On November 3, 2015, the common stock of Rennova
Health, Inc. commenced trading on The NASDAQ Capital Market under the symbol “RNVA.” Prior to that date, our
common stock was listed on The NASDAQ Capital Market under the symbol “CLRX.”
On April 18, 2017, the Company was notified
by NASDAQ that the stockholders’ equity balance reported on the Company’s 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”). In accordance with the Rule, the Company submitted a plan to NASDAQ outlining
how it intended to regain compliance. On August 17, 2017, NASDAQ notified the Company that its plan to correct the stockholders’
equity deficiency did not contain sufficient evidence to support a correction being achieved in the required time frame. The Company
appealed this decision to a Hearing Panel which, on October 23, 2017, maintained this position and denied the Company a continued
listing. Effective October 25, 2017, the Company’s common stock (RNVA) and warrants to purchase common stock (RNVAW) were
no longer listed on The NASDAQ Capital Market but began trading on the OTCQB instead.
As reflected in the consolidated financial
statements, the Company had a working capital deficit and an accumulated deficit of $39.3 million and $39.2 million,
respectively, at December 31, 2018. In addition, the Company had a loss from continuing operations of approximately $13.6
million and cash used in operating activities of $7.3 million for the year ended December 31, 2018. The Company recorded
income from the change in fair value of derivative instruments in the amount of approximately $13.7 million in 2018 compared
to a loss from the value of convertible liabilities of $12.4 million in 2017. We also realized a gain on bargain purchase associated
with the acquisition of Jamestown Regional Medical Center in June 2018 in the amount of $7.6 million, which is more fully discussed
in Note 6. The continued losses and other related factors raise substantial doubt about the Company’s ability to continue
as a going concern for twelve months from the filing date of this report.
The Company’s consolidated financial
statements are prepared assuming the Company can continue as a going concern, which contemplates continuity of operations through
realization of assets, and the settling of liabilities in the normal course of business. Initial cost savings were realized by
reducing the number of laboratory facilities to one for most of its toxicology diagnostics, thereby reducing the number of employees
and associated operating expenses. The Company plans to spin off its Advanced Molecular Services Group (“AMSG”)
and Health Technology Solutions, Inc. (“HTS”), as independent publicly traded companies by way of tax-free distributions
to its shareholders. Completion of these spin offs is now expected to occur during the first quarter of 2020. The
spin offs are subject to numerous conditions, including effectiveness of Registration Statements on Form 10 to be filed
with the Securities and Exchange Commission and consents, including under various funding agreements previously entered by the
Company. The intent of the spin offs of AMSG and HTS is to create three public companies, each of which can focus on its
own strengths and operational plans. In accordance with ASC 205-20 and having met the criteria for “held for sale”,
the Company has reflected amounts relating to AMSG and HTS as disposal groups classified as held for sale and included as part
of discontinued operations. AMSG and HTS are no longer included in the segment reporting following the reclassification to discontinued
operations. The discontinued operations of AMSG and HTS are described further in Note 18.
The Company’s core business is now
rural hospitals which is a specialized marketplace with a requirement for capable and knowledgeable management. The Company’s
current financial condition may make it difficult to attract and maintain adequate expertise in its management team to successfully
operate the Company’s hospitals.
The Emergency Medical Treatment and Labor
Act (“EMTALA”) requires any hospital participating in the Medicare program to conduct an appropriate medical screening
examination of every person who presents to the hospital’s emergency room for treatment and, if the individual is suffering
from an emergency medical condition, to either stabilize the condition or make an appropriate transfer of the individual to a
facility able to handle the condition. The obligation to screen and stabilize emergency medical conditions exists regardless of
an individual’s ability to pay for treatment. Federal and state laws and regulations require, and our commitment to providing
quality patient care encourages, us to provide services to patients who are financially unable to pay for the health care services
they receive. The federal poverty level is established by the federal government and is based on income and family size. The
Company considers the poverty level in determining whether patients qualify for free or reduced cost of care. Because we do
not pursue collection of amounts determined to qualify as charity care, they are not reported in revenues. We provide discounts
to uninsured patients who do not qualify for Medicaid or charity care. In implementing the uninsured discount policy, we may first
attempt to provide assistance to uninsured patients to help determine whether they may qualify for Medicaid, other federal or
state assistance, or charity care. If an uninsured patient does not qualify for these programs, the uninsured discount is applied.
The collection of outstanding receivables
for Medicare, Medicaid, managed care payers, other third-party payers and patients is our primary source of cash and is critical
to our operating performance. The primary collection risks relate to uninsured patient accounts, including patient accounts for
which the primary insurance carrier has paid the amounts covered by the applicable agreement, but patient responsibility amounts
(deductibles and copayments) remain outstanding. Implicit price concessions relate primarily to amounts due directly from patients.
Estimated implicit price concessions are recorded for all uninsured accounts, regardless of the aging of those accounts. Accounts
are written off when all reasonable internal and external collection efforts have been performed. The estimates for implicit price
concessions are based upon management’s assessment of historical write offs and expected net collections, business and economic
conditions, trends in federal, state and private employer health care coverage and other collection indicators. Management relies
on the results of detailed reviews of historical write-off’s and collections at facilities that represent a majority of
our revenues and accounts receivable (the “hindsight analysis”) as a primary source of information in estimating the
collectability of our accounts receivable. We perform the hindsight analysis quarterly, utilizing rolling twelve-months accounts
receivable collection and write off data. We believe our quarterly updates to the estimated contractual allowance amounts
at each of our hospital facilities provide reasonable estimates of our revenues and valuations of our accounts receivable. At
December 31, 2018 and 2017, estimated contractual allowances of $63 million and $7.0 million, respectively,
had been recorded as reductions to our accounts receivable balances to enable us to record our revenues and accounts receivable
at the estimated amounts we expect to collect.
To quantify the total impact of the trends
related to uninsured accounts, we believe it is beneficial to view total uncompensated care, which is comprised of charity care,
uninsured discounts and implicit price concessions. Total uncompensated care as a percentage of gross revenues was 11%
and 18% for the years ended December 31, 2018 and 2017, respectively.
On June 1, 2018, the Company acquired a business
engaging in acute hospital care located in Jamestown, Tennessee under an asset purchase agreement. The acquisition also included
a separate physician practice which now operates under the Company as Mountain View Physician Practice, Inc. This acquisition
was made as part of the Company’s business plan to acquire and operate clusters of rural hospitals.
The fair value of the assets acquired, net
of the liabilities assumed, was approximately $8.2 million. The excess of the aggregate fair value of the net tangible assets
acquired over the purchase price was estimated to be $7.6 million and has been treated as a gain on bargain purchase in accordance
with ASC 805. We attribute the gain primarily to the value of the land and building acquired. The purchase price allocation
was based, in part, on our management’s knowledge of HMA Fentress County General Hospital and Jamestown HMA Physician
Management, LLC.
As noted in the table above, we fully impaired the non-compete intangible asset acquired in the acquisition of Jamestown Regional Medical Center
at December 31, 2018. We determined that this asset was impaired primarily due to the operating results of Jamestown Regional
Medical Center since the acquisition on June 1, 2018, which were as follows:
Notes
Payable – Third Parties
|
|
December
31, 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
|
|
|
1,741,893
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,083,505
|
|
|
|
6,957,830
|
|
Less current
portion
|
|
|
(7,083,505
|
)
|
|
|
(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 $0 as of December 31, 2017. In exchange for the consideration
received, the counterparty received the right to: (i) a 20% per annum investment return from the Company on the consideration,
with a minimum repayment term of six months and minimum return of $0.5 million, (ii) all payments recovered from the accounts
receivable up to $5.25 million, if paid in full within six months, or $5.5 million, if not paid in full within six months, and
(iii) 20% of all payments of the accounts receivable in excess of amounts received in (i) and (ii). On March 31, 2017, to the
extent that the counterparty had not been paid $6.0 million, the Company was required to pay the difference. Christopher Diamantes,
a director of the Company, guaranteed the Company’s obligation. On March 24, 2017, the Company, the counterparty and Mr.
Diamantis, as guarantor, entered into an amendment (the “Amendment”) to extend the Company’s obligation to March
31, 2018. Also, what the counterparty was to receive was amended to equal (a) the $5,000,000 purchase price plus a 20% per annum
investment return thereon, plus (b) $500,000, plus (c) the product of (i) the proceeds received from the accounts receivable,
minus the amount set forth in clauses (a) and (b), multiplied by (ii) 40%. In connection with the extension, the counterparty
received a fee of $1,000,000. On April 2, 2018, the Company, the counterparty and Mr. Diamantis, as guarantor, entered into a
second amendment to extend further the Company’s obligation to May 30, 2018. In connection with this further extension,
the counterparty received a fee of $100,000. The counterparty instituted an arbitration proceeding under the agreement with regard
to the outstanding balance. In December 2018, the Company, Mr. Diamantis and the counterparty entered into a preliminary
settlement agreement in connection with the arbitration, with the terms of the settlement agreement revised on March 31,
2019. The Company and Mr. Diamantis agreed to pay the counterparty $2,000,000 on or before April 5, 2019 and an additional
$7,694,685 plus interest at 10% per annum on or before May 20, 2019, which date was subsequently amended. On April 5, 2019 and
May 31, 2019, Mr. Diamantis made payments totaling $5.0 million on behalf of the Company. The final payment of $4,937,105 was
due on or before July 28, 2019. Mr. Diamantis made that payment on behalf of the Company on July 26, 2019. The Company and Mr.
Diamantis have now complied with all of their obligations under the settlement agreement. As a result, the Company is obligated
to repay Mr. Diamantis a total of $9,937,105. In addition to the $5,000,000 reflected in the table above, $4,937,105 is included
on the Balance Sheets in Accrued Expenses at December 31, 2018. Additional amounts owed to Mr. Diamantis are discussed below and
in Note 21.
The
Company did not make the required monthly principal and interest payments due under the TCA Debenture for the period from October
2016 through March 2017. On February 2, 2017, the Company made a payment to TCA in the amount of $0.4 million, which was applied
to accrued and unpaid interest and fees, including default interest, as of the date of payment. On March 21, 2017, the Company
made a payment to TCA in the amount of $0.75 million, of which approximately $0.1 million was applied to accrued and unpaid interest
and fees in accordance with the terms of the TCA Debenture. Also on March 21, 2017, the Company entered into a letter agreement
with TCA, which (i) waived any payment defaults through March 21, 2017; (ii) provided for the $0.75 million payment discussed
above; (iii) set forth a revised repayment schedule whereby the remaining principal plus interest aggregating to approximately
$2.6 million was to be repaid in various monthly installments from April of 2017 through September of 2017; and (iv) provided
for payment of an additional service fee in the amount of $150,000, which was due on June 27, 2017, the day after the effective
date of the registration statement filed by the Company; which amount is reflected in accrued expenses at December 31, 2018. In
addition, TCA entered into an inter-creditor agreement with the purchasers of the convertible debentures (see Note 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 December 31, 2018, was increased to $1.7 million from $1.4 million, which resulted from accrued interest.
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 16). 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
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
|
|
|
|
|
|
|
Loan payable to Alcimede
LLC, bearing interest at 6% per annum, with all principal and interest due August 2, 2018
|
|
$
|
-
|
|
|
$
|
168,500
|
|
|
|
|
|
|
|
|
|
|
Loan payable
to Christopher Diamantis
|
|
|
800,000
|
|
|
|
960,000
|
|
|
|
|
|
|
|
|
|
|
Total notes payable, related parties
|
|
|
800,000
|
|
|
|
1,128,500
|
|
|
|
|
|
|
|
|
|
|
Less current portion of notes payable,
related parties
|
|
|
(800,000
|
)
|
|
|
(1,128,500
|
)
|
Total notes payable,
related parties long-term
|
|
$
|
-
|
|
|
$
|
-
|
|
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 in full settlement of this loan as more fully discussed in Note 14.
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 Oneida Assets and for general corporate purposes.
On March 7, 2017, the Company issued a promissory note to Mr. Diamantis 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”).
The Company repaid $3.8 million of the 2017 Diamantis Note on March 21, 2017 with the proceeds received from the issuance of the
Convertible Debentures (sees Note 9).
During
the year ended December 31, 2018, the Company borrowed $3.3 million from Christopher Diamantis and incurred interest of
$0.3 million and repaid $4.0 million, including interest of $0.2 million. The loan payable balance, which bears
interest at a rate of 10% on all amounts funded, was $0.8 million on December 31, 2018 and accrued interest was
$0.2 million. See Note 21 for a discussion of amounts borrowed from Mr. Diamantis subsequent to December 31, 2018.
Note
9 – Debentures
The
carrying amount of all outstanding debentures as of December 31, 2018 and 2017 was as follows:
|
|
December
31,
|
|
|
|
2018
|
|
|
2017
|
|
Debentures
|
|
$
|
19,034,800
|
|
|
$
|
17,720,082
|
|
Discount on debentures
|
|
|
(6,247,469
|
)
|
|
|
(12,127,634
|
)
|
Deferred financing
fees
|
|
|
(11,015
|
)
|
|
|
(224,733
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
12,776,316
|
|
|
|
5,367,715
|
|
Less current
portion
|
|
|
(12,776,316
|
)
|
|
|
(1,615,693
|
)
|
Debentures,
long term
|
|
$
|
-
|
|
|
$
|
3,752,022
|
|
Payment
on all outstanding debentures in the amount of $19,034,800 as of December 31, 2018 is due in 2019.
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 originally 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 8 and $0.75 million of the net proceeds to make the partial repayment on the TCA Debenture. The remainder of the net proceeds
was 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. As of December 31, 2018, approximately $2.0 million
of the March Debentures were outstanding and were not paid as of March 21, 2019, the maturity date, as more fully discussed
in Note 21.
In
connection with the March Debentures the Company issued warrants to purchase shares of the Company’s common stock to several
accredited investors. At December 31, 2018, these warrants were exercisable into an aggregate of approximately 47.3 billion shares
of common stock. The warrants were issued to the investors in three tranches, Series A Warrants, Series B Warrants and Series
C Warrants (collectively, the “March Warrants”). At December 31, 2018, the Series A Warrants are exercisable for 17.9
billion shares of the Company’s common stock. They are immediately exercisable and have a term of exercise equal to five
years. At December 31, 2018, the Series B Warrants are exercisable for 11.3 billion shares of the Company’s common stock
and were initially exercisable for a period of 18 months. During 2018, the Company extended the exercise period twice, once to
March 21, 2019 and the second time to June 21, 2019 and recorded an additional discount on the Series B Warrants of approximately
$8.6 million as a result of the extensions, $6.4 million of which is included in interest expense in 2018. Subsequent to December
31, 2018, on March 27, 2019, the expiration date of the Series B Warrants was extended 90 days to September 21, 2019 and again
on May 10, 2019 to March, 31, 2022. At December 31, 2018, the Series C Warrants are exercisable for 18.2 billion shares of the
Company’s common stock and have a term of five years provided such warrants shall only vest if, when and to the extent that
the holders exercise the Series B Warrants. At December 31, 2018, the Series A, Series B and Series C Warrants each have an exercise
price of $.00102 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.
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 $.00102 per share as of December 31, 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 December 31, 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. The aggregate principal amount of the March Debentures, which were non-interest bearing, was $16 million.
Between March 22, 2017 and December 31, 2018, holders of the March Debentures converted an aggregate of $14.0 million of principal
into 4,258,172 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
2017. See Note 2 for the adoption of ASU 2017-11 for the retrospective adjustments made to the Company’s consolidated financial
statements with respect to the derivative liabilities associated with these debentures and warrants. For the years ended December
31, 2018 and 2017, reductions in the exercise prices of the March Warrants have given rise to deemed dividends as more fully discussed
in Notes 2, 3 and 11.
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 $2,812.50 per
common share (subject to adjustment). The July Warrants will terminate five years after they become exercisable.
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
69,355 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 $390.00 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. The September Debentures were not paid on September 19, 2019, the maturity date, as more fully
discussed in Note 21.
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”)
(See Note 13.). 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
December 31, 2018, the Series A Warrants are exercisable for an aggregate of 23,118 shares of the Company’s common stock.
They are immediately exercisable and have a term of exercise equal to five years. At December 31, 2018, the Series B Warrants
are exercisable for an aggregate of 23,119 shares of the Company’s common stock and were initially exercisable for a period
of 18 months commencing immediately. During 2018, the exercise period of the Series B Warrants was extended to June 19, 2019,
which resulted in a de minimus additional discount. Subsequent to December 31, 2018, on March 27, 2019, the expiration date of
these Series B Warrants was extended 90 days to September 21, 2019 and again on May 10, 2019 the expiration date was extended
to March, 31, 2022. At December 31, 2018, the Series C Warrants are exercisable for an aggregate of 23,118 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 exercise price is subject to a floor of $390.00 per share. At December
31, 2018, the September Warrants exercise price was $390.00 per share. The September Warrants contain down round provisions, subject
to a floor of $390.00 per share. 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 $5.5
million in the offerings net of the original issue discount of $1,310,000. On July 16, 2018, August 2, 2018, September 6, 2018
and November 8, 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 $4.3 million aggregate principal
amount of Senior Secured Original Issue Discount Convertible Debentures due September 19, 2019 and received proceeds of $3.5 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. These debentures were not paid on September 19, 2019, the maturity date, as more fully discussed in Note 21.
During
the years ended December 31, 2018 and 2017, the Company realized a total of $24.7 million in proceeds from the issuances of the
debentures and warrants. At December 31, 2018, the unamortized discounts were $6.2 million. These discounts represent original
issue discounts, the relative fair value of the warrants issued with the debentures, including the modifications thereof, and
the relative fair value of the beneficial conversion features of the debentures. During the years ended December 31, 2018 and
2017, the Company recorded approximately $17.6 million and approximately $19.0 million, respectively, of non-cash interest and
amortization of debt discount expense primarily in connection with the debentures and warrants.
See
Note 14 for summarized information related to warrants issued and the activity during the years ended December 31, 2018 and 2017.
See
Notes 3 and 11 for a discussion of the dilutive effect of the outstanding debentures and warrants as of December 31, 2018.
Note
10 – Related Party Transactions
In
addition to the transactions discussed in Notes 8, 9 and 14, the Company had the following related party transactions during the
years ended December 31, 2018 and 2017:
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 December 31,
2018. Michael Goldberg, a director of the Company up until his resignation effective April 24, 2017, is the Managing Director
of Monarch.
Alcimede billed $0.4 million and $0.4 million
for the years ended December 31, 2018 and 2017, respectively, pursuant to a consulting agreement originally entered into
in 2012. It is subject to annual renewals. Seamus Lagan, the Company’s President and Chief Executive Officer, is
the sole manager of Alcimede (see Notes 8 and 14).
The
terms of the foregoing transactions, including those discussed in Notes 8, 9, and 14, are not necessarily indicative of those
that would have been agreed to with unrelated parties for similar transactions.
Note
11 – 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.
|
|
|
|
|
●
|
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 December 31, 2018 and 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, 2018 and 2017:
|
|
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 December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Embedded
conversion options
|
|
|
-
|
|
|
|
-
|
|
|
|
350,260
|
|
|
|
350,260
|
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
350,260
|
|
|
$
|
350,260
|
|
The Company reclassified the derivative
liability previously reported at December 31, 2017 as long term to current liability. In September 2018, the Company’s board
of directors approved two reverse stock splits of the Company’s common stock, one of which was effected on November 12,
2018 (the second was not effected) and which provided sufficient authorized and unissued shares to allow for otherwise equity
classified instruments to be classified in equity. As a result, the fair value of these instruments was evaluated for reclassification.
As a result of the evaluation, during 2018, the Company reclassified the derivative liabilities previously reported as a current
liability to derivative income.
On October 4, 2019, the Board
of Directors authorized the issuance and sale of certain shares of Series K Convertible Preferred Stock to Alcimede LLC
pursuant to the terms of an Exchange Agreement. The Board considered all options to secure additional financing required
to continue operations and determined this authorization to be necessary to secure needed financing in the required time
frame. As a result of this authorization, as of the date of filing this report, the Company believes that it has
the ability to have sufficient authorized shares of its common stock to cover all potentially dilutive common
shares outstanding.
For embedded conversion options, the Company
determined the fair value as of December 31, 2018 by comparing the discounted conversion price per share (85% of market price,
subject to a floor in certain cases) multiplied by the number of shares issuable at the balance sheet date to the actual price
per share of the Company’s common stock multiplied by the number of shares issuable at that date with the difference in
value recorded as a liability.
During 2018, the Company extended the exercise period of the Series B
Warrants twice, once to March 21, 2019 and the second time to June 21, 2019 and recorded an additional discount on the Series
B Warrants of approximately $8.6 million as a result of the extensions, $6.4 million of which is included in interest
expense in 2018. The Company used the Black Scholes model to calculate the fair value of the warrants as of the modification
dates. Using the pre-modification term and related assumptions of risk free rates ranging from 1.91-2.32%, volatility ranging
from 184.0-296.3% and weighted average remaining life of .33 years, and the post-modification term and related assumptions of
risk free rates ranging from 2.09-2.56%, volatility ranging from 208.2-249.1% and weighted average remaining life of .65
years, the change in the fair value of the warrant instruments as a result of the modifications was estimated on each
date.
The
following table reconciles the changes in the liabilities categorized within Level 3 of the fair value hierarchy for the year
ended December 31, 2018:
Balance at December 31, 2017
|
|
$
|
12,435,250
|
|
Gain on change in
fair value of debentures and warrants*
|
|
|
(15,167,335
|
)
|
Fair value of warrants exercised
|
|
|
(4,619,150
|
)
|
Fair value of debentures converted
|
|
|
(1,408,901
|
)
|
Fair value of debentures
exchanged for Series I-2 Preferred Stock
|
|
|
(1,420
|
)
|
Modification of warrants
|
|
|
8,603,069
|
|
Convertible
debt
|
|
|
508,747
|
|
Balance at December 31, 2018
|
|
$
|
350,260
|
|
*In
addition to the gain on change in fair value of debentures and warrants of $15.2 million during the year ended December 31, 2018,
the Company recorded a loss on the exchange of convertible debentures into shares of its Series I-2 Preferred Stock of approximately
$1.5 million, as more fully discussed in Note 13.
During 2018, subsequent to the board approval
of the reverse splits and the resulting reclassification of the warrants from liabilities to equity and in some cases subsequent
to the November 12, 2018 reverse stock split, the conversion of certain convertible notes and preferred stock and or the
exercise of warrants triggered a further reduction in the exercise prices of any debentures and warrants containing ratchet features
that had not already ratcheted down to their floor. In accordance with US GAAP, the incremental fair value of the debentures and
warrants was measured, ignoring the down-round provision, using Black Scholes. The incremental value of $231.8 million and $53.3
million was recorded as a deemed dividend for the years ended December 31, 2018 and 2017, respectively. The following assumptions
were utilized in the valuation models to determine the incremental value and fair value changes: risk free rates ranging from
2.47-2.98%, volatility ranging from 167-257% and a weighted-average remaining life of 2.87 years. Deemed dividends are also discussed
in Notes 2 and 3.
For
the year ended December 31, 2018, total gain realized on instruments valued using Level 3 valuations was $15.2 million. For the
year ended December 31, 2017, total loss realized on instruments valued using Level 3 valuations was $12.4 million. In addition,
during the year ended December 31, 2018, the Company recorded a loss on the exchange of convertible debentures into shares of
its Series I-2 Preferred Stock of approximately $1.5 million.
Note
12 – Capital Lease Obligations
The
Company leases various assets under capital leases that consisted of the following:
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
|
|
|
|
|
|
|
Medical equipment
|
|
$
|
742,745
|
|
|
$
|
4,686,736
|
|
Less accumulated
depreciation
|
|
|
(723,318
|
)
|
|
|
(3,842,443
|
)
|
|
|
|
|
|
|
|
|
|
Net
|
|
$
|
19,427
|
|
|
$
|
844,293
|
|
Depreciation
expense on assets under capital leases was $0.5 million and $1.0 million for the years ended December 31, 2018 and 2017,
respectively.
As
of December 31, 2018, the Company is in default of the majority of its lease obligations, therefore the aggregate future minimum
rentals and accrued interest under capital leases in the amount of $0.8 million are deemed to be due immediately and payments
totaling $31,543 are due in 2020. The significant reduction in the leased assets at December 31, 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 two years. For the year ended December 31, 2018, the Company recorded a non-cash gain of $551,155
on the sale of leased equipment.
Note
13 – 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 14. The following is a summary of the issuances of
the Company’s Redeemable Preferred Stock.
Series
I-1 Convertible Preferred Stock
On
October 30, 2017, the Company closed an offering of $4,960,000 stated value of 4,960 shares of a newly-authorized Series I-1 Convertible
Preferred Stock (the “Series I-1 Preferred Stock”). Each share of Series I-1 Preferred Stock has a stated value of
$1,000. The offering was pursuant to the terms of the Securities Purchase Agreement, dated as of October 30, 2017 (the “Purchase
Agreement”), between the Company and certain existing institutional investors of the Company. The Company received proceeds
of $4.0 million from the offering. The Purchase Agreement gives the investors the right to participate in up to 50% of any offering
of common stock or common stock equivalents by the Company. In the event of any such offering, the investors may also exchange
all or some of their Series I-1 Preferred Stock for such new securities on an $0.80 stated value of Series I-1 Preferred Stock
for $1.00 of new subscription amount basis. Each share of Series I-1 Preferred Stock is convertible into shares of the Company’s
common stock at any time at the option of the holder at a conversion price equal to the lesser of (i) $1.00, subject to adjustment,
and (ii) 85% of the lesser of the volume weighted average market price of the common stock on the day prior to conversion or on
the day of conversion. The conversion price is subject to “full ratchet” and other customary anti-dilution protections
as more fully described in the Certificate of Designation of the Series I-1 Preferred Stock. Upon the occurrence of certain Triggering
Events, as defined in the Certificate of Designation of the Series I-1 Preferred Stock, the holder shall, in addition to any other
right it may have, have the right, at its option, to require the Company to either redeem the Series I-1 Preferred Stock in cash
or in certain circumstance in shares of common stock at the redemption prices set forth in the Certificate of Designation.
Series
I-2 Convertible Preferred Stock
On
October 30, 2017, the Company entered into Exchange Agreements with the holders of the September Debentures to provide that the
holders may, from time to time, exchange their September Debentures for shares of a newly-authorized Series I-2 Preferred Stock.
The exchange agreements permitted the holders of the September Debentures to exchange specified principal amounts of the September
Debentures on various closing dates starting on December 2, 2017, 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 exchanged 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, 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. The Company recorded a loss of approximately $1.5 million as a result of
these exchanges. In 2018, the holder converted 1,286.141 shares of Series I-2 Preferred Stock into 106,335,991 shares of the Company’s
common stock.
See
Notes 3 and 21 for a discussion of the dilutive effect of the Series I-1 Preferred Stock and the Series I-2 Preferred Stock as
of December 31, 2018 and September 10, 2019.
Note
14 – Stockholders’ Deficit
Authorized
Capital
The
Company has 10,000,000,000 authorized shares of Common Stock at $0.0001 par value and 5,000,000 authorized shares of Preferred
Stock at a par value of $0.01.
Preferred
Stock
The
Company has 5,000,000 shares, par value $0.01, of preferred stock authorized. As of December 31, 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 13), 215 shares of its Series G Preferred Stock, 10 shares of its Series
H Preferred Stock, 1,750,000 shares of its Series F Convertible Preferred Stock and 250,000 shares of its Series J Convertible
Preferred Stock.
The
Series G Preferred Stock has a stated value of $1,000 per share and is convertible into shares of the Company’s common
stock at a price equal to 85% of the volume weighted average price of the Company’s common stock at the time of conversion.
The
Series H Preferred Stock has a stated value of $1,000 per share and is convertible into shares of the Company’s common stock
at a conversion price of 85% of the volume weighted average price of the Company’s common stock at the time of conversion.
During the year ended December 31, 2017, 7,785 shares of Series H Preferred Stock were converted into 742 shares of common stock
in accordance with the terms of the Series H Preferred Stock. Also during the year ended December 31, 2017, 2,174 shares of Series
H Preferred Stock with a stated value of $2.2 million were exchanged for Exchange Debentures with an aggregate principal amount
of $2.7 million and warrants (see Note 9). On June 28, 2018, 50 shares of the Series H Preferred Stock were converted into 40,000
shares of the Company’s common stock.
In
connection with the acquisition of Genomas, Inc., on September 27, 2017, which is more fully discussed in Note 20, the Company
issued 1,750,000 shares of its Series F Convertible Preferred Stock valued at $174,097. Each share of the Series F Preferred Stock
is convertible into shares of our common stock (subject to adjustment as provided in the related certificate of designation of
preferences, rights and limitations) at any time after the first anniversary of the issuance date at the option of the holder
at a conversion price equal to the greater of $14,625 or the average closing price of the Company’s common stock for the
10 trading days immediately preceding the conversion. The maximum number of shares of common stock issuable upon the conversion
of the Series F Preferred Stock is 120. Any shares of Series F Preferred Stock outstanding on the fifth anniversary of the issuance
date will be mandatorily converted into common stock at the applicable conversion price on such date. At any time, from time to
time after the first anniversary of the issuance date, the Company has the right to redeem all or any portion of the outstanding
Series F Preferred Stock at a price per share equal to $1.95 plus any accrued but unpaid dividends. The Series F Preferred Stock
has voting rights. Each share of Series F Preferred Stock has one vote, and the holders of the Series F Preferred Stock shall
vote together with the holders of the Company’s common stock as a single class.
On
July 20, 2018, the Company filed a Certificate of Designation with the Secretary of State of the State of Delaware to authorize
the issuance of up to 250,000 shares of its Series J Convertible Preferred Stock (the “Series J Preferred Stock”).
On July 23, 2018, the Company entered into an Exchange Agreement (the “Agreement”) with Alcimede, of which Seamus
Lagan, our Chief Executive Officer, is the sole manager. Pursuant to the Agreement, the Company issued to Alcimede 250,000 shares
of the Series J Preferred Stock in exchange for the cancellation of the outstanding principal and interest owed by the Company
to Alcimede under the Note, dated February 5, 2015, and the cancellation of certain amounts owed by the Company to Alcimede under
a consulting agreement between the parties. The total amount of consideration paid by Alcimede to the Company equaled $250,000.
Each share of the Series J Preferred Stock has a stated value of $1.00. The conversion price is equal to the average closing price
of the Company’s common stock on the 10 trading days immediately prior to the conversion date. Each holder of the Series
J Preferred Stock is entitled to vote on all matters submitted to a vote of the holders of the Company’s common stock. 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. The Series J Preferred Stock is entitled to 8% per annum cumulative
dividends at the discretion of the Company’s board of directors. No dividends have been declared by the board as of December
31, 2018.
The
following table summarizes the activity in the Company’s various classes of Preferred Stock included in Stockholders’
Deficit for the years ended December 31, 2018 and 2017:
|
|
Series
G
|
|
|
Series
H
|
|
|
Series
F
|
|
|
Series
J
|
|
|
Total
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
Balance December 31, 2016
|
|
|
215
|
|
|
$
|
2
|
|
|
|
10,019
|
|
|
$
|
100
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
10,234
|
|
|
$
|
102
|
|
Conversion of Series
H Preferred Stock into common stock
|
|
|
-
|
|
|
|
-
|
|
|
|
(7,785
|
)
|
|
|
(78
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(7,785
|
)
|
|
|
(78
|
)
|
Issuance of Series F
Preferred Stock for business acquisition
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,750,000
|
|
|
|
17,500
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,750,000
|
|
|
|
17,500
|
|
Exchange
of Series H Preferred Stock for convertible debentures
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,174
|
)
|
|
|
(22
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,174
|
)
|
|
|
(22
|
)
|
Balance December
31, 2017
|
|
|
215
|
|
|
$
|
2
|
|
|
|
60
|
|
|
$
|
0
|
|
|
|
1,750,000
|
|
|
$
|
17,500
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
1,750,275
|
|
|
$
|
17,502
|
|
|
|
Series
G
|
|
|
Series
H
|
|
|
Series
F
|
|
|
Series
J
|
|
|
Total
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
Balance December 31, 2017
|
|
|
215
|
|
|
$
|
2
|
|
|
|
60
|
|
|
$
|
-
|
|
|
|
1,750,000
|
|
|
$
|
17,500
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
1,750,275
|
|
|
$
|
17,502
|
|
Conversion of Series
H Preferred Stock into common stock
|
|
|
-
|
|
|
|
-
|
|
|
|
(50
|
)
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(50
|
)
|
|
|
-
|
|
Issuance
of Series J Preferred Stock
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
250,000
|
|
|
|
2,500
|
|
|
|
250,000
|
|
|
|
2,500
|
|
Balance December
31, 2018
|
|
|
215
|
|
|
$
|
2
|
|
|
|
10
|
|
|
$
|
-
|
|
|
|
1,750,000
|
|
|
$
|
17,500
|
|
|
|
250,000
|
|
|
$
|
2,500
|
|
|
|
2,000,225
|
|
|
$
|
20,002
|
|
Common
Stock
On
May 9, 2018, the Company filed an amendment to its Certificate of Incorporation, as amended, to increase its authorized
common stock to 3,000,000,000 shares, and on September 18, 2018, the Company amended its Certificate of Incorporation, as amended,
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 128,567,273 and 39,502 shares of common stock issued and outstanding at December 31, 2018 and 2017, respectively.
During the year ended December 31, 2018, the Company:
|
●
|
issued
an aggregate of 4,221,601 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
17,788,579 shares of common stock upon exercise of 106,006,177 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
106,335,991 shares of common stock upon the conversion of 1286.141 shares of 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. The Company recorded $244,768 of compensation
expense related to this restricted stock in 2017. The value of the common stock issued was based on the fair value of the stock
at the time of issuance.
Activity
during the year ended December 31, 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.
|
|
|
|
|
●
|
The
Company recorded $189,209 of compensation expense related to the restricted stock issued in 2017.
|
Common
Stock and Common Stock Equivalents
The
Company has outstanding options, warrants, convertible preferred stock and convertible debentures. Exercise of the options and
warrants, and conversions of the convertible preferred stock and debentures could result in substantial dilution of our common
stock and a decline in its market price. In addition, the terms of certain of the warrants, convertible preferred stock and convertible
debentures issued by us provide for reductions in the per share exercise prices of the warrants and the per share conversion prices
of the debentures and preferred stock (if applicable and subject to a floor in certain cases), in the event that we issue common
stock or common stock equivalents (as that term is defined in the agreements) at an effective exercise/conversion price that is
less than the then exercise/conversion prices of the outstanding warrants, preferred stock or debentures, as the case
may be. These provisions, as well as the issuances of debentures and preferred stock with conversion prices that vary based
upon the price of our common stock on the date of conversion, have resulted in significant dilution of our common stock and have
given rise to reverse splits of our common stock.
On October 4, 2019, the Board of
Directors authorized the issuance and sale of certain shares of Series K Convertible Preferred Stock to Alcimede LLC pursuant
to the terms of an Exchange Agreement. The Board considered all options to secure additional financing required to
continue operations and determined this authorization to be necessary to secure needed financing in the required time frame.
As a result of this authorization, as of the date of filing this report, the Company believes that it has the ability to
have sufficient authorized shares of its common stock to cover all potentially dilutive common shares outstanding.
Stock
Options
The
Company maintained and sponsored the Tegal Corporation 2007 Incentive Award Equity Plan (the “2007 Equity Plan”).
Tegal Corporation is the prior name of the Company. The 2007 Equity Plan, as amended, provided for the issuance of stock options
and other equity awards to the Company’s officers, directors, employees and consultants. The 2007 Equity Plan terminated
pursuant to its terms in September 2017. The following table summarizes the stock option activity for the years ended December
31, 2018 and 2017:
|
|
Number
of options
|
|
|
Weighted-
average
exercise price
|
|
|
Weighted-
average
contractual
term
|
|
Outstanding at December 31, 2016
|
|
|
95
|
|
|
$
|
970,725
|
|
|
|
8.93
|
|
Granted
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Forfeit
|
|
|
(18
|
)
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2017
|
|
|
77
|
|
|
$
|
1,035,374
|
|
|
|
8.33
|
|
Granted
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Forfeit
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2018
|
|
|
77
|
|
|
$
|
1,036,374
|
|
|
|
7.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2018
|
|
|
68
|
|
|
$
|
1,152,616
|
|
|
|
|
|
The Company recognized stock option expense
of approximately $0.1 million and $0.2 million for the years ended December 31, 2018 and 2017, respectively. As of December 31,
2018, the weighted average remaining contractual life was 7.3 years for options outstanding and exercisable. The intrinsic value
of options exercisable at December 31, 2018 and 2017 was $0. As of December 31, 2018, the remaining compensation expense
of approximately $34,600 will be expensed over the remaining amortization period, which is approximately
one year. 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 information with respect to stock options outstanding and exercisable by employees and directors at
December 31, 2018:
Options
outstanding
|
|
|
Options
vested and exercisable
|
|
Exercise
price
|
|
|
Number
outstanding
|
|
|
Weighted
average remaining contractual life (years)
|
|
|
Weighted
average exercise
|
|
|
Aggregate
intrinsic value
|
|
|
Number
vested
|
|
|
Weighted
average exercise
|
|
|
Aggregate
intrinsic value
|
|
$
|
2,250,500
|
|
|
|
22
|
|
|
|
7.25
|
|
|
|
|
|
|
$
|
–
|
|
|
|
22
|
|
|
$
|
2,250,500
|
|
|
$
|
-
|
|
$
|
1,125,500
|
|
|
|
22
|
|
|
|
7.25
|
|
|
|
|
|
|
|
-
|
|
|
|
22
|
|
|
$
|
1,125,500
|
|
|
|
-
|
|
$
|
225,000
|
|
|
|
16
|
|
|
|
7.33
|
|
|
|
|
|
|
|
-
|
|
|
|
12
|
|
|
$
|
225,000
|
|
|
|
-
|
|
$
|
67,500
|
|
|
|
15
|
|
|
|
7.54
|
|
|
|
|
|
|
|
–
|
|
|
|
12
|
|
|
$
|
67,500
|
|
|
|
–
|
|
|
|
|
|
|
77
|
|
|
|
|
|
|
$
|
1,036,374
|
|
|
$
|
–
|
|
|
|
68
|
|
|
$
|
1,152,616
|
|
|
$
|
–
|
|
Warrants
The
Company, as part of various debt and equity financing transactions, has issued warrants to purchase shares of the Company’s
common stock.
During
the year ended December 31, 2018, the Company issued 53,234,923,889 warrants as a result of the anti-dilution provisions of outstanding
warrants that were issued in connection with the issuances of debentures as more fully discussed in Note 9. The terms of the debenture
warrants are more fully discussed in Note 9. The number of warrants issued, converted and outstanding as well as the exercise
prices of the warrants reflected in the table below have been adjusted to reflect the full ratchet and other dilutive and down
round provisions pursuant to the warrant agreements as of December 31, 2018. As a result of the full ratchet provisions of the
majority of the outstanding warrants (subject to a floor in some cases), subsequent decreases in the price of the Company’s
common stock and subsequent issuances of the Company’s common stock or common stock equivalents at prices below the current
exercise prices of the warrants have resulted in increases in the number of shares issuable pursuant to the
warrants and decreases in the exercise prices.
The
following summarizes the information related to warrant activity during the years ended December 31, 2018 and 2017:
|
|
Number
of warrants
|
|
|
Weighted
average exercise price
|
|
Balance at December 31, 2016
|
|
|
188
|
|
|
$
|
87,750.00
|
|
Increase in warrants during the period
as a result of down round provisions
|
|
|
4,353,957
|
|
|
$
|
18.8119
|
|
Warrants
exchanged during the period
|
|
|
(13
|
)
|
|
$
|
(93,525.00
|
)
|
March Warrants
exercised during the period
|
|
|
(1,326
|
)
|
|
$
|
482.3643
|
|
Balance at December 31, 2017
|
|
|
4,352,806
|
|
|
$
|
22.1782
|
|
Increase in warrants during the period
as a result of down round provisions
|
|
|
53,234,923,889
|
|
|
|
|
|
March Warrants expired during the period
|
|
|
(2,760,079
|
)
|
|
$
|
(0.1700
|
)
|
March Warrants
exercised during the period
|
|
|
(106,006,177
|
)
|
|
$
|
(0.0419
|
)
|
Balance at December 31, 2018
|
|
|
53,130,510,439
|
|
|
$
|
0.0017
|
|
See
above and Notes 3, 9 and 21 for a discussion of the dilutive effect of the outstanding warrants.
Note
15 – Income Taxes
The
provision for income taxes for the years ended December 31, 2018 and 2017 consists of the following:
|
|
2018
|
|
|
2017
|
|
Current
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
766,070
|
|
|
$
|
1,015,724
|
|
State
|
|
|
-
|
|
|
|
-
|
|
|
|
|
766,070
|
|
|
|
1,015,724
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
Federal
|
|
|
-
|
|
|
|
-
|
|
State
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
766,070
|
|
|
$
|
1,015,724
|
|
The
following reconciles the Federal statutory income tax rate to the Company’s effective tax rate for the years ended December
31, 2018 and 2017:
|
|
2018
|
|
|
2017
|
|
|
|
|
%
|
|
|
|
%
|
|
Federal statutory rate
|
|
|
21.00
|
|
|
|
34.00
|
|
Permanent and other items
|
|
|
(5.81
|
)
|
|
|
(0.06
|
)
|
Beneficial conversion feature
|
|
|
-
|
|
|
|
(20.05
|
)
|
Federal income taxes audit and other adjustments
|
|
|
93.55
|
|
|
|
-
|
|
Rate change
|
|
|
-
|
|
|
|
(10.40
|
)
|
Change in valuation allowance
|
|
|
(102.77
|
)
|
|
|
(1.49
|
)
|
|
|
|
5.97
|
|
|
|
2.00
|
|
Deferred
income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. In assessing the realizability of deferred tax assets, Management
evaluates whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those
temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future
taxable income and tax planning strategies in making this assessment. Based on Management’s evaluation, it is more likely
than not that the deferred tax asset will not be realized and as such a valuation allowance has been recorded as of December 31,
2018 and 2017.
Deferred
tax assets and liabilities are comprised of the following at December 31, 2018 and 2017:
|
|
2018
|
|
|
2017
|
|
Deferred income tax assets:
|
|
|
|
|
|
|
|
|
Amortization
|
|
$
|
914,520
|
|
|
$
|
978,688
|
|
Net operating loss carryforward
|
|
|
19,567,649
|
|
|
|
5,244,000
|
|
Goodwill and intangible assets
|
|
|
-
|
|
|
|
(112,742
|
)
|
Allowance for doubtful accounts
|
|
|
703,873
|
|
|
|
259,110
|
|
Charitable contributions
|
|
|
593
|
|
|
|
618
|
|
Stock options
|
|
|
936,641
|
|
|
|
700,745
|
|
Accrued liabilities
|
|
|
390,041
|
|
|
|
121,993
|
|
Business interest expense
|
|
|
989,408
|
|
|
|
-
|
|
Deferred state tax asset
|
|
|
1,139,059
|
|
|
|
595,531
|
|
|
|
|
24,641,784
|
|
|
|
7,787,943
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
(2,301,605
|
)
|
|
|
(406,310
|
)
|
|
|
|
-
|
|
|
|
(406,310
|
)
|
Deferred tax asset, net
|
|
|
22,340,179
|
|
|
|
7,381,633
|
|
|
|
|
|
|
|
|
|
|
Less: valuation allowance
|
|
|
(22,340,179
|
)
|
|
|
(7,381,633
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
On
December 22, 2017, the Tax Cuts and Jobs Act (the “TCJA”) was signed into law. The TCJA includes a number of provisions
impacting us, including the lowering of the U.S. corporate tax rate from 35% to 21%, effective January 1, 2018 and 100% bonus
depreciation for qualifying capital expenditures acquired and placed into service after September 27, 2017, among others.
Management
has reviewed the provisions regarding assessment of their valuation allowance on deferred tax assets and based on
that criteria determined that it should record a valuation allowance of $22.3 million and $7.4 million against
its deferred tax assets as of December 31, 2018 and 2017, respectively. The Company has federal net operating loss
carryforwards totaling approximately $93.4 million generated in 2018, 2017 and 2016. It also has various state net
operating loss carryforwards that begin to expire in 2031. In November of 2016, the IRS commenced an audit of the
Company’s 2015 Federal tax return, which was completed in 2018 (see Note 16).
The
Company recognizes the consolidated financial statement impact of a tax position only after determining that the relevant tax
authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than–not
threshold, the amount recognized in the consolidated financial statements is the largest benefit that has a greater than 50 percent
likelihood of being realized upon ultimate settlement with the relevant tax authority.
The
Company is subject to income taxes in the U.S. federal jurisdiction and the states of Florida, North Carolina, New Mexico, New
Jersey, California and Tennessee. The tax regulations within each jurisdiction are subject to interpretation of related tax laws
and regulations and require significant judgment to apply.
Note
16 – Commitments and Contingencies
Operating
Lease Commitments
The
Company leases office space and business equipment for its corporate office and subsidiaries under multiple year non-cancelable
operating leases that expire through 2021. The office lease agreements have certain escalation clauses and renewal options. As
of September 10, 2019, the Company is in default under certain of its office leases. Additionally, the Company has lease agreements
for computer equipment, office copiers and fax machines.
The
office space lease agreements include escalating rents over the lease term. The Company expenses rent on a straight-line basis
over the lease term which commences on the date the Company has the right to control the property. The cumulative expense recognized
on a straight-line basis in excess of the cumulative payments is included in Accrued Expenses in the accompanying Consolidated
Balance Sheets.
At
December 31, 2018, future minimum lease payments under these leases are as follows:
Year ending December 31,
|
|
|
|
2019
|
|
$
|
730,665
|
|
2020
|
|
|
31,543
|
|
|
|
|
|
|
Total minimum
future lease payments
|
|
$
|
762,208
|
|
Rent
expense for the years ended December 31, 2018 and 2017 was $0.6 million and $0.9 million, respectively.
Concentration
of Credit Risk
Credit
risk with respect to accounts receivable is generally diversified due to the large number of patients comprising the client base.
The Company does have significant receivable balances with government payers and various insurance carriers. Generally, the Company
does not require collateral or other security to support customer receivables. However, the Company continually monitors and evaluates
its client acceptance and collection procedures to minimize potential credit risks associated with its accounts receivable and
establishes an allowance for uncollectible accounts and as a consequence, believes that its accounts receivable credit risk exposure
beyond such allowance is not material to the financial statements.
A
number of proposals for legislation continue to be under discussion which could substantially reduce Medicare and Medicaid (CMS)
reimbursements to hospitals and clinical laboratories. Depending upon the nature of regulatory action, and the content of legislation,
the Company could experience a significant decrease in revenues from Medicare and Medicaid (CMS), which could have a material
adverse effect on the Company. The Company is unable to predict, however, the extent to which such actions will be taken.
The
Company maintains its cash balances in high credit quality financial institutions. The Company’s cash balances may, at times,
exceed the deposit insurance limits provided by the Federal Deposit Insurance Corp.
Legal
Matters
From
time to time, the Company may be involved in a variety of claims, lawsuits, investigations and proceedings related to contractual
disputes, employment matters, regulatory and compliance matters, intellectual property rights and other litigation arising in
the ordinary course of business. The Company operates in a highly regulated industry which may inherently lend itself to legal
matters. Management is aware that litigation has associated costs and that results of adverse litigation verdicts could have a
material effect on the Company’s financial position or results of operations. The Company’s policy is to expense
legal fees and expenses incurred in connection with the legal proceedings in the period in which the expense is incurred. Management,
in consultation with legal counsel, has addressed known assertions and predicted unasserted claims below.
Biohealth
Medical Laboratory, Inc. and PB Laboratories, LLC (the “Companies”) filed suit against CIGNA Health in 2015 alleging
that CIGNA failed to pay claims for laboratory services the Companies provided to patients pursuant to CIGNA - issued and CIGNA
- administered plans. In 2016, the U.S. District Court dismissed part of the Companies’ claims for lack of standing. The
Companies appealed that decision to the Eleventh Circuit Court of Appeals, which in late 2017 reversed the District Court’s
decision and found that the Companies have standing to raise claims arising out of traditional insurance plans as well as self-funded
plans. In July 2019, the Companies and EPIC Reference Labs, Inc., filed suit against Cigna Health for failure to pay claims
for laboratory services provided. Cigna Health, in turn, sued for improper billing practices. Both cases are in the early stages.
The Company’s Epinex Diagnostics Laboratories,
Inc. subsidiary was sued in a California state court by two former employees who alleged that they were wrongfully terminated,
as well as for a variety of unpaid wage claims. The parties entered into a settlement agreement of this matter on July 29, 2016
for approximately $0.2 million, and the settlement was consummated on August 25, 2016. In October of 2016, the plaintiffs in this
matter filed a motion with the court seeking payment for attorneys’ fees in the approximate amount of $0.7 million. On March
24, 2017, the court granted plaintiffs’ motion for payment of attorneys’ fees in the amount of $0.3 million, and the
Company accrued this amount in its consolidated financial statements. Additionally, the Company is seeking indemnification for
these amounts from Epinex Diagnostics, Inc., the seller of Epinex Diagnostic Laboratories, Inc., pursuant to a Stock Purchase Agreement
entered into by and among the parties.
In
February 2016, the Company received notice that the Internal Revenue Service (the “IRS”) placed a lien against Medytox
Solutions, Inc. and its subsidiaries relating to unpaid 2014 taxes due, plus penalties and interest, in the amount of $5.0 million.
The Company paid $0.1 million toward its 2014 tax liability in March 2016. The Company filed its 2015 Federal tax return on March
15, 2016 and the accompanying election to carryback the reported net operating losses was filed in April 2016. On August 24, 2016,
the lien was released, and in September of 2016 the Company received a refund from the IRS in the amount of $1.9 million. In November
of 2016, the IRS commenced an audit of the Company’s 2015 Federal tax return. Based upon the audit results, the Company
has made provisions of approximately $1.0 million as a liability in its financial statements as well as an estimated $0.6 million
of receivables for an additional refund that it believes is due.
On September 27, 2016, a tax warrant was issued
against the Company by the Florida Department of Revenue (the “DOR”) for unpaid 2014 state income taxes in the approximate
amount of $0.9 million, including penalties and interest. The Company has made payments to reduce the amount owed to approximately
$443,000, and entered into a Stipulation Agreement with the DOR allowing the Company to make monthly installments until July 2019.
As of July 2019, the remaining estimated balance of $390,000 was not paid in a lump sum. The Company
intends to renegotiate another Stipulation agreement. However, there can be no assurance the Company will be successful.
The remaining balance accrued of $460,089 remained outstanding to the DOR at December 31, 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 12). 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 December 31, 2018 was $0.3 million and the Company
remains in default.
In
December of 2016, DeLage Landen Financial Services, Inc. (“DeLage”), filed suit against the Company for failure to
make the required payments under an equipment leasing contract that the Company had with DeLage (see Note 12). 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 December 31, 2018.
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, Inc., Phenomas, LLC, filed suit against the Company for payment
of a $200,000 note payable by the Company’s subsidiary, Genomas. This note is recorded in the financial statements of the
subsidiary and is not payable directly from the Company. The Company has made payments totaling $120,000 against this note and
agreed to a payment schedule in order to dismiss the legal action. On November 12, 2018, Phenomas, LLC filed a motion to voluntarily
dismiss the suit without prejudice.
The
counterparty to the prepaid forward purchase agreement entered into by the Company on March 31, 2016, as amended, filed an arbitration
proceeding under the agreement with regard to the outstanding balance. Subsequent to December 31, 2018, Mr. Diamantis advanced
the Company $9.9 million, which was used to repay all obligations under the prepaid forward purchase agreement, as more
fully discussed in Notes 8 and 21.
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 December 31, 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.
On
September 13, 2018, Laboratory Corporation of America sued EPIC Reference Labs, Inc., a subsidiary of the Company, in
Palm Beach County Circuit Court for amounts claimed to be owed of approximately $148,000. The Company has recorded the amount
owed in accrued expenses at December 31, 2018. The court awarded a judgment against EPIC Reference Labs, Inc. in May
2019 for approximately $155,000.
In July 2019, Roche Diagnostics Corporation
sued EPIC Reference Labs, Inc., in the Circuit Court for Palm Beach County claiming approximately $240,000 under an agreement
to purchase laboratory supplies. This suit is in the early stages.
In August 2019, EPIC Reference Labs, Inc.
and Medytox Solutions, Inc. were sued by Beckman Coulter, Inc. in the same court under an agreement to purchase laboratory supplies.
The plaintiff claims damages of approximately $106,000. This case is in the early stages.
In July 2019, the landlord of Medytox Solutions,
Inc. received a judgment in the amount of approximately $413,000 in connection with failure to pay under an office lease in West
Palm Beach, Florida.
In February 2018, Techlogix, Inc.
received a judgment of approximately $72,000 against the Company and HTS in the Superior Court of Middlesex County
Massachusetts.
Following the Company’s decision to suspend operations at Jamestown Regional
Medical Center in June 2019 a number of vendors remain unpaid. A number have initiated or threatened legal actions. The Company
believes it will come to satisfactory arrangements with these parties as it works towards reopening the hospital. On June 10,
2019 the Company hired a new CEO to oversee the reopening of the hospital and took steps to re-enter the Medicare program. The
hospital received initial approval of its application to reactivate the Medicare agreement in August and is currently planning
the reopening of the hospital. Negotiations with vendors are ongoing.
Note
17– Segment Reporting
Operating
segments are defined under U.S. GAAP as components of an enterprise for which discrete financial information is available and
are evaluated regularly by the enterprise’s chief operating decision maker in determining how to allocate resources and
assess performance. The Company operates in two reportable business segments:
|
●
|
Hospital
Operations, which reflects the operations of Jamestown Regional Medical Center, which we acquired on June 1, 2018 and
Big South Fork Medical Center, which began operations on August 8, 2017.
|
|
●
|
Clinical
Laboratory Operations, which specializes in providing urine and blood toxicology and pain medication testing to physicians,
clinics and rehabilitation facilities in the United States.
|
The
Company’s Corporate expenses reflect consolidated company wide support services such as finance, legal counsel, human resources,
and payroll.
The
Company’s Decision Support and Informatics segment and its Supportive Software Solutions segment are now included in discontinued
operations as they have been classified as held for sale as of December 31, 2018. The accounting policies of the reportable segments
are the same as those described in Note 2.
Selected
financial information for the Company’s operating segments is as follows:
|
|
|
Year Ended December 31,
|
|
|
|
|
2018
|
|
|
|
2017
|
|
Net revenues - External
|
|
|
|
|
|
|
|
|
Clinical
Laboratory Operations
|
|
$
|
131,014
|
|
|
$
|
2,210,318
|
|
Hospital
Operations
|
|
|
14,417,676
|
|
|
|
877,898
|
|
|
|
$
|
14,548,690
|
|
|
$
|
3,088,216
|
|
Loss from operations
|
|
|
|
|
|
|
|
|
Clinical Laboratory
Operations
|
|
$
|
(2,247,499
|
)
|
|
$
|
(4,672,768
|
)
|
Hospital Operations
|
|
|
(6,434,538
|
)
|
|
|
(4,800,539
|
)
|
Corporate
|
|
|
(4,542,583
|
)
|
|
|
(6,602,800
|
)
|
|
|
$
|
(13,224,620
|
)
|
|
$
|
(16,076,107
|
)
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
Clinical Laboratory
Operations
|
|
$
|
764,445
|
|
|
$
|
1,639,954
|
|
Hospital Operations
|
|
|
498,352
|
|
|
|
73,985
|
|
Corporate
|
|
|
1,047
|
|
|
|
1,382
|
|
|
|
$
|
1,263,844
|
|
|
$
|
1,715,321
|
|
Capital expenditures
|
|
|
|
|
|
|
|
|
Clinical Laboratory
Operations
|
|
$
|
-
|
|
|
$
|
-
|
|
Hospital
Operations
|
|
|
213,105
|
|
|
|
1,422,002
|
|
|
|
$
|
213,105
|
|
|
$
|
1,422,002
|
|
|
|
Year
Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Total assets
|
|
|
|
|
|
|
|
|
Clinical
Laboratory Operations
|
|
$
|
271,426
|
|
|
$
|
1,503,520
|
|
Hospital Operations
|
|
|
13,568,933
|
|
|
|
2,549,504
|
|
Corporate
|
|
|
2,707,416
|
|
|
|
3,436,773
|
|
Assets of AMSG and
HTS classified as held for sale
|
|
|
152,171
|
|
|
|
255,566
|
|
Eliminations
|
|
|
(2,500,646
|
)
|
|
|
(1,454,570
|
)
|
|
|
$
|
14,199,300
|
|
|
$
|
6,290,794
|
|
Note
18 – Discontinued Operations
On July 12, 2017, the Company announced plans
to spin off AMSG and in the third quarter of 2017, the Company’s Board of Directors voted unanimously to spin off 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. While
these spin offs have taken longer than anticipated, completion
of these spin offs is now expected to occur in the first quarter of 2020. The spin offs are subject to numerous
conditions, including effectiveness of Registration Statements on Form 10 to be filed with the Securities and Exchange Commission,
and consents, including under various funding agreements previously entered into by the Company. A record date to determine those
stockholders entitled to receive shares in the spin offs should be approximately 30 to 60 days prior to the dates of the
spin offs. The strategic goal of the spin offs is to create three public companies, each of which can focus on its
own strengths and operational plans.
In
accordance with ASC 205-20 and having met the criteria for “held for sale”, as the Company reached this decision prior
to December 31, 2017, the Company has reflected amounts relating to AMSG and HTS as disposal groups classified as held for sale
and included as part of discontinued operations. Prior to being classified as “held for sale,” AMSG had been the Company’s
Decision Support and Informatics segment, except for the Company’s subsidiary, Alethea Laboratories, Inc., which had been
included in the Clinical Laboratory Operations segment and now is part of AMSG, and HTS had been the Company’s Supportive
Software Solutions segment. Segment operation disclosures in Note 17 no longer include amounts relating to AMSG and HTS following
the reclassification to discontinued operations.
Carrying
amounts of major classes of assets and liabilities classified as held for sale and included as part of discontinued operations
in the consolidated balance sheets as of December 31, 2018 and 2017 consisted of the following:
AMSG
Assets and Liabilities:
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
4,471
|
|
|
$
|
9,273
|
|
Accounts receivable, net
|
|
|
6,838
|
|
|
|
19,022
|
|
Prepaid expenses
and other current assets
|
|
|
25,477
|
|
|
|
25,477
|
|
Current
assets classified as held for sale
|
|
$
|
36,786
|
|
|
$
|
53,772
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
-
|
|
|
$
|
-
|
|
Deposits
|
|
|
-
|
|
|
|
-
|
|
Non-current
assets classified as held for sale
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Accounts payable (includes related parties)
|
|
$
|
532,858
|
|
|
$
|
671,561
|
|
Accrued expenses
|
|
|
418,932
|
|
|
|
375,165
|
|
Current portion
of notes payable
|
|
|
278,836
|
|
|
|
249,589
|
|
Current
liabilities classified as held for sale
|
|
$
|
1,230,626
|
|
|
$
|
1,296,315
|
|
|
|
|
|
|
|
|
|
|
Non-current
liabilities classified as held for sale
|
|
$
|
-
|
|
|
$
|
-
|
|
HTS
Assets and Liabilities:
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
2,523
|
|
|
$
|
8,281
|
|
Accounts receivable, net
|
|
|
90,743
|
|
|
|
160,715
|
|
Prepaid expenses
and other current assets
|
|
|
10,300
|
|
|
|
3,964
|
|
Current
assets classified as held for sale
|
|
$
|
103,566
|
|
|
$
|
172,960
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
5,790
|
|
|
$
|
21,078
|
|
Deposits
|
|
|
6,029
|
|
|
|
7,756
|
|
Non-current
assets classified as held for sale
|
|
$
|
11,819
|
|
|
$
|
28,834
|
|
|
|
|
|
|
|
|
|
|
Accounts payable (includes related parties)
|
|
$
|
546,969
|
|
|
$
|
407,404
|
|
Accrued expenses
|
|
|
520,251
|
|
|
|
269,135
|
|
Current
liabilities classified as held for sale
|
|
$
|
1,067,220
|
|
|
$
|
676,539
|
|
Consolidated
Discontinued Operations Assets and Liabilities:
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
6,994
|
|
|
$
|
17,554
|
|
Accounts receivable, net
|
|
|
97,581
|
|
|
|
179,737
|
|
Prepaid expenses
and other current assets
|
|
|
35,777
|
|
|
|
29,441
|
|
Current
assets classified as held for sale
|
|
$
|
140,352
|
|
|
$
|
226,732
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
5,790
|
|
|
$
|
21,078
|
|
Deposits
|
|
|
6,029
|
|
|
|
7,756
|
|
Non-current
assets classified as held for sale
|
|
$
|
11,819
|
|
|
$
|
28,834
|
|
|
|
|
|
|
|
|
|
|
Accounts payable (includes related parties)
|
|
$
|
1,079,827
|
|
|
$
|
1,078,965
|
|
Accrued expenses
|
|
|
939,183
|
|
|
|
644,300
|
|
Current portion
of notes payable
|
|
|
278,836
|
|
|
|
249,589
|
|
Current
liabilities classified as held for sale
|
|
$
|
2,297,846
|
|
|
$
|
1,972,854
|
|
Major
line items constituting loss from discontinued operations in the consolidated statements of operations for the years ended December
31, 2018 and 2017 consisted of the following:
AMSG
Income (Loss) from Discontinued Operations:
|
|
Year
Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Revenue from services
|
|
$
|
102,991
|
|
|
$
|
283,460
|
|
Cost of services
|
|
|
38,299
|
|
|
|
12,575
|
|
Gross profit
|
|
|
64,692
|
|
|
|
270,885
|
|
Operating expenses
|
|
|
480,436
|
|
|
|
2,525,110
|
|
Gain on sale of stock
|
|
|
(800,000
|
)
|
|
|
-
|
|
Other expense
|
|
|
1,049
|
|
|
|
46,859
|
|
Provision for income taxes
|
|
|
-
|
|
|
|
-
|
|
Income
(loss) from Discontinued Operations:
|
|
$
|
383,207
|
|
|
$
|
(2,301,084
|
)
|
HTS
Loss from Discontinued Operations:
|
|
Year
Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Revenue from services (**)
|
|
$
|
1,419,494
|
|
|
$
|
1,650,109
|
|
Cost of services
|
|
|
123,721
|
|
|
|
168,274
|
|
Gross profit
|
|
|
1,295,773
|
|
|
|
1,481,835
|
|
Operating expenses
|
|
|
2,108,880
|
|
|
|
3,402,860
|
|
Other expense
|
|
|
4,943
|
|
|
|
54,809
|
|
Provision for income taxes
|
|
|
-
|
|
|
|
-
|
|
Loss
from Discontinued Operations:
|
|
$
|
(818,050
|
)
|
|
$
|
(1,975,834
|
)
|
**Revenue
from services, includes related party revenue of $0.7 million and $0.7 million, respectively
Consolidated
Loss from Discontinued Operations:
|
|
Year
Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Revenue from services
|
|
$
|
1,522,485
|
|
|
$
|
1,933,569
|
|
Cost of services
|
|
|
162,020
|
|
|
|
180,849
|
|
Gross profit
|
|
|
1,360,465
|
|
|
|
1,752,720
|
|
Operating expenses
|
|
|
2,589,316
|
|
|
|
5,927,970
|
|
Gain on sale of stock
|
|
|
(800,000
|
)
|
|
|
-
|
|
Other expense
|
|
|
5,992
|
|
|
|
101,668
|
|
Provision for income taxes
|
|
|
-
|
|
|
|
-
|
|
Loss
from Discontinued Operations:
|
|
$
|
(434,843
|
)
|
|
$
|
(4,276,918
|
)
|
Acquisition
of Genomas, Inc. on September 27, 2017
On
September 29, 2016, the Company announced that it had entered into a Stock Purchase Agreement (the “Purchase Agreement”)
to acquire the remaining outstanding equity securities of Genomas, Inc. (“Genomas”) that the Company did not already
own, representing approximately 85% of the outstanding equity interests in Genomas, for 1,750,000 shares of the Company’s
newly - designated Series F Preferred Stock. (The Series F Preferred Stock is more fully described in Note 14 and below.) Genomas
is a biomedical company that develops PhyzioType Systems for DNA-guided management and prescription of drugs used to treat mental
illness, pain, heart disease, and diabetes. The Company had previously announced that on July 19, 2016 it acquired approximately
15% of the outstanding equity of Genomas from Hartford Healthcare Corporation (“Hartford”), along with approximately
$1.5 million of notes payable to Hartford and certain rights to and license participation in technology that is used by Genomas,
for $250,000 in cash. The closing of this acquisition under the Purchase Agreement, which was subject to, among other things,
receipt of regulatory and licensure approvals as well as other customary closing conditions, did not occur until September 27,
2017. As a result of delays in the closing of the transaction, the Company expensed all amounts previously paid to the company
aggregating $1.0 million during the fourth quarter of 2016, including outstanding advances to Genomas in the amount of $0.4 million.
Genomas will be spun-off as part of AMSG, so it is presented here in discontinued operations.
The
Series F Preferred Stock issued effective September 27, 2017 has an aggregate stated value of $1,750,000, and is convertible into
shares of the Company’s common stock at any time after the one-year anniversary of the closing date at a conversion price
per common share equal to the greater of $14,625 or the average closing sales price of the Company’s common stock for the
10 trading days immediately preceding the conversion. The maximum number of common shares issuable upon the conversion of the
Series F Preferred Stock is 120. The Company valued the Series F Preferred Stock based on the value of the common stock issuable
upon conversion on the date of the acquisition, which was $174,097.
The
following table summarizes the fair values of assets acquired and liabilities assumed at the acquisition date of Genomas. See
the discussion below regarding the impairment of the goodwill acquired.
Cash
|
|
$
|
7,990
|
|
Accounts
receivable, net
|
|
|
6,503
|
|
Accounts
payable and accrued expenses
|
|
|
(458,736
|
)
|
Deferred
revenue
|
|
|
(20,000
|
)
|
Loans
payable short-term
|
|
|
(142,514
|
)
|
Note
payable long-term
|
|
|
(134,118
|
)
|
Total
identifiable net liabilities
|
|
|
(740,875
|
)
|
Goodwill
|
|
|
914,972
|
|
Total
consideration
|
|
$
|
174,097
|
|
During
the fourth quarter of 2017, the Company determined that the goodwill acquired in the Genomas acquisition was impaired and, accordingly,
it recorded an impairment charge of $914,972 in the discontinued operations of AMSG for the year ended December 31, 2017.
Note
19 – Supplemental Disclosure of Cash Flow Information
|
|
Year
Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Cash
paid for interest
|
|
$
|
313,918
|
|
|
$
|
1,200,759
|
|
Cash paid for
income taxes
|
|
$
|
23,362
|
|
|
$
|
541,313
|
|
|
|
|
|
|
|
|
|
|
Acquisition of Jamestown
Regional Medical Center:
|
|
|
|
|
|
|
|
|
Inventory
|
|
$
|
450,682
|
|
|
$
|
-
|
|
Prepaid and other
assets
|
|
|
310,385
|
|
|
|
-
|
|
Property and equipment
|
|
|
7,129,484
|
|
|
|
-
|
|
Intangible assets
|
|
|
504,806
|
|
|
|
-
|
|
Accrued expenses
|
|
|
(193,966
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing
and financing activities:
|
|
|
|
|
|
|
|
|
Cashless exercise of warrants
|
|
|
4,619,150
|
|
|
|
-
|
|
Exchange of debentures
for Series I-2 Preferred Stock
|
|
|
3,127,556
|
|
|
|
-
|
|
Note payable and
accrued expenses settled through issuance of Series J Preferred Stock
|
|
|
250,000
|
|
|
|
-
|
|
Common stock issued
for conversion of Series I-2 Preferred Stock
|
|
|
1,513,105
|
|
|
|
-
|
|
Beneficial conversion feature
|
|
|
192,308
|
|
|
|
|
|
Services and severance
settled through the issuances of common stock
|
|
|
-
|
|
|
|
161,003
|
|
Exchange of convertible
debentures for convertible debentures and warrants
|
|
|
-
|
|
|
|
10,734,336
|
|
Series F Preferred
Stock issued for business acquisition
|
|
|
-
|
|
|
|
174,097
|
|
Notes payable and
warrants settled through issuance of common stock
|
|
|
-
|
|
|
|
440,000
|
|
Convertible debentures
issued in exchange for Series H Preferred Stock
|
|
|
-
|
|
|
|
2,695,760
|
|
Debentures converted
into common stock
|
|
|
8,128,044
|
|
|
|
7,306,314
|
|
Deemed dividend
for trigger of down round provision feature
|
|
|
231,843,826
|
|
|
|
53,341,619
|
|
Conversions of preferred
stock into common stock
|
|
|
-
|
|
|
|
7,785,000
|
|
Value of convertible liabilities
|
|
|
-
|
|
|
|
12,435,250
|
|
Note
20 – 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 2.
Effective
January 1, 2018, the Company adopted ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” as
more fully discussed in Note 2.
Accounting
Pronouncements Not Yet Adopted
In
February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) as updated. We plan to adopt this new standard beginning
on January 1, 2019 by applying a modified retrospective approach in which we will not adjust prior comparable information and
disclosures. We expect to utilize the practical expedients being made available, including the package of practical expedients
not to reassess whether a contract is or contains a lease, the lease classification and the initial direct costs. We believe the
primary effect of adopting the new standard will be to record right-of-use assets and obligations for our leases currently accounted
for as operating leases and we expect the amount of right-of-use assets and liabilities resulting from the adoption to be approximately
$0.5 million on January 1, 2019.
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.
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. These technical corrections and
improvements are intended to clarify certain aspects of the guidance on recognizing and measuring financial assets and
liabilities in ASU 2016-01. This includes equity securities without a readily determinable fair value, forward contracts and purchased
options, presentation requirements for certain fair value option liabilities, fair value option liabilities denominated in foreign
currency and transition guidance for equity securities without a readily determinable fair value. 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.
In
August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure
Requirements for Fair Value Measurement. This standard will require entities to disclose the amount of total gains or losses
for the period recognized in other comprehensive income that is attributable to fair value changes in assets and liabilities held
as of the balance sheet date and categorized within Level 3 of the fair value hierarchy. This ASU will be effective for us for
annual and interim periods beginning on December 31, 2020. Early adoption of this standard is permitted. We do not expect the
adoption of this ASU to have a material impact on our results of operations, financial position and cash flows.
In
August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s
Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. Under this standard
customers will apply the same criteria for capitalizing implementation costs as they would for an arrangement that has a software
license. The adoption of this new guidance prescribes the balance sheet, income statement, and cash flow classification of the
capitalized implementation costs and related amortization expense, and additional quantitative and qualitative disclosures. This
ASU will be effective for us for annual and interim periods beginning on December 30, 2020. Early adoption of this standard is
permitted and may be applied either prospectively to eligible costs incurred on or after the date of the new guidance or retrospectively.
We do not expect the adoption of this ASU to have a material impact on our results of operations, financial position and cash
flows.
Other
recent accounting standards issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified
Public Accountants, and the SEC did not or are not believed by management to have a material impact on the Company’s present
or future consolidated financial statements.
Note
21 – Subsequent Events
Asset
Acquisitions of Jellico Community Hospital and CarePlus Center
On
March 5, 2019, the Company closed an asset purchase agreement (the “Purchase Agreement”) whereby it acquired certain
assets related to an acute care hospital located in Jellico, Tennessee and an outpatient clinic located in Williamsburg, Kentucky.
The hospital is known as Jellico Community Hospital and the clinic is known as the CarePlus Center. The hospital and the clinic
and their associated assets were acquired from Jellico Community Hospital, Inc. and CarePlus Rural Health Clinic, LLC, respectively.
Jellico
Community Hospital is a fully operational 54-bed acute care facility that offers comprehensive services, including diagnostic
imaging, radiology, surgery (general, gynecological and vascular), nuclear medicine, wound care and hyperbaric medicine, intensive
care, emergency care and physical therapy. The CarePlus Center offers sophisticated testing capabilities and compassionate care,
all in a modern, patient-friendly environment. Services include diagnostic imaging services, x-ray, mammography, bone densitometry,
computed tomography (CT), ultrasound, physical therapy and laboratory services on a walk-in basis.
The
purchase price was approximately $658,537. This purchase price was made available by Christopher Diamantis, a director of the
Company. Diligence, legal and other costs associated with the acquisition are estimated to be approximately $250,000, meaning
the total cost of acquisition to the Company is approximately $908,000.
Annual
net revenues in recent years have been approximately $12,000,000, with government payors, including Medicare and Medicaid, accounting
for in excess of 70% of the payor mix. The Company does not expect that payor mix to change in the near future.
Accounts
Receivable Financing (Prepaid Forward Purchase Contract) and Loans From Mr. Diamantis
Subsequent
to December 31, 2018, Mr. Diamantis advanced the Company $9.9 million, which was used to repay obligations under a prepaid forward
purchase contract related to an accounts receivable financing, as more fully discussed in Note 8. In addition Mr. Diamantis loaned
the Company $6.5 million, of which $1.9 million was used for fees and expenses incurred in connection with the settlement of the
prepaid forward purchase contract, $0.7 million was used to purchase Jellico Community Hospital in March 2019 and the remainder
was used for working capital purposes. Subsequent to December 31, 2018, the Company incurred interest of $1.5 million on the loans
from Mr. Diamantis and the Company repaid Mr. Diamantis $1.5 million of accrued interest.
2019
Debenture Offerings
The
Company issued debentures on February 24, 2019 in the aggregate principal amount of $300,000, on March 27, 2019 in the aggregate
principal amount of $300,000 and on May 12, 2019 in the aggregate principal amount of $500,000. All of these debentures were guaranteed
by Mr. Diamantis, a director of the Company, and were due on June 3, 2019. In addition, the Company issued debentures on June
5, 2019 in the aggregate principal amount of $125,000 and on June 7, 2019 in the aggregate principal amount of $200,000. These
debentures were also guaranteed by Mr. Diamantis and were due on July 20, 2019.
On
June 13, 2019, the Company closed an offering of $1,250,000 aggregate principal amount of debentures with certain existing
institutional investors pursuant to the terms of a Bridge Debenture Agreement, dated as of June 13, 2019 ( the “June 13
Agreement”) and received proceeds of $1,250,000. The June 13 Agreement provided that on or prior to June 30, 2019, at the
mutual election of the Company and the investors, the investors could purchase an additional $1,250,000 principal amount on the
same terms and conditions as provided in the June 13 Agreement. Under the June 13 Agreement, the maturity dates of the
debentures issued on February 24, 2019, March 27, 2019, May 12, 2019, June 5, 2019 and June 7, 2019 were extended to December
31, 2019 and the terms were changed such that they have the same interest terms as contained in the June 13, 2019 debentures,
as more fully discussed below.
On
June 21, 2019, the Company and the investors agreed that the Company would issue, and the investors would purchase, $250,000 principal
amount of debentures and on June 24, 2019 the Company and the investors agreed that the Company would issue, and the investors
would purchase, an additional $1,020,000 aggregate principal amount of debentures. In connection with the issuances of the June
21, 2019 and June 24, 2019 debentures, the Company received total proceeds of $1,270,000.
The
June 13, 2019, June 21, 2019 and June 24, 2019 debentures (collectively, “the June 2019 Debentures”) are secured
and guaranteed by the Company’s subsidiaries on the same terms as provided in the Purchase Agreement, dated as of August
31, 2017, which is more fully described in Note 9. At the Company’s option, the June 2019 Debentures may also be exchanged
for shares of the Company’s Series I-2 Convertible Preferred Stock under the terms of the previously-announced Exchange
Agreement, dated as of October 30, 2017. Commencing on August 17, 2019, the June 2019 Debentures shall bear interest on the outstanding
principal amount at a rate of 2.5% per month (increasing to 5% per month on October 12, 2019), payable quarterly beginning on
October 1, 2019. All overdue accrued and unpaid interest shall entail a late fee equal to the lesser of 24% per annum or the maximum
rate permitted by applicable law. Christopher Diamantis is a guarantor of the June 2019 Debentures.
The
total proceeds received from the issuances of the debentures noted above were $3.8 million.
Modification of Warrants
On March 27, 2019, the expiration date of the Series B warrants issued in March 2017
and September 2017 were extended from June 2019 to September 2019. On May 12, 2019, the expiration date of these warrants was
further extended to March 31, 2022. The Company used the Black Scholes model to calculate the fair value of the warrants as of
the modification date. Using the pre-modification term and related assumptions, and the post-modification terms and related assumptions,
the Company determined that the change in fair value of the warrants as a result of these modifications was $9.5 million, which
will be recorded as interest expense.
Issuance
of Common Stock
Subsequent
to December 31, 2018 and through September 10, 2019, the Company issued an aggregate of 7,380,369,502 shares of common stock for
conversions of preferred stock and the cashless exercise of warrants. The following table presents the dilutive effect of our
various potential common shares as of September 10, 2019:
|
|
September
10, 2019
|
|
Common shares outstanding
|
|
|
7,508,936,775
|
|
Dilutive potential shares:
|
|
|
|
|
Stock options
|
|
|
77
|
|
Warrants
|
|
|
634,525,355,377
|
|
Convertible debt
|
|
|
30,570,395,193
|
|
Convertible
preferred stock
|
|
|
83,791,788,355
|
|
Total
dilutive potential common shares, including outstanding common stock
|
|
|
756,396,475,777
|
|
On October 4,
2019, the Board of Directors authorized the issuance and sale of certain shares of Series K Convertible Preferred
Stock to Alcimede LLC pursuant to the terms of an Exchange Agreement. The Board considered all options to secure additional
financing required to continue operations and determined this authorization to be necessary to secure needed financing in the
required time frame. As a result of this authorization, as of the date of filing this report, the Company believes that
it has the ability to have sufficient authorized shares of its common stock to cover all potentially dilutive common shares
outstanding.
Jamestown Regional Medical Center. Medicare
Agreement;
Following an inspection at Jamestown
Regional Medical Center on February 5, 2019, the hospital was informed on February 15 that several conditions of
participation in its Medicare agreement were deficient. The hospital was informed that if the deficiencies
where not corrected by May 16 the Medicare agreement would terminate. A follow-up inspection on May 15 resulted in the
determination that the hospital had failed to adequately correct the deficiencies highlighted and a notice of involuntary
termination was issued that was effective on June 12, 2019. A significant percentage of patients at Jamestown Regional
Medical Center are covered by Medicare and without any ability to get paid for these services the Company suspended
operations at the hospital. On June 10, 2019 the Company hired a new CEO to oversee the reopening of the hospital and took
steps to re-enter the Medicare program. The hospital received initial approval of its application to reactivate the Medicare
agreement in August and is currently planning the reopening of the hospital.
Accounts
Receivable Factoring Arrangements
Subsequent
to December 31, 2018 and through September 10, 2019, the Company entered into five accounts receivable factoring arrangements.
The aggregate amount of accounts receivable sold on a non-recourse basis, was $3.9 million. The aggregate purchase price paid
to the Company was $2.7 million, less $0.1 million of origination fees. As of September 10, 2019, $1.7 million was outstanding
and owed to the factors under these arrangements.
Promissory Note
On September 27, 2019, the Company issued
a promissory note to a lender in the principal amount of $1.9 million and received proceeds of $1.6 million. The first principal
payment of $1.0 million is due on or before November 8, 2019 and the remaining $0.9 million is due on or before December 26, 2019.
The note does not bear interest except upon the occurrence of an event of default (as defined in the note). The note is unsecured
and is guaranteed by Mr. Diamantis.
Past Due Debentures
The Company had $1,984,000 principal amount
of March Debentures issued March 21, 2017 and due on March 21, 2019 outstanding on the maturity date. These debentures have
not been paid and remain outstanding, accruing interest at the default rate of 18% per annum. Per the terms of the debentures,
the Company accrued a default penalty of approximately $0.6 million during the three months ended March 31, 2019.
The Company had $17,050,000 principal
amount of debentures due September 19, 2019 outstanding on the maturity date. These debentures have not been paid and
remain outstanding, accruing interest at the default rate of 18% per
annum. In addition, the Company will incur a default penalty of approximately $5.1 million during the three months ended
September 30, 2019 as a result of the payment default.