NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For
the Three Months Ended March 31, 2019 and 2018
(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) Hospital Operations; and (ii) Clinical Laboratory Operations. The Company presents its financial results
based upon these two business segments, which are more fully discussed in Note 16.
Reverse
Stock Split
On
November 5, 2018, the Company’s Board of Directors approved an amendment to the Company’s Certificate of Incorporation
to effect a 1-for-500 reverse stock split effective November 12, 2018 (the “Reverse Stock Split”). The stockholders
of the Company had approved the amendment to the Company’s Certificate of Incorporation on August 22, 2018 for the Reverse
Stock Split. 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 split within certain specified effective dates.
As
a result of the Reverse Stock Split, every 500 shares of the Company’s then outstanding common stock was combined and automatically
converted into one share of the Company’s common stock on November 12, 2018. 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 applicable reverse split ratio in accordance
with the terms of such instruments. In addition, proportionate voting rights and other rights of common stockholders were not
affected by the Reverse Stock Split, other than as a result of cash paid in lieu of fractional shares as no fractional shares
were issued in connection with the Reverse Stock Split.
All
share, per share and capital stock amounts as of and for the three months ended March 31, 2018 have been restated to give effect
to the Reverse Stock Split.
In addition, on September 18, 2018, the Company
amended its Certificate of Incorporation to have the authority to issue 10,000,000,000 shares of common stock and the par value
of the Company’s common stock was decreased from $0.01 per share to $0.0001 per share. No additional change was made
to the terms of the Company’s common stock as a result of the November 12, 2018 reverse stock split and no change was made
to the authorized preferred stock, which remains at 5,000,000 shares of preferred stock, par value $0.01 per share.
The
Reverse Stock Split provided sufficient authorized and unissued shares to allow for the Company’s outstanding and otherwise
equity classified instruments to be classified in equity. As a result, the fair value of these instruments was evaluated for reclassification
and, as a result, during the third quarter of 2018, the Company reclassified its derivative liabilities previously reported as
a current liability to derivative income. On October 4, 2019, the Board of Directors authorized the issuance and sale of certain
shares of its Series K Convertible Preferred Stock to Alcimede LLC (“Alcimede”), a related party, as more fully discussed
in Note 9. The Board considered all options to secure additional financing required to continue operations and determined this
authorization to be necessary to secure needed financing in the required time frame. As a result of this authorization, as of
the date of filing this report, the Company believes that it has the ability to have sufficient authorized shares of its common
stock to cover all potentially dilutive common shares outstanding.
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, 2018, filed with the Securities and Exchange Commission on October 21, 2019. 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 March 31, 2019, and the results of its operations, changes
in stockholders’ deficit and cash flows for the three months ended March 31, 2019 and 2018. Such adjustments are of a normal
recurring nature. The results of operations for the three months ended March 31, 2019 may not be indicative of results for the
year ending December 31, 2019.
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
For
the three months ended March 31, 2018, the Company has presented the proceeds from related party notes payable and advances that
were previously netted against payments on related party notes payable and advances as a separate line item on the Statement of
Cash Flows. This reclassification did not have an effect on total cash flow from financing activities for the three months ended
March 31, 2018.
Comprehensive
Loss
During
the three months ended March 31, 2019 and 2018, comprehensive loss was equal to the net loss amounts presented in the accompanying
condensed consolidated statements of operations.
Use
of Estimates
The
preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, and disclosure of contingent liabilities at the date of the consolidated financial
statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those
estimates. Significant estimates and assumptions include the estimates of fair values of assets acquired and liabilities assumed
in business combinations, including hospital acquisitions, reserves, contractual allowances and write-downs related to receivables
and inventories, the recoverability of long-lived assets, stock based compensation, the valuation allowance relating to the Company’s
deferred tax assets, valuation of equity and derivative instruments, including modifications thereof, deemed dividends and debt
discounts, among others. Actual results could differ from those estimates and would impact future results of operations and cash
flows.
Cash
and Cash Equivalents
The
Company considers all highly liquid temporary cash investments with an original maturity of three months or less to be cash equivalents.
The Company had minimal cash equivalents at March 31, 2019 and December 31, 2018.
Revenue
Recognition
Hospital
Operations
Our
revenues generally relate to contracts with patients in which our performance obligations are to provide health care services
to the patients. Revenues are recorded during the period our obligations to provide health care services are satisfied. Our performance
obligations for inpatient services are generally satisfied over periods that average approximately five days, and revenues are
recognized based on charges incurred in relation to total expected charges. Our performance obligations for outpatient services
are generally satisfied over a period of less than one day. The contractual relationships with patients, in most cases, also involve
a third-party payer (Medicare, Medicaid, managed care health plans and commercial insurance companies, including plans offered
through the health insurance exchanges) and the transaction prices for the services provided are dependent upon the terms provided
by (Medicare and Medicaid) or negotiated with (managed care health plans and commercial insurance companies) the third-party payers.
The payment arrangements with third-party payers for the services we provide to the related patients typically specify payments
at amounts less than our standard charges. Medicare generally pays for inpatient and outpatient services at prospectively determined
rates based on clinical, diagnostic and other factors. Services provided to patients having Medicaid coverage are generally paid
at prospectively determined rates per discharge, per identified service or per covered member. Agreements with commercial insurance
carriers, managed care and preferred provider organizations generally provide for payments based upon predetermined rates per
diagnosis, per diem rates or discounted fee-for-service rates. Management continually reviews the contractual estimation process
to consider and incorporate updates to laws and regulations and the frequent changes in managed care contractual terms resulting
from contract renegotiations and renewals. Our revenues are based upon the estimated amounts we expect to be entitled to receive
from patients and third-party payers. Estimates of contractual allowances under managed care and commercial insurance plans are
based upon the payment terms specified in the related contractual agreements. Revenues related to uninsured patients and uninsured
copayment and deductible amounts for patients who have health care coverage may have discounts applied (uninsured discounts and
contractual discounts). We also record estimated implicit price concessions (based primarily on historical collection experience)
related to uninsured accounts to record self-pay revenues at the estimated amounts we expect to collect.
Laws
and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation. Estimated reimbursement
amounts are adjusted in subsequent periods as cost reports are prepared and filed and as final settlements are determined (in
relation to certain government programs, primarily Medicare, this is generally referred to as the “cost report” filing
and settlement process). There were no adjustments to estimated Medicare and Medicaid reimbursement amounts and disproportionate-share
funds related primarily to cost reports filed during the three months ended March 31, 2019 and 2018.
The
Emergency Medical Treatment and Labor Act (“EMTALA”) requires any hospital participating in the Medicare program to
conduct an appropriate medical screening examination of every person who presents to the hospital’s emergency room for treatment
and, if the individual is suffering from an emergency medical condition, to either stabilize the condition or make an appropriate
transfer of the individual to a facility able to handle the condition. The obligation to screen and stabilize emergency medical
conditions exists regardless of an individual’s ability to pay for treatment. Federal and state laws and regulations require,
and our commitment to providing quality patient care encourages, us to provide services to patients who are financially unable
to pay for the health care services they receive. The federal poverty level is established by the federal government and is based
on income and family size. The Company considers the poverty level in determining whether patients qualify for free or reduced
cost of care. Because we do not pursue collection of amounts determined to qualify as charity care, they are not reported in revenues.
We provide discounts to uninsured patients who do not qualify for Medicaid or charity care. In implementing the uninsured discount
policy, we may first attempt to provide assistance to uninsured patients to help determine whether they may qualify for Medicaid,
other federal or state assistance, or charity care. If an uninsured patient does not qualify for these programs, the uninsured
discount is applied.
The
collection of outstanding receivables for Medicare, Medicaid, managed care payers, other third-party payers and patients is our
primary source of cash and is critical to our operating performance. The primary collection risks relate to uninsured patient
accounts, including patient accounts for which the primary insurance carrier has paid the amounts covered by the applicable agreement,
but patient responsibility amounts (deductibles and copayments) remain outstanding. Implicit price concessions relate primarily
to amounts due directly from patients. Estimated implicit price concessions are recorded for all uninsured accounts, regardless
of the aging of those accounts. Accounts are written off when all reasonable internal and external collection efforts have been
performed. The estimates for implicit price concessions are based upon management’s assessment of historical write-offs
and expected net collections, business and economic conditions, trends in federal, state and private employer health care coverage
and other collection indicators. Management relies on the results of detailed reviews of historical write-offs and collections
at facilities that represent a majority of our revenues and accounts receivable (the “hindsight analysis”) as a primary
source of information in estimating the collectability of our accounts receivable. We perform the hindsight analysis quarterly,
utilizing rolling twelve-months accounts receivable collection and write-off data. We believe our quarterly updates to the estimated
contractual allowance amounts at each of our hospital facilities provide reasonable estimates of our revenues and valuations of
our accounts receivable. At March 31, 2019 and December 31, 2018, estimated contractual allowances of $32 million and $63 million,
respectively, had been recorded as reductions to our accounts receivable balances to enable us to record our revenues and accounts
receivable at the estimated amounts we expect to collect.
Clinical
Laboratory Operations.
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.
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.
Total
gross revenues for Hospital and Clinical Laboratory Operations were reduced by approximately $1.6 million and $0.6 million
for bad debt for the three months ended March 31, 2019 and 2018, respectively. After bad debt and contractual and related allowance
adjustments to revenues of $33.4 million and $7.5 million, for the three months ended March 31, 2019 and 2018, respectively,
we reported net revenues of $5.2 million and $1.6 million. We continue to review the provision for bad debt and contractual
and related allowances
Leases, Including the Adoption of ASU
No. 2016-02
We adopted ASU No. 2016-02, Leases (Topic 842), which requires leases with
durations greater than 12 months to be recognized on the balance sheet, effective January 1, 2019, using the modified retrospective
approach. Prior period financial statement amounts and disclosures have not been adjusted to reflect the provisions of the new
standard. We elected the package of transition provisions available which allowed us to carryforward our historical assessments
of (1) whether contracts are or contain leases, (2) lease classification and (3) initial direct costs. We lease property and equipment
under finance and operating leases. For leases with terms greater than 12 months, we record the related right-of-use assets and
right-of-use obligations at the present value of lease payments over the term. We do not separate lease and nonlease components
of contracts. Our operating and finance leases are more fully discussed in Note 10.
Derivative
Financial Instruments and Fair Value, Including the Adoption of ASU 2017-11
We
account for warrants issued in conjunction with the issuance of common stock and certain convertible debt instruments in accordance
with the guidance contained in Accounting Standards Codification (“ASC”) Topic 815, Derivatives and Hedging (“ASC
815”) and ASC Topic 480, Distinguishing Liabilities from Equity (“ASC 480”). For warrant instruments and conversion
options embedded in promissory notes that are not deemed to be indexed to the Company’s own stock, we classified such instruments
as liabilities at their fair values at the time of issuance and adjusted the instruments to fair value at each reporting period.
These liabilities were subject to re-measurement at each balance sheet date until extinguished either through conversion or exercise,
and any change in fair value was recognized in our statement of operations. The fair values of these derivative and other financial
instruments had been estimated using a Black-Scholes model and other valuation techniques.
In
July 2017, the FASB issued ASU 2017-11 “Earnings Per Share (Topic 260) Distinguishing Liabilities from Equity (Topic 480)
Derivatives and Hedging (Topic 815).” The amendments in Part I of this Update change the classification analysis of certain
equity-linked financial instruments (or embedded features) with down round features. When determining whether certain financial
instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification
when assessing whether the instrument is indexed to an entity’s own stock. The amendments also clarify existing disclosure
requirements for equity-classified instruments. As a result, a freestanding equity-linked financial instrument (or embedded conversion
option) no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round
feature. For freestanding equity classified financial instruments, the amendments require entities that present earnings per share
(EPS) in accordance with Topic 260 to recognize the effect of the down round feature when it is triggered. That effect is treated
as a dividend and as a reduction of income available to common shareholders in basic EPS. Convertible instruments with embedded
conversion options that have down round features are now subject to the specialized guidance for contingent beneficial conversion
features (in Subtopic 470-20, Debt—Debt with Conversion and Other Options), including related EPS guidance (in Topic 260).
The amendments in Part II of this Update re-characterize the indefinite deferral of certain provisions of Topic 480 that now are
presented as pending content in the Codification, to a scope exception. Those amendments do not have an accounting effect.
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.
The Company 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 of which $51 million of the deemed dividend was recorded retrospectively as of
the beginning of the issuance of the debentures issued in March 2017 where the initial derivative liability was recorded as a result
of the down round provision feature. A deemed dividend of $231.8 million was recorded for the year ended December 31, 2018 and
a deemed dividend of $123.9 million was recorded during the three months ended March 31, 2019 as a result of down round provision
features. See Note 11 for an additional discussion of derivative financial instruments.
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 (loss) earnings 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 months ended March 31, 2019 and 2018.
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.
The
Company had a working capital deficit, an accumulated deficit and a stockholders’ deficit of $49.4 million, $552.3
million and $47.9 million, respectively, at March 31, 2019. In addition, the Company had a net loss of approximately
$13.4 million and cash used in operating activities of $0.9 million for the three ended March 31, 2019. The continued losses
and other related factors raise substantial doubt about the Company’s ability to continue as a going concern for twelve
months from the filing date of this report.
The
Company’s unaudited condensed consolidated financial statements are prepared assuming the Company can continue as a going
concern, which contemplates continuity of operations through realization of assets, and the settling of liabilities in the normal
course of business. 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. The Company intends to spin
off its 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. While these spin offs have taken longer than anticipated,
completion of these spin offs is now expected to occur during the first quarter of 2020. 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 spin offs of AMSG
and HTS is to create three public companies, each of which can focus on its own strengths and operational plans. In accordance
with ASC 205-20 and having met the criteria for “held for sale”, the Company has reflected amounts relating to AMSG
and HTS as disposal groups classified as held for sale and included as part of discontinued operations. AMSG and HTS are no longer
included in the segment reporting following the reclassification to discontinued operations. The discontinued operations of AMSG
and HTS are described further in Note 17.
The
Company’s core business is now rural hospitals which is a specialized marketplace with a requirement for capable and knowledgeable
management. The Company’s current financial condition may make it difficult to attract and maintain adequate expertise in
its management team to successfully operate the Company’s hospitals.
There
can be no assurance that the Company will be able to achieve its business plan, which is to acquire and operate clusters of rural
hospitals, raise any additional capital or secure the additional financing necessary to implement its current operating plan.
The ability of the Company to continue as a going concern is dependent upon its ability to significantly reduce its operating
costs, increase its revenues, and eventually regain profitable operations. The accompanying condensed consolidated financial statements
do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
Note
3 – Loss Per Share
Basic
and diluted loss per share is computed by dividing (i) loss available to common stockholders, by (ii) the weighted-average number
of shares of common stock outstanding during the period. Basic loss per share excludes dilution and is computed by dividing loss
attributable to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted loss
per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised
or converted into common stock or resulted in the issuance of common stock that then shared in the income of the Company. For
each of the three months ended March 31, 2019 and 2018, basic loss per share is the same as diluted loss per share.
The
following table sets forth the computation of the Company’s basic and diluted net loss per share during the three months
ended March 31, 2019 and 2018:
|
|
Three Months Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Numerator
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
$
|
(12,932,795
|
)
|
|
$
|
(146,786,377
|
)
|
Deemed dividend from trigger of down round provision feature
|
|
|
(123,861,587
|
)
|
|
|
-
|
|
Net loss attributable to common stockholders, continuing operations
|
|
$
|
(136,794,382
|
)
|
|
$
|
(146,786,377
|
)
|
Net (loss) income from discontinued operations
|
|
|
(508,609
|
)
|
|
|
421,793
|
|
Net loss available to common stockholders
|
|
$
|
(137,302,991
|
)
|
|
$
|
(146,364,584
|
)
|
|
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
|
|
Basic and diluted weighted average common shares outstanding
|
|
|
1,404,610,862
|
|
|
|
443,885
|
|
|
|
|
|
|
|
|
|
|
(Loss) income per share, basic and diluted
|
|
|
|
|
|
|
|
|
Basic and diluted, continuing operations
|
|
$
|
(0.10
|
)
|
|
$
|
(330.69
|
)
|
Basic and diluted, discontinued operations
|
|
$
|
(0.00
|
)
|
|
$
|
0.95
|
|
Total basic and diluted
|
|
$
|
(0.10
|
)
|
|
$
|
(329.74
|
)
|
Diluted
loss per share excludes all dilutive potential shares if their effect is anti-dilutive. As of March 31, 2019 and 2018, the following
potential common stock equivalents were excluded from the calculation of diluted loss per share as their effect was anti-dilutive:
|
|
Three
Months Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Warrants
|
|
|
634,585,355,377
|
|
|
|
30,937,267
|
|
Convertible preferred stock
|
|
|
87,902,722,060
|
|
|
|
1,786,197
|
|
Convertible debentures
|
|
|
30,570,395,193
|
|
|
|
1,562,971
|
|
Stock options
|
|
|
77
|
|
|
|
77
|
|
|
|
|
753,058,472,707
|
|
|
|
34,286,512
|
|
The
terms of certain of the warrants, convertible preferred stock and convertible debentures issued by the Company provide for reductions
in the per share exercise prices of the warrants and the per share conversion prices of the debentures and preferred stock (if
applicable and subject to a floor in certain cases), in the event that the Company issues common stock or common stock equivalents
(as that term is defined in the agreements) at an effective exercise/conversion price that is less than the then exercise/conversion
prices of the outstanding warrants, preferred stock and debentures. In addition, many of these equity-based securities contain
exercise or conversion prices that vary based upon the price of the Company’s common stock on the date of exercise/conversion
(see Notes 12 and 13). These provisions have resulted in significant dilution of the Company’s common stock and have given
rise to reverse splits of the Company’s common stock. As a result of these down round provisions, the outstanding common
stock and potential common stock equivalents totaled 756.6 billion at September 30, 2019. See Notes 13 and 19 regarding a discussion
of the Company’s common stock and potential common stock equivalents.
Note
4 – Accounts Receivable
Accounts
Receivable Factoring Arrangements
During
the three months ended March 31, 2019, the Company entered into an accounts receivable factoring arrangement. Under the terms
of the arrangement, the amount of accounts receivable sold on a non-recourse basis, was $0.9 million. The purchase price paid
to the Company was $0.6 million, the total origination and other fees incurred by the Company were $30,000 and the Company recorded
a loss on sale of the receivables of $0.3 million. As of March 31, 2019, $0.8 million of the outstanding accounts receivable were
purchased but not yet paid to the factor. Subsequent to March 31, 2019, the Company entered into four additional factoring arrangements
as more fully discussed in Note 19.
Note
5 – 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 acquisition also included a separate physician practice which now operates as Mountain View Physician Practice,
Inc. This acquisition was made as part of the Company’s business plan to acquire and operate clusters of rural hospitals.
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, legal costs of approximately
$115,000, and other diligence related costs, which were expensed in 2018.
The
fair value of the purchase consideration paid to the Sellers was allocated to the net tangible and intangible assets acquired.
The Company accounted for the acquisition as a business combination under U.S. GAAP. In accordance with the acquisition method
of accounting under ASC 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
fair value of the assets acquired, net of the liabilities assumed, was approximately $8.2 million. The excess of the aggregate
fair value of the net tangible assets acquired over the purchase price was $7.6 million and has been treated as a gain on bargain
purchase in accordance with ASC 805.
The
following table shows the 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 fair value:
|
|
|
|
|
Cash
|
|
$
|
375
|
|
Inventories
|
|
|
450,682
|
|
Prepaids and deposits
|
|
|
310,385
|
|
Property and equipment
|
|
|
7,129,484
|
|
Intangible assets
|
|
|
504,806
|
|
Accrued expenses
|
|
|
(193,966
|
)
|
Net tangible and intangible assets acquired
|
|
$
|
8,201,766
|
|
Gain on bargain purchase
|
|
$
|
7,566,670
|
|
As
reflected in the table above, the total value of intangible assets acquired in the Jamestown acquisition was $504,806, which included
a certificate of need valued at $259,443 and a non-compete intangible asset valued at $245,363. The certificate of need has an
indefinite life. During the year ended December 31, 2018, the Company determined that the fair value of the non-compete intangible
asset, which was being amortized over two years, was fully impaired and, accordingly, the Company recorded an impairment of approximately
$0.2 million in December 31, 2018.
Purchase
Agreement re Jellico Community Hospital and CarePlus Center
Effective
March 5, 2019, the Company acquired certain assets related to Jellico Community Hospital and CarePlus Center. Jellico Community
Hospital is a fully operational 54-bed acute care facility that offers comprehensive services, including diagnostic imaging, radiology,
surgery (general, gynecological and vascular), nuclear medicine, wound care and hyperbaric medicine, intensive care, emergency
care and physical therapy. The CarePlus Center offers sophisticated testing capabilities and compassionate care, all in a modern,
patient-friendly environment. Services include diagnostic imaging services, x-ray, mammography, bone densitometry, computed tomography
(CT), ultrasound, physical therapy and laboratory services on a walk-in basis.
The
purchase price was $658,537. This purchase price was made available by Mr. Diamantis. The total cost of the acquisition is estimated
to be $908,537, including $250,000 of diligence, legal and other costs associated with the acquisition. The acquisition costs
will be fully expensed in 2019.
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 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 assets acquired, net of the liabilities assumed, was approximately $0.9 million. The excess of the aggregate
fair value of the net tangible assets acquired over the purchase price is currently estimated to be $0.3 million and has been
treated as a gain on bargain purchase in accordance with ASC 805. The gain is primarily due to the value of the intangible assets
acquired. In addition, 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 a 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 hospital operations.
The
following table shows the preliminary allocation of the purchase price of Jellico Community Hospital and CarePlus Center to the
acquired identifiable assets acquired, and liabilities assumed:
Total purchase price
|
|
$
|
658,537
|
|
Tangible and intangible assets acquired, and liabilities assumed at estimated fair value:
|
|
|
|
|
Inventories
|
|
$
|
317,427
|
|
Property and equipment
|
|
|
500,000
|
|
Intangible asset- certificate of need
|
|
|
250,000
|
|
Accrued expenses
|
|
|
(158,890
|
)
|
Net tangible and intangible assets acquired
|
|
$
|
908,537
|
|
Gain on bargain purchase
|
|
$
|
250,000
|
|
The
following presents the unaudited pro-forma combined results of operations of the Company and Jamestown Regional Medical Center
and Jellico Community Hospital and CarePlus Center as if the acquisitions had occurred on January 1, 2018. 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 acquisitions been completed as of January 1, 2018 or to project
potential operating results as of any future date or for any future periods.
|
|
Three Months Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
Net revenue
|
|
$
|
6,908,270
|
|
|
$
|
8,918,189
|
|
Net loss from continuing operations
|
|
|
(13,133,608
|
)
|
|
|
(148,397,145
|
)
|
Deemed dividend from trigger of down round provision feature
|
|
|
(123,861,587
|
)
|
|
|
—
|
|
Net (loss) income from discontinued operations
|
|
|
(508,609
|
)
|
|
|
421,793
|
|
Net loss to common stockholders
|
|
$
|
(137,503,804
|
)
|
|
$
|
(147,975,352
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per common share:
|
|
|
|
|
|
|
|
|
Basic and diluted continuing operations
|
|
$
|
(0.10
|
)
|
|
$
|
(334.31
|
)
|
Basic and diluted net loss
|
|
$
|
(0.10
|
)
|
|
$
|
(333.36
|
)
|
Note
6 – Accrued Expenses
Accrued
expenses at March 31, 2019 (unaudited) and December 31, 2018 consisted of the following:
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
Commissions payable
|
|
$
|
19,113
|
|
|
$
|
19,113
|
|
Sales tax payable
|
|
|
8,016
|
|
|
|
8,016
|
|
Accrued payroll and related liabilities
|
|
|
5,213,999
|
|
|
|
3,400,052
|
|
Accrued property tax
|
|
|
1,734
|
|
|
|
47,396
|
|
Accrued interest
|
|
|
5,686,593
|
|
|
|
5,464,837
|
|
Other accrued expenses
|
|
|
1,664,459
|
|
|
|
1,771,867
|
|
Accrued expenses
|
|
$
|
12,593,914
|
|
|
$
|
10,711,281
|
|
Accrued
expenses at March 31, 2019 and December 31, 2018 include $4.9 million of interest due under the terms of a settlement agreement
for a prepaid forward purchase contract related to an accounts receivable financing as more fully discussed in Note 7 and $0.4
million of accrued interest due to Mr. Diamantis.
Note
7 – Notes Payable
The
Company and its subsidiaries are party to a number of loans with affiliates and unrelated parties. At March 31, 2019 and December
31, 2018, notes payable consisted of the following:
Notes
Payable – Third Parties
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
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
|
|
|
1,741,893
|
|
|
|
1,741,893
|
|
|
|
|
|
|
|
|
|
|
Notes payable to CommerceNet and Jay Tenenbaum in the original principal
amount of $500,000, bearing interest at 6% per annum (the “Tegal Notes”). Principal and interest payments
due annually from July 12, 2015 through July 12, 2017
|
|
|
336,099
|
|
|
|
341,612
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,077,992
|
|
|
|
7,083,505
|
|
Less current portion
|
|
|
(7,077,992
|
)
|
|
|
(7,083,505
|
)
|
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 $0 as of December 31, 2017. In exchange for the consideration
received, the counterparty received the right to: (i) a 20% per annum investment return from the Company on the consideration,
with a minimum repayment term of six months and minimum return of $0.5 million, (ii) all payments recovered from the accounts
receivable up to $5.25 million, if paid in full within six months, or $5.5 million, if not paid in full within six months, and
(iii) 20% of all payments of the accounts receivable in excess of amounts received in (i) and (ii). On March 31, 2017, to the
extent that the counterparty had not been paid $6.0 million, the Company was required to pay the difference. Christopher Diamantes,
a director of the Company, guaranteed the Company’s obligation. On March 24, 2017, the Company, the counterparty and Mr.
Diamantis, as guarantor, entered into an amendment (the “Amendment”) to extend the Company’s obligation to March
31, 2018. Also, what the counterparty was to receive was amended to equal (a) the $5,000,000 purchase price plus a 20% per annum
investment return thereon, plus (b) $500,000, plus (c) the product of (i) the proceeds received from the accounts receivable,
minus the amount set forth in clauses (a) and (b), multiplied by (ii) 40%. In connection with the extension, the counterparty
received a fee of $1,000,000. 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. The counterparty instituted an arbitration proceeding under the agreement with regard
to the outstanding balance. In December 2018, the Company, Mr. Diamantis and the counterparty entered into a preliminary settlement
agreement in connection with the arbitration, with the terms of the settlement agreement revised on March 31, 2019. The Company
and Mr. Diamantis agreed to pay the counterparty $2,000,000 on or before April 5, 2019 and an additional $7,694,685 plus interest
at 10% per annum on or before May 20, 2019, which date was subsequently amended. On April 5, 2019 and May 31, 2019, Mr. Diamantis
made payments totaling $5.0 million on behalf of the Company. The final payment of $4,937,105 was due on or before July 28, 2019.
Mr. Diamantis made that payment on behalf of the Company on July 26, 2019. The Company and Mr. Diamantis have now complied with
all of their obligations under the settlement agreement. As a result, the Company is obligated to repay Mr. Diamantis a total
of $9,937,105. In addition to the $5,000,000 reflected in the table above, $4,937,105 is included on the Balance Sheets in Accrued
Expenses at March 31, 2019 and December 31, 2018. Additional amounts owed to Mr. Diamantis are discussed below and in Note 19.
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 at December 31, 2018. In
addition, TCA entered into an inter-creditor agreement with the purchasers of the convertible debentures (see Note 8) which sets
forth rights, preferences and priorities with respect to the security interests in the Company’s assets. On September 19,
2017, the Company entered into a new agreement with TCA, which extended the repayment schedule through December 31, 2017. The
remaining debt to TCA remains outstanding and TCA has made a demand for payment. The parties are currently working to amend the
TCA Debenture 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 Party
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
Loan payable to Christopher Diamantis
|
|
$
|
1,513,788
|
|
|
$
|
800,000
|
|
|
|
|
|
|
|
|
|
|
Total notes payable, related party
|
|
|
1,513,788
|
|
|
|
800,000
|
|
|
|
|
|
|
|
|
|
|
Less current portion of notes payable, related party
|
|
|
(1,513,788
|
)
|
|
|
(800,000
|
)
|
Total notes payable, related party, net of current portion
|
|
$
|
-
|
|
|
$
|
-
|
|
During
the year ended December 31, 2018, the Company borrowed $3.3 million from Christopher Diamantis and incurred interest of $0.3 million
and repaid $4.0 million, including interest of $0.2 million. The loan payable balance, which bears interest at a rate of 10% on
all amounts funded, was $0.8 million on December 31, 2018 and accrued interest was $0.2 million.
During
the three months ended March 31, 2019, Mr. Diamantis advanced the Company: (i) $0.7 million for the purchase of Jellico Community
Hospital as more fully discussed in Note 5; $0.1 million for fees and expenses incurred in connection with the settlement of the
prepaid forward purchase contract (see the discussion of the settlement of this contract above); and $0.6 million for working
capital purposes. During the three months ended March 31, 2019, we accrued interest of $0.1 million on the advances from Mr. Diamantis
and we repaid $0.7 million to Mr. Diamantis. Interest accrues on loans from Mr. Diamantis at a rate of 10% on all amounts funded.
See Note 19 for the discussion of additional advances made to the Company by Mr. Diamantis subsequent to March 31, 2019.
Note
8 – Debentures
The
carrying amount of all outstanding debentures as of March 31, 2019 (unaudited), and December 31, 2018 is as follows:
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
Debentures
|
|
$
|
20,230,240
|
|
|
$
|
19,034,800
|
|
Discount on Debentures
|
|
|
(2,893,148
|
)
|
|
|
(6,247,469
|
)
|
Deferred financing fees
|
|
|
(7,315
|
)
|
|
|
(11,015
|
)
|
|
|
|
17,329,777
|
|
|
|
12,776,316
|
|
Less current portion
|
|
|
(17,329,777
|
)
|
|
|
(12,776,316
|
)
|
Debentures, long-term
|
|
$
|
-
|
|
|
$
|
-
|
|
Payment
on all outstanding debentures of $20.2 million at March 31, 2019 is due in 2019. As of March 31, 2019, $2.0 million of the outstanding
debentures were not paid as of March 21, 2019, the maturity date. The Company has accrued penalties and interest in connection
with this non-payment in the amount of $0.6 million as of March 31, 2019. See Note 19 for a discussion of outstanding debentures
that were also not paid on the maturity date, which was September 19, 2019.
Debentures
Issued in the Three Months Ended March 31, 2019
The
Company issued debentures on February 24, 2019 in the aggregate principal amount of $300,000 and on March 27, 2019 in the aggregate
principal amount of $300,000. Both of these debentures were guaranteed by Mr. Diamantis and were originally due on June 3, 2019.
As more fully discussed in Note 19, the maturity dates of these debentures were extended to December 31, 2019 and the terms were
changed so that commencing on August 17, 2019 the debentures shall bear interest on the outstanding principal amount at a rate
of 2.5% per month (increasing to 5% per month on October 12, 2019), payable quarterly beginning on October 1, 2019. All overdue
accrued and unpaid interest shall entail a late fee equal to the lesser of 24% per annum or the maximum rate permitted by applicable
law.
In
addition to the debentures issued in the three months ended March 31, 2019, during the years ending December 31, 2017 and 2018,
the Company has entered into convertible debentures, which are more fully described in Note 9 the Company’s audited consolidated
financial statements included in its Annual Report on Form 10-K. Certain of these convertible debentures were issued with warrants
to purchase shares of the Company’s common stock. Outstanding warrants are more fully discussed in Note 13.
The debentures issued during the three
months ended March 31, 2019 and 2018, were issued at discounts of $0.1 million and $0.5 million, respectively, and accordingly,
the Company realized a total of $0.5 million and $2.0 million, respectively, in proceeds from the issuances of these
debentures. At March 31, 2019, the unamortized discounts were $2.9 million. These discounts represent original issue discounts,
the relative fair value of the warrants issued with the debentures and the relative fair value of the beneficial conversion features
of the debentures. During the three months ended March 31, 2019 and 2018, the Company recorded approximately $7.5 million and
approximately $4.5 million, respectively, of non-cash interest and amortization of debt discount expense primarily in connection
with the debentures and warrants.
See
Note 13 for summarized information related to warrants issued and the activity during the three months ended March 31, 2019.
See
Notes 3, 13 and 19 for a discussion of the dilutive effect of the outstanding debentures and warrants as of March 31, 2019.
Note
9 – Related Party Transactions
Alcimede
billed $0.1 million and $0.4 million for consulting fees for the three months ended March 31, 2019 and 2018, respectively. Seamus
Lagan, the Company’s President and Chief Executive Officer, is the sole manager of Alcimede (see Note 13).
See
Notes 5, 7 and 19 for a discussion of amounts advanced to the Company by Mr. Diamantis.
The
terms of the foregoing transactions, including those discussed in Notes 5, 7, 13 and 19, are not necessarily indicative of those
that would have been agreed to with unrelated parties for similar transactions.
Note
10 – Capital and Operating Lease Obligations
As more fully discussed in Note 1, we
adopted ASU No.2016-02, Leases (Topic 842), which requires leases with durations greater than 12 months to be recognized
on the balance sheet, effective January 1, 2019, using the modified retrospective approach.
Generally,
we use our estimated weighted average cost of capital at lease commencement as our interest rate, as most of our operating leases
do not provide a readily determinable implicit interest rate.
The
following table presents our lease-related assets and liabilities at March 31, 2019:
|
|
Balance Sheet Classification
|
|
March 31, 2019
|
|
Assets:
|
|
|
|
|
|
|
Operating leases
|
|
Right-of-use operating lease assets
|
|
$
|
430,499
|
|
Finance leases
|
|
Property and equipment, net
|
|
|
688,467
|
|
Total lease assets
|
|
|
|
$
|
1,119,117
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
Operating leases
|
|
Right-of-use operating lease assets
|
|
$
|
191,000
|
|
Finance leases
|
|
Current liabilities
|
|
|
659,729
|
|
Noncurrent:
|
|
|
|
|
|
|
Operating leases
|
|
Right-of-use operating lease obligations
|
|
|
239,699
|
|
Finance leases
|
|
Long-term debt
|
|
|
28,738
|
|
|
|
|
|
|
|
|
Total lease liabilities
|
|
|
|
$
|
1,119,117
|
|
|
|
|
|
|
|
|
Weighted-average remaining term:
|
|
|
|
|
|
|
Operating leases
|
|
|
|
|
2.39 years
|
|
Finance leases
|
|
|
|
|
0.28 years
|
|
Weighted-average discount rate:
|
|
|
|
|
|
|
Operating leases (1)
|
|
|
|
|
13.0
|
%
|
Finance leases
|
|
|
|
|
5.0
|
%
|
(1)
|
Upon
adoption of the new lease standard, discount rates used for existing operating leases were established at January 1, 2019.
|
The
following table presents certain information related to lease expense for finance and operating leases for the three months ended
March 31, 2019:
|
|
Three-Months Ended
March 31, 2019
|
|
Finance lease expense:
|
|
|
|
|
Depreciation/amortization of leased assets (1)
|
|
$
|
(54,349
|
)
|
Interest on lease liabilities
|
|
|
3,945
|
|
Operating leases:
|
|
|
|
|
Short-term lease expense(2)
|
|
|
87,474
|
|
Total lease expense
|
|
$
|
37,070
|
|
(1)
Adjusts depreciation recorded in prior year.
(2)
Expenses are included in general and administrative expenses in our condensed consolidated statements of operations.
Other
Information
The
following table presents supplemental cash flow information for the three months ended March 31, 2019:
|
|
2019
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
Operating cash flows for operating leases
|
|
$
|
82,552
|
|
Operating cash flows for finance leases
|
|
$
|
3,945
|
|
Financing cash flows for finance leases payments
|
|
$
|
73,741
|
|
Aggregate
future minimum rentals under right-to-use operating and capital leases are as follows:
|
|
Right-to-Use
|
|
|
|
|
|
|
Operating Leases
|
|
|
Capital Leases
|
|
April 1 2019 to March 31, 2020
|
|
$
|
234,817
|
|
|
$
|
674,226
|
|
April 1, 2020 to March 31, 2021
|
|
|
134,776
|
|
|
|
32,523
|
|
April 1, 2021 to March 31, 2022
|
|
|
110,062
|
|
|
|
-
|
|
April 1, 2022 to March 31, 2023
|
|
|
29,247
|
|
|
|
-
|
|
April 1, 2023 to March 31, 2024
|
|
|
2,436
|
|
|
|
-
|
|
Total
|
|
|
511,338
|
|
|
|
706,749
|
|
|
|
|
|
|
|
|
|
|
Less interest
|
|
|
(80,639
|
)
|
|
|
(18,282
|
)
|
Present value of minimum lease payments
|
|
|
430,699
|
|
|
|
688,467
|
|
|
|
|
|
|
|
|
|
|
Less current portion of lease obligations
|
|
|
(191,000
|
)
|
|
|
(659,729
|
)
|
Lease obligations, net of current portion
|
|
$
|
239,699
|
|
|
$
|
28,738
|
|
As
of March 31, 2019, the Company is in default of substantially all its finance lease obligations, therefore the aggregate future
minimum rentals and accrued interest under finance leases in the amount of $ 0.7 million are deemed to be immediately due.
Note
11 – Derivative Financial Instruments and Fair Value
The
following table sets forth the financial assets and liabilities carried at fair value measured on a recurring basis as of March
31, 2019 and December 31, 2018:
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
As of December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Embedded conversion options
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
350,260
|
|
|
$
|
350,260
|
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
350,260
|
|
|
$
|
350,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Embedded conversion options
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
455,336
|
|
|
$
|
455,336
|
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
455,336
|
|
|
$
|
455,336
|
|
The
Company utilized the following methods to value its derivative liabilities as of March 31, 2019 and December 31, 2018, for embedded
conversion options valued at $455,336 and $350,260, respectively. The Company determined the fair value by comparing the discounted
conversion price per share (85% of market price, subject to a floor in certain cases) multiplied by the number of shares issuable
at the balance sheet date to the actual price per share of the Company’s common stock multiplied by the number of shares
issuable at that date with the difference in value recorded as a liability. All inputs for the derivative liabilities are observable
and, therefore, there is no sensitivity in the valuation to unobservable inputs.
The
following table reconciles the changes in the liabilities categorized within Level 3 of the fair value hierarchy for the three
months ended March 31, 2019:
Balance at December 31, 2018
|
|
$
|
350,260
|
|
Change in fair value of debentures
|
|
|
105,076
|
|
Balance at March 31, 2019
|
|
$
|
455,336
|
|
During
the three months ended March 31, 2019, the conversion of preferred stock triggered a further reduction in the exercise prices
of any debentures and warrants containing ratchet features that had not already ratcheted down to their floor. In accordance with
U.S. GAAP, the incremental fair value of the debentures and warrants was measured, ignoring the down round provision, using Black
Scholes. The following assumptions were utilized in the Black Scholes valuation models: risk free rates ranging from 2.4% to 2.6%
and volatility ranging from 189.5% to 273.1% and weighted average life of 0.3 to 3.2 years. The incremental value of $123.9 million
was recorded as a deemed dividend for the three months ended March 31, 2019. Deemed dividends are also discussed in Notes 1 and
3.
During
the three months ended March 31, 2019, the Company recorded interest expense of $4.1 million, which was the fair value of the
modification of warrants during the period (the terms of the modification are discussed in Note 13). The Company used the Black
Scholes model to calculate the fair value of the warrants as of the modification date. Using the pre-modification term and related
assumptions of risk free rate of 2.46%, volatility of 204.4% and expected term of .24 years, and the post-modification term and
related assumptions of risk free rate of 2.49%, volatility of 259.4% and expected term of .48 years, the change in the fair value
of the warrant instruments as a result of the modification was estimated.
For
the three months ended March 31, 2018, the total loss realized on instruments valued using Level 3 valuations was $139.8 million.
The loss in the three months ended March 31, 2018 resulted primarily from the significant reduction in the exercise prices of
outstanding warrants as a result of the down round provisions. The Company utilized the following methods to value its derivative
liabilities for the three months ended March 31, 2018: (i) for embedded conversion options valued at $1.0 million, the Company
determined the fair value by comparing the discounted conversion price per share (85% of market price) multiplied by the number
of shares issuable at the balance sheet date to the actual price per share of the Company’s common stock multiplied by the
number of shares issuable at that date with the difference in value recorded as a liability; (ii) for warrants valued at $151.4
million, the Company determined the fair value by using a binomial model and Monte Carlo simulations; and (iii) for warrants valued
at $0.1 million and embedded conversion options valued at $0.2 million, the Company determined the fair value using the Black-Scholes
option pricing model. All inputs for the derivative liabilities are observable and, therefore, there is no sensitivity in the
valuation to unobservable inputs.
In
September 2018, the Company’s board of directors approved two reverse stock splits of the Company’s common stock,
one of which was effected on November 12, 2018 (the second was never effected), which provided sufficient authorized and unissued
shares to allow for otherwise equity classified instruments to be classified in equity. As a result, the fair value of these instruments
was evaluated for reclassification. As a result of the evaluation, during the third quarter of 2018, the Company reclassified
the derivative liabilities previously reported as a current liability to derivative income.
On
October 4, 2019, the Board of Directors authorized the issuance and sale of certain shares of Series K Convertible Preferred Stock
to Alcimede LLC pursuant to the terms of an Exchange Agreement. The Board considered all options to secure additional financing
required to continue operations and determined this authorization to be necessary to secure needed financing in the required time
frame. As a result of this authorization, as of the date of filing this report, the Company believes that it has the ability to
have sufficient authorized shares of its common stock to cover all potentially dilutive common shares outstanding.
Note
12 – Redeemable Preferred Stock
The
Company has 5,000,000 authorized shares of Preferred Stock at a par value of $0.01. Issuances of the Company’s Preferred
Stock included as part of stockholders’ deficit are discussed in Note 13. The following is a summary of the issuances of
the Company’s Redeemable Preferred Stock.
Series
I-1 Convertible Preferred Stock
On
October 30, 2017, the Company closed an offering of $4,960,000 stated value of 4,960 shares of a 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 (debentures are more fully discussed in Note 8 to the consolidated
financial statements included in the Company’s Annual Report on Form 10-K). At the holder’s option each holder could
reduce the principal amount of September Debentures exchanged on any particular closing date, or elect not to exchange any September
Debentures at all on a closing date. If a holder chose to exchange less principal amount of September Debentures, or no September
Debentures at all, it could carry forward such lesser amount to a future closing date and then exchange more than the originally
specified principal amount for that later closing date. For each $0.80 of principal amount of 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 21,346 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. On July 16, 2018,
under the Exchange Agreements with the holders of the September Debentures, 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. In 2018, the holder converted 1,286.141 shares of Series I-2 Preferred Stock into 106,335,991 shares of the Company’s
common stock and during the three months ended March 31, 2019, the holder converted 547.298 shares of Series I-2 Preferred Stock
into 3,255,700,000 shares of the Company’s common stock.
See
Notes 3 and 19 for a discussion of the dilutive effect of the Series I-1 Preferred Stock and the Series I-2 Preferred Stock as
of March 31, 2019 and September 30, 2019, respectively.
Note
13 – Stockholders’ Deficit
Authorized
Capital
The
Company has 10,000,000,000 authorized shares of Common Stock at $0.0001 par value and 5,000,000 authorized shares of Preferred
Stock at a par value of $0.01.
Preferred
Stock
The
Company has 5,000,000 shares, par value $0.01, of preferred stock authorized. As of March 31, 2019, 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, 1,750,000 shares of its Series F Convertible Preferred Stock and 250,000 shares of its Series J Convertible Preferred Stock.
The
215 shares of the Series G Preferred Stock have a stated value of $1,000 per share and 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 H
Preferred Stock has a stated value of $1,000 per share and is convertible into shares of the Company’s common stock
at a conversion price of 85% of the volume weighted average price of the Company’s common stock at the time of conversion.
In
September 2017, the Company issued 1,750,000 shares of its Series F Preferred Stock valued at $174,097 in connection with the
acquisition of Genomas Inc. Genomas Inc. is included in the Company’s discontinued operations, which are discussed in Note
17. Each share of the Series F Preferred Stock is convertible into shares of our common stock (subject to adjustment as provided
in the related certificate of designation) at any time after the first anniversary of the issuance date at the option of the holder
at a conversion price equal to the greater of $14,625 or the average closing price of the Company’s common stock for the
10 trading days immediately preceding the conversion. The maximum number of shares of common stock issuable upon the conversion
of the Series F Preferred Stock is 120. Any shares of Series F Preferred Stock outstanding on the fifth anniversary of the issuance
date will be mandatorily converted into common stock at the applicable conversion price on such date. At any time, from time to
time after the first anniversary of the issuance date, the Company has the right to redeem all or any portion of the outstanding
Series F Preferred Stock at a price per share equal to $1.95 plus any accrued but unpaid dividends. The Series F Preferred Stock
has voting rights. Each share of Series F Preferred Stock has one vote, and the holders of the Series F Preferred Stock shall
vote together with the holders of the Company’s common stock as a single class.
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.
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 is entitled to vote on all matters submitted to a vote of the holders of the Company’s common stock. From
and after October 1, 2018, each share of the Series J Preferred Stock is 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 Securities and Exchange
Commission on July 24, 2018. The Series J Preferred Stock is entitled to 8% per annum cumulative dividends at the discretion of
the Company’s board of directors. No dividends have been declared by the board as of March 31, 2019.
Common
Stock
The
Company has authorized 10,000,000,000 shares of Common Stock, par value $.0001 per share.
The
Company had 3,503,882,657 and 128,567,273 shares of common stock issued and outstanding at March 31, 2019 and December 31, 2018,
respectively. During the three months ended March 31, 2019, the Company:
●
|
Issued
119,615,384 shares of common stock upon exercise of 755,000,000
warrants, on a cashless basis; and
|
|
|
●
|
Issued 3,255,700,000 shares
of common stock upon the conversion of 547.298 shares of its Series I-2 Preferred
Stock;
|
Restricted
Stock
During
the three months ended March 31, 2018, the Company issued an aggregate of 142,667 shares of restricted stock to employees and
directors, based upon the recommendation of the Compensation Committee of the Board of Directors. 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 $3.35 per share. The value of the common stock issued was based on the fair value of the stock at the time of issuance.
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 or debentures, as the case may be.
These provisions, as well as the issuances of debentures and preferred stock with conversion prices that vary based upon the price
of our common stock on the date of conversion, have resulted in significant dilution of our common stock and have given rise to
reverse splits of our common stock.
On
October 4, 2019, the Board of Directors authorized the issuance and sale of certain shares of Series K Convertible Preferred Stock
to Alcimede LLC pursuant to the terms of an Exchange Agreement. The Board considered all options to secure additional financing
required to continue operations and determined this authorization to be necessary to secure needed financing in the required time
frame. As a result of this authorization, as of the date of filing this report, the Company believes that it has the ability to
have sufficient authorized shares of its common stock to cover all potentially dilutive common shares. These potentially dilutive
shares are presented in Note 19.
Stock
Options
The
Company maintained and sponsored the Tegal Corporation 2007 Incentive Award Plan (the “2007 Equity Plan”). Tegal Corporation
is the prior name of the Company. The 2007 Equity Plan, as amended, provided for the issuance of stock options and other equity
awards to the Company’s officers, directors, employees and consultants. The 2007 Equity Plan terminated pursuant to its
terms in September 2017. The following table summarizes the stock option activity for the three months ended March 31, 2019:
|
|
Number of options
|
|
|
Weighted-average exercise price
|
|
|
Weighted-average contractual term
|
|
Outstanding at December 31, 2018
|
|
|
77
|
|
|
$
|
1,036,375
|
|
|
|
7.33
|
|
Granted
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Forfeit
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2019
|
|
|
77
|
|
|
$
|
1,036,375
|
|
|
|
7.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2019
|
|
|
68
|
|
|
$
|
1,152,616
|
|
|
|
|
|
The
Company recognized stock option expense of approximately $8,649 and $24,196 for the three months ended March 31, 2019 and 2018,
respectively. As of March 31, 2019, the weighted average remaining contractual life was 7 years for options outstanding and exercisable.
The intrinsic value of options exercisable at March 31, 2019 was $0. As of March 31, 2019, the remaining compensation expense
of approximately $25,950 will be amortized over the remaining vesting period, which is approximately nine months.
Warrants
The
Company, as part of various debt and equity financing transactions, has issued warrants to purchase shares of the Company’s
common stock.
During
the three months ended March 31, 2019, the number of outstanding warrants increased by 582 billion as a result of the anti-dilution
provisions of outstanding warrants that were issued in connection with the issuances of debentures as more fully discussed in
Note 8 to the Company’s consolidated financial statement included in its Annual Report on Form 10-K. The number of warrants
issued, converted and outstanding as well as the exercise prices of the warrants reflected in the table below have been adjusted
to reflect the full ratchet and other dilutive and down round provisions pursuant to the warrant agreements. As a result of the
current exercise prices for the majority of the outstanding warrants (subject to a floor in some cases), as well as the full ratchet
provisions of the majority of the outstanding warrants (again, subject to a floor in some cases), subsequent decreases in the
price of the Company’s common stock and subsequent issuances of the Company’s common stock or common stock equivalents
at prices below the current exercise prices of the warrants will result in increases in the number of shares issuable pursuant
to the warrants and decreases in the exercise prices of the warrants.
The
following summarizes the information related to warrants issued and the activity during the three months ended March 31, 2019:
|
|
Number of
warrants
|
|
|
Weighted average exercise price
|
|
Balance at December 31, 2018
|
|
|
53,130,510,439
|
|
|
$
|
0.00172
|
|
Increase in warrants during the period as a result of down round provisions
|
|
|
582,209,844,938
|
|
|
$
|
0.00034
|
|
Warrants exercised during the period
|
|
|
(755,000,000
|
)
|
|
$
|
0.00014
|
|
Balance at March 31, 2019
|
|
|
634,585,355,377
|
|
|
|
|
|
On
March 27, 2019, the expiration date of certain warrants issued in March 2017 and September 2017 with convertible debentures, referred
to as the March 2017 Series B Warrants and the September 2017 Series B Warrants, were extended from June 2019 to September 2019.
The Company used the Black Scholes model to calculate the fair value of the warrants as of the modification date. Using the pre-modification
term and related assumptions, and the post-modification term and related assumptions, the Company determined that the change in
fair value of the warrants as a result of the modification was $4.1 million, as more fully discussed in Note 11. Accordingly,
the Company recorded the $4.1 million as interest expense in the three months ended March 31, 2019.
See
Note 19 for a discussion of the dilutive effect of the outstanding warrants as of September 30, 2019.
Note
14 – Supplemental Disclosure of Cash Flow Information
|
|
Three Months Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Cash paid for interest
|
|
$
|
-
|
|
|
$
|
24,791
|
|
Cash paid for income taxes
|
|
$
|
30,000
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Acquisition of Jellico Community Hospital:
|
|
|
|
|
|
|
|
|
Inventory
|
|
$
|
317,427
|
|
|
$
|
-
|
|
Property and equipment
|
|
|
500,000
|
|
|
|
-
|
|
Intangible assets
|
|
|
250,000
|
|
|
|
-
|
|
Accrued expenses
|
|
|
158,890
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Exchange of Series I-2 Preferred Stock for convertible debentures
|
|
$
|
-
|
|
|
$
|
1,384,556
|
|
Series I-2 Preferred Stock converted into common stock
|
|
|
643,880
|
|
|
|
-
|
|
Debentures converted into common stock
|
|
|
-
|
|
|
|
3,056,675
|
|
Value of common stock issued in cashless exercise of warrants
|
|
|
11,961
|
|
|
|
756,000
|
|
Deemed dividend for trigger of down round provision feature
|
|
|
123,861,587
|
|
|
|
-
|
|
Note
15 – Commitments and Contingencies
Concentration
of Credit Risk
Credit
risk with respect to accounts receivable is generally diversified due to the large number of patients comprising the client base.
The Company does have significant receivable balances with government payers and various insurance carriers. Generally, the Company
does not require collateral or other security to support customer receivables. However, the Company continually monitors and evaluates
its client acceptance and collection procedures to minimize potential credit risks associated with its accounts receivable and
establishes an allowance for uncollectible accounts and as a consequence, believes that its accounts receivable credit risk exposure
beyond such allowance is not material to the financial statements.
A
number of proposals for legislation continue to be under discussion which could substantially reduce Medicare and Medicaid (CMS)
reimbursements to hospitals and clinical laboratories. Depending upon the nature of regulatory action, and the content of legislation,
the Company could experience a significant decrease in revenues from Medicare and Medicaid (CMS), which could have a material
adverse effect on the Company. The Company is unable to predict, however, the extent to which such actions will be taken.
The
Company maintains its cash balances in high credit quality financial institutions. The Company’s cash balances may, at times,
exceed the deposit insurance limits provided by the Federal Deposit Insurance Corp.
Legal
Matters
From
time-to-time, the Company may be involved in a variety of claims, lawsuits, investigations and proceedings related to contractual
disputes, employment matters, regulatory and compliance matters, intellectual property rights and other litigation arising in
the ordinary course of business. The Company operates in a highly regulated industry which may inherently lend itself to legal
matters. Management is aware that litigation has associated costs and that results of adverse litigation verdicts could have a
material effect on the Company’s financial position or results of operations. The Company’s policy is to expense legal
fees and expenses incurred in connection with the legal proceedings in the period in which the expense is incurred. Management,
in consultation with legal counsel, has addressed known assertions and predicted unasserted claims below.
Biohealth
Medical Laboratory, Inc. and PB Laboratories, LLC (the “Companies”) filed suit against CIGNA Health in 2015 alleging
that CIGNA failed to pay claims for laboratory services the Companies provided to patients pursuant to CIGNA - issued and CIGNA
- administered plans. In 2016, the U.S. District Court dismissed part of the Companies’ claims for lack of standing. The
Companies appealed that decision to the Eleventh Circuit Court of Appeals, which in late 2017 reversed the District Court’s
decision and found that the Companies have standing to raise claims arising out of traditional insurance plans as well as self-funded
plans. In July 2019, the Companies and EPIC Reference Labs, Inc., filed suit against Cigna Health for failure to pay claims for
laboratory services provided. Cigna Health, in turn, sued for improper billing practices. Both cases are in the early stages.
The
Company’s Epinex Diagnostics Laboratories, Inc. subsidiary was sued in a California state court by two former employees
who alleged that they were wrongfully terminated, as well as for a variety of unpaid wage claims. The parties entered into a settlement
agreement of this matter on July 29, 2016 for approximately $0.2 million, and the settlement was consummated on August 25, 2016.
In October of 2016, the plaintiffs in this matter filed a motion with the court seeking payment for attorneys’ fees in the
approximate amount of $0.7 million. On March 24, 2017, the court granted plaintiffs’ motion for payment of attorneys’
fees in the amount of $0.3 million, and the Company accrued this amount in its consolidated financial statements. 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 in March 2016. The Company filed its 2015 Federal tax return on March
15, 2016 and the accompanying election to carryback the reported net operating losses was filed in April 2016. On August 24, 2016,
the lien was released, and in September of 2016 the Company received a refund from the IRS in the amount of $1.9 million. In November
of 2016, the IRS commenced an audit of the Company’s 2015 Federal tax return. Based upon the audit results, the Company
has made provisions of approximately $1.0 million as a liability in its financial statements as well as an estimated $0.6 million
of receivables for an additional refund that it believes is due.
On
September 27, 2016, a tax warrant was issued against the Company by the Florida Department of Revenue (the “DOR”)
for unpaid 2014 state income taxes in the approximate amount of $0.9 million, including penalties and interest. The Company has
made payments to reduce the amount owed to approximately $443,000, and entered into a Stipulation Agreement with the DOR allowing
the Company to make monthly installments until July 2019. As of July 2019, the remaining estimated balance of $390,000 was not
paid in a lump sum. The Company intends to renegotiate another Stipulation agreement. However, there can be no assurance the Company
will be successful. The remaining balance accrued of approximately $0.5 million remained outstanding to the DOR at March 31, 2019.
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 10). 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
$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 March 31, 2019 was $0.3 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 10). On January 24,
2017, DeLage received a default judgment against the Company in the approximate amount of $1.0 million, representing the balance
owed on the lease, as well as additional interest, penalties and fees. The Company recognized this amount in its consolidated
financial statements as of December 31, 2016. On February 8, 2017, a Stay of Execution was filed and under its terms the balance
due was to be paid in variable monthly installments through January of 2019, with an implicit interest rate of 4.97%. The Company
and DeLage have now disposed of certain equipment and reduced the balance owed to DeLage. A balance of $0.2 million remained outstanding
at March 31, 2019.
On
December 7, 2016, the holders of the Tegal Notes (see Note 7) filed suit against the Company seeking payment for the amounts due
under the notes in the aggregate of the principal of $341,612, and accrued interest of $43,000. A request for entry of default
judgment was filed on January 24, 2017. On April 23, 2018, the holders of the Tegal Notes received a judgment against the Company.
To date, the Company has repaid $5,513 of this amount.
In
November 2017, a former shareholder of Genomas, Inc., Phenomas, LLC, filed suit against the Company for payment of a $200,000
note payable by the Company’s subsidiary, Genomas. This note is recorded in the financial statements of the subsidiary and
is not payable directly from the Company. The Company has made payments totaling $120,000 against this note and agreed to a payment
schedule in order to dismiss the legal action. On November 12, 2018, Phenomas, LLC filed a motion to voluntarily dismiss the suit
without prejudice.
The
counterparty to the prepaid forward purchase agreement entered into by the Company on March 31, 2016, as amended, filed an arbitration
proceeding under the agreement with regard to the outstanding balance. Subsequent to March 31, 2019, Mr. Diamantis advanced the
Company $9.9 million, which was used to repay all obligations under the prepaid forward purchase agreement, as more fully discussed
in Notes 7 and 19.
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. One former employee received a judgment
in October 2018 for approximately $253,000. The other former employee’s claim is for approximately $110,000. The Company
is considering its options to refute these matters and believes the claims against the Company to be frivolous and outside of
entitlement and contractual agreements.
The
Company, as well as many of our subsidiaries, are defendants in a case filed in Broward County Circuit Court by TCA Global Credit
Master Fund, L.P. The plaintiff alleges a breach by Medytox Solutions, Inc. of its obligations under a debenture and claims damages
of approximately $2,030,000 plus interest, costs and fees. The Company and the other subsidiaries are sued as alleged guarantors
of the debenture. The complaint was filed on August 1, 2018. The Company has recorded the principal balance and interest owed
under the debenture agreement for the period ended March 31, 2019. The Company and all defendants have filed a motion to dismiss
the complaint, but have not recorded any potential liability related to any further damages.
On
September 13, 2018, Laboratory Corporation of America sued EPIC Reference Labs, Inc., a subsidiary of the Company, in Palm Beach
County Circuit Court for amounts claimed to be owed of approximately $148,000. The Company has recorded the amount owed in accrued
expenses at March 31, 2019. The court awarded a judgment against EPIC Reference Labs, Inc. in May 2019 for approximately $155,000.
In
July 2019, Roche Diagnostics Corporation sued EPIC Reference Labs, Inc., in the Circuit Court for Palm Beach County claiming approximately
$240,000 under an agreement to purchase laboratory supplies. This suit is in the early stages.
In
August 2019, EPIC Reference Labs, Inc. and Medytox Solutions, Inc. were sued by Beckman Coulter, Inc. in the same court under
an agreement to purchase laboratory supplies. The plaintiff claims damages of approximately $106,000. This case is in the early
stages.
In
July 2019, the landlord of Medytox Solutions, Inc. received a judgment in the amount of approximately $413,000 in connection with
failure to pay under an office lease in West Palm Beach, Florida.
In
February 2018, Techlogix, Inc. received a judgment of approximately $72,000 against the Company and HTS in the Superior Court
of Middlesex County Massachusetts.
Following
the Company’s decision to suspend operations at Jamestown Regional Medical Center in June 2019 a number of vendors remain
unpaid. A number have initiated or threatened legal actions. The Company believes it will come to satisfactory arrangements with
these parties as it works towards reopening the hospital. On June 10, 2019 the Company hired a new CEO to oversee the reopening
of the hospital and took steps to re-enter the Medicare program. The hospital received initial approval of its application to
reactivate the Medicare agreement in August and is currently planning the reopening of the hospital. Negotiations with vendors
are ongoing.
Note
16– Segment Reporting
Operating
segments are defined under U.S. GAAP as components of an enterprise for which discrete financial information is available and
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:
|
●
|
Hospital Operations,
which reflects the operations of Jamestown Regional Medical Center, Big South Fork Medical Center, Jellico Community Hospital
and CarePlus Center.
|
|
●
|
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.
|
The
Company’s Corporate expenses reflect consolidated company-wide support services such as finance, legal counsel, human resources,
and payroll.
The
Company’s Decision Support and Informatics segment and its Supportive Software Solutions segment are now included in discontinued
operations as they have been classified as held for sale as of March 31, 2019. The accounting policies of the reportable segments
are the same as those described in Note 1.
Selected
financial information for the Company’s operating segments is as follows:
|
|
Three Months Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Net revenues – External
|
|
|
|
|
|
|
|
|
Hospital Operations
|
|
$
|
5,105,265
|
|
|
$
|
1,556,075
|
|
Clinical Laboratory Operations
|
|
|
85,385
|
|
|
|
45,586
|
|
|
|
$
|
5,190,650
|
|
|
$
|
1,601,661
|
|
Net loss from continuing operations before income taxes
|
|
|
|
|
|
|
|
|
Hospital Operations
|
|
$
|
(3,175,107
|
)
|
|
$
|
(1,472,600
|
)
|
Clinical Laboratory Operations
|
|
|
(225,530
|
)
|
|
|
(756,083
|
)
|
Corporate
|
|
|
(1,072,835
|
)
|
|
|
(1,483,341
|
)
|
Other income (expense) ,net
|
|
|
(8,459,323
|
)
|
|
|
(143,074,277
|
)
|
|
|
$
|
(12,932,795
|
)
|
|
$
|
(146,786,301
|
)
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
Hospital Operations
|
|
$
|
173,776
|
|
|
$
|
37,728
|
|
Clinical Laboratory Operations
|
|
|
49,662
|
|
|
|
295,474
|
|
Corporate
|
|
|
148
|
|
|
|
313
|
|
|
|
$
|
223,586
|
|
|
$
|
333,515
|
|
Capital expenditures
|
|
|
|
|
|
|
|
|
Hospital Operations
|
|
$
|
42,317
|
|
|
$
|
301
|
|
Clinical Laboratory Operations
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
42,317
|
|
|
$
|
301
|
|
|
|
As of
|
|
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
Total assets
|
|
|
|
|
|
|
|
|
Hospital Operations
|
|
$
|
14,856,310
|
|
|
$
|
13,568,933
|
|
Clinical Laboratory Operations
|
|
|
462,354
|
|
|
|
271,426
|
|
Corporate
|
|
|
2,588,391
|
|
|
|
2,707,416
|
|
Assets of AMSG and HTS classified as held for sale
|
|
|
172,539
|
|
|
|
152,171
|
|
Eliminations
|
|
|
(2,466,859
|
)
|
|
|
(2,500,646
|
)
|
|
|
$
|
15,612,735
|
|
|
$
|
14,199,300
|
|
Note
17 – Discontinued Operations
On
July 12, 2017, the Company announced plans to spin off AMSG and in the third quarter of 2017, the Company’s Board of Directors
voted unanimously to spin off HTS as independent publicly traded companies by way of tax-free distributions to the Company’s
stockholders. While the spin offs have taken longer than anticipated, completion of these spin offs is now expected to occur in
the first quarter of 2020. The spin offs are subject to numerous conditions, including effectiveness of Registration Statements
on Form 10 to be filed with the Securities and Exchange Commission, and consents, including under various funding agreements previously
entered into by the Company. A record date to determine those stockholders entitled to receive shares in the spin offs should
be approximately 30 to 60 days prior to the dates of the spin offs. The strategic goal of the spin offs is to create three 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”, as the Company reached this decision prior
to December 31, 2017, the Company has reflected amounts relating to AMSG and HTS as disposal groups classified as held for sale
and included as part of discontinued operations. Prior to being classified as “held for sale,” AMSG had been the Company’s
Decision Support and Informatics segment, except for the Company’s subsidiary, Alethea Laboratories, Inc., which had been
included in the Clinical Laboratory Operations segment and now is part of AMSG, and HTS had been the Company’s Supportive
Software Solutions segment. Segment disclosures in Note 16 no longer include amounts relating to AMSG and HTS following the reclassification
to discontinued operations.
Carrying
amounts of major classes of assets and liabilities classified as held for sale and included as part of discontinued operations
in the condensed consolidated balance sheets consisted of the following:
AMSG Assets and Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Cash
|
|
$
|
3,419
|
|
|
$
|
4,471
|
|
Accounts receivable, net
|
|
|
9,921
|
|
|
|
6,838
|
|
Prepaid expenses and other current assets
|
|
|
-
|
|
|
|
25,477
|
|
Current assets classified as held for sale
|
|
$
|
13,340
|
|
|
$
|
36,786
|
|
|
|
|
|
|
|
|
|
|
Accounts payable (includes related parties)
|
|
$
|
540,991
|
|
|
$
|
532,858
|
|
Accrued expenses
|
|
|
460,720
|
|
|
|
418,932
|
|
Current portion of notes payable
|
|
|
274,536
|
|
|
|
278,836
|
|
Current liabilities classified as held for sale
|
|
$
|
1,276,247
|
|
|
$
|
1,230,626
|
|
HTS Assets and Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Cash
|
|
$
|
8,629
|
|
|
$
|
2,523
|
|
Accounts receivable, net
|
|
|
128,397
|
|
|
|
90,743
|
|
Prepaid expenses and other current assets
|
|
|
7,725
|
|
|
|
10,300
|
|
Current assets classified as held for sale
|
|
$
|
144,751
|
|
|
$
|
103,566
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
8,419
|
|
|
$
|
5,790
|
|
Deposits
|
|
|
6,029
|
|
|
|
6,029
|
|
Non-current assets classified as held for sale
|
|
$
|
14,448
|
|
|
$
|
11,819
|
|
|
|
|
|
|
|
|
|
|
Accounts payable (includes related parties)
|
|
$
|
659,562
|
|
|
$
|
546,969
|
|
Accrued expenses
|
|
|
568,347
|
|
|
|
520,251
|
|
Current liabilities classified as held for sale
|
|
$
|
1,227,909
|
|
|
$
|
1,067,220
|
|
Total Discontinued Assets and Liabilities:
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Cash
|
|
$
|
12,048
|
|
|
$
|
6,994
|
|
Accounts receivable, net
|
|
|
138,318
|
|
|
|
97,581
|
|
Prepaid expenses and other current assets
|
|
|
7,725
|
|
|
|
35,777
|
|
Current assets classified as held for sale
|
|
$
|
158,091
|
|
|
$
|
140,352
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
8,419
|
|
|
$
|
5,790
|
|
Deposits
|
|
|
6,029
|
|
|
|
6,029
|
|
Non-current assets classified as held for sale
|
|
$
|
14,448
|
|
|
$
|
11,819
|
|
|
|
|
|
|
|
|
|
|
Accounts payable (includes related parties)
|
|
$
|
1,200,553
|
|
|
$
|
1,079,827
|
|
Accrued expenses
|
|
|
1,029,067
|
|
|
|
939,183
|
|
Current portion of notes payable
|
|
|
274,536
|
|
|
|
278,836
|
|
Current liabilities classified as held for sale
|
|
$
|
2,504,156
|
|
|
$
|
2,297,846
|
|
Major
line items constituting loss from discontinued operations in the condensed consolidated statements of operations for the three
months ended March 31, 2019 and 2018 consisted of the following:
AMSG (Loss) Income from Discontinued Operations:
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31, 2019
|
|
|
March 31, 2018
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Revenue from services
|
|
$
|
22,982
|
|
|
$
|
33,685
|
|
Cost of services
|
|
|
16,655
|
|
|
|
16,138
|
|
Gross profit
|
|
|
6,327
|
|
|
|
17,547
|
|
Operating expenses
|
|
|
102,610
|
|
|
|
176,202
|
|
Other (income) expense
|
|
|
25,960
|
|
|
|
(800,196
|
)
|
Provision for income taxes
|
|
|
-
|
|
|
|
-
|
|
(Loss) income from discontinued operations
|
|
$
|
(122,243
|
)
|
|
$
|
641,541
|
|
HTS Loss from Discontinued Operations:
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
|
March 31, 2019
|
|
|
March 31, 2018
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Revenue from services
|
|
$
|
120,089
|
|
|
$
|
355,147
|
|
Cost of services
|
|
|
32,190
|
|
|
|
34,218
|
|
Gross profit
|
|
|
87,899
|
|
|
|
320,929
|
|
Operating expenses
|
|
|
474,265
|
|
|
|
538,199
|
|
Other (income) expense
|
|
|
-
|
|
|
|
2,478
|
|
Provision for income taxes
|
|
|
-
|
|
|
|
-
|
|
Loss from discontinued operations
|
|
$
|
(386,366
|
)
|
|
$
|
(219,748
|
)
|
Consolidated (Loss) Income from Discontinued Operations:
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31, 2019
|
|
|
March 31, 2018
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Revenue from services
|
|
$
|
143,071
|
|
|
$
|
388,832
|
|
Cost of services
|
|
|
48,845
|
|
|
|
50,356
|
|
Gross profit
|
|
|
94,226
|
|
|
|
338,476
|
|
Operating expenses
|
|
|
576,875
|
|
|
|
714,401
|
|
Other (income) expense
|
|
|
25,960
|
|
|
|
(797,718
|
)
|
Provision for income taxes
|
|
|
-
|
|
|
|
-
|
|
(Loss) income from discontinued operations
|
|
$
|
(508,609
|
)
|
|
$
|
421,793
|
|
Note
18 – Recent Accounting Pronouncements
Accounting
Pronouncements Adopted
In addition to the adoption of pronouncements
related to derivative liabilities discussed in Note 1, and ASU 2018-02, Leases (Topic 842) discussed in Notes 1 and
10, the Company adopted the following pronouncements:
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. 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. This ASU
became effective for us for annual and interim periods beginning after December 15, 2018. The adoption of this ASU did not have
a material impact on our 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. These technical corrections and improvements
are 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. We were required to adopt these standards starting in
the first quarter of fiscal year 2019. The implementation did not have a material impact on our 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
adoption did not have a material impact on our 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
adoption did not have a material impact on our consolidated financial statements.
Accounting
Pronouncements Not Yet Adopted
In
August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure
Requirements for Fair Value Measurement. This standard will require entities to disclose the amount of total gains or losses
for the period recognized in other comprehensive income that is attributable to fair value changes in assets and liabilities held
as of the balance sheet date and categorized within Level 3 of the fair value hierarchy. This ASU will be effective for us for
annual and interim periods beginning after December 31, 2020. Early adoption of this standard is permitted. We have not yet determined
the impact of the adoption of this ASU on our results of operations, financial position and cash flows.
In
August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s
Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. Under this standard
customers will apply the same criteria for capitalizing implementation costs as they would for an arrangement that has a software
license. The adoption of this new guidance prescribes the balance sheet, income statement, and cash flow classification of the
capitalized implementation costs and related amortization expense, and additional quantitative and qualitative disclosures. This
ASU will be effective for us for annual and interim periods beginning after December 30, 2020. Early adoption of this standard
is permitted and may be applied either prospectively to eligible costs incurred on or after the date of the new guidance or retrospectively.
We have not yet determined the impact of the adoption of this ASU on our results of operations, financial position and cash flows.
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
19 – Subsequent Events
Accounts
Receivable Financing (Prepaid Forward Purchase Contract) and Loans From Mr. Diamantis
Subsequent
to March 31, 2019, Mr. Diamantis advanced the Company $9.9 million, which was used to repay obligations under a prepaid forward
purchase contract related to an accounts receivable financing, as more fully discussed in Note 7. In addition, Mr. Diamantis loaned
the Company $5.2 million, of which $1.8 million was used for fees and expenses incurred in connection with the settlement of the
prepaid forward purchase contract and the remainder was used for working capital purposes. Subsequent to March 31, 2019 and through
September 30, 2019, the Company incurred interest of $1.3 million on the loans from Mr. Diamantis and the Company repaid Mr. Diamantis
$1.7 million of which $0.8 million was from the proceeds of a promissory note issued on September 27, 2019 as more fully discussed
below.
Debenture
Offerings Subsequent to March 31, 2019
The
Company issued debentures on May 12, 2019 in the aggregate principal amount of $500,000. These debentures were due on June 3,
2019. In addition, the Company issued debentures on June 5, 2019 in the aggregate principal amount of $125,000 and on June 7,
2019 in the aggregate principal amount of $200,000. Both of these issuances of debentures were due on July 20, 2019. All of these
debentures are guaranteed by Mr. Diamantis. They are also exchangeable, at the Company’s option, for shares of the Company’s
Series I-2 Preferred Stock.
On
June 3, 2019, the Company closed an offering of $1,250,000 aggregate principal amount of debentures due December 31, 2019 with
certain existing institutional investors pursuant to a Bridge Debenture Agreement (the “June 13 Agreement”), and received
proceeds of $1,250,000. These debentures are also guaranteed by Mr. Diamantis and are exchangeable at the Company’s option
into shares of Series I-2 Preferred Stock. Commencing on August 17, 2019, these debentures shall bear interest on the outstanding
principal amount at a rate of 2.5% per month (increasing to 5% per month on October 12, 2019), payable quarterly beginning on
October 1, 2019. All overdue accrued and unpaid interest shall entail a late fee equal to the lesser of 24% per annum or the maximum
rate permitted by law.
The
June 13 Agreement also amended the debentures issued on February 24, 2019, March 27, 2019, May 12, 2019, June 5, 2019 and June
7, 2019 to extend their maturity date to December 31, 2019 and to incorporate the same interest terms as contained in the debentures
issued under the June 13 Agreement. Additionally, the June 13 Agreement provided that, on or prior to June 30, 2019, at the mutual
election of the Company and the investors, the investors may purchase an additional $1,250,000 principal amount of debentures
as provided in the June 13 Agreement.
On
June 21, 2019, the Company and the investors agreed that the Company would issue, and the investors would purchase $250,000 principal
amount of debentures and on June 24, 2019, the Company and the investors would purchase an additional $1,020,000 aggregate principal
amount of debentures. The Company received total proceeds of $1,270,000 and these debentures are guaranteed by Mr. Diamantis.
These debentures have the same terms as those issued under the June 13 Agreement.
All
of the debentures issued by the Company in May and June 2019 are secured and guaranteed by the Company’s subsidiaries on
the same terms as provided in the Securities Purchase Agreement, dated as of August 31, 2017. The total proceeds received by the
Company from the issuance of the debentures in May and June 2019 were $3.3 million.
Modification
of Warrants
On
March 27, 2019, the expiration date of the Series B warrants issued in March 2017 and September 2017 was extended from June 2019
to September 2019, as more fully discussed in Notes 11 and 13. On May 12, 2019, the expiration date of these warrants was further
extended to March 31, 2022. The Company used the Black Scholes model to calculate the fair value of the warrants as of the modification
date. Using the pre-modification term and related assumptions, and the post-modification terms and related assumptions, the Company
determined that the change in fair value of the warrants as a result of the Mary 12, 2019 modification was $5.4 million, which
will be recorded as interest expense in the second quarter of 2019.
Jamestown
Regional Medical Center Medicare Agreement;
Following
an inspection at Jamestown Regional Medical Center on February 5, 2019, the hospital was informed on February 15 that several
conditions of participation in its Medicare agreement were deficient. The hospital was informed that if the deficiencies where
not corrected by May 16 the Medicare agreement would terminate. A follow-up inspection on May 15 resulted in the determination
that the hospital had failed to adequately correct the deficiencies highlighted and a notice of involuntary termination was issued
that was effective on June 12, 2019. A significant percentage of patients at Jamestown Regional Medical Center are covered by
Medicare and without any ability to get paid for these services the Company suspended operations at the hospital. On June 10,
2019 the Company hired a new CEO to oversee the reopening of the hospital and took steps to re-enter the Medicare program. The
hospital received initial approval of its application to reactivate the Medicare agreement in August of 2019 and is currently
planning the reopening of the hospital.
Issuance
of Common Stock
Subsequent
to March 31, 2019 and through September 30, 2019, the Company issued an aggregate of 4.8 billion shares of common stock for conversions
of preferred stock. The following table presents the dilutive effect of our various potential common shares as of September 30,
2019:
|
|
September 30, 2019
|
|
Common shares outstanding
|
|
|
8,398,936,775
|
|
Dilutive potential shares:
|
|
|
|
|
Stock options
|
|
|
77
|
|
Warrants
|
|
|
634,525,355,377
|
|
Convertible debt
|
|
|
30,634,784,339
|
|
Convertible preferred stock
|
|
|
82,991,785,590
|
|
Total dilutive potential common shares, including outstanding common stock
|
|
|
756,550,862,158
|
|
On
October 4, 2019, the Board of Directors authorized the issuance and sale of certain shares of Series K Convertible Preferred Stock
to Alcimede LLC pursuant to the terms of an Exchange Agreement. The Board considered all options to secure additional financing
required to continue operations and determined this authorization to be necessary to secure needed financing in the required time
frame. As a result of this authorization, as of the date of filing this report, the Company believes that it has the ability to
have sufficient authorized shares of its common stock to cover all potentially dilutive common shares outstanding.
Accounts
Receivable Factoring Arrangements
In
addition to the accounts receivable factoring arrangement discussed in Note 4, subsequent to March 31, 2019 and through September
30, 2019, the Company entered into four additional accounts receivable factoring arrangements. Under the terms of the four agreements,
the aggregate amount of accounts receivable sold on a non-recourse basis, was $3.0 million. The aggregate purchase price paid
to the Company was $2.1 million and the total origination and other fees incurred by the Company were $0.1 million. As of September
30, 2019, an aggregate of $1.6 million was purchased but not yet paid to the factors under all factoring arrangements.
Promissory
Note
On
September 27, 2019, the Company issued a promissory note to a lender in the principal amount of $1.9 million and received proceeds
of $1.6 million. The first principal payment of $1.0 million is due on or before November 8, 2019 and the remaining $0.9 million
is due on or before December 26, 2019. The note does not bear interest except upon the occurrence of an event of default (as defined
in the note). The note is unsecured and is guaranteed by Mr. Diamantis. The Company used $0.8 million of the proceeds to repay
amounts due to Mr. Diamantis.
Past
Due Debentures
The
Company had $17,050,000 principal amount of debentures due September 19, 2019 outstanding on the maturity date. These debentures
have not been paid and remain outstanding, accruing interest at the default rate of 18% per annum. In addition, the Company will
incur a default penalty of approximately $5.1 million during the three months ended September 30, 2019 as a result of the payment
default.