The total cost relating to the acquisition
was approximately $1,100,000. This includes $668,983, which was paid in cash consideration to the sellers, closing costs
of $35,735, legal costs of approximately $115,000, and other diligence related costs, which were expensed as of September 30,
2018.
As prescribed by Regulation S-X of the Securities and Exchange Commission, within
seventy-five days of the acquisition of a significant business, separate audited pre-acquisition historical financial statements
are required to be filed. An audit of the Jamestown Regional Medical Center’s financial statements was deemed necessary
based on the guidance applicable to our financial statements and based on the acquisition’s significance to the Company’s
financial statements prior to completion. On August 25, 2018, the Company engaged our auditors, Haynie & Company to perform
the required audit. As of the date of the filing of this report, the Company has not met this filing requirement.
Notes
Payable – Third Parties
|
|
September
30, 2018
|
|
|
December
31, 2017
|
|
Loan
payable under prepaid forward purchase contract
|
|
$
|
5,000,000
|
|
|
$
|
5,000,000
|
|
|
|
|
|
|
|
|
|
|
Loan
payable to TCA Global Master Fund, LP (“TCA”) in the original principal amount of $3 million at 16% interest (the
“TCA Debenture”). Principal and interest payments due in various installments through December 31, 2017.
|
|
|
1,359,737
|
|
|
|
1,616,218
|
|
|
|
|
|
|
|
|
|
|
Notes
payable to CommerceNet and Jay Tenenbaum in the original principal amount of $500,000, bearing interest at 6% per annum (the
“Tegal Notes”). Principal and interest payments due annually from July 12, 2015 through July 12, 2017.
|
|
|
341,612
|
|
|
|
341,612
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,701,349
|
|
|
|
6,957,830
|
|
Less
current portion
|
|
|
(6,701,349
|
)
|
|
|
(6,957,830
|
)
|
Notes
payable - third parties, net of current portion
|
|
$
|
-
|
|
|
$
|
-
|
|
On
March 31, 2016, the Company entered into an agreement to pledge certain of its accounts receivable as collateral against a prepaid
forward purchase contract, whereby the Company received consideration in the amount of $5.0 million. The receivables had an estimated
collectable value of $8.7 million, which had been adjusted down to approximately $1.5 million on the Company’s balance sheet
as of December 31, 2016 and $0 as of December 31, 2017. In exchange for the consideration received, the counterparty received
the right to: (i) a 20% per annum investment return from the Company on the consideration, with a minimum repayment term of six
months and minimum return of $0.5 million, (ii) all payments recovered from the accounts receivable up to $5.25 million, if paid
in full within six months, or $5.5 million, if not paid in full within six months, and (iii) 20% of all payments of the accounts
receivable in excess of amounts received in (i) and (ii). On March 31, 2017, to the extent that the counterparty had not been
paid $6.0 million, the Company was required to pay the difference.
Christopher
Diamantis, a director of the Company, guaranteed the Company’s obligation. On March 24, 2017, the Company, the counterparty
and Mr. Diamantis, as guarantor, entered into an amendment to extend the Company’s obligation to March 31, 2018. Also, what
the counterparty is to receive was amended to equal (a) the $5,000,000 purchase price plus a 20% per annum investment return thereon,
plus (b) $500,000, plus (c) the product of (i) the proceeds received from the accounts receivable, minus the amount set forth
in clauses (a) and (b), multiplied by 40%. In connection with this extension, the counterparty received a fee of $1,000,000. On
April 2, 2018, the Company, the counterparty and Mr. Diamantis, as guarantor, entered into a second amendment to extend further
the Company’s obligation to May 30, 2018. In connection with this further extension, the counterparty received a fee of
$100,000. To date, the Company has not recovered any payments against the accounts receivable and the full balance is now payable.
The counterparty has instituted an arbitration proceeding under the agreement with regard to the outstanding balance.
As of November 14, 2018, the Company has not made a payment under this agreement and the full balance is now payable. The Company
does not have the financial resources to satisfy this amount.
RENNOVA
HEALTH, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(unaudited)
The
Company did not make the required monthly principal and interest payments due under the TCA Debenture for the period from October
2016 through March 2017. On February 2, 2017, the Company made a payment to TCA in the amount of $0.4 million, which was applied
to accrued and unpaid interest and fees, including default interest, as of the date of payment. On March 21, 2017, the Company
made a payment to TCA in the amount of $0.75 million, of which approximately $0.1 million was applied to accrued and unpaid interest
and fees in accordance with the terms of the TCA Debenture. Also on March 21, 2017, the Company entered into a letter agreement
with TCA, which (i) waived any payment defaults through March 21, 2017; (ii) provided for the $0.75 million payment discussed
above; (iii) set forth a revised repayment schedule whereby the remaining principal plus interest aggregating to approximately
$2.6 million was to be repaid in various monthly installments from April of 2017 through September of 2017; and (iv) provided
for payment of an additional service fee in the amount of $150,000, which was due on June 27, 2017, the day after the effective
date of the registration statement filed by the Company; which amount is reflected in accrued expenses in the accompanying condensed
consolidated balance sheet at December 31, 2017. In addition, TCA entered into an inter-creditor agreement with the purchasers
of the convertible debentures (see Note 9) which sets forth rights, preferences and priorities with respect to the security interests
in the Company’s assets. On September 19, 2017, the Company entered into a new agreement with TCA, which extended the repayment
schedule through December 31, 2017. The principal balance as of September 30, 2018, was reduced from $1.6 million to $1.4 million,
with interest accrued of approximately $145,000. The remaining debt to TCA remains outstanding and TCA has made a demand for payment.
The parties are currently working to amend the TCA Debenture to extend the maturity although there can be no assurance
that the parties will agree to any such extension.
The
Company did not make the principal payments under the Tegal Notes that were due on July 12, 2016. On November 3, 2016, the Company
received a default notice from the holders of the Tegal Notes demanding immediate repayment of the outstanding principal of $341,612
and accrued interest of $43,000. On December 7, 2016, the Company received a breach of contract complaint with a request for the
entry of a default judgment (see Note 15). On April 23, 2018, the holders of the Tegal Notes received a judgment against the Company.
To date, the Company has yet to repay this amount.
Notes
Payable – Related Parties
|
|
September
30, 2018
|
|
|
December
31, 2017
|
|
Loan
payable to Alcimede LLC, bearing interest at 6% per annum, with all principal and interest due on August 2, 2018
|
|
$
|
-
|
|
|
$
|
168,500
|
|
|
|
|
|
|
|
|
|
|
Loan
payable to Christopher Diamantis
|
|
|
450,000
|
|
|
|
960,000
|
|
|
|
|
450,000
|
|
|
|
1,128,500
|
|
Less
current portion
|
|
|
(450,000
|
)
|
|
|
(1,128,500
|
)
|
Total
notes payable - related parties, net of current portion
|
|
$
|
-
|
|
|
$
|
-
|
|
On
February 3, 2015, the Company borrowed $3.0 million from Alcimede LLC (“Alcimede”). Seamus Lagan, the Company’s
President and Chief Executive Officer, is the sole manager of Alcimede. The note had an interest rate of 6% and was originally
due on February 2, 2016. Alcimede later agreed to extend the maturity date of the loan to August 2, 2017. On June 29, 2015, Alcimede
exercised options granted in October 2012 to purchase shares of the Company’s common stock, and the loan outstanding was
reduced in satisfaction of the aggregate exercise price of $2.5 million. In August of 2016, $0.3 million was repaid by the Company
through the issuance of shares of common stock. In March of 2017, the Company and Mr. Lagan agreed that a payment made to Alcimede
in the amount of $50,000 would be deducted from the outstanding balance of the note. On August 2, 2017, the Company and Alcimede
agreed to further extend the maturity date of the loan to August 2, 2018. On July 23, 2018, the Company issued preferred stock
to Alcimede and part of the consideration was full settlement of this loan as more fully discussed in Note 20.
During
the nine months ended September 30, 2018, the Company borrowed $3.1 million from Christopher Diamantis and repaid $2.6 million.
The loan payable balance including interest was $0.5 million on September 30, 2018.
RENNOVA
HEALTH, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note
9 – Debentures
The
carrying amount of all outstanding debentures as of September 30, 2018 (unaudited), and December 31, 2017 is as follows:
|
|
September
30, 2018
|
|
|
December
31, 2017
|
|
Debentures
|
|
$
|
17,837,502
|
|
|
$
|
17,720,082
|
|
Discount
on Debentures
|
|
|
(7,284,194
|
)
|
|
|
(12,127,634
|
)
|
Deferred
financing fees
|
|
|
(19,717
|
)
|
|
|
(224,733
|
)
|
|
|
|
10,533,591
|
|
|
|
5,367,715
|
|
Less
current portion
|
|
|
(10,533,591
|
)
|
|
|
(1,615,693
|
)
|
Debentures
|
|
$
|
-
|
|
|
$
|
3,752,022
|
|
Payment
on all outstanding debentures as of September 30, 2018 is due as follows:
Period
ended September 30,
|
|
|
|
2018
|
|
$
|
2,027,502
|
|
2019
|
|
$
|
15,810,000
|
|
|
|
$
|
17,837,502
|
|
February
2017 Offering
On
February 2, 2017, the Company issued $1.6 million aggregate principal amount of Original Issue Discount Convertible Debentures
due three months from the date of issuance (the “February Debentures”) and warrants to purchase an aggregate of 13
shares of common stock, which can be exercised at any time after August 17, 2017 at an exercise price of $19,350 per
share (the “February Warrants”), to an accredited investor for a purchase price of $1.5 million. On March 21, 2017,
the February Debentures were exchanged for $2.5 million of exchange debentures as more fully discussed below.
March
2017 Offerings
On
March 21, 2017, the Company issued $10.85 million aggregate principal amount of Senior Secured Original Issue Discount Convertible
Debentures due March 21, 2019 (the “Convertible Debentures”). The Company received net proceeds from this transaction
in the approximate amount of $8.4 million. The Company used $3.8 million of the net proceeds to repay a loan from Mr. Diamantis
as more fully discussed in Note 10 and $0.75 million of the net proceeds to make the partial repayment on the TCA Debenture. The
remainder of the net proceeds were used for general corporate purposes. In conjunction with the issuance of the Convertible Debentures,
the holder of the February Debentures exchanged these debentures for $2.5 million of new debentures (the “Exchange Debentures”
and, collectively with the Convertible Debentures, the “March Debentures”) on the same terms as, and pari passu with,
the Convertible Debentures and warrants. The Company recorded non-cash interest expense in the amount of $0.4 million as a result
of this exchange. Additionally, the holders of an aggregate of $2.2 million stated value of the Company’s Series H Convertible
Preferred Stock (the “Series H Preferred Stock”) exchanged such preferred stock into $2.7 million principal amount
of Exchange Debentures and warrants. The March Debentures contain a 24% original issue discount, have no regularly scheduled interest
payments except in the event of a default and have a maturity date of March 21, 2019.
In
connection with the March Debentures the Company issued warrants to purchase shares of the Company’s common stock to several
accredited investors. At September 30, 2018, these warrants were exercisable into an aggregate of approximately 382.3 million
shares of common stock. The warrants were issued to the investors in three tranches, Series A Warrants, Series B Warrants and
Series C Warrants (collectively, the “March Warrants”). At September 30, 2018, the Series A Warrants are exercisable
for 146.6 million shares of the Company’s common stock. They are immediately exercisable and have a term of exercise
equal to five years. At September 30, 2018, the Series B Warrants are immediately exercisable for 90.1 million shares of
the Company’s common stock and were initially exercisable for a period of 18 months. During the three months ended September
30, 2018, the Company extended the exercise period for 180 days and recorded an additional discount on the March Debentures
of approximately $8.3 million as a result of the extension. The Series C Warrants are exercisable for 145.6 million shares
of the Company’s common stock and have a term of five years provided such warrants shall only vest if, when and to the extent
that the holders exercise the Series B Warrants. At September 30, 2018, the Series A, Series B and Series C Warrants each have
an exercise price of $0.1275 per share, which reflects adjustments pursuant to their terms. The Series A, Series B and
Series C Warrants are subject to “full ratchet” and other customary anti-dilution protections.
RENNOVA
HEALTH, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(unaudited)
The
March Debentures are convertible into shares of the Company’s common stock, at a conversion price which has been adjusted
pursuant to the terms of the March Debentures to $0.1275 per share as of September 30, 2018, due to prices at which the
Company has subsequently issued shares of common stock. The Convertible Debentures began to amortize monthly commencing on the
90th day following the closing date. The Exchange Debentures began to amortize monthly on the closing date. On each monthly amortization
date, the Company may elect to repay 5% of the original principal amount of the March Debentures in cash or, in lieu thereof,
the conversion price of such debentures will thereafter be 85% of the volume weighted average price at the time of conversion.
In the event the Company does not elect to pay such amortization amounts in cash, each investor, in their sole discretion, may
increase the conversion amount subject to the alternative conversion price by up to four times the amortization amount. The March
Debentures contain customary affirmative and negative covenants. The conversion prices are subject to reset in the event of offerings
or other issuances of common stock, or rights to purchase common stock, at a price below the then conversion price, as well as
other customary anti-dilution protections as more fully described in the debentures.
On
October 30, 2017, the Company agreed to amend the March Debentures and March Warrants to remove the floor in the anti-dilution
provisions therein. The conversion price of the March Debentures and the exercise price of the March Warrants as of September
30, 2018 stated above reflect the amendment as well as other adjustments for dilutive issuances, which triggered the down round
provisions in the March Debentures and March Warrants. The March Debentures are secured by all the Company’s assets and
are guaranteed by substantially all of the Company’s subsidiaries. Between March 22, 2017 and September 30, 2018, holders
of the March Debentures converted an aggregate of $13,982,758 of these debentures into 3,923,251 shares of common
stock.
The
exercise prices of the March Warrants issued relating to the March Debentures are subject to reset in the event of offerings or
other issuances of common stock, or rights to purchase common stock, at a price below the then exercise price, as well as other
customary anti-dilution protections. Because of these provisions, both the March Debentures and the March Warrants were deemed
to be not indexed to the Company’s common stock, and the Company recognized derivative liabilities for the embedded conversion
feature of the March Debentures and the March Warrants in the original amount of $15.3 million and $41.3 million, respectively.
The Company recognized a discount for 100% of the principal value of the March Debentures and non-cash interest expense in the
amount of $43.7 million regarding the recognition of these derivative liabilities. Because of the adoption of ASU 2017-11 in the
second quarter of 2017, the interest expense and derivative liability originally recognized were adjusted and extinguished during
the three months ended September 30, 2017. See Note 1 for the adoption of ASU 2017-11 for the retrospective adjustments made to
the Company’s condensed consolidated financial statements with respect to the derivative liabilities associated with these
debentures and warrants.
June
2017 Offerings
In
June 2017, the Company issued debentures due three months from the date of issuance in two issuances (collectively, the “June
Debentures”) and warrants to purchase an aggregate of 200 shares of common stock (67 warrants in the June
2, 2017 transaction and 133 in the June 22, 2017 transaction), which can be exercised at any time after nine months at
an exercise price of $2,925 per share for the June 2, 2017 warrants and $2,850 per share for the June 22, 2017 warrants
(collectively the “June Warrants”), to accredited investors for a purchase price of $1,902,700 and proceeds to the
Company of $1.5 million. The Company recorded a discount on the debentures of $107,700 which has been fully amortized. As more
fully discussed below, on July 17, 2017, the June Debentures were exchanged.
July
2017 Offerings
On
July 17, 2017, the Company closed an offering of $4,136,862 aggregate principal amount of Original Issue Discount Debentures due
October 17, 2017 (the “July Debentures”) and warrants to purchase an aggregate of 283 shares of common stock
(the “July Warrants”) for consideration of $2,000,000 in cash and the exchange of the full $1,902,700 aggregate principal
amount of the June Debentures. The July Debentures were guaranteed by substantially all the subsidiaries of the Company pursuant
to a Subsidiary Guarantee in favor of the holders of the July Debentures. As more fully discussed below, on September 19, 2017,
the July Debentures were exchanged for $6.4 million of exchange debentures.
The
July Warrants are exercisable into shares of the Company’s common stock at any time from and after six months from the closing
date at an exercise price of $2,815 per common share (subject to adjustment). The July Warrants will terminate five years
after they become exercisable.
RENNOVA
HEALTH, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(unaudited)
September
2017 Offerings
On
September 19, 2017, the Company closed an offering of $2,604,000 principal amount of Senior Secured Original Issue Discount Convertible
Debentures due September 19, 2019 (the “New Debentures”) and three series of warrants to purchase an aggregate of
34,677,585 shares of the Company’s common stock (the “Series A Warrants,” the “Series B Warrants,”
and the “Series C Warrants,” and collectively, the “September Warrants”). The offering was pursuant to
the terms of a Securities Purchase Agreement, dated as of August 31, 2017 (the “Purchase Agreement”), between the
Company and certain existing institutional investors of the Company. The Company received proceeds of $2,100,000 from the offering.
Also
on September 19, 2017, the Company closed exchanges by which the holders of the Company’s July Debentures exchanged $4,136,862
principal amount of such debentures for $6,412,136 principal number of new debentures on the same items as, and pari passu with,
the New Debentures (the “September Exchange Debentures” and, together with the New Debentures, the “September
Debentures”). The Company recorded non-cash interest expense in the amount of $1.0 million because of this exchange. All
issuance amounts of the September Debentures reflect a 24% original issue discount.
The
September Debentures contain customary affirmative and negative covenants. The conversion price is subject to “full ratchet”
and other customary anti-dilution protections as more fully described in the debentures. The September Debentures may be converted
at any time into shares of the Company’s common stock. Originally, the September Debentures begin to amortize monthly commencing
on October 1, 2017, and for the first three amortization dates, the amortization amount was $100,000. On October 19, 2017, the
September Debentures were amended so that they began to amortize immediately. On each monthly amortization date, the Company may
elect to repay 5% of the original principal amount of September Debentures in cash or, in lieu thereof, the conversion price of
such September Debentures shall thereafter be 85% of the volume weighted average price at the time of conversion, but not less
than the floor of $.78 per share. In the event the Company does not elect to pay such amortization amounts in cash, each
investor, in their sole discretion, may increase the conversion amount subject to the alternative conversion price by up to four
times the amortization amount. On October 30, 2017, the Company entered into exchange agreements (“Exchange Agreements”)
with the holders of the September Debentures to provide that the holders may, from time to time, exchange their September Debentures
for shares of a newly-authorized Series I-2 Convertible Preferred Stock of the Company (the “Series I-2 Preferred Stock”).
On February 8, 2018, $1,384,556 of the September Debentures were exchanged for 1,730.1 shares of Series I-2 Preferred Stock and
the Company recorded a loss on the exchange of $651,562. On July 16, 2018, $1,741,580 of the September Debentures were exchanged
for 2,176.9 shares of Series I-2 Preferred Stock and the Company recorded a loss on the exchange of $819,561. The Series I-2
Preferred Stock is more fully discussed in Note 13.
At
September 30, 2018, the Series A Warrants are exercisable for an aggregate of 11,559,195 shares of the Company’s
common stock. They are immediately exercisable and have a term of exercise equal to five years. The Series B Warrants are exercisable
for an aggregate of 11,559,195 shares of the Company’s common stock and are exercisable for a period of 18 months
commencing immediately. At September 30, 2018, the Series C Warrants are exercisable for an aggregate of 11,559,195 shares of
the Company’s common stock, and have a term of five years provided such Series C Warrants shall only vest if, when and to
the extent that the holders exercise the Series B Warrants. The September Warrants have a fixed exercise price, subject to a floor
of $0.78 per share. At September 30, 2018, the exercise price was $0.78 per share, which reflects adjustments made pursuant to
their terms due to the down round provisions in the September Warrants. The September Warrants are subject to “full ratchet”
and other customary anti-dilution protections.
The
Company’s obligations under the September Debentures are secured by a security interest in all of the Company’s and
its subsidiaries’ assets, pursuant to the terms of the Security Agreement, dated as of March 20, 2017.
2018
Offerings
On
March 5, 2018, May 14, 2018, May 21, 2018 and June 28, 2018, the Company closed offerings of $6,810,000 aggregate principal amount
of Senior Secured Original Issue Discount Convertible Debentures due September 19, 2019. The Company received proceeds of $5,500,000
in the offerings net of the original issue discount of $1,310,000. On July 16, 2018, August 2, 2018, and September 6, 2018,
the Company entered into Additional Issuance Agreements (the “Issuance Agreements”), with two existing institutional
investors of the Company. Under the Issuance Agreements, the Company issued $3.1 million aggregate principal amount of Senior
Secured Original Issue Discount Convertible Debentures due September 19, 2019 and received proceeds of $2.5 million. The conversion
terms of these debentures are the same as those issued in September 2017 under the Purchase Agreement, dated as of August
31, 2017, as more fully described above, with the exception of the floor conversion price, which is $.052 per share. These
debentures may also be exchanged for shares of the Company’s Series I-2 Preferred Stock under the terms of the Exchange
Agreements.
During
the year ended December 31, 2017 and the nine months ended September 30, 2018, the Company realized approximately $23.7 million
in proceeds from the issuances of the debentures and warrants. At September 30, 2018, the unamortized discounts were $7.3 million.
These discounts represent original issue discounts, the relative fair value of the warrants issued with the debentures and the
relative fair value of the beneficial conversion features of the debentures. During the nine months ended September 30, 2018 and
2017, the Company recorded approximately $16.0 million and approximately $14.7 million, respectively, of non-cash
interest and amortization of debt discount expense primarily in connection with the debentures and warrants.
RENNOVA
HEALTH, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(unaudited)
See
Note 13 for summarized information related to warrants issued and the activity during the nine months ended September 30, 2018
and 2017.
See
Notes 3 and 13 for a discussion of the dilutive effect of the outstanding debentures and warrants as of September 30, 2018.
Note
10 – Related Party Transactions
In
addition to the transactions discussed in Note 8, the Company had the following related party transactions during the nine months
ended September 30, 2018 and 2017:
In
January and February of 2017, the Company received advances aggregating $3.6 million from Christopher Diamantis, a director of
the Company. The advances, along with $0.5 million of previously accrued but unpaid interest, were due on demand, bearing interest
at 10% per annum. The Company used the advances to pay the purchase price for the Hospital Assets and for general corporate purposes.
On March 7, 2017, the Company issued a promissory note to Mr. Diamantis in the amount of $0.5 million relating to these advances
received in 2017, plus accrued and unpaid interest of $0.5 million (and together with the advances and accrued interest the “2017
Diamantis Note”). In the nine months ended September 30, 2018, the Company has paid $251,000 of the accrued interest.
In conjunction with the issuance of the 2017 Diamantis Note, the Company also issued to Mr. Diamantis warrants to purchase
55 shares of the Company’s common stock, exercisable at $7,500. The 2017 Diamantis Note was repaid on March 21, 2017 with
the proceeds received from the issuance of the Convertible Debentures (see Note 9).
Monarch
Capital, LLC (“Monarch”) billed the Company for consulting fees delivered in 2017, pursuant to a consulting
agreement in the amount of $0.1 million. While the agreement expired on August 31, 2017, the balance remains outstanding
at September 30, 2018. Michael Goldberg, a director of the Company up until his resignation effective April 24, 2017, is the
Managing Director of Monarch.
Alcimede billed the Company $0.1 million
and $0.1 million for consulting fees pursuant to a consulting agreement for the three months ended September 30,
2018 and 2017, respectively. Alcimede billed $0.3 million and $0.2 million for the nine months ended September 30, 2018 and
2017, respectively. Seamus Lagan, the Company’s President and Chief Executive Officer, is the sole manager of Alcimede
(see Note 8).
Note
11 – Capital Lease Obligations
The
Company leases various assets under capital leases expiring through 2020 as follows. At September 30, 2018 (unaudited) and December
31, 2017, capital lease equipment consisted of the following:
|
|
September
30, 2018
|
|
|
December
31, 2017
|
|
Medical
equipment
|
|
$
|
742,745
|
|
|
$
|
4,686,736
|
|
Less
accumulated depreciation
|
|
|
(618,931
|
)
|
|
|
(3,842,443
|
)
|
|
|
|
|
|
|
|
|
|
Net
|
|
$
|
123,815
|
|
|
$
|
844,293
|
|
As
of September 30, 2018, the Company is in default of substantially all its lease obligations, therefore the aggregate future minimum
rentals and accrued interest under capital leases in the amount of $988,936 are deemed to be due. The significant reduction
in the leased assets at September 30, 2018 from December 31, 2017, was due to the sale and or surrender of certain leased medical
equipment relating to our laboratory operations which have significantly decreased in size over the past 24 months.
In
December 2016, several lawsuits were filed for past due lease payment obligations. In January 2017, default judgements were issued
against the Company aggregating to $3.5 million, including default interest, late fees, penalties and other fees (see Note 15).
Additionally, the Company recognized additional interest expense of $0.6 million to recognize the additional obligations under
these leases.
Note
12 – Redeemable Preferred Stock
The
Company has 5,000,000 authorized shares of Preferred Stock at a par value of $0.01. Issuances of the Company’s Preferred
Stock included as part of stockholders’ deficit are discussed in Note 13. The following is a summary of the issuances of
the Company’s Redeemable Preferred Stock.
RENNOVA
HEALTH, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Series
I-1 Convertible Preferred Stock
On
October 30, 2017, the Company closed an offering of $4,960,000 stated value of 4,960 shares of a newly-authorized Series
I-1 Convertible Preferred Stock (the “Series I-1 Preferred Stock”). Each share of Series I-1 Preferred Stock has a
stated value of $1,000. The offering was pursuant to the terms of the Securities Purchase Agreement, dated as of October 30, 2017
(the “Purchase Agreement”), between the Company and certain existing institutional investors of the Company. The Company
received proceeds of $4.0 million from the offering. The Purchase Agreement gives the investors the right to participate in up
to 50% of any offering of common stock or common stock equivalents by the Company. In the event of any such offering, the investors
may also exchange all or some of their Series I-1 Preferred Stock for such new securities on an $0.80 stated value of Series I-1
Preferred Stock for $1.00 of new subscription amount basis. Each share of Series I-1 Preferred Stock is convertible into shares
of the Company’s common stock at any time at the option of the holder at a conversion price equal to the lesser of (i) $1.00,
subject to adjustment, and (ii) 85% of the lesser of the volume weighted average market price of the common stock on the day prior
to conversion or on the day of conversion. The conversion price is subject to “full ratchet” and other customary anti-dilution
protections as more fully described in the Certificate of Designation of the Series I-1 Preferred Stock. Upon the occurrence of
certain Triggering Events, as defined in the Certificate of Designation of the Series I-1 Preferred Stock, the holder shall, in
addition to any other right it may have, have the right, at its option, to require the Company to either redeem the Series I-1
Preferred Stock in cash or in certain circumstance in shares of common stock at the redemption prices set forth in the Certificate
of Designation.
Series
I-2 Convertible Preferred Stock
On
October 30, 2017, the Company entered into Exchange Agreements with the holders of the September Debentures to provide that the
holders may, from time to time, exchange their September Debentures for shares of a newly-authorized Series I-2 Preferred Stock.
The exchange agreements permitted the holders of the September Debentures to exchange specified principal amounts of the September
Debentures on various closing dates starting on December 2, 2017, as more fully discussed in Note 9. At the holder’s option
each holder may reduce the principal amount of September Debentures exchanged on any particular closing date, or elect not to
exchange any September Debentures at all on a closing date. If a holder does choose to exchange less principal amount of September
Debentures, or no September Debentures at all, it can carry forward such lesser amount to a future closing date and then exchange
more than the originally specified principal amount for that later closing date. For each $0.80 of principal amount of September
Debenture surrendered to the Company at any closing date, the Company will issue the holder a share of Series I-2 Preferred Stock
with a stated value of $1.00. Each share of Series I-2 Preferred Stock is convertible into shares of the Company’s common
stock at any time at the option of the holder at a conversion price equal to the lesser of (i) $1.00, subject to adjustment, and
(ii) 85% of the lesser of the volume weighted average market price of the common stock on the day prior to conversion or on the
day of conversion. The conversion price is subject to “full ratchet” and other customary anti-dilution protections
as more fully described in the Certificate of Designation of the Series I-2 Preferred Stock. From December 2, 2017 through March
1, 2018, any exchange under the Exchange Agreements was at the option of the holder. Subsequent to March 2018, any exchange is
at the option of the Company.
The
Company’s board of directors has designated up to 21,346 shares of the 5,000,000 authorized shares of preferred stock
as the Series I-2 Preferred Stock. Each share of Series I-2 Preferred Stock has a stated value of $1,000. Upon the occurrence
of certain Triggering Events (as defined in the Certificate of Designation of the Series I-2 Preferred Stock), the holder shall,
in addition to any other right it may have, have the right, at its option, to require the Company to either redeem the Series
I-2 Preferred Stock in cash or in certain circumstance in shares of common stock at the redemption prices set forth in the Certificate
of Designation.
On
February 9, 2018, the holders exercised their right to exchange a portion of the September Debentures for shares of the Series
I-2 Preferred Stock for the first time. On that date, the holders elected to exchange an aggregate of $1,384,556 principal amount
of September Debentures and the Company issued an aggregate 1,730.7 shares of its Series I-2 Preferred Stock. On July 16,
2018, under the Exchange Agreements with the holders of the September Debentures, the holders exchanged a portion of the September
Debentures for shares of the Company’s Series I-2 Preferred Stock. On that date, the holders elected to exchange an aggregate
of $1,741,580 principal amount of the September Debentures and the Company issued an aggregate of 2,176.975 shares of its Series
I-2 Preferred Stock. In July 2018, the holder converted 538.137 shares of Series I-2 Preferred Stock into 1,764,927
shares of the Company’s common stock.
RENNOVA
HEALTH, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note
13 – Stockholders’ Deficit
Preferred
Stock
The
Company has 5,000,000 shares, par value $0.01, of preferred stock authorized. As of September 30, 2018, the Company had outstanding
shares of preferred stock consisting of shares of its Series I-1 Preferred Stock and shares of Series I-2 Preferred Stock (both
of which are more fully discussed in Note 12), 215 shares of its Series G Preferred Stock, 10 shares of its Series H Preferred
Stock and 1,750,000 shares of its Series F Convertible Preferred Stock. On June 28, 2018, 50 shares of the Series H Preferred
Stock were converted into 40,000 shares of the Company’s common stock.
The
rights of the Series F, G, and H preferred stock are disclosed in the Company’s Annual Report on Form 10-K
for the year ended December 31, 2017. The Series G and H preferred stock are convertible into shares of the Company’s common
stock at a price equal to 85% of the volume weighted average price of the Company’s common stock at the time of conversion.
The Series F Preferred Stock is convertible into shares of the Company’s common stock at a fixed price of $14,625 per share.
On July 20, 2018, the Company filed a Certificate of Designation with the Secretary of State of the State
of Delaware to authorize the issuance of up to 250,000 shares of its Series J Convertible Preferred Stock (the “Series J
Preferred Stock”). On July 23, 2018, the Company entered into an Exchange Agreement (the “Agreement”) with Alcimede,
of which Seamus Lagan, our Chief Executive Officer, is the sole manager. Pursuant to the Agreement, the Company issued to Alcimede
250,000 shares of the Series J Preferred Stock in exchange for the cancellation of the outstanding principal and interest owed
by the Company to Alcimede under the Note, dated February 5, 2015, and the cancellation of certain amounts owed by the Company
to Alcimede under a consulting agreement between the parties. The total amount of consideration paid by Alcimede to the Company
equaled $250,000. Each share of the Series J Preferred Stock has a stated value of $1.00. The conversion price is equal to the
average closing price of the Company’s common stock on the 10 trading days immediately prior to the conversion date. Each
holder of the Series J Preferred Stock is entitled to vote on all matters submitted to a vote of the holders of the Company’s
common stock. With respect to a vote of stockholders, no later than September 30, 2018 only, to approve either or both of a reverse
stock split of the Company’s common stock and an increase in the authorized shares of common stock from three billion shares
to up to ten billion shares, each share of the Series J Preferred Stock had the whole number of votes equal to 24 shares of common
stock. With respect to all other matters, and from and after October 1, 2018, each share of the Series J Preferred Stock is entitled
to the whole number of votes equal to the number of common shares into which it is then convertible. The full terms of the Series
J Preferred Stock are listed in the Certificate of Designations filed as Exhibit 3.16 to the Company’s Current Report on
Form 8-K filed with the Securities and Exchange Commission on July 24, 2018.
Common
Stock
On
May 9, 2018, the Company held a Special Meeting of Stockholders, in part, to approve an amendment to the Company’s Certificate
of Incorporation, as amended, to increase the number of authorized shares of common stock from 500,000,000 to 3,000,000,000 shares.
The proposal was approved and on May 9, 2018 the Company filed an amendment to its Certificate of Incorporation to increase its
authorized common stock to 3,000,000,000 shares.
On
September 18, 2018, the Company amended its Certificate of Incorporation to have the authority to issue 10,000,000,000 shares
of Common Stock, par value $.0001 per share, and 5,000,000 shares of Preferred Stock, par value $0.01 per share.
The
Company had 7,365,881 and 39,502 shares of common stock issued and outstanding at September 30, 2018 and December
31, 2017, respectively. During the nine months ended September 30, 2018, the Company:
|
●
|
issued an aggregate
of 3,886,680 shares of its common stock upon conversion of $6.7 million of the principal amount of the March 2017 Debentures.
The value of the common stock issued was based on the fair value of the stock at the time of issuance;
|
|
|
|
|
●
|
issued 1,492,228
shares of common stock upon exercise of 5,906,177 warrants, on a cashless basis;
|
|
|
|
|
●
|
issued 40,000
shares of common stock upon the conversion of 50 shares of its Series H Preferred stock as discussed above; and
|
|
|
|
|
●
|
issued
1,764,927 shares of common stock upon the conversion of 538.137 shares its Series I-2 Preferred stock;
|
Restricted
Stock
On
August 14, 2017, the Board of Directors, based on the recommendation of the Compensation Committee of the Board and in accordance
with the provisions of the 2007 Equity Plan, approved grants to employees and directors of the Company of an aggregate of 364
shares of restricted common stock of the Company. The grants fully vested on the first anniversary of the date of grant,
subject to the grantee’s continued status as an employee or director on the vesting date.
During
the nine months ended September 30, 2018:
|
●
|
122
shares of the restricted
stock were forfeited by their terms and returned to treasury.
|
|
|
|
|
●
|
the Company issued
an aggregate of 142,667 shares of restricted stock to employees and directors, based upon the recommendation of the
Compensation Committee of the Board. The grants fully vested immediately. The Company recognized stock-based compensation
in the amount of $477,933 for the grant of such restricted stock based on a valuation of $3.35 per share. In addition,
the Company recorded $189,209 of compensation expense related to restricted stock issued in 2017. The value of the
common stock issued was based on the fair value of the stock at the time of issuance.
|
RENNOVA
HEALTH, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Stock
Options
During
the nine months ended September 30, 2018 and 2017, the Company recorded approximately $72,590 and $34,081, respectively,
as stock compensation expense from the amortization of stock options issued in prior periods. As of September 30, 2018, the weighted
average remaining contractual life was 7.6 years for options outstanding and exercisable. The intrinsic value of options
exercisable at September 30, 2018 and 2017 was $0. As of September 30, 2018, the remaining expense is approximately $58,796
over the remaining amortization period which is 0.53 years under the Company’s 2007 Equity Plan. The Company
estimates forfeiture and volatility using historical information. The risk-free interest rate is based on the implied yield available
on U.S. Treasury zero-coupon issues over the equivalent lives of the options. The expected life of the options represents the
estimated period using the simplified method. The Company has not paid cash dividends on its common stock and no assumption of
dividend payment(s) is made in the model.
The
following table summarizes the Company’s stock option activity for the nine months ended September 30, 2018:
|
|
Number
of
options
|
|
|
Weighted-
average
exercise
price
|
|
|
Weighted-
average
contractual
term
(Yrs.)
|
|
Outstanding
at December 31, 2017
|
|
|
77
|
|
|
$
|
1,036,374
|
|
|
|
8
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Forfeit
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Outstanding
at September 30, 2018
|
|
|
77
|
|
|
$
|
1,036,374
|
|
|
|
8
|
|
Exercisable
at September 30, 2018
|
|
|
66
|
|
|
$
|
1,186,581
|
|
|
|
|
|
Warrants
The
Company, as part of various debt and equity financing transactions, has issued warrants to purchase shares of the Company’s
common stock. The following summarizes the information related to warrants issued and the activity during the nine months
ended September 30, 2018:
|
|
Number
of warrants
|
|
|
Weighted
average
exercise
price
|
|
Balance at
December 31, 2017
|
|
|
38,961,036
|
|
|
$
|
2.48
|
|
Warrants
issued during the period
|
|
|
-
|
|
|
$
|
-
|
|
Increases
due to dilution
|
|
|
433,154,987
|
|
|
$
|
0.67
|
|
Warrants
exercised during the period
|
|
|
(5,906,177
|
)
|
|
$
|
0.17
|
|
Warrants
expired during the period
|
|
|
(2,760,079
|
)
|
|
$
|
-
|
|
Balance
at September 30, 2018
|
|
|
463,449,767
|
|
|
$
|
0.21
|
|
RENNOVA
HEALTH, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Common
Stock and Common Stock Equivalents
The
Company has outstanding options, warrants, convertible preferred stock and convertible debentures. Exercise of the options and
warrants, and conversions of the convertible preferred stock and debentures could result in substantial dilution of our common
stock and a decline in its market price. In addition, the terms of certain of the warrants, convertible preferred stock,
and convertible debentures issued by us provide for reductions in the per share exercise prices of the warrants. These terms
also provide for reductions in the per share conversion prices of the debentures and preferred stock (if applicable and subject
to a floor in certain cases), in the event that we issue common stock or common stock equivalents (as that term is defined in
the agreements), at an effective exercise/conversion price that is less than the then exercise/conversion prices of the
outstanding warrants, preferred stock and debentures. These provisions, as well as the issuances of debentures and preferred stock
with conversion prices that vary based upon the price of our common stock on the date of conversion, have resulted in significant
dilution of our common stock and have given rise to reverse splits of our common stock.
The
following table presents the dilutive effect of our various potential common shares as of September 30, 2018:
|
|
September
30, 2018
|
|
Common shares outstanding
|
|
|
7,365,881
|
|
Dilutive potential shares:
|
|
|
|
|
Stock options
|
|
|
77
|
|
Warrants
|
|
|
463,449,767
|
|
Convertible debt
|
|
|
214,222,493
|
|
Convertible preferred
stock
|
|
|
68,344,495
|
|
Total dilutive potential common shares, including
outstanding common stock
|
|
|
753,382,713
|
|
As
of November 9, 2018, the Company had sufficient authorized shares of its common stock to cover all potentially dilutive
common shares outstanding.
Note
14 – Supplemental Disclosure of Cash Flow Information
The
supplemental cash flow information for the nine months ended September 30, 2018 and 2017 (unaudited) is as follows:
|
|
Nine
Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
Cash
paid for interest
|
|
$
|
302,308
|
|
|
$
|
1,106,835
|
|
Cash
paid for income taxes
|
|
$
|
20,000
|
|
|
$
|
506,313
|
|
|
|
|
|
|
|
|
|
|
Acquisition
of Jamestown Regional Medical Center:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
-
|
|
|
$
|
-
|
|
Inventory
|
|
$
|
450,682
|
|
|
$
|
-
|
|
Prepaid
expenses and other current assets
|
|
$
|
310,385
|
|
|
$
|
-
|
|
Property
and equipment
|
|
$
|
7,347,468
|
|
|
$
|
-
|
|
Intangible
assets
|
|
$
|
486,716
|
|
|
$
|
-
|
|
Accrued
expenses
|
|
$
|
(193,966
|
)
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Non-cash
investing and financing activities:
|
|
|
|
|
|
|
|
|
Exchange
of preferred stock for convertible debentures and warrants
|
|
$
|
-
|
|
|
$
|
10,734,336
|
|
Cashless
exercise of warrants
|
|
$
|
4,619,150
|
|
|
$
|
-
|
|
Exchange
of convertible debentures for convertible debentures and warrants
|
|
$
|
-
|
|
|
$
|
-
|
|
Exchange
of debentures for Series I-2 Preferred Stock
|
|
$
|
1,420
|
|
|
$
|
-
|
|
Services
and severance settled through issuance of common stock
|
|
$
|
-
|
|
|
$
|
161,003
|
|
Note
payable, warrants, and accrued expenses settled through issuance of common stock
|
|
$
|
-
|
|
|
$
|
440,000
|
|
Note
payable and accrued expenses settled through issuance of Series J Preferred Stock
|
|
$
|
250,000
|
|
|
|
-
|
|
Exchange
of Series H Preferred Stock for debentures
|
|
$
|
-
|
|
|
$
|
2,695,760
|
|
Series
F Preferred Stock issued for business acquisition
|
|
$
|
-
|
|
|
$
|
174,097
|
|
Debentures
converted into common stock
|
|
$
|
8,085,342
|
|
|
$
|
4,064,162
|
|
OID
from issuance of debentures
|
|
$
|
1,920,000
|
|
|
$
|
-
|
|
Conversions
of shares of Preferred Stock into common stock
|
|
$
|
633,100
|
|
|
$
|
-
|
|
Conversions
of shares of Series H Preferred Stock into common stock
|
|
$
|
50,000
|
|
|
$
|
-
|
|
Deemed
dividend for trigger of down round provision feature
|
|
$
|
17,942,578
|
|
|
$
|
53,341,619
|
|
RENNOVA
HEALTH, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note
15 – Commitments and Contingencies
Legal
Matters
From
time to time, the Company may be involved in a variety of claims, lawsuits, investigations and proceedings related to contractual
disputes, employment matters, regulatory and compliance matters, intellectual property rights and other litigation arising in
the ordinary course of business. The Company operates in a highly regulated industry which may inherently lend itself to legal
matters. Management is aware that litigation has associated costs and that results of adverse litigation verdicts could have a
material effect on the Company’s financial position or results of operations. Management, in consultation with legal counsel,
has addressed known assertions and predicted unasserted claims below.
Biohealth
Medical Laboratory, Inc. and PB Laboratories, LLC (the “Companies”) filed suit against CIGNA Health in 2015 alleging
that CIGNA failed to pay claims for laboratory services the Companies provided to patients pursuant to CIGNA - issued and CIGNA
- administered plans. In 2016, the U.S. District Court dismissed part of the Companies’ claims for lack of standing. The
Companies appealed that decision to the Eleventh Circuit Court of Appeals, which in late 2017 reversed the District Court’s
decision and found that the Companies have standing to raise claims arising out of traditional insurance plans as well as self-funded
plans. The Company continues to consider its options in this matter.
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 condensed consolidated financial statements. Additionally,
the Company is seeking indemnification for these amounts from Epinex Diagnostics, Inc., the seller of Epinex Diagnostic Laboratories,
Inc., pursuant to a Stock Purchase Agreement entered into by and among the parties.
In
February 2016, the Company received notice that the Internal Revenue Service (the “IRS”) placed a lien against Medytox
Solutions, Inc. and its subsidiaries relating to unpaid 2014 taxes due, plus penalties and interest, in the amount of $5.0 million.
The Company paid $0.1 million toward its 2014 tax liability 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. The Company is currently unable to predict
the outcome of the audit or any liability to the Company that may result from the audit and made provisions of approximately $2.0
million as a liability in its financial statements as well as an estimated $1.9 million of receivables for an additional refund
that it believes is due. The Company expects the audit and all tax related matters to be concluded before the end of 2018.
On
September 27, 2016, a tax warrant was issued against the Company by the Florida Department of Revenue (the “DOR”)
for unpaid 2014 state income taxes in the approximate amount of $0.9 million, including penalties and interest. The Company has
made payments to reduce the amount owed to approximately $443,000, and entered into a Stipulation Agreement with
the DOR allowing the Company to make monthly installments until July 2019. If in July 2019, the remaining estimated
balance of $390,000 is not paid in lump sum, the Company would have the option to renegotiate another Stipulation agreement.
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 could be accelerated. The remaining balance
of approximately $443,000 remains outstanding to the DOR at September 30, 2018.
In
December of 2016, TCS-Florida, L.P. (“Tetra”), filed suit against the Company for failure to make the required payments
under an equipment leasing contract that the Company had with Tetra (see Note 11). On January 3, 2017, Tetra received a Default
Judgment against the Company in the amount of $2.6 million, representing the balance owed on the leases, as well as additional
interest, penalties and fees. In January and February of 2017, the Company made payments to Tetra relating to this judgment aggregating
to $0.7 million, and on February 15, 2017, the Company entered into a forbearance agreement with Tetra whereby the remaining $1.9
million due would be paid in 24 equal monthly installments. The Company has not maintained the payment schedule to Tetra. As a
result of this default, in May 2018, Tetra and the Company agreed to dispose of certain equipment and the proceeds from the sale
have been applied to the outstanding balance. The balance owed to Tetra at September 30, 2018 was $0.5 million and the Company
remains in default.
In
December of 2016, DeLage Landen Financial Services, Inc. (“DeLage”), filed suit against the Company for failure to
make the required payments under an equipment leasing contract that the Company had with DeLage (see Note 11). On January 24,
2017, DeLage received a default judgment against the Company in the approximate amount of $1.0 million, representing the balance
owed on the lease, as well as additional interest, penalties and fees. The Company recognized this amount in its consolidated
financial statements as of December 31, 2016. On February 8, 2017, a Stay of Execution was filed and under its terms the balance
due will be paid in variable monthly installments through January of 2019, with an implicit interest rate of 4.97%. The Company
and DeLage have now disposed of certain equipment and reduced the balance owed to DeLage. A balance of $0.2 million remains outstanding
at September 30, 2018.
RENNOVA
HEALTH, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(unaudited)
On
December 7, 2016, the holders of the Tegal Notes (see Note 8) filed suit against the Company seeking payment for the amounts due
under the notes in the aggregate of the principal of $341,612, and accrued interest of $43,000. A request for entry of default
judgment was filed on January 24, 2017. On April 23, 2018, the holders of the Tegal Notes received a judgment against the Company.
To date, the Company has yet to repay this amount.
In
November 2017, a former shareholder of Genomas, Phenomas, LLC, filed suit against the Company for payment of a $200,000 note payable
by the Company’s subsidiary, Genomas. This note is recorded in the financial statements of the subsidiary and is not payable
directly from the Company. The Company has made payments totaling $120,000 against this note and agreed to a payment schedule
in order to dismiss the legal action. On November 12, 2018, Phenomas, LLC filed a motion to voluntarily dismisses the suit without
prejudice.
The
counterparty to the prepaid forward purchase agreement entered into by the Company on March 31, 2016, as amended, has filed an
arbitration proceeding under the agreement with regard to the outstanding balance. See Note 9. The Company does not
have the financial resources to satisfy this amount.
Two
former employees of the Company’s CollabRx, Inc. subsidiary have filed suits in a California state court in connection with
amounts claimed to be owed under their respective employment agreements with the subsidiary. One former employee received a judgment
in October 2018 for approximately $253,000. The other former employee’s claim is for approximately $110,000. The Company
is considering its options to refute these matters and believes the claims 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 debentures agreement for the period ended September 30, 2018. 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. The case is in its early
stages.
On
September 13, 2018, Laboratory Corporation of America sued EPIC Reference Laboratories, Inc., a subsidiary of the Company, in
Palm Beach County Circuit Court for amounts claimed to be owed of approximately $148,000. The Company has recorded the amount
owed in accrued expenses for the period ended September 30, 2018. This case is in its early stages.
Note
16 – Segment Information
Operating
segments are defined under U.S. GAAP as components of an enterprise for which discrete financial information is available and
are evaluated regularly by the enterprise’s chief operating decision maker in determining how to allocate resources and
assess performance. The Company operates in two reportable business segments:
|
●
|
Clinical
Laboratory Operations
, which specializes in providing urine and blood toxicology and pain medication testing to physicians,
clinics and rehabilitation facilities in the United States.
|
|
|
|
|
●
|
Hospital
Operations,
which reflects the operations of Jamestown Regional
Medical Center and Big South Fork Medical Center.
|
The
Company’s Corporate expenses reflect consolidated company wide support services such as finance, legal counsel, human resources,
and payroll.
The
Company’s Decision Support and Informatics segment and its Supportive Software Solutions segment are now included in discontinued
operations as they have been classified as held for sale as of September 30, 2018. The accounting policies of the reportable segments
are the same as those described in Note 1 above and in Note 2 to the Company’s Annual Report on Form 10-K for the year ended
December 31, 2017 filed with the SEC on April 24, 2018.
RENNOVA
HEALTH, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Selected
financial information for the Company’s operating segments is as follows:
|
|
Three
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Net
revenues - External
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Clinical
Laboratory Operations
|
|
$
|
17,568
|
|
|
$
|
190,610
|
|
|
$
|
177,890
|
|
|
$
|
949,440
|
|
Hospital
Operations
|
|
|
5,021,541
|
|
|
|
619,478
|
|
|
|
9,755,099
|
|
|
|
619,478
|
|
|
|
$
|
5,039,110
|
|
|
$
|
810,088
|
|
|
$
|
9,932,989
|
|
|
$
|
1,568,918
|
|
(Loss)
from operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Clinical
Laboratory Operations
|
|
$
|
(547,041
|
)
|
|
$
|
(1,039,118
|
)
|
|
$
|
(1,765,395
|
)
|
|
$
|
(3,809,147
|
)
|
Hospital
Operations
|
|
|
(1,294,580
|
)
|
|
|
(2,093,805
|
)
|
|
|
(3,998,943
|
)
|
|
|
(3,114,473
|
)
|
Corporate
|
|
|
(973,954
|
)
|
|
|
(1,369,765
|
)
|
|
|
(3,156,645
|
)
|
|
|
(5,058,569
|
)
|
Eliminations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
(2,815,575
|
)
|
|
$
|
(4,502,688
|
)
|
|
$
|
(8,920,983
|
)
|
|
$
|
(11,982,189
|
)
|
Depreciation
and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Clinical
Laboratory Operations
|
|
$
|
112,908
|
|
|
$
|
410,801
|
|
|
$
|
625,877
|
|
|
$
|
1,265,174
|
|
Hospital
Operations
|
|
|
39,669
|
|
|
|
15,436
|
|
|
|
177,386
|
|
|
|
15,436
|
|
Corporate
|
|
|
248
|
|
|
|
345
|
|
|
|
810
|
|
|
|
1006
|
|
Eliminations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
152,825
|
|
|
$
|
426,582
|
|
|
$
|
804,073
|
|
|
$
|
1,281,616
|
|
|
|
September
30, 2018
|
|
|
December
31, 2017
|
|
Total
assets
|
|
|
|
|
|
|
|
|
Clinical
Laboratory Operations
|
|
$
|
421,478
|
|
|
$
|
1,503,520
|
|
Supportive
Software Solutions
|
|
|
1,650,984
|
|
|
|
2,549,504
|
|
Decision
Support and Informatics
|
|
|
38,323
|
|
|
|
-
|
|
Hospital
Operations
|
|
|
16,730,568
|
|
|
|
3,436,773
|
|
Corporate
|
|
|
4,087,610
|
|
|
|
255,566
|
|
Eliminations
|
|
|
(3,506,178
|
)
|
|
|
(1,454,569
|
)
|
Total
Assets
|
|
$
|
19,422,785
|
|
|
$
|
6,290,794
|
|
Note
17 – Derivative Financial Instruments and Fair Value
In
accordance with ASC 820, “
Fair Value Measurements and Disclosures
,” the Company applies fair value accounting
for all financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value
in the financial statements on a recurring basis. Fair value is defined as the price that would be received from selling an asset
or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining
the fair value measurements for assets and liabilities, which are required to be recorded at fair value, the Company considers
the principal or most advantageous market in which it would transact and the market-based risk measurements or assumptions that
market participants would use in pricing the asset or liability, such as risks inherent in valuation techniques, transfer restrictions
and credit risk. Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair
value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and
significant to the fair value measurement:
|
●
|
Level
1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities
that we have the ability to access at the measurement date.
|
RENNOVA
HEALTH, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(unaudited)
|
●
|
Level
2 applies to assets or liabilities for which there are inputs other than quoted prices included in Level 1 that are observable
for the asset or liability, either directly or indirectly, such as quoted prices for similar assets or liabilities in active
markets; or quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions
(less active markets).
|
|
|
|
|
●
|
Level
3 applies to assets or liabilities for which fair value is derived from valuation techniques in which one or more significant
inputs are unobservable, including our own assumptions.
|
The
estimated fair value of financial instruments is determined by the Company using available market information and valuation methodologies
considered to be appropriate. At September 30, 2018 and December 31, 2017, the carrying value of the Company’s accounts
receivable, accounts payable and accrued expenses approximate their fair values due to their short-term nature.
The
following table sets forth the financial assets and liabilities carried at fair value measured on a recurring basis as of December
31, 2017 and September 30, 2018:
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
As
of December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Embedded
conversion options
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,577,025
|
|
|
$
|
1,577,025
|
|
Common
stock warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
10,858,225
|
|
|
|
10,858,225
|
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
12,435,250
|
|
|
$
|
12,435,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of September 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Embedded
conversion options
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
357,797
|
|
|
$
|
357,797
|
|
Common
stock warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
0
|
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
357,797
|
|
|
$
|
357,797
|
|
For
the three and nine months ended September 30, 2018, total income (loss) on instruments valued using Level 3 valuations was $109.3
million and $13.7 million, respectively.
The
Company reclassified the derivative liability previously reported at December 31, 2017 as long term to current liability for the
second quarter 2018. On September 23, 2018, the Company’s board of directors approved a reverse split of its common stock,
which would provide sufficient authorized and unissued shares to allow for otherwise equity classified instruments to be classified
in equity. As of September 23, 2018, the fair value of these instruments was evaluated for reclassification. As a result of the
evaluation, the Company reclassified the derivative liability previously reported as a current liability to derivative income.
The
Company utilized the following methods to value its derivative liabilities for the nine months ended September 30, 2018, for embedded
conversion options valued at $357,797. The Company determined the fair value by comparing the discounted conversion price
per share (85% of market price) multiplied by the number of shares issuable at the balance sheet date to the actual price per
share of the Company’s common stock multiplied by the number of shares issuable at that date with the difference in value
recorded as a liability. In addition, the Company valued the modification in the term of the March 2017 Series B Warrants at $
8,603,067
using Monte Carlo simulations. All inputs for the derivative liabilities are observable
and, therefore, there is no sensitivity in the valuation to unobservable inputs.
The
following table reconciles the changes in the liabilities categorized within Level 3 of the fair value hierarchy for the nine
months ended September 30, 2018:
Balance
at December 31, 2017
|
|
$
|
12,435,250
|
|
Loss
on change in fair value of debentures and warrants
|
|
|
(15,159,799
|
)
|
Fair
value of warrants exercised
|
|
|
(4,619,150
|
)
|
Fair
value of debentures converted
|
|
|
(1,408,899
|
)
|
Fair
value of debentures exchanged for Series I-2 Preferred Stock
|
|
|
(1,420
|
)
|
Modification
of warrants
|
|
|
8,603,067
|
|
Issuance
of convertible debt
|
|
|
508,748
|
|
Balance
at September 30, 2018
|
|
$
|
357,797
|
|
In
addition to the loss on change in fair value of debentures and warrants, during the nine months ended September 30, 2018, the
Company recorded a loss on the exchange of convertible debentures into shares of its Series I-2 Preferred Stock of $1,471,121.
RENNOVA
HEALTH, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(unaudited)
On
September 14, 2018, the expiration date of certain warrants was extended by 180 days. The Company used the Black Scholes
model to calculate the fair value of the warrants as of the modification date. Using the pre-modification term and related assumptions,
and the post-modification term and related assumptions, the fair value of the warrant instruments was estimated for embedded conversion
options on each conversation date. This was done by comparing the fair value of shares issued upon conversion to the amount of
principal and interest converted.
On
September 28, 2018, subsequent to the board approval of the reverse split and resulting reclassification of the warrants from
liabilities to equity, the conversion of certain convertible notes triggered a further reduction in the exercise prices of any
warrants containing a ratchet feature that had not already ratcheted down to their floor. In accordance with US GAAP, the incremental
fair value of the warrants was measured, ignoring the down-round provision, using Black Scholes.
Note
18 – Discontinued Operations
On
July 12, 2017, the Company announced plans to spinoff its Advanced Molecular Services Group (“AMSG”) and in
the third quarter of 2017 the Company’s Board of Directors voted unanimously to spinoff the Company’s wholly-owned
subsidiary, Health Technology Solutions, Inc. (“HTS”), as independent publicly traded companies by way of tax-free
distributions to the Company’s stockholders. Completion of these spinoffs is now expected to occur in the fourth quarter
of 2018. The spinoffs are subject to numerous conditions, including effectiveness of Registration Statements on Form 10 to be
filed with the Securities and Exchange Commission, and consents, including under various funding agreements previously entered
into by the Company. A record date to determine those stockholders entitled to receive shares in the spinoffs should be approximately
30 to 60 days prior to the dates of the spinoffs. The strategic goal of the spinoffs is to create three public companies, each
of which can focus on its own strengths and operational plans. In addition, after the spinoffs, each company will provide a distinct
and targeted investment opportunity.
The
Company has reflected the amounts relating to AMSG and HTS as disposal groups classified as held for sale and included in discontinued
operations in the Company’s accompanying consolidated financial statements. Prior to being classified as held for sale,
AMSG had been included in the Decision Support and Informatics division, except for the Company’s subsidiary, Alethea Laboratories,
Inc., which had been included in the Clinical Laboratories division, and HTS had been included in the Company’s Supportive
Software Solutions division. The segment disclosures included in our results of operations no longer include amounts relating
to AMSG and HTS following the reclassification to discontinued operations except that the inter-company debt as of September 30,
2018 from HTS to the Company of $15,396,149 and from AMSG of $7,429,387 will remain with the separated entities. The Company hopes
to complete the spinoffs in a manner to permit it to recognize these amounts on its balance sheet as investments in the
divisions.
Carrying
amounts of major classes of assets and liabilities classified as held for sale and included as part of discontinued operations
in the condensed consolidated balance sheets consisted of the following:
AMSG
Assets and Liabilities:
|
|
September
30, 2018
|
|
|
December
31, 2017
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Cash
|
|
$
|
8,575
|
|
|
$
|
9,273
|
|
Accounts
receivable, net
|
|
|
1,837
|
|
|
|
19,022
|
|
Prepaid
expenses and other current assets
|
|
|
25,477
|
|
|
|
25,477
|
|
Current
assets classified as held for sale
|
|
$
|
35,889
|
|
|
$
|
53,772
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable (includes related parties)
|
|
$
|
492,898
|
|
|
$
|
671,561
|
|
Accrued
expenses
|
|
|
405,616
|
|
|
|
375,165
|
|
Current
portion of notes payable
|
|
|
281,728
|
|
|
|
249,589
|
|
Current
liabilities classified as held for sale
|
|
$
|
1,180,242
|
|
|
$
|
1,296,315
|
|
RENNOVA
HEALTH, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(unaudited)
HTS
Assets and Liabilities:
|
|
September
30, 2018
|
|
|
December
31, 2017
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Cash
|
|
$
|
1,424
|
|
|
$
|
8,281
|
|
Accounts
receivable, net
|
|
|
178,027
|
|
|
|
160,715
|
|
Prepaid
expenses and other current assets
|
|
|
10,300
|
|
|
|
3,964
|
|
Current
assets classified as held for sale
|
|
$
|
189,751
|
|
|
$
|
172,960
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
$
|
8,619
|
|
|
$
|
21,078
|
|
Deposits
|
|
|
6,029
|
|
|
|
7,756
|
|
Non-current
assets classified as held for sale
|
|
$
|
14,648
|
|
|
$
|
28,834
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable (includes related parties)
|
|
$
|
493,535
|
|
|
$
|
407,404
|
|
Accrued
expenses
|
|
|
455,645
|
|
|
|
269,135
|
|
Current
liabilities classified as held for sale
|
|
$
|
949,180
|
|
|
$
|
676,539
|
|
Consolidated
Discontinued Operations Assets and Liabilities:
Total Discontinued Assets and Liabilities:
|
|
September
30, 2018
|
|
|
December
31, 2017
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Cash
|
|
$
|
9,999
|
|
|
$
|
17,554
|
|
Accounts
receivable, net
|
|
|
179,864
|
|
|
|
179,737
|
|
Prepaid
expenses and other current assets
|
|
|
35,777
|
|
|
|
29,441
|
|
Current
assets classified as held for sale
|
|
$
|
225,640
|
|
|
$
|
226,732
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
$
|
8,619
|
|
|
$
|
21,078
|
|
Deposits
|
|
|
6,029
|
|
|
|
7,756
|
|
Non-current
assets classified as held for sale
|
|
$
|
14,648
|
|
|
$
|
28,834
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable (includes related parties)
|
|
$
|
986,433
|
|
|
$
|
1,078,965
|
|
Accrued
expenses
|
|
|
861,261
|
|
|
|
644,300
|
|
Current
portion of notes payable
|
|
|
281,728
|
|
|
|
249,589
|
|
Current
liabilities classified as held for sale
|
|
$
|
2,129,422
|
|
|
$
|
1,972,854
|
|
RENNOVA
HEALTH, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Major
line items constituting income (loss) from discontinued operations in the consolidated statements of operations for the three
and nine months ended September 30, 2018 and 2017 consisted of the following:
AMSG
Loss from Discontinued Operations:
|
|
Three
Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Revenue
from services
|
|
$
|
13,249
|
|
|
$
|
1,120
|
|
Cost
of services
|
|
|
15,559
|
|
|
|
8,513
|
|
Gross
profit
|
|
|
(2,310
|
)
|
|
|
(7,393
|
)
|
Operating
expenses
|
|
|
93,059
|
|
|
|
328,233
|
|
Other
(income) expenses
|
|
|
(5,748
|
)
|
|
|
34,523
|
|
Loss
from discontinued operations
|
|
$
|
(89,621
|
)
|
|
$
|
(370,149
|
)
|
HTS
Loss from Discontinued Operations:
|
|
Three
Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Revenue
from services
|
|
$
|
499,317
|
|
|
$
|
344,304
|
|
Cost
of services
|
|
|
30,082
|
|
|
|
47,347
|
|
Gross
profit
|
|
|
469,235
|
|
|
|
296,957
|
|
Operating
expenses
|
|
|
532,892
|
|
|
|
957,757
|
|
Other
(income) expenses
|
|
|
6,152
|
|
|
|
(22,992
|
)
|
Loss
from discontinued operations
|
|
$
|
(69,808
|
)
|
|
$
|
(637,808
|
)
|
AMSG
Income (loss) from Discontinued Operations:
|
|
Nine
Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Revenue
from services
|
|
$
|
92,090
|
|
|
$
|
224,224
|
|
Cost of services
|
|
|
37,773
|
|
|
|
9282
|
|
Gross
profit
|
|
|
54,317
|
|
|
|
214,942
|
|
Operating
expenses
|
|
|
363,944
|
|
|
|
1,225,639
|
|
Other
(income) expenses
|
|
|
(819,258
|
)
|
|
|
42,767
|
|
Income
(loss) from discontinued operations
|
|
$
|
509,631
|
|
|
$
|
(1,053,464
|
)
|
RENNOVA
HEALTH, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(unaudited)
HTS
Loss from Discontinued Operations:
|
|
Nine
Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Revenue
from services
|
|
$
|
1,291,288
|
|
|
$
|
1,112,653
|
|
Cost
of services
|
|
|
95,965
|
|
|
|
122,728
|
|
Gross
profit
|
|
|
1,195,323
|
|
|
|
989,925
|
|
Operating
expenses
|
|
|
1,577,046
|
|
|
|
2,711,619
|
|
Other
(income) expenses
|
|
|
12,121
|
|
|
|
(22,992
|
)
|
Loss
from discontinued operations
|
|
$
|
(393,844
|
)
|
|
$
|
(1,698,702
|
)
|
Consolidated
Loss from Discontinued Operations:
|
|
Three
Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Revenue
from services
|
|
$
|
512,566
|
|
|
$
|
345,424
|
|
Cost
of services
|
|
|
45,641
|
|
|
|
55,860
|
|
Gross
profit
|
|
|
466,925
|
|
|
|
289,564
|
|
Operating
expenses
|
|
|
625,950
|
|
|
|
1,285,990
|
|
Other
(income) expenses
|
|
|
404
|
|
|
|
11,532
|
|
Loss
from discontinued operations
|
|
$
|
(159,430
|
)
|
|
$
|
(1,007,957
|
)
|
Consolidated
Income (loss) from Discontinued Operations:
|
|
Nine
Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Revenue
from services
|
|
$
|
1,383,378
|
|
|
$
|
1,336,877
|
|
Cost
of services
|
|
|
133,738
|
|
|
|
132,010
|
|
Gross
profit
|
|
|
1,249,640
|
|
|
|
1,204,867
|
|
Operating
expenses
|
|
|
1,940,990
|
|
|
|
3,937,258
|
|
Other
(income) expenses
|
|
|
(807,137
|
)
|
|
|
19,776
|
|
Income
(loss) from discontinued operations
|
|
$
|
115,787
|
|
|
$
|
(2,752,166
|
)
|
Note
19 – Recent Accounting Pronouncements
Accounting
Pronouncements Adopted
In
July 2017, the FASB issued ASU 2017-11 “
Earnings Per Share (Topic 260) Distinguishing Liabilities from Equity (Topic
480) Derivatives and Hedging (Topic 815).”
The amendments in Part I of this Update change the classification analysis
of certain equity-linked financial instruments (or embedded features) with down round features. For public business entities,
the amendments in Part I of this Update are effective for fiscal years, and interim periods within those fiscal years, beginning
after December 15, 2018. Early adoption is permitted for all entities, including adoption in an interim period. If an entity early
adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes
that interim period. The Company had determined that this amendment had a material impact on its consolidated financial statements
and has early adopted this accounting standard update. The provisions of this Update and its impact on the Company’s financial
statements are discussed in Note 1.
RENNOVA
HEALTH, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Effective
January 1, 2018, the Company adopted ASU No. 2014-09,
“Revenue from Contracts with Customers (Topic 606)”
as
more fully discussed in Note 1.
Accounting
Pronouncements Not Yet Adopted
In
February 2016, the FASB issued ASU 2016-02
, Leases (Topic 842)
as updated. This new standard introduces a new lease model
that requires the recognition of lease assets and lease liabilities on the balance sheet and the disclosure of key information
about leasing arrangements. While this new standard retains most of the principles of the existing lessor model under U.S. GAAP,
it aligns many of those principles with
ASC 606: Revenue from Contracts with Customers
. The new guidance will be effective
for us beginning after December 31, 2018. Early adoption will be permitted for all entities. The Company has not yet determined
the impact of the adoption of this guidance on its consolidated financial statements.
In
February 2018, the FASB issued ASU 2018-02,
Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification
of Certain Tax Effects from Accumulated Other Comprehensive Income.
This standard provides companies with an option to reclassify
stranded tax effects resulting from enactment of the Tax Cuts and Jobs Act (“TCJA”) from accumulated other comprehensive
income to retained earnings. This ASU will be effective for us for annual and interim periods beginning on December 15, 2018.
Early adoption of this standard is permitted and may be applied either in the period of adoption or retrospectively to each period
in which the effect of the change in the tax rate as a result of TCJA is recognized. The Company does not expect the adoption
of this ASU to have a material impact on its results of operations, financial position and cash flows.
In
February 2018, the FASB issued ASU 2018-03;
Technical Corrections and Improvements to Financial Instruments—Overall (Subtopic
825-10): Recognition and Measurement of Financial Assets and Financial Liabilities
. The technical corrections and improvements
intended to clarify certain aspects of the guidance on recognizing and measuring financial assets and liabilities in ASU 2016-01.
This includes equity securities without a readily determinable fair value, forward contracts and purchased options, presentation
requirements for certain fair value option liabilities, fair value option liabilities denominated in foreign currency and transition
guidance for equity securities without a readily determinable fair value. The Company is required to adopt these standards starting
in the first quarter of fiscal year 2019 and does not anticipate that implementation will have a material impact on its consolidated
financial statements.
In
March 2018, the FASB issued ASU 2018-05;
“Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC
Staff Accounting Bulletin No. 118 (SEC Update)”, which amended ASC 740 to incorporate the requirements of Staff Accounting
Bulletin (“SAB”) 118
. Issued in December 2017 by the SEC, SAB 118 addresses the application of U.S. GAAP in situations
in which a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable
detail to complete the accounting for certain income tax effects of the TCJA which was signed into law on December 22, 2017. The
Company does not expect this to have a material impact on its consolidated financial statements.
In
June 2018, the FASB issued ASU 2018-07 to expand the scope of
ASC Topic 718, Compensation - Stock Compensation
, to include
share-based payment transactions for acquiring goods and services from nonemployees. The pronouncement is effective for fiscal
years, and for interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. The
Company has not yet determined the effect of this pronouncement on its consolidated financial statements.
Other
recent accounting standards issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified
Public Accountants, and the SEC did not or are not believed by management to have a material impact on the Company’s present
or future consolidated financial statements.
RENNOVA
HEALTH, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note
20 – Subsequent Events
Common
Stock
As
of November 9, 2018, the Company has outstanding 15.2 million shares of its common stock. Since September 30, 2018,
the Company has issued 7,925,985 shares of common stock through November 9, 2018 as follows:
|
●
|
482.21
shares of its Series I-2 Preferred Stock were converted into 7,365,985 shares of common
stock;
|
|
|
|
|
●
|
200,000
shares of common stock were issued upon conversion of $25,500 of the principal amount of the March 2017 Debentures; and
|
|
|
|
|
●
|
360,000
shares of common stock were issued for the cashless exercise of 2,400,000 March 2017 Series B warrants.
|
On
November 5, 2018, the Board of Directors of the Company approved an amendment to the Company’s Certificate of Incorporation,
to effect a 1-for-500 reverse stock split of the Company’s shares of common stock. As a result of the reverse stock split,
every 500 shares of the Company’s pre-reverse split common stock were combined and reclassified into one share of
the Company’s common stock. Proportionate voting rights and other rights of common stockholders will not be affected by
the reverse stock split, other than as a result of the cash payment for any fractional shares that would have otherwise been issued.
Stockholders who would otherwise hold a fractional share of common stock will receive a cash payment in respect of such fraction
of a share of common stock. No fractional shares will be issued in connection with the reverse stock split.
After
the reverse stock split, effective at 5:00 p.m., Eastern Time, on November 12, 2018, the Company’s common stock trades
on a post-split basis. The par value and other terms of the common stock was not be affected by the reverse stock split. The
authorized capital of the Company of 10,000,000,000 shares of common stock and 5,000,000 shares of preferred stock, also will
not be affected by the reverse split.
All
outstanding preferred shares, stock options, warrants, and equity incentive plans immediately prior to the reverse stock split
will generally be appropriately adjusted by dividing the number of shares of common stock into which the preferred shares, stock
options, warrants and equity incentive plans of the common stock are exercisable or convertible by 500 and multiplying the exercise
or conversion price by 500, as a result of the reverse stock split.
The
Company’s transfer agent, Computershare Inc., is acting as exchange agent for the reverse stock split and will send instructions
to stockholders of record regarding the exchange of certificates for common stock.
The following table presents the dilutive
effect of our various potential common shares as of November 9, 2018:
|
|
November
9, 2018
|
|
Common shares outstanding
|
|
|
15,291,866
|
|
Dilutive potential shares:
|
|
|
|
|
Stock options
|
|
|
77
|
|
Warrants
|
|
|
1,318,592,863
|
|
Convertible debt
|
|
|
269,272,606
|
|
Convertible preferred stock
|
|
|
194,943,417
|
|
Total dilutive potential common
shares, including outstanding common stock
|
|
|
1,798,100,829
|
|
As of November 9, 2018, the Company had
sufficient authorized shares of its common stock to cover all potentially dilutive common shares outstanding.