Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
SPECIAL
NOTE CONCERNING FORWARD-LOOKING STATEMENTS
Certain
statements made in this Form 10-Q are “forward-looking statements” (within the meaning of the Private Securities Litigation
Reform Act of 1995) regarding the plans and objectives of management for future operations. Such statements involve known and
unknown risks, uncertainties and other factors that may cause actual results, performance or achievements of the Company to be
materially different from any future results, performance or achievements expressed or implied by such forward-looking statements.
The forward-looking statements included herein are based on current expectations that involve numerous risks and uncertainties.
The Company’s plans and objectives are based, in part, on assumptions involving its continued business operations. Assumptions
related to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions
and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond the
control of the Company. Although the Company believes its assumptions underlying the forward-looking statements are reasonable,
any of the assumptions could prove to be inaccurate and, therefore, there can be no assurance the forward-looking statements included
in this report will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements
included herein, the inclusion of such information should not be regarded as a representation by the Company or any other person
that the objectives and plans of the Company will be achieved.
The
forward-looking statements included in this Form 10-Q and referred to elsewhere are related to future events or our strategies
or future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may,”
“should,” “believe,” “anticipate,” “future,” “potential,” “estimate,”
“expect,” “intend,” “plan,” or the negative of such terms or comparable terminology. All forward-looking
statements included in this Form 10-Q are based on information available to us as of the filing date of this report, and the Company
assumes no obligation to update any such forward-looking statements, except as required by law. Our actual results could differ
materially from the forward-looking statements.
Important
factors that might cause our actual results to differ materially from the results contemplated by the forward-looking statements
are contained in the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended December 31,
2016 (the “2016 Form 10-K”) and in our subsequent filings with the Securities and Exchange Commission. The following
discussion of our results of operations should be read in conjunction with the audited financial statements contained within the
2016 Form 10-K and with our unaudited condensed consolidated financial statements and related notes thereto included elsewhere
in this report.
COMPANY
OVERVIEW
We
are a healthcare enterprise that delivers products and services to healthcare providers, their patients and individuals. We currently
operate in three synergistic divisions: 1) Clinical diagnostics through our clinical laboratories; 2) supportive software solutions
to healthcare providers including Electronic Health Records (“EHR”), Laboratory Information Systems and Medical Billing
services; and 3) the recent addition of a rural critical access hospital in Tennessee. We aspire to create a more sustainable
relationship with our customers by offering needed and interoperable solutions to capture multiple revenue streams from medical
providers.
Our
Services
Our
principal line of business to date is laboratory blood and urine testing services performed by our Clinical Laboratory Operations
business segment, with a particular emphasis on the provision of urine drug toxicology testing to physicians, clinics and rehabilitation
facilities in the United States. Testing services to rehabilitation facilities represented approximately 74% and 86% of our revenues
for the six months ended June 30, 2017 and 2016, respectively.
Our
Supportive Software Solutions segment provides a customizable EHR and revenue cycle management services providing a full suite
of billing services to substance abuse and behavioral health providers, as well as a dictation-based ambulatory EHR for physician
practices and advanced transcription services.
On
January 13, 2017, we closed on an asset purchase agreement to acquire certain assets related to Scott County Community Hospital,
based in Oneida, Tennessee (the “Hospital Assets”). The Hospital Assets include a 52,000 square foot hospital building
and 6,300 square foot professional building on approximately 4.3 acres. Scott County Community Hospital is classified as a Critical
Access Hospital (rural) with 25 beds, a 24/7 emergency department, operating rooms and a laboratory that provides a range of diagnostic
services. Scott County Community Hospital closed in July 2016 in connection with the bankruptcy filing of its parent company,
Pioneer Health Services, Inc. We acquired the Hospital Assets out of bankruptcy for a purchase price of $1.0 million. The hospital,
which has been renamed Big South Fork Medical Center, became operational on August 8, 2017. We believe that the hospital will
provide us with a stable revenue base, as well as the potential for significant synergistic opportunities with our Clinical Laboratory
Operations business segment.
Our
Decision Support and Informatics business segment develops and markets medical information and clinical decision support products
and services intended to set a standard for the clinical interpretation of genomics-based, precision medicine. CollabRx offers
interpretation and decision support solutions that enhance cancer diagnoses and treatment through actionable data analytics and
reporting for oncologists and their patients. This segment is now considered part of our discontinued operations.
RESULTS
OF OPERATIONS
Critical
Accounting Policies and Estimates
Our
discussion and analysis of financial condition and results of operations are based on our consolidated financial statements, which
have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make a number of
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements. Such estimates and assumptions affect the reported amounts of revenues and expenses during
the reporting period. We base our estimates on historical experiences and on various other assumptions that we believe to be reasonable
under the circumstances. Actual results may differ materially from these estimates under different assumptions and conditions.
We continue to monitor significant estimates made during the preparation of our financial statements. On an ongoing basis, we
evaluate estimates and assumptions based upon historical experience and various other factors and circumstances. We believe our
estimates and assumptions are reasonable in the circumstances; however, actual results may differ from these estimates under different
future conditions.
We
have identified the policies and significant estimation processes discussed below as critical to our business and to the understanding
of our results of operations. For a detailed application of these and other accounting policies, see Note 2 to the audited consolidated
financial statements as of and for the year ended December 31, 2016 included in the 2016 Form 10-K.
Revenue
Recognition
Service
revenues are principally generated from laboratory testing services, including 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 United States have an agreement
with a third-party payer such as a commercial insurance provider, Medicaid or Medicare to pay all or a portion of their healthcare
expenses; the majority of services provided by us are to patients covered under a third-party payer contract. In most cases, the
Company is provided the third-party billing information and seeks payment from the third party in accordance with the terms and
conditions of the third party payer for health service providers like us. Each of these third-party payers may differ not only
in terms of rates, but also with respect to terms and conditions of payment and providing coverage (reimbursement) for specific
tests. Estimated revenues are established based on a series of procedures and judgments that require industry specific healthcare
experience and an understanding of payer methods and trends. Despite follow up billing efforts, the Company does not currently
anticipate collection of a significant portion of self-pay billings, including the patient responsibility portion of the billing
for patients covered by third party payers. The Company currently does not have any capitated agreements.
We
review our calculations for the realizability of gross service revenues on a monthly basis in order to make certain that we are
properly allowing for the uncollectable portion of our gross billings and that our estimates remain sensitive to variances and
changes within our payer groups. The contractual allowance calculation is made on the basis of historical allowance rates for
the various specific payer groups on a monthly basis with a greater weight being given to the most recent trends; this process
is adjusted based on recent changes in underlying contract provisions and shifts in the testing being performed. This calculation
is routinely analyzed by us on the basis of actual allowances issued by payers and the actual payments made to determine what
adjustments, if any, are needed. Based on the calculations at June 30, 2017 and 2016, we determined that the collectible portion
of our gross billings that should be reflected in net revenues was approximately 13% and 15%, respectively, of the outgoing gross
billings.
Contractual
Allowances and Doubtful Accounts
Accounts
receivable are reported at realizable value, net of allowances for credits and doubtful accounts, which are estimated and recorded
in the period the related revenue is recorded. The Company has a standardized approach to estimating and reviewing the collectability
of its receivables based on a number of factors, including the period they have been outstanding. Historical collection and payer
reimbursement experience is an integral part of the estimation process related to allowances for contractual credits and doubtful
accounts. In addition, the Company regularly assesses the state of its billing operations in order to identify issues which may
impact the collectability of these receivables or reserve estimates. Receivables deemed to be uncollectible are charged against
the allowance for doubtful accounts at the time such receivables are written-off. Recoveries of receivables previously written-off
are recorded as credits to the allowance for doubtful accounts. Revisions to the allowances for doubtful accounts estimates are
recorded as an adjustment to provision for bad debts within selling, general and administrative expenses.
Impairment
or Disposal of Long-Lived Assets
The
Company accounts for the impairment or disposal of long-lived assets according to the Financial Accounting Standards Board’s
(“FASB”) Accounting Standards Codification (“ASC”) Topic 360,
Property, Plant and Equipment
(“ASC
360”). ASC 360 clarifies the accounting for the impairment of long-lived assets and for long-lived assets to be disposed
of, including the disposal of business segments and major lines of business. Long-lived assets are reviewed when facts and circumstances
indicate that the carrying value of the asset may not be recoverable. When necessary, impaired assets are written down to estimated
fair value based on the best information available. Estimated fair value is generally based on either appraised value or measured
by discounting estimated future cash flows. Considerable management judgment is necessary to estimate discounted future cash flows.
Accordingly, actual results could vary significantly from such estimates. We did not record any impairment charges during the
six months ended June 30, 2017 and 2016.
Derivative
Financial Instruments and Fair Value
We
account for warrants issued in conjunction with the issuance of common stock and certain convertible debt instruments in accordance
with the guidance contained in ASC Topic 815,
Derivatives and Hedging
(“ASC 815”) and ASC Topic 480,
Distinguishing
Liabilities from Equity
(“ASC 480”). For warrant instruments and conversion options embedded in promissory notes
that are not deemed to be indexed to the Company’s own stock, we classified such instruments as liabilities at their fair
values at the time of issuance and adjusted the instruments to fair value at each reporting period. These liabilities were subject
to re-measurement at each balance sheet date until extinguished either through conversion or exercise, and any change in fair
value was recognized in our statement of operations. The fair values of these derivative and other financial instruments had been
estimated using a Black-Scholes model and other valuation techniques.
In
July 2017, the FASB issued ASU 2017-11 “Earnings Per Share (Topic 260) Distinguishing Liabilities from Equity (Topic 480)
Derivatives and Hedging (Topic 815).” The amendments in Part I of this Update change the classification analysis of certain
equity-linked financial instruments (or embedded features) with down round features. When determining whether certain financial
instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification
when assessing whether the instrument is indexed to an entity’s own stock. The amendments also clarify existing disclosure
requirements for equity-classified instruments. As a result, a freestanding equity-linked financial instrument (or embedded conversion
option) no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round
feature. For freestanding equity classified financial instruments, the amendments require entities that present earnings per share
(EPS) in accordance with Topic 260 to recognize the effect of the down round feature when it is triggered. That effect is treated
as a dividend and as a reduction of income available to common shareholders in basic EPS. Convertible instruments with embedded
conversion options that have down round features are now subject to the specialized guidance for contingent beneficial conversion
features (in Subtopic 470-20, Debt—Debt with Conversion and Other Options), including related EPS guidance (in Topic 260).
The amendments in Part II of this Update recharacterize the indefinite deferral of certain provisions of Topic 480 that now are
presented as pending content in the Codification, to a scope exception. Those amendments do not have an accounting effect.
Under
current GAAP, an equity-linked financial instrument with a down round feature that otherwise is not required to be classified
as a liability under the guidance in Topic 480 is evaluated under the guidance in Topic 815, Derivatives and Hedging, to determine
whether it meets the definition of a derivative. If it meets that definition, the instrument (or embedded feature) is evaluated
to determine whether it is indexed to an entity’s own stock as part of the analysis of whether it qualifies for a scope
exception from derivative accounting. Generally, for warrants and conversion options embedded in financial instruments that are
deemed to have a debt host (assuming the underlying shares are readily convertible to cash or the contract provides for net settlement
such that the embedded conversion option meets the definition of a derivative), the existence of a down round feature results
in an instrument not being considered indexed to an entity’s own stock. This results in a reporting entity being required
to classify the freestanding financial instrument or the bifurcated conversion option as a liability, which the entity must measure
at fair value initially and at each subsequent reporting date.
The
amendments in this Update revise the guidance for instruments with down round features in Subtopic 815-40, Derivatives and Hedging—Contracts
in Entity’s Own Equity, which is considered in determining whether an equity-linked financial instrument qualifies for a
scope exception from derivative accounting. An entity still is required to determine whether instruments would be classified in
equity under the guidance in Subtopic 815-40 in determining whether they qualify for that scope exception. If they do qualify,
freestanding instruments with down round features are no longer classified as liabilities and embedded conversion options with
down round features are no longer bifurcated.
For
entities that present EPS in accordance with Topic 260, and when the down round feature is included in an equity-classified freestanding
financial instrument, the value of the effect of the down round feature is treated as a dividend when it is triggered and as a
numerator adjustment in the basic EPS calculation. This reflects the occurrence of an economic transfer of value to the holder
of the instrument, while alleviating the complexity and income statement volatility associated with fair value measurement on
an ongoing basis. Convertible instruments are unaffected by the Topic 260 amendments in this Update.
The
amendments in Part 1 of this Update are a cost savings relative to current GAAP. This is because, assuming the required criteria
for equity classification in Subtopic 815-40 are met, an entity that issued such an instrument no longer measures the instrument
at fair value at each reporting period (in the case of warrants) or separately accounts for a bifurcated derivative (in the case
of convertible instruments) on the basis of the existence of a down round feature. For convertible instruments with embedded conversion
options that have down round features, applying specialized guidance such as the model for contingent beneficial conversion features
rather than bifurcating an embedded derivative also reduces cost and complexity. Under that specialized guidance, the issuer recognizes
the intrinsic value of the feature only when the feature becomes beneficial instead of bifurcating the conversion option and measuring
it at fair value each reporting period.
The
amendments in Part II of this Update replace the indefinite deferral of certain guidance in Topic 480 with a scope exception.
This has the benefit of improving the readability of the Codification and reducing the complexity associated with navigating the
guidance in Topic 480.
We
have early adopted this amendment as it has a material impact on our condensed consolidated financial statements.
Stock
Based Compensation
We
account for Stock-Based Compensation under ASC 718 “
Compensation – Stock Compensation
”, which addresses
the accounting for transactions in which an entity exchanges its equity instruments for goods or services, with a primary focus
on transactions in which an entity obtains employee services in share-based payment transactions. ASC 718 requires measurement
of the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of
the award. Incremental compensation costs arising from subsequent modifications of awards after the grant date must be recognized.
The
Company accounts for stock-based compensation awards to non-employees in accordance with ASC 505-50, Equity-Based Payments to
Non-Employees. Under ASC 505-50, the Company determines the fair value of the options, warrants or stock-based compensation awards
granted as either the fair value of the consideration received or the fair value of the equity instruments issued, whichever is
more reliably measurable. Any stock options or warrants issued to non-employees are recorded in expense and additional paid-in
capital in stockholders’ equity (deficit) over the applicable service periods using variable accounting through the vesting
dates based on the fair value of the options or warrants at the end of each period.
Three
months ended June 30, 2017 compared to three months ended June 30, 2016
The
following table summarizes the results of our consolidated continuing operations for the three months ended June 30, 2017 and
2016:
|
|
Three
Months Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
Net
revenues
|
|
$
|
898,730
|
|
|
|
100.0
|
%
|
|
$
|
2,565,272
|
|
|
|
100.0
|
%
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
costs of revenue
|
|
|
248,750
|
|
|
|
27.7
|
%
|
|
|
355,569
|
|
|
|
13.9
|
%
|
General
and administrative expenses
|
|
|
3,660,458
|
|
|
|
407.3
|
%
|
|
|
5,351,555
|
|
|
|
208.6
|
%
|
Sales
and marketing expenses
|
|
|
197,727
|
|
|
|
22.0
|
%
|
|
|
433,329
|
|
|
|
16.9
|
%
|
Bad
debt expense
|
|
|
577,252
|
|
|
|
64.2
|
%
|
|
|
-
|
|
|
|
0.0
|
%
|
Depreciation
and amortization
|
|
|
471,954
|
|
|
|
52.5
|
%
|
|
|
678,141
|
|
|
|
26.4
|
%
|
Loss
from operations
|
|
|
(4,257,411
|
)
|
|
|
-473.7
|
%
|
|
|
(4,253,322
|
)
|
|
|
-165.8
|
%
|
Interest
expense
|
|
|
(6,135,982
|
)
|
|
|
-682.7
|
%
|
|
|
(2,042,002
|
)
|
|
|
-79.6
|
%
|
Other
income, net
|
|
|
50,757
|
|
|
|
5.6
|
%
|
|
|
(17,650
|
)
|
|
|
-0.7
|
%
|
Change
in fair value of derivative instruments
|
|
|
-
|
|
|
|
0.0
|
%
|
|
|
(1,293,072
|
)
|
|
|
-50.4
|
%
|
Net
loss
|
|
$
|
(10,342,636
|
)
|
|
|
-1150.8
|
%
|
|
$
|
(5,019,902
|
)
|
|
|
-195.7
|
%
|
Net
Revenues
Consolidated
net revenues were $0.9 million for the three months ended June 30, 2017, as compared to $2.6 million for the three months ended
June 30, 2016, a decrease of $1.7 million, or 65%. The decrease is mainly the result of an 78% decline in insured test volumes
in our Clinical Laboratory Operations business segment. Net Revenues in our Supportive Software Solutions decreased by $0.1 million
or 22% for the three months ended June 30, 2017 compared to the same period a year ago.
Direct
Cost of Revenue
Direct
costs of revenue decreased by 30%, from $0.4 million in the three months ended June 30, 2016 to $0.3 million in the three months
ended June 30, 2017. The decrease is a result of reduced expenses for reagents and supplies at our laboratories, resulting in
a 16% decrease in direct costs per sample.
General
and Administrative Expenses
General
and administrative expenses decreased by $1.7 million, or 32%, in the second quarter of 2017 as compared to the same period a
year ago. The decrease is mainly the result of a $1.5 million reduction in employee compensation and related costs, as we significantly
reduced our headcount throughout the latter half of 2016 and 2017 in response to the decline in revenues, and a $0.2 million reduction
in maintenance costs for our laboratory equipment.
Sales
and Marketing Expenses
The
decline in sales and marketing expenses of $0.2 million, or 54%, for the three months ended June 30, 2017 as compared to the three
months ended June 30, 2016 was primarily due to a reduction in sales employee and contractor compensation expenses in the amount
of $0.2 million, as well as reduced travel, advertising and commissionable collections related to the decline in net revenues.
Bad
Debt Expense
During
the three months ended June 30, 2017, we identified certain accounts receivable related to our Clinical Laboratory Operations
business segment deemed uncollectible. As a result, we recorded a $0.6 million of uncollectible receivables, which is reflected
in bad debt expense in the accompanying consolidated statements of operations.
Depreciation
and Amortization Expenses
Depreciation
and amortization expense was $0.5 million for the three months ended June 30, 2017 as compared to $0.7 million for the same period
a year ago, as some of our property and equipment became fully depreciated during 2016 and our capital expenditures have been
minimal due to the reduced sample volume at our laboratories.
Loss
from Operations
Our
operating loss is essentially unchanged in the three months ended June 30, 2017, as compared to the three months ended June 30,
2016.
Interest
Expense
Interest
expense for the three months ended June 30, 2017 was $6.1 million, as compared to $2.0 million for the three months ended June
30, 2016. Interest expense in the three months ended June 30, 2017 includes a $2.8 million non-cash interest charge related to
the issuance of convertible debentures and warrants during the period, and $0.9 million for the amortization of debt discount
and deferred financing costs.
Net
Loss
Our
net loss from continuing operations for the three months ended June 30, 2017 was $10.3 million, as compared to $5 million for
the same period of a year ago, an increase of $5.3 million. The change is primarily due to the increase of $2.8 million in non-cash
interest charge, $1.7 million decrease in general and administrative expenses, and a decrease of net revenues of $1.7 million
in 2017.
The
following table presents key financial and operating metrics for our Clinical Laboratory Operations segment:
|
|
Three
Months Ended June 30,
|
|
|
|
|
|
|
|
Clinical
Laboratory Operations
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenues
|
|
$
|
645,386
|
|
|
$
|
2,240,170
|
|
|
$
|
(1,594,784
|
)
|
|
|
-71.2
|
%
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
costs of revenue
|
|
|
183,598
|
|
|
|
290,798
|
|
|
|
(107,200
|
)
|
|
|
-36.9
|
%
|
Bad
debt expense
|
|
|
570,821
|
|
|
|
-
|
|
|
|
570,821
|
|
|
|
-
|
|
General
and administrative expenses
|
|
|
756,416
|
|
|
|
1,851,704
|
|
|
|
(1,095,288
|
)
|
|
|
-59.2
|
%
|
Sales
and marketing expenses
|
|
|
192,400
|
|
|
|
435,230
|
|
|
|
(242,830
|
)
|
|
|
-55.8
|
%
|
Depreciation
and amortization
|
|
|
419,905
|
|
|
|
548,979
|
|
|
|
(129,074
|
)
|
|
|
-23.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
$
|
(1,477,754
|
)
|
|
$
|
(886,541
|
)
|
|
$
|
(591,213
|
)
|
|
|
66.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Key
Operating Measures - Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insured
tests performed
|
|
|
14,459
|
|
|
|
67,072
|
|
|
|
(52,613
|
)
|
|
|
-78.4
|
%
|
Net
revenue per insured test
|
|
$
|
44.64
|
|
|
$
|
33.40
|
|
|
$
|
11.24
|
|
|
|
33.6
|
%
|
Revenue
recognition percent of gross billings
|
|
|
13.0
|
%
|
|
|
15.0
|
%
|
|
|
-2.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Key
Operating Measures - Direct Costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
samples processed
|
|
|
5,545
|
|
|
|
7,386
|
|
|
|
(1,841
|
)
|
|
|
-24.9
|
%
|
Direct
costs per sample
|
|
$
|
33.11
|
|
|
$
|
39.37
|
|
|
$
|
(6.26
|
)
|
|
|
-15.9
|
%
|
The
following table presents key financial metrics for our Supportive Software Solutions segment:
|
|
Three
Months Ended June 30,
|
|
|
|
|
|
|
|
Supportive
Software Solutions
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenues
|
|
$
|
253,344
|
|
|
$
|
325,102
|
|
|
$
|
(71,758
|
)
|
|
|
-22.1
|
%
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
costs of revenue
|
|
|
28,677
|
|
|
|
64,771
|
|
|
|
(36,094
|
)
|
|
|
-55.7
|
%
|
General
and administrative expenses
|
|
|
515,163
|
|
|
|
1,332,466
|
|
|
|
(817,303
|
)
|
|
|
-61.3
|
%
|
Bad
debt expense
|
|
|
6,431
|
|
|
|
-
|
|
|
|
6,431
|
|
|
|
-
|
|
Depreciation
and amortization
|
|
|
45,421
|
|
|
|
162,059
|
|
|
|
(116,638
|
)
|
|
|
-72.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
$
|
(342,348
|
)
|
|
$
|
(1,234,194
|
)
|
|
$
|
891,846
|
|
|
|
-72.3
|
%
|
Our
Hospital Operations segment, formed in January of 2017, had general and administrative expenses of $0.6 million for the three
months ended June 30, 2017. These expenses consisted primarily of employee compensation costs, legal expenses and startup expenses.
The
following table presents key financial metrics for our Corporate group:
|
|
Three
Months Ended June 30,
|
|
|
|
|
|
|
|
Corporate
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative expenses
|
|
$
|
1,854,795
|
|
|
$
|
2,165,377
|
|
|
$
|
(310,582
|
)
|
|
|
-14.3
|
%
|
Direct
costs of revenue
|
|
|
26,805
|
|
|
|
-
|
|
|
|
26,805
|
|
|
|
-
|
|
Sales
and marketing expenses
|
|
|
2,338
|
|
|
|
-
|
|
|
|
2,338
|
|
|
|
-
|
|
Depreciation
and amortization
|
|
|
19
|
|
|
|
874
|
|
|
|
(855
|
)
|
|
|
-97.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
$
|
(1,883,957
|
)
|
|
$
|
(2,166,251
|
)
|
|
$
|
282,294
|
|
|
|
-13.0
|
%
|
Six
months ended June 30, 2017 compared to six months ended June 30, 2016
The
following table summarizes the results of our consolidated continuing operations for the six months ended June 30, 2017 and 2016:
|
|
Six
Months Ended June 30,
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
Net
revenues
|
|
$
|
1,898,265
|
|
|
|
100.0
|
%
|
|
$
|
4,026,200
|
|
|
|
100.0
|
%
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
costs of revenue
|
|
|
540,285
|
|
|
|
28.5
|
%
|
|
|
822,903
|
|
|
|
20.4
|
%
|
General
and administrative expenses
|
|
|
7,808,871
|
|
|
|
411.4
|
%
|
|
|
10,644,545
|
|
|
|
264.4
|
%
|
Sales
and marketing expenses
|
|
|
450,532
|
|
|
|
23.7
|
%
|
|
|
1,025,346
|
|
|
|
25.5
|
%
|
Bad
debt expense
|
|
|
574,341
|
|
|
|
30.3
|
%
|
|
|
1,285
|
|
|
|
0.0
|
%
|
Depreciation
and amortization
|
|
|
1,056,445
|
|
|
|
55.7
|
%
|
|
|
1,357,331
|
|
|
|
33.7
|
%
|
Loss
from operations
|
|
|
(8,532,209
|
)
|
|
|
-449.5
|
%
|
|
|
(9,825,210
|
)
|
|
|
-244.0
|
%
|
Interest
expense
|
|
|
(11,178,844
|
)
|
|
|
-588.9
|
%
|
|
|
(3,049,037
|
)
|
|
|
-75.7
|
%
|
Other
income, net
|
|
|
50,757
|
|
|
|
2.7
|
%
|
|
|
82,360
|
|
|
|
2.0
|
%
|
Change
in fair value of derivative instruments
|
|
|
(42,702,815
|
)
|
|
|
-2249.6
|
%
|
|
|
4,726,660
|
|
|
|
117.4
|
%
|
Gain
on extinguishment of debt
|
|
|
42,702,815
|
|
|
|
2249.6
|
%
|
|
|
-
|
|
|
|
0.0
|
%
|
Income
tax expense
|
|
|
3,250
|
|
|
|
0.2
|
%
|
|
|
-
|
|
|
|
0.0
|
%
|
Net
loss
|
|
$
|
(19,663,546
|
)
|
|
|
-1035.9
|
%
|
|
$
|
(8,065,227
|
)
|
|
|
-200.3
|
%
|
Net
Revenues
Consolidated
net revenues were $1.9 million for the six months ended June 30, 2017, as compared to $4 million for the six months ended June
30, 2016, a decrease of $2.1 million, or 53%. The decrease is mainly the result of a 71% decline in insured test volumes in our
Clinical Laboratory Operations business segment. Net Revenues in our Supportive Software Solutions decreased by $0.1 million or
12% for the six months ended June 30, 2017 as compared to the same period of a year ago.
Direct
Cost of Revenue
Direct
costs of revenue decreased by 34%, from $0.8 million in the six months ended June 30, 2016 to $0.5 million in the six months ended
June 30, 2017. The decrease is a result of reduced expenses for reagents and supplies at our laboratories, resulting in a 38%
decrease in direct costs per sample.
General
and Administrative Expenses
General
and administrative expenses decreased by $2.8 million, or 27%, for the six months ended June 30, 2017, compared to the same period
a year ago. The decrease is mainly the result of a $2.6 million reduction in employee compensation and related costs, as we significantly
reduced our headcount throughout the latter half of 2016 and 2017 in response to the decline in revenues, and a $0.2 million reduction
in maintenance costs for our laboratory equipment.
Sales
and Marketing Expenses
The
decline in sales and marketing expenses of $0.6 million, or 56%, for the six months ended June 30, 2017 as compared to the six
months ended June 30, 2016 was primarily due to a reduction in sales employee and contractor compensation expenses in the amount
of $0.6 million, as well as reduced travel, advertising and commissionable collections related to the decline in net revenues.
Bad
Debt Expense
During
the six months ended June 30, 2017, we identified certain accounts receivable related to our Clinical Laboratory Operations business
segment deemed uncollectible. As a result, we recorded a $0.6 million of uncollectible receivables, which is reflected in bad
debt expense in the accompanying consolidated statements of operations.
Depreciation
and Amortization Expenses
Depreciation
and amortization expense was $1.1 million for the six months ended June 30, 2017 as compared to $1.4 million for the same period
a year ago, as some of our property and equipment became fully depreciated during 2016 and our capital expenditures have been
minimal due to the reduced sample volume at our laboratories.
Loss
from Operations
Our
operating loss decreased by $1.3 million, to $8.5 million for the six months ended June 30, 2017, as compared to $9.8 million
for the six months ended June 30, 2016. The decrease is due to the $3.4 million decrease in total operating expenses for the quarter
partially offset by the $2.1 million decrease in net revenues.
Interest
Expense
Interest
expense for the six months ended June 30, 2017 was $11.2 million, as compared to $3 million for the six months ended June 30,
2016. Interest expense in the six months ended June 30, 2017 includes a $7.4 million non-cash interest charge related to the issuance
of convertible debentures and warrants during the period, and $2.5 million for the amortization of debt discount and deferred
financing costs.
Net
Loss
Our
net loss from continuing operations for the six months ended June 30, 2017 was $19.7 million, as compared to $8.1 million for
the same period a year ago, an increase of $11.6 million. The change is primarily due to the increase of $9.9 million non-cash
interest and amortization of debt discount charge, $2.8 million decrease in general and administrative expenses, and a decrease
of net revenues of $2.1 million in 2017.
The
following table presents key financial and operating metrics for our Clinical Laboratory Operations segment:
|
|
Six
Months Ended June 30,
|
|
|
|
|
|
|
|
Clinical
Laboratory Operations
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenues
|
|
$
|
1,407,976
|
|
|
$
|
3,471,072
|
|
|
$
|
(2,063,096
|
)
|
|
|
-59.4
|
%
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
costs of revenue
|
|
|
414,056
|
|
|
|
674,159
|
|
|
|
(260,103
|
)
|
|
|
-38.6
|
%
|
Bad
debt expense
|
|
|
570,821
|
|
|
|
-
|
|
|
|
570,821
|
|
|
|
-
|
|
General
and administrative expenses
|
|
|
1,897,105
|
|
|
|
3,901,487
|
|
|
|
(2,004,382
|
)
|
|
|
-51.4
|
%
|
Sales
and marketing expenses
|
|
|
441,649
|
|
|
|
1,025,346
|
|
|
|
(583,697
|
)
|
|
|
-56.9
|
%
|
Depreciation
and amortization
|
|
|
854,373
|
|
|
|
1,096,419
|
|
|
|
(242,046
|
)
|
|
|
-22.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
income from operations
|
|
$
|
(2,770,028
|
)
|
|
$
|
(3,226,339
|
)
|
|
$
|
456,311
|
|
|
|
-14.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Key
Operating Measures - Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insured
tests performed
|
|
|
37,171
|
|
|
|
126,206
|
|
|
|
(89,035
|
)
|
|
|
-70.5
|
%
|
Net
revenue per insured test
|
|
$
|
37.88
|
|
|
$
|
27.50
|
|
|
$
|
10.38
|
|
|
|
37.7
|
%
|
Revenue
recognition percent of gross billings
|
|
|
13.0
|
%
|
|
|
15.0
|
%
|
|
|
-2.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Key
Operating Measures - Direct Costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
samples processed
|
|
|
12,230
|
|
|
|
12,355
|
|
|
|
(125
|
)
|
|
|
-1.0
|
%
|
Direct
costs per sample
|
|
$
|
33.86
|
|
|
$
|
54.57
|
|
|
$
|
(20.71
|
)
|
|
|
-38.0
|
%
|
The
following table presents key financial metrics for our Supportive Software Solutions segment:
|
|
Six
Months Ended June 30,
|
|
|
|
|
|
|
|
Supportive
Software Solutions
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenues
|
|
$
|
490,289
|
|
|
$
|
555,128
|
|
|
$
|
(64,839
|
)
|
|
|
-11.7
|
%
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
costs of revenue
|
|
|
75,381
|
|
|
|
148,744
|
|
|
|
(73,363
|
)
|
|
|
-49.3
|
%
|
General
and administrative expenses
|
|
|
1,269,298
|
|
|
|
2,627,404
|
|
|
|
(1,358,106
|
)
|
|
|
-51.7
|
%
|
Bad
debt expense
|
|
|
3,520
|
|
|
|
-
|
|
|
|
3,520
|
|
|
|
-
|
|
Depreciation
and amortization
|
|
|
202,984
|
|
|
|
326,487
|
|
|
|
(123,503
|
)
|
|
|
-37.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
$
|
(1,060,894
|
)
|
|
$
|
(2,547,507
|
)
|
|
$
|
1,486,613
|
|
|
|
-58.4
|
%
|
Our
Hospital Operations segment, formed in January of 2017, had general and administrative expenses of $1.0 million for the six months
ended June 30, 2017. These expenses consisted primarily of employee compensation costs, legal expenses and startup expenses.
The
following table presents key financial metrics for our Corporate group:
|
|
Six
Months Ended June 30,
|
|
|
|
|
|
|
|
Corporate
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative expenses
|
|
$
|
3,642,013
|
|
|
$
|
4,116,939
|
|
|
$
|
(474,926
|
)
|
|
|
-11.5
|
%
|
Direct
costs of revenue
|
|
|
41,177
|
|
|
|
-
|
|
|
|
41,177
|
|
|
|
-
|
|
Sales
and marketing expenses
|
|
|
4,953
|
|
|
|
-
|
|
|
|
4,953
|
|
|
|
-
|
|
Depreciation
and amortization
|
|
|
(7,520
|
)
|
|
|
1,749
|
|
|
|
(9,269
|
)
|
|
|
-530.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
$
|
(3,680,623
|
)
|
|
$
|
(4,118,688
|
)
|
|
$
|
438,065
|
|
|
|
-10.6
|
%
|
LIQUIDITY
AND CAPITAL RESOURCES
For
the year ended December 31, 2016 and through June 30, 2017, we have financed our operations primarily from the sale of our equity
securities, short-term advances from related parties, through the issuance of debentures and the proceeds we received from pledging
certain of our accounts receivable as discussed below. Future cash needs for working capital, capital expenditures and potential
acquisitions will require management to seek additional equity or obtain additional credit facilities. The sale of additional
equity will result in additional dilution to the Company’s stockholders. A portion of the Company’s cash may be used
to acquire or invest in complementary businesses or products or to obtain the right to use complementary technologies. From time
to time, in the ordinary course of business, the Company evaluates potential acquisitions of such businesses, products or technologies.
At
June 30, 2017, we had cash on hand of approximately $30,000, a working capital deficit of $17 million and a stockholders’
deficit of $17.5 million. In addition, we incurred a loss from continuing operations of $8.5 million for the six months ended
June 30, 2017. As of the date of this report, our cash position is critically deficient and payments critical to our ability to
operate are not being made in the ordinary course. Our fixed operating expenses, including payroll, rent, capital lease payments
and other fixed expenses, including the costs required to reopen Big South Fork Medical Center, are approximately $1.5-$2.0 million
per month. Our failure to raise additional capital in the coming weeks will have a material adverse effect on our ability to operate
our business. In addition, we will be required to raise additional capital in order to fund our operations for the next twelve
months. There can be no assurances that we will be able to raise the necessary capital on terms that are acceptable to us, or
at all. If we are unable to secure the necessary funding as and when required, it will have a material adverse effect on our business
and we may be required to downsize, further reduce our workforce, sell some of our assets or possibly curtail or even cease operations,
raising substantial doubt about our ability to continue as a going concern.
In
2017, we received short term advances from Christopher Diamantis, a member of our Board of Directors, in the amount of $3.3 million.
On March 7, 2017 we issued a promissory note to Mr. Diamantis in the amount of $3.8 million (the “2017 Diamantis Note”)
in connection with the advances we received in 2017, plus accrued and unpaid interest reflecting the advances we received in both
fiscal 2016 and 2017, in the amount of $0.5 million. The net advances of $0.2 million received in the three months ended June
30, 2017 are not covered under this note.
On
February 2, 2017, we issued $1.59 million of convertible debentures (the “February Debentures”) and warrants and received
net proceeds of $1.5 million.
On
March 21, 2017, we issued $10.85 million aggregate principal amount of Senior Secured Original Issue Discount Convertible Debentures
due two years from the date of issuance (the “Convertible Debentures”) and three series of warrants to purchase shares
of the Company’s common stock to several accredited investors. We received net proceeds from this transaction in the approximate
amount of $8.4 million. We used $3.8 million of the net proceeds to repay the 2017 Diamantis Note and $0.75 million of the net
proceeds to make a partial repayment on the TCA Debenture (as defined below). The remainder of the net proceeds were used for
general corporate purposes. In conjunction with the issuance of the Convertible Debentures, the holder of the February Debentures
exchanged these debentures for $2.5 million of new debentures (the “Exchange Debentures” and, collectively with the
Convertible Debentures, the “Debentures”) on the same terms as, and pari passu with, the Convertible Debentures and
warrants. Additionally, the holders of an aggregate of $2.2 million stated value of the Company’s Series H Convertible Preferred
Stock (the “Series H Preferred Stock”) exchanged such preferred stock into $2.7 million principal amount of Exchange
Debentures and warrants. All of the Debentures contain a 24% original issue discount.
The
Debentures are convertible into shares of the Company’s common stock at an initial conversion price equal of $1.66 per share,
subject to adjustment, which is of June 30, 2017 is at $0.39 per share, as more fully described in the Debentures. The Debentures
will begin to amortize monthly commencing on the 90
th
day following the closing date, except for the Exchange Debentures
related to the Series H Preferred Stock, which began to amortize monthly on the closing date. On each monthly amortization date,
the Company may elect to repay 5% of the original principal amount of Debentures in cash or, in lieu thereof, the conversion price
of such Debentures will thereafter be 85% of the volume weighted average price at the time of conversion. In the event the Company
does not elect to pay such amortization amounts in cash, each investor, in their sole discretion, may increase the conversion
amount subject to the alternative conversion price by up to four times the amortization amount. The conversion price is subject
to “full ratchet” and other customary anti-dilution protections as more fully described in the Debentures. The Debentures
are secured by all of our assets and are guaranteed by substantially all of our subsidiaries.
On
June 2, 2017 and June 22, 2017, the Company issued $1.9 million aggregate principal amount of Original Issue Discount Debentures
due three months from the date of issuance in these two issuances (collectively, the “June Debentures”) and warrants
to purchase an aggregate of 1,500,000 shares of common stock (500,000 warrants in the June 2, 2017 transaction and 1,000,000 in
the June 22, 2017 transaction), which can be exercised at any time after six months at an exercise price of $0.39 per share for
the June 2, 2017 warrants and $0.38 per share for the June 22, 2017 warrants (collectively the “Warrants”), to accredited
investors for a purchase price of $1.8 million. The Company recorded a discount on the debentures of $107,700 which is to be amortized
over the term of the June 22, 2017 debenture.
On
July 12, 2017 we announced that we plan to spin off the Advanced Molecular Services Group (“AMSG”) as an independent
publicly traded company by way of a tax-free distribution to our shareholders. Completion of the spinoff is expected to occur
at the end of September 2017, and is subject to numerous conditions, including effectiveness of a Registration Statement on Form
10 to be filed with the Securities and Exchange Commission. The intent of the spinoff is to create two public companies, each
of which can focus on its own strengths and operational plans. We also announced on July 24, 2017 that the Big South Fork Medical
Center received CMS regional office licensure approval and that the hospital opened on August 8, 2017. The Company expects that
the hospital will provide us additional revenue and cash flow sources.
On
July 17, 2017, the Company closed an offering of $4,136,862 aggregate principal amount of Original Issue Discount Debentures due
October 17, 2017 and warrants to purchase an aggregate of 2,120,000 shares of common stock for consideration of $2,000,000 in
cash and the exchange of the $1,902,700 aggregate principal amount of Original Issue Discount Debentures due September 22, 2017
issued by the Company on June 22, 2017. Pursuant to the offering, the purchasers shall have the right, for one year, to participate
in any issuance by the Company of common stock or common stock equivalents for cash consideration, indebtedness or a combination
of units thereof, with certain exceptions. Also, the Company is required to hold a stockholders’ meeting to obtain stockholder
approval for at least a 1-for-8 reverse split of the Company’s common stock. If such approval is not obtained on or before
September 20, 2017, it shall be an event of default under the debentures. Promptly following receipt of such approval, the Company
shall cause such reverse split to occur.
On
March 31, 2016, we entered into an agreement to pledge certain of our accounts receivable as collateral against a prepaid forward
purchase contract. The receivables had an estimated collectable value of $8.7 million which had been adjusted down to approximately
$4.3 million and nil on our balance sheet as of March 31, 2016 and December 31, 2016, respectively. The consideration received
was $5.0 million. 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 has not been paid $6.0 million, the Company was required
to pay the difference, plus 30% interest per annum on the total balance. As of June 30, 2017 and the date of this report, we had
not collected any amounts due on these receivables, and $6.5 million is currently due to the counterparty. We currently do not
have the financial resources to satisfy this obligation. Mr. Diamantis has guaranteed the Company’s payment obligation under
this agreement.
On
November 3, 2016, we received a Notice of Default from TCA Global Credit Master Fund, LP (“TCA”), the holder of a
secured convertible debenture with an outstanding principal amount of $3.0 million (the “TCA Debenture”), related
to our failure to pay the monthly principal and interest payments required under the TCA Debenture. Prior to our issuance of the
Convertible Debentures on March 21, 2017, we had not made the last six required payments under the TCA Debenture, other than a
$0.4 million payment we made in February of 2017. In conjunction with the issuance of the Convertible Debentures on March 21,
2017, we entered into a letter agreement with TCA, which (i) waived any non-payment default 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 is repaid in various monthly installments from April of 2017 through September
of 2017; and (iv) provided for payment of an additional service fee in the amount of $150,000, which was due on June 27, 2017,
the day after the effective date of the registration statement filed by the Company; which amount is reflected in accrued expenses
in the accompanying consolidated balance sheet at June 30, 2017. In addition, TCA entered into an intercreditor agreement with
the purchasers of the Convertible Debentures which sets forth rights, preferences and priorities with respect to the security
interests in our assets.
In
December of 2016, TCS-Florida, L.P. (“Tetra”), filed suit against us for our failure to make the required payments
under an equipment leasing contract that we had with Tetra. On January 3, 2017, Tetra received a Default Judgment against us 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, we made payments to Tetra in connection with this judgment aggregating to $0.7 million, and on February
15, 2017 we entered into a forbearance agreement with Tetra whereby the remaining $1.9 million due would be paid in 24 equal monthly
installments of $77,400 commencing on May 1, 2017.
In
December of 2016, DeLage Landen Financial Services, Inc. (“DeLage”), filed suit against us for failure to make the
required payments under an equipment leasing contract that we had with DeLage. On January 24, 2017, DeLage received a default
judgment against us in the approximate amount of $1.0 million, representing the balance owed on the lease, as well as additional
interest, penalties and fees. On February 8, 2017, a Stay of Execution was filed and under its terms the balance due is to be
paid in variable monthly installments commencing in February of 2017 through January of 2019, with an implicit interest rate of
4.97%.
On
December 7, 2016, the holders of the Tegal Notes (see Note 4 to the accompanying condensed consolidated financial statements)
filed suit against the Company seeking payment for the amounts due under the notes in the aggregate of $0.4 million, including
accrued interest. A request for entry of default judgment was filed on January 24, 2017. The Company has attempted to work out
a payment arrangement with the plaintiffs, but to date has not been able to consummate such an arrangement. A Case Management
Conference is scheduled for September 5, 2017.
In
September of 2016, we received $0.4 million from the sale of convertible notes and warrants with a maturity date of March 15,
2017. On March 13, 2017, these securities were exchanged for 400,000 shares of our common stock.
Also
in September of 2016, we were issued warrants from the Florida Department of Revenue (the “DOR”) for unpaid taxes
related to the Company’s 2014 state income tax return in the amount of $0.9 million, including interest and penalties. On
January 25, 2017, the Company paid the DOR $250,000 as partial payment on this liability, and in February 2017 the Company entered
into a Stipulation Agreement with the DOR which requires monthly payments of $35,000 from March 2017 through January 2018 and
a final payment of approximately $0.3 million in February 2018. Under certain circumstances, the Company may be permitted to spread
the final $0.3 million payment over an additional 12 months subsequent to January 2018. If at any time during the Stipulation
period the Company fails to timely file any required tax returns with the DOR or does not meet the payment obligations under the
Stipulation Agreement, the entire amount due will be accelerated.
The
following table presents our capital resources as of June 30, 2017 and December 31, 2016:
|
|
June
30, 2017
|
|
|
December
31, 2016
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
27,704
|
|
|
$
|
75,017
|
|
|
$
|
(47,313
|
)
|
Working
capital
|
|
|
(16,986,565
|
)
|
|
|
(16,344,128
|
)
|
|
|
(642,437
|
)
|
Total
debt, excluding discounts and derivative liabilities
|
|
|
22,988,226
|
|
|
|
9,110,112
|
|
|
|
13,878,114
|
|
Capital
lease obligations
|
|
|
2,429,008
|
|
|
|
3,570,174
|
|
|
|
(1,141,166
|
)
|
Stockholders’
deficit
|
|
$
|
(17,516,514
|
)
|
|
$
|
(14,885,896
|
)
|
|
$
|
(2,630,618
|
)
|
The
following table presents the major sources and uses of cash for the six months ended June 30, 2017 and 2016:
|
|
Six
Months Ended June 30,
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
Cash
used in operations
|
|
$
|
(8,604,498
|
)
|
|
$
|
(11,891,559
|
)
|
|
$
|
3,287,061
|
|
Cash
used in investing activities
|
|
|
(1,392,151
|
)
|
|
|
(41,356
|
)
|
|
|
(1,350,795
|
)
|
Cash
provided by financing activities
|
|
|
9,949,336
|
|
|
|
3,584,926
|
|
|
|
6,364,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
change in cash
|
|
$
|
(47,313
|
)
|
|
$
|
(8,347,989
|
)
|
|
$
|
8,300,676
|
|
The
decrease in cash used in operations for continuing operations for the six months ended June 30, 2017 and 2016 is presented in
the following table:
|
|
Six
Months Ended June 30,
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(19,663,546
|
)
|
|
$
|
(8,065,227
|
)
|
|
$
|
(11,598,319
|
)
|
Non-cash
adjustments to income
|
|
|
11,390,941
|
|
|
|
(1,017,482
|
)
|
|
|
12,408,423
|
|
Accounts
receivable
|
|
|
409,261
|
|
|
|
459,414
|
|
|
|
(50,153
|
)
|
Accounts
payable and accrued expenses
|
|
|
246,304
|
|
|
|
(773,211
|
)
|
|
|
1,019,515
|
|
Loss
from discontinued operations
|
|
|
(683,320
|
)
|
|
|
(2,040,875
|
)
|
|
|
1,357,555
|
|
Other
|
|
|
(416,363
|
)
|
|
|
(370,759
|
)
|
|
|
(45,604
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
used in operations
|
|
$
|
(8,716,723
|
)
|
|
$
|
(11,808,140
|
)
|
|
$
|
3,091,417
|
|
The
increase in cash used in investing activities for continuing operations is due to the acquisition of the Hospital Assets in January
of 2017.
Cash
provided by financing activities for the six months ended June 30, 2017 consists of the $11.6 million of net proceeds received
in connection with the issuance of the February, March and June Debentures and $0.6 million of related party payments net of advances,
partially offset by payments on capital lease obligations in the amount of $1.1 million.
Cash
provided by financing activities for the six months ended June 30, 2016 consists of the $5.0 million received from the prepaid
forward purchase contract and $.1 million of related party payments, net of advances, partially offset by the repayment of capital
lease obligations in the amount of $0.7 million.
OTHER
MATTERS
Inflation
We
do not believe inflation has a significant effect on the Company’s operations at this time.
Off
Balance Sheet Arrangements
Under
SEC regulations, we are required to disclose the Company’s off-balance sheet arrangements that have or are reasonably likely
to have a current or future effect on the Company’s financial condition, results of operations, liquidity, capital expenditures
or capital resources that are material to investors. Off-balance sheet arrangements consist of transactions, agreements or contractual
arrangements to which any entity that is not consolidated with us is a party, under which we have:
|
●
|
Any
obligation under certain guarantee contracts.
|
|
|
|
|
●
|
Any
retained or contingent interest in assets transferred to an unconsolidated entity or similar arrangement that serves as credit,
liquidity or market risk support to that entity for such assets.
|
|
|
|
|
●
|
Any
obligation under a contract that would be accounted for as a derivative instrument, except that it is both indexed to the
Company’s stock and classified in stockholder’s equity in the Company’s statement of financial position.
|
|
|
|
|
●
|
Any
obligation arising out of a material variable interest held by us in an unconsolidated entity that provides financing, liquidity,
market risk or credit risk support to us, or engages in leasing, hedging or research and development services with us.
|
As
of June 30, 2017, the Company had no off-balance sheet arrangements that have, or are reasonably likely to have, a current or
future effect on the Company’s financial condition, results of operations, liquidity, capital expenditures or capital resources
that is material to investors.
Potential
De-Listing of the Company’s Stock
On
April 18, 2017, the Company was notified by Nasdaq that the stockholders’ equity balance reported on its Form 10-K for the
year ended December 31, 2016 fell below the $2.5 million minimum requirement for continued listing under the Nasdaq Capital Market’s
Listing Rule 5550(b)(1) (the “Rule”). As of December 31, 2016, the Company’s stockholders’ deficit balance
was $14.9 million. In accordance with the Rule, the Company submitted a plan to Nasdaq outlining how it intends to regain compliance.
If the plan is accepted, the Company can be granted up to 180 calendar days from April 18, 2017 to evidence compliance. There
can be no guarantee that the Company will be able to regain compliance with the continued listing requirement of Nasdaq Marketplace
Rule 5550(b)(1) or that its plan will be accepted by Nasdaq.
On
June 12, 2017, the Company was notified by Nasdaq that the bid price of the Company’s common stock closed below the minimum
$1.00 per share requirement for continued inclusion under Nasdaq Rule 5550(a)(2) (the “Price Rule”). In accordance
with Nasdaq Rule 5810(c)(3)(A), the Company has 180 calendar days, or until December 11, 2017, to regain compliance. If at any
time before December 11, 2017, the bid price of the Company’s common stock closes at $1.00 per share or more for a minimum
of 10 consecutive business days, the Company will regain compliance with the Price Rule. If the Company does not regain compliance
by December 11, 2017, an additional 180 days may be granted to regain compliance, so long as the Company meets The Nasdaq Capital
Market initial listing criteria (except for the bid price requirement). The Company is required to hold a meeting of stockholders
at the earliest practicable date to obtain stockholder approval of at least a 1-for-8 reverse split of the Company’s common
stock.