At March 31, 2020, the Company had $1.8
million of income tax refunds receivable of which $0.6 million is more fully discussed in Note 15. During the three months ended
March 31, 2020, the U.S. Congress approved the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”).
The CARES Act allows a five-year carryback
privilege for federal net operating tax losses that arose in a tax year beginning in 2018 and through the current tax year, that
is, 2020. As a result, during the three months ended March 31, 2020, the Company recorded approximately $1.1 million in refunds
from the carryback of certain of its federal net operating losses. The Company’s federal net operating losses are more fully
discussed in Note 15 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
Notes
Payable – Third Parties
|
|
March 31, 2020
|
|
|
December 31, 2019
|
|
|
|
(unaudited)
|
|
|
|
|
Loan payable to TCA Global Master Fund, L.P. (“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
|
|
|
329,669
|
|
|
|
335,817
|
|
|
|
|
|
|
|
|
|
|
Note payable to Anthony O’Killough dated September 27, 2019 in the original principal amount of $1.9 million. Interest is due only upon event of default. Issued net of $0.3 million of debt discount and $0.1 million of financing fees with $1.0 million of principal due on November 8, 2019 and $0.9 million of principal due December 26, 2019
|
|
|
1,900,000
|
|
|
|
1,900,000
|
|
|
|
|
|
|
|
|
|
|
Installment note payable to Ponte Investments, LLC dated January 29, 2020, less original
issue discount of $0.1 million, non-interest bearing, payable in weekly installment payments ranging from $22,500 to $34,000
due on or before February 5, 2020 through on or before October 21, 2020, the maturity date.
|
|
|
915,548
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,887,110
|
|
|
|
3,977,710
|
|
Less current portion
|
|
|
(4,887,110
|
)
|
|
|
(3,977,710
|
)
|
Notes payable - third parties, net of current portion
|
|
$
|
-
|
|
|
$
|
-
|
|
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 under 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 was reflected in accrued expenses at March 31, 2020. 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. In May 2020, the SEC appointed a Receiver to close down the TCA Global Master Fund, L.P.
over allegations of accounting fraud. The amount recorded by the Company as being owed to TCA was based on TCA’s application
of prior payments made by the Company. The Company believes that prior payments of principal and interest may have been applied
to unenforceable investment banking and other fees and charges. It is the Company’s position that the amount owed to TCA
is less than the amount set forth above.
The
Company did not make the second annual principal payment under the Tegal Notes that was 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. As of March 31, 2020, the Company has paid $11,943 of these notes.
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 $1.5 million, which was net of a $0.3 million original issue discount and $0.1 million in financing fees. The first principal
payment of $1.0 million was due on November 8, 2019 and the remaining $0.9 million was due on December 26, 2019. These payments
were not paid. In February 2020, the note holder sued the Company and Mr. Diamantis, as guarantor, in New York State
Court for the County of New York, for approximately $2.0 million for non-payment of the promissory note. As a result of the payment
default, the Company has accrued “penalty” interest in the amount of $0.1 million as of March 31, 2020. See Note 15
for a discussion of a Stipulation entered into among the Company, Mr. Diamantis, as guarantor, and the note holder.
On
January 29, 2020, the Company entered into the Installment Note in the principal amount of $1.2 million. The Company used the
proceeds to satisfy in full the amounts due under accounts receivable factoring agreements. The factoring agreements are more
fully discussed in Note 4. Pursuant to the Installment Note, weekly installment payments ranging from $22,500 to $34,000 are due
on or before February 5, 2020 through on or before October 21, 2020, the maturity date. Accordingly, the Company made payments
totaling $0.2 million during the three months ended March 31, 2020. The Installment Note, which was issued with an original issue
discount in the amount of approximately $0.1 million, is non-interest bearing and subject to late-payment fees of 10%.
Notes
Payable – Related Party
|
|
March 31, 2020
|
|
|
December 31, 2019
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Loan payable to Christopher Diamantis
|
|
$
|
18,229,408
|
|
|
$
|
15,159,455
|
|
|
|
|
|
|
|
|
|
|
Total note payable, related party
|
|
|
18,229,408
|
|
|
|
15,159,455
|
|
|
|
|
|
|
|
|
|
|
Less current portion of notes payable, related party
|
|
|
(18,229,408
|
)
|
|
|
(15,159,455
|
)
|
Total note payable, related party, net of current portion
|
|
$
|
-
|
|
|
$
|
-
|
|
During
the three months ended March 31, 2020, Mr. Diamantis, a former member of our Board of Directors, provided short term loans to
the Company or paid expenses and fees and a portion of the principal due on outstanding debentures on behalf of the Company. The
Company paid $0.4 million for interest incurred by Mr. Diamantis on borrowings he procured in order to loan funds to the Company.
During the three months ended March 31, 2019, Mr. Diamantis
loaned the Company: (i) $0.7 million for the purchase of Jellico Community Hospital and CarePlus Center as more fully discussed
in Note 5; (ii) $0.1 million for fees and expenses incurred in connection with the settlement of the prepaid forward purchase
contract; and (iii) $0.6 million for working capital purposes.
During
the three months ended March 31, 2020 and March 31, 2019, we accrued interest of $0.3 million and $0.1 million, respectively,
on the loans from Mr. Diamantis and we repaid $25,000 and $0.7 million, respectively, of loans from 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 loans made to the Company by Mr. Diamantis subsequent to March 31, 2020 and the exchange
of loans payable from Mr. Diamantis for newly issued preferred stock.
Note
8 – Debentures
The
carrying amount of all outstanding debentures as of March 31, 2020 (unaudited), and December 31, 2019 is as follows:
|
|
March 31, 2020
|
|
|
December 31, 2019
|
|
|
|
(unaudited)
|
|
|
|
|
Debentures
|
|
$
|
29,653,740
|
|
|
$
|
29,873,740
|
|
|
|
|
29,653,740
|
|
|
|
29,873,740
|
|
Less current portion
|
|
|
(29,653,740
|
)
|
|
|
(29,873,740
|
)
|
Debentures, long-term
|
|
$
|
-
|
|
|
$
|
-
|
|
Payment
on all outstanding debentures of $29.7 million at March 31, 2020, which included non-payment penalties of $6.9 million, is past
due. Approximately $0.6 million of the non-payment penalties was recorded in the three months ended March 31, 2019 and the remaining
$6.3 million was recorded in the second half of 2019. In January 2020, the Company and Mr. Diamantis entered into a Forbearance
Agreement with certain debenture holders under which Mr. Diamantis paid the debenture holders $50,000 for legal fees and $220,000
in principal payments on debentures that were issued in February 2019. In addition, Mr. Diamantis, who had guaranteed certain
of the debentures, agreed to grant the debenture holders security interests in certain potential legal settlements funds that
may become due to Mr. Diamantis. The Forbearance Agreement, which terminated on March 15, 2020, required the Company and Mr. Diamantis
to repay the debenture holders a total of $4.9 million on or before the termination date, of which $4.7 million was not repaid.
On June 30, 2020, the Company received a formal notice of default and demand for full payment of the $29.7 million of outstanding
debentures plus accrued interest as discussed in Note 19.
The
outstanding debentures at March 31, 2020 and December 31, 2019, which were issued during the years ending December 31, 2017, 2018
and 2019, are more fully described in Note 9 to the Company’s audited consolidated financial statements included in its
Annual Report on Form 10-K. Certain of these debentures were issued with warrants to purchase shares of the Company’s common
stock. Outstanding warrants are more fully discussed in Note 13.
During
the three months ended March 31, 2019, the Company realized a total of $0.5 million in proceeds from the issuances of the debentures.
At March 31, 2019, unamortized discounts were $2.9 million. These discounts represented 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, the Company recorded approximately $7.5 million of non-cash interest
and amortization of debt discount expense primarily in connection with the debentures and warrants. These discounts were fully
amortized as of December 31, 2019 and, accordingly, no amortization associated with the debentures was recorded in the three months
ended March 31, 2020. In addition to the non-cash interest expense and amortization of debt discount recorded during the three
months ended March 31, 2019, during the three months ended March 31, 2020 and 2019, the Company accrued interest expense, including
penalty interest, on outstanding debentures of $1.9 million and $13,997, respectively.
See
Note 13 for summarized information related to warrants issued and the activity during the three months ended March 31, 2020.
See
Notes 3 and 13 for a discussion of the dilutive effect of the outstanding debentures and warrants as of March 31, 2020.
Note
9 – Related Party Transactions
Alcimede
billed $0.1 million and $0.1 million for consulting fees for the three months ended March 31, 2020 and 2019, 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 discussions of transactions between the Company and 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 – Finance and Operating Lease Obligations
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 non-lease components of contracts.
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, 2020 and December 31, 2019:
|
|
Balance Sheet Classification
|
|
March 31, 2020
|
|
|
December 31, 2019
|
|
Assets:
|
|
|
|
|
|
|
|
|
Operating leases
|
|
Right-of-use operating lease assets
|
|
$
|
239,701
|
|
|
$
|
274,747
|
|
Finance leases
|
|
Property and equipment, net
|
|
|
1,018,711
|
|
|
|
1,119,418
|
|
|
|
|
|
|
|
|
|
|
|
|
Total lease assets
|
|
|
|
$
|
1,258,412
|
|
|
$
|
1,394,165
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
Right-of-use operating lease assets
|
|
$
|
129,714
|
|
|
$
|
116,037
|
|
Finance leases
|
|
Current liabilities
|
|
|
1,018,711
|
|
|
|
1,119,418
|
|
Noncurrent:
|
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
Right-of-use operating lease obligations
|
|
|
109,987
|
|
|
|
158,710
|
|
Finance leases
|
|
Long-term debt
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Total lease liabilities
|
|
|
|
$
|
1,258,412
|
|
|
$
|
1,394,165
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average remaining term:
|
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
|
|
1.85 years
|
|
|
|
2.02 years
|
|
Finance leases
|
|
|
|
|
0.00 years
|
|
|
|
0.08 years
|
|
Weighted-average discount rate:
|
|
|
|
|
|
|
|
|
|
|
Operating leases (1)
|
|
|
|
|
13.0
|
%
|
|
|
13.0
|
%
|
Finance leases
|
|
|
|
|
20.1
|
%
|
|
|
5.122
|
%
|
(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, 2020 and 2019:
|
|
Three Months Ended
March 31, 2020
|
|
|
Three Months Ended
March 31, 2019
|
|
Finance lease expense:
|
|
|
|
|
|
|
|
|
Depreciation/amortization of leased assets (1)
|
|
$
|
15,810
|
|
|
$
|
(54,349
|
)
|
Interest on lease liabilities
|
|
|
46,509
|
|
|
|
3,945
|
|
Operating leases:
|
|
|
|
|
|
|
|
|
Short-term lease expense (2)
|
|
|
115,736
|
|
|
|
87,474
|
|
|
|
|
|
|
|
|
|
|
Total lease expense
|
|
$
|
178,055
|
|
|
$
|
37,070
|
|
(1)
|
Adjusts
depreciation recorded in the three months ended March 31, 2019.
|
(2)
|
Expenses
are included in general and administrative expenses in our unaudited condensed consolidated statements of operations.
|
Other
Information
The
following table presents supplemental cash flow information for the three months ended March 31, 2020 and 2019:
|
|
Three Months
Ended
March 31, 2020
|
|
|
Three Months
Ended
March 31, 2019
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
|
|
|
|
Operating cash flows for operating leases
|
|
$
|
-
|
|
|
$
|
76,559
|
|
Financing cash flows for operating leases
|
|
$
|
50,194
|
|
|
$
|
5,993
|
|
Operating cash flows for finance leases
|
|
$
|
9,455
|
|
|
$
|
3,945
|
|
Financing cash flows for finance leases payments
|
|
$
|
100,707
|
|
|
$
|
73,741
|
|
Aggregate
future minimum lease payments under right-of-use operating and finance leases are as follows:
|
|
Right-of-Use
|
|
|
|
|
|
|
Operating Leases
|
|
|
Finance Leases
|
|
April 1, 2020 to March 31, 2021
|
|
$
|
134,776
|
|
|
$
|
1,251,922
|
|
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
|
|
|
2,438
|
|
|
|
-
|
|
April 1, 2024 to March 31, 2025
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
276,523
|
|
|
|
1,251,922
|
|
|
|
|
|
|
|
|
|
|
Less interest
|
|
|
(36,822
|
)
|
|
|
(233,211
|
)
|
Present value of minimum lease payments
|
|
|
239,701
|
|
|
|
1,018,711
|
|
|
|
|
|
|
|
|
|
|
Less current portion of lease obligations
|
|
|
(129,714
|
)
|
|
|
(1,018,711
|
)
|
Lease obligations, net of current portion
|
|
$
|
109,987
|
|
|
$
|
-
|
|
As
of March 31, 2020, the Company was in default under certain of its finance lease obligations, therefore, the aggregate future
minimum lease payments and accrued interest under finance leases in the amount of $1.0 million are deemed to be immediately due.
Note
11 – Derivative Financial Instruments and Fair Value
The
estimated fair value of financial instruments was determined by the Company using available market information and valuation methodologies
considered to be appropriate. At March 31, 2020 and December 31, 2019, the carrying value of the Company’s accounts receivable,
accounts payable and accrued expenses approximated their fair values due to their short-term nature.
The
following table sets forth the financial assets and liabilities carried at fair value measured on a recurring basis as of March
31, 2020 and December 31, 2019:
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Embedded conversion options
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
455,336
|
|
|
$
|
455,336
|
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
455,336
|
|
|
$
|
455,336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2020 and December 31, 2019 for embedded
conversion options that were valued at $455,336. 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. There was no change in the value of embedded conversion options
in the three months ended March 31, 2020 as there was no change in the conversion price during the period.
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 deemed dividends 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.
Effective
June 9, 2020, the Company’s shareholders approved an amendment to the Company’s Certificate of Incorporation, as amended,
to effect a reverse stock split of all of the outstanding shares of the Company’s common stock, at a specific ratio from
1-for-100 to 1-for-10,000, and to grant authorization to its Board of Directors to determine, in its discretion, the specific
ratio and timing of the reverse split at any time on or before December 31, 2020, subject to the Board of Directors’ discretion
to abandon such amendment. 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. The
definition of Triggering Events includes the Company not having enough shares of common stock available to issue upon conversion,
a default on certain obligations over $150,000 resulting in their acceleration and monetary judgments in excess of $200,000 that
are not satisfied after 45 days.
Series
I-2 Convertible Preferred Stock
On
October 30, 2017, the Company entered into Exchange Agreements with the holders of debentures that were issued in September 2017
(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). 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. 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. Each share of Series I-2 Preferred Stock is convertible into shares of the Company’s common stock at any
time at the option of the holder at a conversion price equal to the lesser of (i) $1.00, subject to adjustment, and (ii) 85% of
the lesser of the volume weighted average market price of the common stock on the day prior to conversion or on the day of conversion.
The conversion price is subject to “full ratchet” and other customary anti-dilution protections as more fully described
in the Certificate of Designation of the Series I-2 Preferred Stock.
The
Company’s Board of Directors has designated up to 21,346 shares of the 5,000,000 authorized shares of preferred stock as
the Series I-2 Preferred Stock and the Company has issued 3,907.67 shares of its 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, which is the same as the definition in 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-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.
During
the three months ended March 31, 2020 and 2019, the holder converted 21.25 shares and 547.298 shares of Series I-2 Preferred Stock,
respectively, into 250,000,000 and 3,255,700,000 shares, respectively, of the Company’s common stock. As of March 31, 2020,
1,521.65 shares of the Series I-2 Preferred Stock remain outstanding.
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, 2020, the Company had outstanding
shares of preferred stock consisting of shares of its Series I-1 Preferred Stock and shares of its Series I-2 Preferred Stock
(both of which are more fully discussed in Note 12), 10 shares of its Series H Convertible Preferred Stock (the “Series
H Preferred Stock”), 1,750,000 shares of its Series F Convertible Preferred Stock (the “Series F Preferred
Stock”) and 250,000 shares of its Series K Convertible Preferred Stock (the “Series K Preferred Stock”).
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 December 23, 2019, the Company entered into an Exchange Agreement
(the “Agreement”) with Alcimede LLC (“Alcimede”), of which Seamus Lagan, our Chief Executive Officer, is
the sole manager as previously stated. Pursuant to the Agreement, the Company issued to Alcimede 250,000 shares of its Series K
Preferred Stock in exchange for the 250,000 shares of the Company’s Series J Convertible Preferred Stock (the “Series
J Preferred Stock”) held by Alcimede. The holder of the Series J Preferred Stock was entitled to receive, when and as declared
by the Board of Directors of the Company, but only out of funds that were legally available therefor, cumulative cash dividends
at the rate of 8% of the stated value per annum on each share of Series J Preferred Stock. The Series J Preferred Stock had been
issued to Alcimede on July 23, 2018 and upon the issuance of the Series K Preferred Stock to Alcimede, the shares of Series J Preferred
Stock were cancelled. Under the Agreement, Alcimede relinquished all rights to any cumulative dividends on the Series J Preferred
Stock. The terms of the Series K Preferred Stock do not provide for cumulative dividends. Subsequent to March 31, 2020, Alcimede
LLC exchanged the Series K Preferred Stock for Series L Convertible Preferred Stock as more fully discussed in Note 19.
Common
Stock
The
Company has authorized 10,000,000,000 shares of Common Stock, par value $.0001 per share.
The
Company had 9,898,936,775 and 9,648,936,775 shares of common stock issued and outstanding at March 31, 2020 and December 31, 2019,
respectively. During the three months ended March 31, 2020, the Company issued 250,000,000 shares of its common stock upon the
conversion of 21.25 shares of its Series I-2 Preferred Stock.
Common
Stock and Common Stock Equivalents
The
Company has outstanding options, warrants, convertible preferred stock and convertible debentures. Exercise of the options and
warrants, and conversions of the convertible preferred stock and debentures could result in substantial dilution of our common
stock and a decline in its market price. In addition, the terms of certain of the warrants, convertible preferred stock and convertible
debentures issued by us provide for reductions in the per share exercise prices of the warrants and the per share conversion prices
of the debentures and preferred stock (if applicable and subject to a floor in certain cases), in the event that we issue common
stock or common stock equivalents (as that term is defined in the agreements) at an effective exercise/conversion price that is
less than the then exercise/conversion prices of the outstanding warrants, preferred stock 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.
Effective
June 9, 2020, the Company’s shareholders approved an amendment to the Company’s Certificate of Incorporation, as amended,
to effect a reverse stock split of all of the outstanding shares of the Company’s common stock, at a specific ratio from
1-for-100 to 1-for-10,000, and to grant authorization to its Board of Directors to determine, in its discretion, the specific
ratio and timing of the reverse split at any time on or before December 31, 2020, subject to the Board of Directors’ discretion
to abandon such amendment. See Note 19. 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.
Stock
Options
The
Company maintained and sponsored the Tegal Corporation 2007 Incentive Award Plan (the “2007 Equity Plan”). Tegal Corporation
was 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, 2020:
|
|
Number of
options
|
|
|
Weighted-
average
exercise price
|
|
|
Weighted-
average
contractual
term
|
|
Outstanding at December 31, 2019
|
|
|
68
|
|
|
$
|
1,152,616
|
|
|
|
6.33
|
|
Granted
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Forfeit
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2020
|
|
|
68
|
|
|
$
|
1,152,616
|
|
|
|
6.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2020
|
|
|
68
|
|
|
$
|
1,152,616
|
|
|
|
|
|
All
outstanding stock options as of March 31, 2020 were fully vested as of December 31, 2019 and, accordingly, the Company did not
incur stock option compensation expense during the three months ended March 31, 2020. The Company recognized stock option compensation
expense of $8,650 for the three months ended March 31, 2019. As of March 31, 2020, the weighted average remaining contractual
life was 6.08 years for options outstanding and exercisable. The intrinsic value of options exercisable at March 31, 2020 was
$0.
Warrants
The
Company, as part of various debt and equity financing transactions, has issued warrants to purchase shares of the Company’s
common stock.
At
March 31, 2020, there were 634.6 billion warrants outstanding primarily 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. The number of warrants
issued 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 (1) increases in the number of shares issuable pursuant to the
warrants and (2) 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, 2020:
|
|
Number of
warrants
|
|
|
Weighted
average
exercise price
|
|
Balance at December 31, 2019
|
|
|
634,585,355,376
|
|
|
$
|
0.00014
|
|
Warrants expired
|
|
|
(1
|
)
|
|
$
|
(3,150.00
|
)
|
Balance at March 31, 2020
|
|
|
634,585,355,375
|
|
|
$
|
0.00014
|
|
On
March 27, 2019, the expiration date of certain warrants issued in March 2017 and September 2017, 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 valuation 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. (Note that these expiration
dates of these warrants were further extended during May 2019 until March 31, 2022).
Note
14 – Supplemental Disclosure of Cash Flow Information
|
|
Three Months Ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Cash paid for interest
|
|
$
|
-
|
|
|
$
|
-
|
|
Cash paid for income taxes
|
|
$
|
-
|
|
|
$
|
30,000
|
|
|
|
|
|
|
|
|
|
|
Acquisition of Jellico Community Hospital and CarePlus Center:
|
|
|
|
|
|
|
|
|
Inventory
|
|
$
|
-
|
|
|
$
|
317,427
|
|
Property and equipment
|
|
|
-
|
|
|
|
500,000
|
|
Intangible assets
|
|
|
-
|
|
|
|
250,000
|
|
Accrued expenses
|
|
|
-
|
|
|
|
158,890
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Series I-2 Preferred Stock converted into common stock
|
|
$
|
25,000
|
|
|
$
|
643,880
|
|
Value of common stock issued in cashless exercise of warrants
|
|
|
-
|
|
|
|
11,961
|
|
Deemed dividends 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 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. CIGNA’s case was dismissed on
June 22, 2020; the Company’s case remains 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.
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 entered
into a Stipulation Agreement with the DOR allowing the Company to make monthly installments until July 2019. The Company has made
payments to reduce the amount owed. The Company intends to renegotiate another Stipulation agreement. However, there can be no
assurance the Company will be successful. The balance accrued of approximately $0.4 million remained outstanding to the DOR at
March 31, 2020.
In
December of 2016, TCS-Florida, L.P. (“Tetra”), filed suit against the Company for failure to make the required
payments under an equipment leasing contract that the Company had with Tetra (see Note 11). On January 3, 2017, Tetra
received a Default Judgment against the Company in the amount of $2.6 million, representing the balance owed on the leases,
as well as additional interest, penalties and fees. In January and February of 2017, the Company made payments to Tetra
relating to this judgment aggregating $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, 2020 was $1.0 million, including $0.2 million of accrued interest. In July 2020, the
Company entered into a settlement with Tetra and paid $100,000 as full and final settlement of all liability to Tetra.
In
December of 2016, DeLage Landen Financial Services, Inc. (“DeLage”), filed suit against the Company for failure to
make the required payments under an equipment leasing contract that the Company had with DeLage (see Note 11). On January 24,
2017, DeLage received a default judgment against the Company in the approximate amount of $1.0 million, representing the balance
owed on the lease, as well as additional interest, penalties and fees. The Company 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, 2020.
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.
As of March 31, 2020, the Company has repaid $11,943 of this amount.
Two
former employees of the Company’s CollabRx, Inc. subsidiary have filed suits in a California state court in connection with
amounts claimed to be owed under their respective employment agreements with the subsidiary. One former employee received a judgment
in October 2018 for approximately $253,000. The other former employee received a judgment in December 2018 for approximately $173,000.
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, 2020 (see Note 7). 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. In May 2020, the SEC appointed a Receiver to close down the TCA Global
Master Fund, L.P. over allegations of accounting fraud. The amount recorded by the Company as being owed to TCA was based
on TCA’s application of prior payments made by the Company. The Company believes that prior payments of principal and interest
may have been applied to unenforceable investment banking and other fees and charges. It is the Company’s position that
the amount owed to TCA is less than what is set forth in Note 7 above.
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. The court awarded a judgment against EPIC Reference Labs, Inc. in May 2019
for approximately $155,000. The Company has recorded the amount owed as a liability at March 31, 2020.
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 lease equipment and purchase supplies. The amount of the settlement in this case of $110,000 was
accrued in 2019 and paid in full during the three months ended March 31, 2020.
In
August 2019, EPIC Reference Labs, Inc. and Medytox Diagnostics, Inc. were sued by Beckman Coulter, Inc. in the same court under
an agreement to purchase laboratory supplies. The plaintiff claims damages of approximately $124,000.
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. The Company reached a settlement in May 2020 to resolve the
judgment in the amount of $300,000, which is required to be paid under a payment plan.
In
February 2020, Anthony O. Killough sued the Company and Mr. Diamantis, as guarantor, in New York State Court for the County of
New York, for approximately $2.0 million relating to the promissory note issued by the Company in September 2019 (see Note 7).
In May 2020, the parties entered into a Stipulation providing for a payment of a total of $2,158,168 (which includes accrued interest)
in installments through November 1, 2020. From April 1, 2020 and through June 30, 2020, $150,000 has been paid.
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. The Company has hired a new COO 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 2019 and is currently planning the reopening of the hospital.
In
June 2019, CHSPSC, the former owners of Jamestown Regional Medical Center, obtained a judgment against the Company in the
amount of $592,650. The Company believes that a number of insurance payments were made to CHSPCS after the change of ownership
and will likely offset the majority of the claim made by CHSPCS.
In
August 2019, Morrison Management Specialists, Inc. obtained a judgment against Jamestown Regional Medical Center and the Company
in Fentress County, Tennessee in the amount of $194,455 in connection with the housekeeping and dietary services.
In
November 2019, Newstat, PLLC obtained a judgment against Big South Fork Medical Center in Knox County, Tennessee in the amount
of $190,600 in connection with the provision of medical services.
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, 2020 (see Note 17). 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 was as follows:
|
|
Three Months Ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Net revenues – External
|
|
|
|
|
|
|
|
|
Hospital Operations
|
|
$
|
1,840,091
|
|
|
$
|
5,105,265
|
|
Clinical Laboratory Operations
|
|
|
1,440
|
|
|
|
85,385
|
|
|
|
$
|
1,841,531
|
|
|
$
|
5,190,650
|
|
Net loss from continuing operations before income taxes
|
|
|
|
|
|
|
|
|
Hospital Operations
|
|
$
|
(3,092,933
|
)
|
|
$
|
(3,175,107
|
)
|
Clinical Laboratory Operations
|
|
|
(113,386
|
)
|
|
|
(225,530
|
)
|
Corporate
|
|
|
(645,866
|
)
|
|
|
(1,072,835
|
)
|
Other expense, net
|
|
|
(3,018,303
|
)
|
|
|
(8,459,323
|
)
|
|
|
$
|
(6,870,488
|
)
|
|
$
|
(12,932,795
|
)
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
Hospital Operations
|
|
$
|
182,315
|
|
|
$
|
173,776
|
|
Clinical Laboratory Operations
|
|
|
(17,743
|
)
|
|
|
49,662
|
|
Corporate
|
|
|
135
|
|
|
|
148
|
|
|
|
$
|
164,707
|
|
|
$
|
223,586
|
|
Capital expenditures
|
|
|
|
|
|
|
|
|
Hospital Operations
|
|
$
|
-
|
|
|
$
|
42,317
|
|
|
|
$
|
-
|
|
|
$
|
42,317
|
|
|
|
As of
|
|
|
|
March 31, 2020
|
|
|
December 31, 2019
|
|
Total assets
|
|
|
|
|
|
|
|
|
Hospital Operations
|
|
$
|
13,186,606
|
|
|
$
|
14,275,256
|
|
Clinical Laboratory Operations
|
|
|
278,011
|
|
|
|
330,381
|
|
Corporate
|
|
|
4,531,979
|
|
|
|
2,305,380
|
|
Assets of AMSG and HTS classified as held for sale
|
|
|
487,278
|
|
|
|
514,772
|
|
Eliminations
|
|
|
(2,718,130
|
)
|
|
|
(2,718,130
|
)
|
|
|
$
|
15,765,744
|
|
|
$
|
14,707,659
|
|
Note
17 – Discontinued Operations
On
July 12, 2017, the Company announced plans to spin off AMSG and in the third quarter 2017 our Board of Directors voted unanimously
to spin off the Company’s wholly-owned subsidiary, HTS, as independent publicly traded companies by way of tax-free distributions
to the Company’s stockholders. On June 10, 2020, the Company signed an agreement that will lead to the separation of these
divisions into a public company. The agreement is with TPT Global Tech, Inc. (OTC: TPTW), a California-based public company, to
merge HTS and AMSG into a public company after TPT completes a merger of its wholly-owned subsidiary, InnovaQor, Inc. with this
public company. The public company will be known as InnovaQor going forward. Completion of the agreement is subject to a number
of approvals and consents which need to be secured to complete the transaction. Subject to closing and the relevant SEC approvals
it is intended that Rennova will receive approximately $22 million of preferred shares in the transaction, $5 million of which
will be converted to common shares in the public company, and distributed to Rennova shareholders upon completion of the relevant
registration/approvals with the SEC. The remaining approximately $17 million of preferred shares held by Rennova as an investment
in InnovaQor will be convertible to common shares on achievement of certain milestones going forward. There can be no assurance
that the transaction as described will be consummated or that terms including numbers or values for consideration shares will
not change significantly before closing.
In
accordance with ASC 205-20 and having met the criteria for “held for sale”, as the Company reached this decision prior
to January 1, 2019, 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 operation 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, 2020
|
|
|
December 31, 2019
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
Cash
|
|
$
|
968
|
|
|
$
|
452
|
|
Accounts receivable, net
|
|
|
-
|
|
|
|
-
|
|
Prepaid expenses and other current assets
|
|
|
-
|
|
|
|
-
|
|
Current assets classified as held for sale
|
|
$
|
968
|
|
|
$
|
452
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
-
|
|
|
$
|
-
|
|
Deposits
|
|
|
-
|
|
|
|
-
|
|
Non-current assets classified as held for sale
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
491,206
|
|
|
$
|
491,206
|
|
Accrued expenses
|
|
|
556,545
|
|
|
|
565,943
|
|
Current portion of notes payable
|
|
|
253,076
|
|
|
|
256,274
|
|
Current liabilities classified as held for sale
|
|
$
|
1,300,827
|
|
|
$
|
1,313,423
|
|
HTS
Assets and Liabilities:
|
|
March 31, 2020
|
|
|
December 31, 2019
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
Cash
|
|
$
|
1,921
|
|
|
$
|
17,315
|
|
Accounts receivable, net
|
|
|
475,483
|
|
|
|
482,472
|
|
Prepaid expenses and other current assets
|
|
|
4,292
|
|
|
|
5,150
|
|
Current assets classified as held for sale
|
|
$
|
481,696
|
|
|
$
|
504,937
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
3,114
|
|
|
$
|
3,354
|
|
Deposits
|
|
|
1,500
|
|
|
|
6,029
|
|
Non-current assets classified as held for sale
|
|
$
|
4,614
|
|
|
$
|
9,383
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
676,581
|
|
|
$
|
668,895
|
|
Accrued expenses
|
|
|
814,543
|
|
|
|
810,184
|
|
Current liabilities classified as held for sale
|
|
$
|
1,491,124
|
|
|
$
|
1,479,079
|
|
Consolidated
Discontinued Operations Assets and Liabilities:
|
|
March 31, 2020
|
|
|
December 31, 2019
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
Cash
|
|
$
|
2,889
|
|
|
$
|
17,767
|
|
Accounts receivable, net
|
|
|
475,483
|
|
|
|
482,472
|
|
Prepaid expenses and other current assets
|
|
|
4,292
|
|
|
|
5,150
|
|
Current assets classified as held for sale
|
|
$
|
482,664
|
|
|
$
|
505,389
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
3,114
|
|
|
$
|
3,354
|
|
Deposits
|
|
|
1,500
|
|
|
|
6,029
|
|
Non-current assets classified as held for sale
|
|
$
|
4,614
|
|
|
$
|
9,383
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,167,787
|
|
|
$
|
1,160,101
|
|
Accrued expenses
|
|
|
1,371,088
|
|
|
|
1,376,127
|
|
Current portion of notes payable
|
|
|
253,076
|
|
|
|
256,274
|
|
Current liabilities classified as held for sale
|
|
$
|
2,791,951
|
|
|
$
|
2,792,502
|
|
Major
line items constituting loss from discontinued operations in the unaudited condensed consolidated statements of operations for
the three months ended March 31, 2020 and 2019 consisted of the following:
AMSG
Loss from Discontinued Operations:
|
|
Three Months Ended
|
|
|
|
March 31, 2020
|
|
|
March 31, 2019
|
|
|
|
|
(unaudited)
|
|
|
|
(unaudited)
|
|
Revenue from services
|
|
$
|
-
|
|
|
$
|
22,982
|
|
Cost of services
|
|
|
-
|
|
|
|
16,655
|
|
Gross profit
|
|
|
-
|
|
|
|
6,327
|
|
Operating expenses
|
|
|
963
|
|
|
|
102,610
|
|
Other expense
|
|
|
6,297
|
|
|
|
25,960
|
|
Provision for income taxes
|
|
|
-
|
|
|
|
-
|
|
Loss from discontinued operations
|
|
$
|
(7,260
|
)
|
|
$
|
(122,243
|
)
|
HTS
Loss from Discontinued Operations:
|
|
Three Months Ended
|
|
|
|
March 31, 2020
|
|
|
March 31, 2019
|
|
|
|
|
(unaudited)
|
|
|
|
(unaudited)
|
|
Revenue from services
|
|
$
|
159,068
|
|
|
$
|
120,089
|
|
Cost of services
|
|
|
8,777
|
|
|
|
32,190
|
|
Gross profit
|
|
|
150,291
|
|
|
|
87,899
|
|
Operating expenses
|
|
|
182,806
|
|
|
|
474,265
|
|
Other expense
|
|
|
-
|
|
|
|
-
|
|
Provision for income taxes
|
|
|
-
|
|
|
|
-
|
|
Loss from discontinued operations
|
|
$
|
(32,515
|
)
|
|
$
|
(386,366
|
)
|
Consolidated
Loss from Discontinued Operations:
|
|
Three Months Ended
|
|
|
|
March 31, 2020
|
|
|
March 31, 2019
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Revenue from services
|
|
$
|
159,068
|
|
|
$
|
143,071
|
|
Cost of services
|
|
|
8,777
|
|
|
|
48,845
|
|
Gross profit
|
|
|
150,291
|
|
|
|
94,226
|
|
Operating expenses
|
|
|
183,769
|
|
|
|
576,875
|
|
Other expense
|
|
|
6,297
|
|
|
|
25,960
|
|
Provision for income taxes
|
|
|
-
|
|
|
|
-
|
|
Loss from discontinued operations
|
|
$
|
(39,775
|
)
|
|
$
|
(508,609
|
)
|
Note
18 – Recent Accounting Pronouncements
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.
In
December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The
new guidance simplifies the accounting for income taxes by removing certain exceptions to the general principles and also simplification
of areas such as franchise taxes, step-up in tax basis goodwill, separate entity financial statements and interim recognition
of enactment of tax laws or rate changes. This standard will be effective for us for annual periods beginning on January 1, 2021,
including interim periods within those fiscal years. Early adoption of this standard is permitted, including adoption of all amendments
in any interim period for which financial statements have not yet been issued. We are evaluating the impact of adopting this new
accounting guidance on our consolidated financial statements.
Other
recent accounting standards issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified
Public Accountants, and the SEC did not, or are not, believed by management to have a material impact on the Company’s present
or future consolidated financial statements.
Note
19 – Subsequent Events
Shareholder
Proposal Approval
On
May 7, 2020, Mr. Lagan and Alcimede LLC, the holders of an aggregate of 53,368 shares of common stock and 250,000 shares of Series
L Preferred Stock, which votes with the common stock and the Series F Preferred Stock, with each share of Series L Preferred Stock
having 40,000 votes, representing 50.25% of the total voting power of the Company’s voting securities, approved by written
consent in lieu of a special meeting of stockholders the following proposal, which had previously been approved and recommended
to be approved by the stockholders by the Board of Directors of the Company.
Proposal
1: To approve an amendment to our Certificate of Incorporation, as amended, to effect a reverse stock split of all of the
outstanding shares of our common stock, at a specific ratio from 1-for-100 to 1-for-10,000, and grant authorization to our Board
of Directors to determine, in its discretion, the specific ratio and timing of the reverse split at any time on or before December
31, 2020, subject to the Board of Directors’ discretion to abandon such amendment.
The
stockholder approval of the above proposal became effective on June 9, 2020. 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.
Exchange
of Preferred Stock
On
May 4, 2020, 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 L Convertible Preferred Stock (the “Series L Preferred Stock”).
On May 5, 2020, the Company entered into an exchange agreement with Alcimede. Pursuant to the exchange agreement, the Company
issued to Alcimede 250,000 shares of its Series L Preferred Stock in exchange for the 250,000 shares of the Company’s Series
K Preferred Stock held by Alcimede. The Series K Preferred Stock had been issued to Alcimede on December 23, 2019 and upon the
issuance of the Series L Preferred Stock to Alcimede, the shares of Series K Preferred Stock were cancelled. Shares of the Series
K Preferred Stock were convertible immediately into common stock and were entitled to receive, when and as declared by the Board
of Directors, dividends equal (on an as if converted to common stock basis) to and in the same form as dividends actually paid
on shares of common stock. The Series L Preferred Stock is not convertible into common stock prior to December 1, 2020 and is
not entitled to receive any dividends.
Series
M Convertible Preferred Stock Exchanged for Loans from Mr. Diamantis
On
June 9, 2020, the Company filed a certificate of designation to authorize 30,000 shares of its Series M Convertible Preferred
Stock (the “Series M Preferred Stock”) with a stated value of $1,000 per share. On June 30, 2020, the Company
and Mr. Diamantis entered into an exchange agreement wherein Mr. Diamantis agreed to the extinguishment of the Company’s
indebtedness to Mr. Diamantis totaling $18.8 million, including accrued interest, on that date in exchange for 22,000 shares of
the Company’s Series M Preferred Stock with a par value of $0.01 per share.
The
terms of the Series M Preferred Stock were set forth in the Company’s Current Report on Form 8-K filed with the SEC on June
16, 2020. In particular: (i) each holder of the Series M Preferred Stock shall be entitled to vote on all matters submitted to
a vote of the holders of the Company’s common stock. Regardless of the number of shares of Series M Preferred Stock outstanding
and so long as at least one share of Series M Preferred Stock is outstanding, the outstanding shares of Series M Preferred Stock
shall have the number of votes, in the aggregate, equal to 51% of all votes entitled to be voted at any meeting of stockholders
or action by written consent. Each outstanding share of the Series M Preferred Stock shall represent its proportionate share of
the 51% allocated to the outstanding shares of Series M Preferred Stock in the aggregate. The Series M Preferred Stock shall vote
with the common stock and any other voting securities as if they were a single class of securities; (ii) each share of the Series
M Preferred Stock is convertible into shares of the Company’s common stock at a conversion price equal to 90% of the average
closing price of the Company’s common stock on the ten trading days immediately prior to the conversion date but in any
event no less than the par value of the Company’s common stock; and (iii) dividends at the rate per annum of ten percent
(10%) of the stated value per share shall accrue on each outstanding share of Series M Preferred Stock from and after the date
of the original issuance of such share of Series M Preferred Stock (subject to appropriate adjustment in the event of any stock
dividend, stock split, combination or other similar recapitalization). The dividends shall accrue from day to day, whether or
not declared, and shall be cumulative and non-compounding; provided, however, that such dividend shall be payable
only when, as, and if declared by the Board of Directors and the Company shall be under no obligation to pay such dividends. No
cash dividends shall be paid on the Company’s common stock unless the dividends are paid on the Series M Preferred Stock.
Paycheck
Protection Loan
As
of May 7, 2020, the Company and its subsidiaries have received loan proceeds in the aggregate amount of approximately $2.4 million
under the Paycheck Protection Program (“PPP”). The PPP, established as part of the CARES Act, provides for loans to qualifying businesses. A portion of the loans and accrued interest
are forgivable as long as the borrower uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities,
and maintains its payroll levels. The amount of loan forgiveness will be reduced if the borrower terminates employees or reduces
salaries. No collateral or guarantees were provided in connection with the PPP loans.
The
unforgiven portion of the PPP loans is payable over two years at an interest rate of 1%, with a deferral of payments for the first
six months. The Company intends to use the proceeds for purposes consistent with the PPP. While the Company currently believes
that its use of the loan proceeds will meet the conditions for forgiveness of the loans, we cannot assure you that we will not
take actions that could cause the Company to be ineligible for forgiveness of the loans, in whole or in part.
HHS
Provider Relief Funds
The Company received Provider Relief Funds
from the United States Department of Health and Human Services (“HHS”) provided to eligible healthcare providers out
of the $100 billion Public Health and Social Services Emergency Fund provided for in the CARES Act. The funds are allocated to
eligible healthcare providers for expenses and lost revenue attributable to the COVID-19 pandemic. The funds are being released
in tranches, and HHS partnered with UnitedHealth Group to distribute the initial $30 billion in funds by direct deposit to providers.
As of July 15, 2020, Company-owned hospital facilities have received approximately $12.4 million in relief
funds. The fund payments are grants, not loans, and HHS will not require repayment, but providers are restricted and the funds
must be used only for grant approved purposes.
Past
Due Debentures
As
more fully discussed in Notes 6 and 8, the Company had outstanding past due debentures, including non-payment penalties and accrued
interest aggregating $33.7 million at March 31, 2020. On June 30, 2020, the Company received a formal notice of default and demand
for full payment of the outstanding debentures and accrued interest.