$
|
18,894
|
|
|
$
|
976,984
|
|
Cash paid for income taxes
|
|
$
|
-
|
|
|
$
|
401,313
|
|
|
|
|
|
|
|
|
|
|
Acquisition of Jamestown Regional Medical Center:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
375
|
|
|
$
|
-
|
|
Inventory
|
|
$
|
450,682
|
|
|
$
|
-
|
|
Prepaid expenses and other current assets
|
|
$
|
310,384
|
|
|
$
|
-
|
|
Property and equipment
|
|
$
|
7,347,467
|
|
|
$
|
-
|
|
Intangible Assets
|
|
$
|
452,455
|
|
|
$
|
-
|
|
Accrued expenses
|
|
$
|
(193,966
|
)
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Exchange of preferred stock for convertible debentures and warrants
|
|
$
|
-
|
|
|
$
|
4,490,760
|
|
Cashless exercise of warrants
|
|
$
|
3,957,766
|
|
|
$
|
-
|
|
Exchange of convertible debentures for convertible debentures and warrants
|
|
$
|
-
|
|
|
$
|
2,464,500
|
|
Exchange of debentures into Series I-2 Preferred Stock
|
|
$
|
1,384,556
|
|
|
$
|
-
|
|
Note payable and warrants settled through issuance of common stock
|
|
$
|
-
|
|
|
$
|
440,000
|
|
Exchange of Series H Preferred Stock for debentures
|
|
$
|
-
|
|
|
$
|
2,174,000
|
|
Debentures converted into common stock
|
|
$
|
7,093,763
|
|
|
$
|
2,651,236
|
|
OID from issuance of debentures
|
|
$
|
1,310,000
|
|
|
$
|
3,080,200
|
|
Conversions of shares of Preferred Stock for common stock
|
|
$
|
|
|
|
$
|
7,785,000
|
|
Conversions of shares of Series H Preferred Stock for common stock
|
|
$
|
200,000
|
|
|
$
|
|
|
Deemed dividend for trigger of down round provision feature
|
|
$
|
-
|
|
|
$
|
51,061,339
|
|
RENNOVA
HEALTH, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note
15 – 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.
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., the
seller of Epinex Diagnostic Laboratories, Inc., 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 and made provisions of approximately $2.0
million as a liability in its financial statements as well as an estimated $1.9 million of receivables for an additional
refund that it believes is due. The Company expects the audit and all tax related matters to be concluded in late 2018.
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 approximately $0.5 million remains outstanding to the DOR at June 30, 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 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. In January and February of 2017, the Company made payments to Tetra relating to 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 would be paid in 24 equal monthly installments. The Company has not maintained the payment schedule to Tetra. As
a result of this default, in May 2018, Tetra and the Company agreed to dispose of certain equipment and the proceeds
from the sale have been applied to the outstanding balance. The balance owed to Tetra at June 30, 2018 was $0.9 million and
the Company remains in default.
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 11). 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. A balance of $0.2 million remains
outstanding at June 30, 2018.
RENNOVA
HEALTH, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(unaudited)
On
December 7, 2016, the holders of the Tegal Notes (see Note 8) filed suit against the Company seeking payment for the amounts due
under the notes in the aggregate of the principal of $341,612, and accrued interest of $43,000. A request for entry
of default judgment was filed on January 24, 2017. On April 23, 2018, the holders of the Tegal Notes received a judgment against
the Company. To date, the Company has yet to repay this amount.
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 believed to be frivolous and without merit. The Company filed a motion to dismiss certain of the claims. The
Company has now made payments totaling $120,000 against this note and agreed to a schedule of payments to discharge the remaining
amounts. The parties have agreed to dismiss the legal action.
The counterparty to the prepaid forward
purchase agreement entered into by the Company on March 31, 2016, as amended, has filed a demand for arbitration under the agreement
with regard to the outstanding balance. See Note 9. The Company does not have the financial resources to satisfy this amount.
Two former employees of the Company’s CollabRx, Inc. subsidiary have filed
suits in a California state court in connection with amounts claimed to be owed under their respective employment agreements with
the subsidiary. The aggregate amount claimed is approximately $300,000. The Company intends to defend these cases vigorously.
Note
16 – 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 Jamestown Regional Medical Center and the operations of 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 June 30, 2018. The accounting policies of the reportable segments
are the same as those described in Note 1 above and in Note 2 to the Company’s Annual Report on Form 10-K for the year ended
December 31, 2017 filed with the SEC on April 24, 2018.
RENNOVA
HEALTH, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Selected
financial information for the Company’s operating segments is as follows:
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Net revenues - External
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Clinical Laboratory Operations
|
|
$
|
114,736
|
|
|
$
|
74,565
|
|
|
$
|
160,321
|
|
|
$
|
758,830
|
|
Hospital Operations
|
|
|
3,177,481
|
|
|
|
-
|
|
|
|
4,733,556
|
|
|
|
-
|
|
|
|
$
|
3,292,217
|
|
|
$
|
74,565
|
|
|
$
|
4,893,877
|
|
|
$
|
758,830
|
|
(Loss) income from operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Clinical Laboratory Operations
|
|
$
|
(462,271
|
)
|
|
$
|
(1,477,754
|
)
|
|
$
|
(1,218,354
|
)
|
|
$
|
(2,770,029
|
)
|
Hospital Operations
|
|
|
(1,231,764
|
)
|
|
|
(553,352
|
)
|
|
|
(2,704,363
|
)
|
|
|
(1,020,668
|
)
|
Corporate
|
|
|
(699,350
|
)
|
|
|
(1,884,287
|
)
|
|
|
(2,182,691
|
)
|
|
|
(3,688,804
|
)
|
Eliminations
|
|
|
-
|
|
|
|
330
|
|
|
|
-
|
|
|
|
8,181
|
|
|
|
$
|
(2,393,385
|
)
|
|
$
|
(3,915,063
|
)
|
|
$
|
(6,105,408
|
)
|
|
$
|
(7,471,320
|
)
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Clinical Laboratory Operations
|
|
$
|
217,495
|
|
|
$
|
419,905
|
|
|
$
|
512,969
|
|
|
$
|
854,373
|
|
Corporate
|
|
|
248
|
|
|
|
349
|
|
|
|
562
|
|
|
|
661
|
|
Hospital Operations
|
|
|
99,991
|
|
|
|
-
|
|
|
|
137,717
|
|
|
|
-
|
|
Eliminations
|
|
|
-
|
|
|
|
(330
|
)
|
|
|
-
|
|
|
|
(8,181
|
)
|
|
|
$
|
317,734
|
|
|
$
|
419,924
|
|
|
$
|
651,248
|
|
|
$
|
846,853
|
|
Capital expenditures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Clinical Laboratory Operations
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Hospital Operations
|
|
|
-
|
|
|
|
214,147
|
|
|
|
-
|
|
|
|
1,394,087
|
|
Eliminations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
-
|
|
|
$
|
214,147
|
|
|
$
|
-
|
|
|
$
|
1,394,087
|
|
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
Total assets
|
|
|
|
|
|
|
|
|
Clinical Laboratory Operations
|
|
$
|
789,278
|
|
|
$
|
1,503,520
|
|
Supportive Software Solutions
|
|
|
1,697,042
|
|
|
|
2,549,504
|
|
Decision Support and Informatics
|
|
|
36,870
|
|
|
|
-
|
|
Hospital Operations
|
|
|
11,783,059
|
|
|
|
3,436,773
|
|
Corporate
|
|
|
5,446,170
|
|
|
|
255,566
|
|
Eliminations
|
|
|
(3,506,174
|
)
|
|
|
(1,454,569
|
)
|
Total Assets
|
|
$
|
16,246,245
|
|
|
$
|
6,290,794
|
|
Note
17 – 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.
|
RENNOVA
HEALTH, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(unaudited)
|
●
|
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.
|
The
estimated fair value of financial instruments is determined by the Company using available market information and valuation methodologies
considered to be appropriate. At June 30, 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 June 30, 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 June 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Embedded conversion options
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
564,241
|
|
|
$
|
564,241
|
|
Common stock warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
102,376,314
|
|
|
|
102,376,314
|
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
102,940,555
|
|
|
$
|
102,940,555
|
|
For
the three and six months ended June 30, 2018, total income (loss) on instruments valued using Level 3 valuations was $44.2 million
and ($95.6) million, respectively.
The
Company utilized the following methods to value its derivative liabilities for the six months ended June 30, 2018: (i) for embedded
conversion options valued at $507,438, 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 $102.4 million, the Company determined the fair value by using a binomial model and
monte carlo simulations; and (iii) for warrants valued at $12,999 and embedded conversion options valued at $56,803, the Company
determined the fair value using the Black-Scholes option pricing model. In addition, the Company valued the modification in the
term of the March 2017 Series B Warrants at $256,417 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 six months
ended June 30, 2018:
Balance at December 31, 2017
|
|
$
|
12,435,250
|
|
Loss on change in fair value of debentures and warrants *
|
|
|
94,965,093
|
|
Fair value of warrants exercised
|
|
|
(3,957,766
|
)
|
Fair value of debentures converted
|
|
|
(1,265,300
|
)
|
Fair value of debentures exchanged for Series I-2 Preferred Stock
|
|
|
(1,331
|
)
|
Modification of warrants
|
|
|
256,457
|
|
Issuance of convertible debt
|
|
|
508,152
|
|
Balance at June 30, 2018
|
|
$
|
102,940,555
|
|
*In
addition to the loss on change in fair value of debentures and warrants, during the six months ended June 30, 2018, the Company
recorded a loss on the exchange of convertible debentures into shares of its Series I-2 Preferred Stock of $651,560.
RENNOVA
HEALTH, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(unaudited)
The increase in the fair value of the derivative
liabilities is primarily due to the increase in the number of warrants issuable as a result of ratchet provisions and the increase
in the spread between the price of the Company’s common stock and the exercise prices of the derivatives. Because the exercise
price of a significant portion of the Company’s outstanding warrants is at $0.0018 per share on June 30, 2018, and
subject to further reduction in the event of future issuances at lower than $0.0018 per share, the fair value of the warrants
increased significantly during the six months ended June 30, 2018.
Note
18 – 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 now 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 as of June 30, 2018
from HTS to the Company of $14,545,208 and from AMSG of $7,318,608 will remain with the separated entities. The
Company hopes to complete the spin off(s) in a manner to permit it to recognize these amounts on its balance sheet as investments
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:
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Cash
|
|
$
|
5,121
|
|
|
$
|
9,273
|
|
Accounts receivable, net
|
|
|
5,947
|
|
|
|
19,022
|
|
Prepaid expenses and other current assets
|
|
|
25,477
|
|
|
|
25,477
|
|
Current assets classified as held for sale
|
|
$
|
36,545
|
|
|
$
|
53,772
|
|
|
|
|
|
|
|
|
|
|
Accounts payable (includes related parties)
|
|
$
|
480,013
|
|
|
$
|
671,561
|
|
Accrued expenses
|
|
|
396,440
|
|
|
|
375,165
|
|
Current portion of notes payable
|
|
|
325,603
|
|
|
|
249,589
|
|
Current liabilities classified as held for sale
|
|
$
|
1,202,056
|
|
|
$
|
1,296,315
|
|
RENNOVA
HEALTH, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(unaudited)
HTS Assets and Liabilities:
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Cash
|
|
$
|
6,568
|
|
|
$
|
8,281
|
|
Accounts receivable, net
|
|
|
214,962
|
|
|
|
160,715
|
|
Prepaid expenses and other current assets
|
|
|
11,451
|
|
|
|
3,964
|
|
Current assets classified as held for sale
|
|
$
|
232,981
|
|
|
$
|
172,960
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
11,449
|
|
|
$
|
21,078
|
|
Deposits
|
|
|
6,029
|
|
|
|
7,756
|
|
Non-current assets classified as held for sale
|
|
$
|
17,478
|
|
|
$
|
28,834
|
|
|
|
|
|
|
|
|
|
|
Accounts payable (includes related parties)
|
|
$
|
458,976
|
|
|
$
|
407,404
|
|
Accrued expenses
|
|
|
370,782
|
|
|
|
269,135
|
|
Current liabilities classified as held for sale
|
|
$
|
829,758
|
|
|
$
|
676,539
|
|
Consolidated Discontinued Operations Assets and Liabilities:
Total Discontinued Assets and Liabilities:
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Cash
|
|
$
|
11,689
|
|
|
$
|
17,554
|
|
Accounts receivable, net
|
|
|
220,909
|
|
|
|
179,737
|
|
Prepaid expenses and other current assets
|
|
|
36,928
|
|
|
|
29,441
|
|
Current assets classified as held for sale
|
|
$
|
269,526
|
|
|
$
|
226,732
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
11,449
|
|
|
$
|
21,078
|
|
Deposits
|
|
|
6,029
|
|
|
|
7,756
|
|
Non-current assets classified as held for sale
|
|
$
|
17,478
|
|
|
$
|
28,834
|
|
|
|
|
|
|
|
|
|
|
Accounts payable (includes related parties)
|
|
$
|
938,989
|
|
|
$
|
1,078,965
|
|
Accrued expenses
|
|
|
767,222
|
|
|
|
644,300
|
|
Current portion of notes payable
|
|
|
325,603
|
|
|
|
249,589
|
|
Current liabilities classified as held for sale
|
|
$
|
2,031,814
|
|
|
$
|
1,972,854
|
|
RENNOVA
HEALTH, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Major line items constituting income (loss)
from discontinued operations in the consolidated statements of operations for the three and six months ended June 30,
2018 and 2017 consisted of the following:
AMSG Loss from Discontinued Operations:
|
|
Three Months Ended
|
|
|
|
June 30, 2018
|
|
|
June 30, 2017
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Revenue from services
|
|
$
|
45,156
|
|
|
$
|
46,526
|
|
Cost of services
|
|
|
6,075
|
|
|
|
-
|
|
Gross profit
|
|
|
39,080
|
|
|
|
46,526
|
|
Operating expenses
|
|
|
94,683
|
|
|
|
370,873
|
|
Other (income) expenses
|
|
|
(13,313
|
)
|
|
|
11,225
|
|
Loss from discontinued operations
|
|
$
|
(42,290
|
)
|
|
$
|
(335,572
|
)
|
HTS Loss from Discontinued Operations:
|
|
Three Months Ended
|
|
|
|
June 30, 2018
|
|
|
June 30, 2017
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Revenue from services
|
|
$
|
441,458
|
|
|
$
|
459,512
|
|
Cost of services
|
|
|
31,665
|
|
|
|
28,677
|
|
Gross profit
|
|
|
409,793
|
|
|
|
430,835
|
|
Operating expenses
|
|
|
510,589
|
|
|
|
773,184
|
|
Other (income) expenses
|
|
|
3,491
|
|
|
|
-
|
|
Loss from discontinued operations
|
|
$
|
(104,287
|
)
|
|
$
|
(342,349
|
)
|
AMSG Income (loss) from Discontinued Operations:
|
|
Six Months Ended
|
|
|
|
June 30, 2018
|
|
|
June 30, 2017
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Revenue from services
|
|
$
|
78,841
|
|
|
$
|
223,104
|
|
Cost of services
|
|
|
22,214
|
|
|
|
769
|
|
Gross profit
|
|
|
56,627
|
|
|
|
222,335
|
|
Operating expenses
|
|
|
270,885
|
|
|
|
897,406
|
|
Other (income) expenses
|
|
|
(813,510
|
)
|
|
|
8,244
|
|
Income (loss) from discontinued operations
|
|
$
|
599,252
|
|
|
$
|
(683,315
|
)
|
RENNOVA
HEALTH, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(unaudited)
HTS Loss from Discontinued Operations:
|
|
Six Months Ended
|
|
|
|
June 30, 2018
|
|
|
June 30, 2017
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Revenue from services
|
|
$
|
791,971
|
|
|
$
|
774,782
|
|
Cost of services
|
|
|
65,883
|
|
|
|
75,381
|
|
Gross profit
|
|
|
726,088
|
|
|
|
699,401
|
|
Operating expenses
|
|
|
1,044,155
|
|
|
|
1,760,295
|
|
Other (income) expenses
|
|
|
5,969
|
|
|
|
-
|
|
Loss from discontinued operations
|
|
$
|
(324,036
|
)
|
|
$
|
(1,060,894
|
)
|
Consolidated
Loss from Discontinued Operations:
|
|
Three Months Ended
|
|
|
June 30, 2018
|
|
June 30, 2017
|
|
|
(unaudited)
|
|
(unaudited)
|
Revenue from services
|
|
$
|
486,614
|
|
|
$
|
506,038
|
|
Cost of services
|
|
|
37,740
|
|
|
|
28,677
|
|
Gross profit
|
|
|
448,874
|
|
|
|
477,361
|
|
Operating expenses
|
|
|
605,272
|
|
|
|
1,144,057
|
|
Other (income) expenses
|
|
|
(9,821
|
)
|
|
|
11,225
|
|
Loss from discontinued operations
|
|
$
|
(146,577
|
)
|
|
$
|
(677,921
|
)
|
Consolidated
Income (loss) from Discontinued Operations:
|
|
Six
Months Ended
|
|
|
|
June
30, 2018
|
|
|
June
30, 2017
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Revenue
from services
|
|
$
|
870,812
|
|
|
$
|
997,886
|
|
Cost
of services
|
|
|
88,097
|
|
|
|
76,150
|
|
Gross
profit
|
|
|
782,715
|
|
|
|
921,736
|
|
Operating
expenses
|
|
|
1,315,040
|
|
|
|
2,657,701
|
|
Other
(income) expenses
|
|
|
(
807,541
|
)
|
|
|
8,244
|
|
Income
(loss) from discontinued operations
|
|
$
|
275,216
|
|
|
$
|
(1,744,209
|
)
|
Note
19 – Recent Accounting Pronouncements
Accounting
Pronouncements Adopted
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. 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. 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 Company had determined that this amendment had a material impact on its consolidated financial statements
and has early adopted this accounting standard update. The provisions of this Update and its impact on the Company’s financial
statements are discussed in Note 1.
RENNOVA
HEALTH, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Effective
January 1, 2018, the Company adopted ASU No. 2014-09,
“Revenue from Contracts with Customers (Topic 606)”
as
more fully discussed in Note 1.
Accounting
Pronouncements Not Yet Adopted
In
February 2016, the FASB issued ASU 2016-02
, Leases (Topic 842)
as updated. This new standard introduces a new lease model
that requires the recognition of lease assets and lease liabilities on the balance sheet and the disclosure of key information
about leasing arrangements. While this new standard retains most of the principles of the existing lessor model under U.S. GAAP,
it aligns many of those principles with
ASC 606: Revenue from Contracts with Customers
. The new guidance will be effective
for us beginning after December 31, 2018. Early adoption will be permitted for all entities. The Company has not yet determined the impact of the adoption of this guidance on
its consolidated financial statements.
In
February 2018, the FASB issued ASU 2018-02,
Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification
of Certain Tax Effects from Accumulated Other Comprehensive Income.
This standard provides companies with an option to reclassify
stranded tax effects resulting from enactment of the Tax Cuts and Jobs Act (“TCJA”) from accumulated other comprehensive
income to retained earnings. This ASU will be effective for us for annual and interim periods beginning on December 15, 2018.
Early adoption of this standard is permitted and may be applied either in the period of adoption or retrospectively to each period
in which the effect of the change in the tax rate as a result of TCJA is recognized. The Company does not expect the adoption
of this ASU to have a material impact on its results of operations, financial position and cash flows.
In
February 2018, the FASB issued ASU 2018-03;
Technical Corrections and Improvements to Financial Instruments—Overall
(Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities
. The technical corrections and
improvements intended to clarify certain aspects of the guidance on recognizing and measuring financial assets and liabilities
in ASU 2016-01. This includes equity securities without a readily determinable fair value, forward contracts and purchased options,
presentation requirements for certain fair value option liabilities, fair value option liabilities denominated in foreign currency
and transition guidance for equity securities without a readily determinable fair value. The Company is required to adopt these
standards starting in the first quarter of fiscal year 2019 and does not anticipate that implementation will have a material impact
on its consolidated financial statements.
In
March 2018, the FASB issued ASU 2018-05 “Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting
Bulletin No. 118 (SEC Update)”, which amended ASC 740 to incorporate the requirements of Staff Accounting Bulletin (“SAB”)
118. Issued in December 2017 by the SEC, SAB 118 addresses the application of U.S. GAAP in situations in which a registrant does
not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete
the accounting for certain income tax effects of the TCJA which was signed into law on December 22, 2017. The Company does not
expect this to have a material impact on its consolidated financial statements.
In
June 2018, the FASB issued ASU 2018-07 to expand the scope
of ASC Topic 718, Compensation - Stock Compensation
,
to include share-based payment transactions for acquiring goods and services from nonemployees. The pronouncement is effective
for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted.
The Company has not yet determined the effect of this pronouncement on its consolidated financial statements.
Other
recent accounting standards issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified
Public Accountants, and the SEC did not or are not believed by management to have a material impact on the Company’s present
or future consolidated financial statements.
Note
20 – Subsequent Events
Issuance
of Debentures
On July 16, 2018, the Company entered into
Additional Issuance Agreements (the “Issuance Agreements”), with two existing institutional investors of the Company.
Under the Issuance Agreements, the Company issued $1,240,000 aggregate principal amount of Senior Secured Original Issue Discount
Convertible Debentures due September 19, 2019 and received proceeds of $1,000,000. The Issuance Agreements also provide that,
from time to time on or before December 31, 2018, in one or more closings, the Company may request that the institutional investors
purchase up to $3,100,000 aggregate principal amount of additional debentures, on the same terms. Any purchase by the investors
will be at their discretion. As of August 13, 2018, the Company has received additional proceeds of $1,500,000 from
the issuances of $1,860,000 of principal amount of additional debentures.
RENNOVA
HEALTH, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Issuance
of Series I-2 Preferred Stock in Exchange for Debentures
Under
the Exchange Agreements with the holders of the September Debentures, on July 16, 2018, the holders exchanged a portion of the
September Debentures for shares of the Company’s Series I-2 Preferred Stock. On that date, the holders elected
to exchange an aggregate of $1,741,580 principal amount of the September Debentures and the Company issued an aggregate of 2,176.975
shares of its Series I-2 Preferred Stock.
Issuance
of Series J Convertible Preferred Stock
On July 20, 2018, the Company filed a Certificate
of Designation with the Secretary of State of the State of Delaware to authorize the issuance of up to 250,000 shares of its Series
J Convertible Preferred Stock (the “Series J Preferred Stock”). On July 23, 2018, the Company entered into an Exchange
Agreement (the “Agreement”) with Alcimede, of which Seamus Lagan, our Chief Executive Officer, is the sole manager.
Pursuant to the Agreement, the Company issued to Alcimede 250,000 shares of the Series J Preferred Stock in exchange for the cancellation
of the outstanding principal and interest owed by the Company to Alcimede under the Note, dated February 5, 2015, and the cancellation
of certain amounts owed by the Company to Alcimede under a consulting agreement between the parties. The total amount of consideration
paid by Alcimede to the Company equaled $250,000. The Company’s Board of Directors has designated 250,000 shares of the
5,000,000 authorized shares of its preferred stock as the Series J Preferred Stock. Each share of the Series J Preferred Stock
has a stated value of $1.00. The conversion price is equal to the average closing price of the Company’s common stock on
the 10 trading days immediately prior to the conversion date. Each holder of the Series J Preferred Stock shall be entitled
to vote on all matters submitted to a vote of the holders of the Company’s common stock. With respect to a vote of stockholders,
no later than September 30, 2018 only, to approve either or both of a reverse stock split of the Company’s common stock
and an increase in the authorized shares of common stock from three billion shares to up to ten billion shares, each share of
the Series J Preferred Stock shall be entitled to the whole number of votes equal to 12,000 shares of common stock. With respect
to all other matters, and from and after October 1, 2018, each share of the Series J Preferred Stock shall be entitled to the
whole number of votes equal to the number of common shares into which it is then convertible. The full terms of the Series
J Preferred Stock are listed in the Certificate of Designations filed as Exhibit 3.16 to the Company’s Current Report on
Form 8-K filed with the SEC on July 24, 2018.
Common
Stock
As
of August 1, 2018, the Company has outstanding 3.0 billion shares of its common stock. Since June 30, 2018, the Company has issued
1.4 billion shares of common stock through August 1, 2018 as follows:
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421.94233
shares of its Series I-2 Preferred Stock were converted into 482,643,330 shares of common stock;
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624,529,524
shares of common stock were issued upon conversion of $809,334 of the principal amount of the March 2017 Debentures; and
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301,333,334
shares of common stock were issued for the cashless exercise of 1,849,500,000 March 2017 Series B warrants.
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The Company has exhausted all of its authorized
shares of common stock and, absent an increase in the authorized shares or a reverse split or both, will be unable to issue any
additional shares of common stock.