UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark one)

 

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2018

 

OR

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ______ to ______.

 

Commission File Number: 001-35141

 

RENNOVA HEALTH, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   68-0370244

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification No.)

     

400 South Australian Ave., 8th Floor

West Palm Beach, FL

  33401
(Address of principal executive offices)   (Zip Code)

 

(561) 855-1626

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [  ] No [X]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act: (Check one)

 

Large accelerated filer [  ] Accelerated filer [  ]
Non-accelerated filer [  ] (Do not check if a smaller reporting company) Smaller reporting company [X]

 

  Emerging growth company [  ]

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

 

As of November 9, 2018, the registrant had 15,291,866 shares of its Common Stock, $0.0001 par value, outstanding

 

 

 

 
 

 

RENNOVA HEALTH, INC. AND SUBSIDIARIES

FORM 10-Q

 

September 30, 2018

TABLE OF CONTENTS

 

  Page No.
PART I – FINANCIAL INFORMATION  
     
Item 1. Financial Statements 3
  Condensed Consolidated Balance Sheets as of September 30, 2018 (unaudited) and December 31, 2017 3
  Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2018 and 2017 (unaudited) 4
  Condensed Consolidated Statement of Changes in Stockholders’ Deficit for the nine months ended September 30, 2018 (unaudited) 5
  Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 and 2017 (unaudited) 6
  Notes to Condensed Consolidated Financial Statements (unaudited) 7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 37
Item 3. Quantitative and Qualitative Disclosures About Market Risk 47
Item 4. Controls and Procedures 47
     
PART II – OTHER INFORMATION  
     
Item 1. Legal Proceedings 48
Item 1A. Risk Factors 48
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 48
Item 3. Defaults Upon Senior Securities 48
Item 4. Mine Safety Disclosures 48
Item 5. Other Information 48
Item 6. Exhibits 48
     
SIGNATURES 49

 

 2 
 

 

RENNOVA HEALTH, INC. AND SUBSIDIARIES

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

 

  

September 30, 2018

  

December 31, 2017

 
   (unaudited)     
ASSETS          
Current assets:          
Cash  $-   $- 
Accounts receivable, net   6,619,655    971,312 
Inventory   662,530    236,914 
Prepaid expenses and other current assets   231,195    9,842 
Income tax refunds receivable   1,940,845    1,940,845 
Current assets of AMSG and HTS classified as held for sale   225,640    226,732 
Total current assets   9,679,865    3,385,645 
           
Property and equipment, net   9,136,994    2,695,440 
Intangibles, net   444,413    - 
Deposits   156,864    180,875 
Non-current assets of AMSG and HTS classified as held for sale   14,648    28,834 
           
Total assets  $19,432,784   $6,290,794 
           
LIABILITIES AND STOCKHOLDERS’ DEFICIT          
Current liabilities:          
Accounts payable (includes related parties of $0.3 and $0.2 million, respectively)  $7,746,626   $4,188,678 
Accrued expenses   8,908,303    4,967,405 
Income taxes payable   1,959,349    1,971,592 
Current portion of notes payable   6,701,349    6,957,830 
Current portion of notes payable, related parties   450,000    1,128,500 
Current portion of capital lease obligations   941,687    2,079,137 
Current portion of debentures   10,533,591    1,615,693 
Derivative liabilities   357,797    12,435,250 
Current liabilities of AMSG and HTS classified as held for sale   2,129,422    1,972,854 
Total current liabilities   39,728,124    37,316,939 
           
Other liabilities:          
Debentures, net of current portion   -    3,752,022 
Capital lease obligations, net of current portion   39,940    - 
Total liabilities   39,768,064    41,068,961 
           
Commitments and contingencies (Note 15)          
           
Redeemable Preferred Stock I-1   5,835,294    5,835,294 
Redeemable Preferred Stock I-2   3,964,156    - 
           
Stockholders’ deficit:          
Series G preferred stock, $0.01 par value, 14,000 shares authorized, 215 shares issued and outstanding   2    2 
Series H preferred stock, $0.01 par value, 14,202 shares authorized, 10 and 60 shares issued and outstanding   -    - 
Series F preferred stock, $0.01 par value, 1,750,000 shares authorized, 1,750,000 shares issued and outstanding   17,500    17,500 
Series J preferred stock, $0.01 par value, 250,000 shares authorized, 250,000 and 0 shares issued and outstanding   2,500    - 
Common stock, $0.0001 par value, 10,000,000,000 shares authorized, 7,365,881 and 39,502 shares issued and outstanding   737    4 
Additional paid-in-capital   160,817,545    128,549,458 
Accumulated deficit   (190,973,014)   (169,180,425)
Total stockholders’ deficit   (30,134,730)   (40,613,461)
Total liabilities and stockholders’ deficit  $19,432,784   $6,290,794 

 

The accompanying notes are an integral part of these condensed unaudited consolidated financial statements.

 

 3 
 

 

RENNOVA HEALTH, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2018   2017   2018   2017 
                 
Net revenues  $5,039,112   $810,088   $9,932,989   $1,568,918 
                     
Operating expenses:                    
Direct costs of revenue   3,350,286    262,000    7,809,465    717,234 
General and administrative   4,348,818    4,454,167    10,238,891    10,935,179 
Sales and marketing expenses   2,758    170,028    1,543    617,080 
Depreciation and amortization   152,825    426,582    804,074    1,273,435 
Total operating expenses   7,854,687    5,312,777    18,853,973    13,542,928 
                     
Loss from continuing operations before other income (expense) and income taxes   (2,815,575)   (4,502,688)   (8,920,984)   (11,974,010)
                     
Other income (expense):                    
Other income   188,658    40,455    609,719    91,212 
Gain on Bargain Purchase   -    -    7,732,302    - 
Change in fair value of derivative instruments   109,305,331    -    13,688,678    (42,702,815)
Gain on extinguishment of debt   -    (23,000)   -    42,679,815 
Interest expense   (9,322,333)   (5,331,673)   (17,075,437)   (16,510,517)
Total other income (expense), net   100,171,656    (5,314,218)   4,955,262    (16,442,305)
                     
Net income (loss) from continuing operations before income taxes   97,356,081    (9,816,906)   (3,965,722)   (28,416,314)
                     
Income tax expense   -    372    76    3,622 
                     
Net income (loss) from continuing operations   97,356,081    (9,817,278)   (3,965,798)   (28,419,936)
                     
Net income (loss) from discontinued operations   (159,430)   (1,007,959)   115,787    (2,752,168)
Net income (loss)   97,196,652    (10,825,237)   (3,850,011)   (31,172,104)
Deemed dividend from trigger of down round provision feature   (17,942,578)   (2,280,280)   (17,942,578)   (53,341,619)
Net income (loss) to common shareholders  $79,254,074   $(13,105,517)  $(21,792,589)  $(84,513,723)
                     
Net income (loss) per common share:                    
Basic continuing operations  $17.60   $(4,083)  $(1.55)  $(20,793)
Diluted continuing operations  $(0.08)  $(4,083)  $(1.55)  $(20,793)
Basic discontinued operations  $(0.03)  $(419)  $0.05   $(2,014)
Diluted discontinued operations  $(0.00)  $(419)  $0.05   $(2,014)
Basic net income (loss)  $14.33  $(5,450)  $(8.54)  $(61,832)
Diluted net loss  $(0.08)  $(5,450)  $(8.54)  $(61,832)
Weighted average number of common shares outstanding during the period:                    
Basic   5,531,767    2,405    2,550,632    1,367 
Diluted   81,951,541    2,405    2,550,632    1,367 

 

The accompanying notes are an integral part of these condensed unaudited consolidated financial statements.

 

 4 
 

 

RENNOVA HEALTH, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIT

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018 (unaudited)

 

   Preferred Stock   Common Stock  

Additional

paid-in

   Accumulated  

Total

Stockholders’

 
   Shares   Amount   Shares   Amount   capital   Deficit   Deficit 
Balance at December 31, 2017   1,750,275   $17,502    39,502   $4   $128,549,458   $(169,180,425)  $(40,613,461)
Conversion of Series H Preferred stock into common stock   (50)   -    40,000    4    (4)   -    - 
Common stock issued in cashless exercise of warrants   -    -    1,492,228    150    4,619,000    -    4,619,150 
Common stock issued for conversion of Series I-2 Preferred stock   -    -    1,764,927    176    632,924         633,100 
Conversion of debentures into common stock   -    -    3,886,680    389    8,084,953    -    8,085,342 
Exchange of notes payable and accrued expenses for Series J Preferred Stock   250,000    2,500    -    -    247,500    -    250,000 
Stock-based compensation   -    -    -    -    261,796    -    261,796 
Deemed dividend from trigger of down round provision feature                       17,942,579    (17,942,579)     
Exchange of debentures into Series I-2 Preferred stock   -    -    -    -    1,420    -    1,420 
Restricted stock issued to employees   -    -    142,667    14    477,919    -    477,933 
Adjustment to Treasury Shares   -    -    (122)   -    -    -    - 
Net loss   -    -    -    -    -    (3,850,010)   (3,850,010)
Balance at September 30, 2018   2,000,225   $20,002    7,365,881   $737   $160,817,545   $(190,973,014)  $(30,134,730)

 

The accompanying notes are an integral part of these condensed unaudited consolidated financial statements.

 

 5 
 

 

RENNOVA HEALTH, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

   Nine Months Ended September 30, 
   2018   2017 
         
Cash flows used in operating activities:          
Net income (loss) from continuing operations  $(3,965,798)  $(28,419,936)
Adjustments to reconcile net income (loss) to net cash used in operations:          
Depreciation and amortization   804,074    1,273,435 
Gain on sale of fixed assets   (549,524)   - 
Stock issued for services   -    161,003 
Stock-based compensation   739,729    34,081 
Non-cash interest expense   -    8,441,043 
Amortization of debt discount   16,080,270    6,228,352 
Gain on purchase of Jamestown Medical Center   

(7,732,302

)   - 
Non-cash settlement of debt   -    (50,000)
Gain on extinguishment of debt   -    (42,702,815)
Change in fair value of derivative instruments   (13,688,678)   42,702,815 
Income (loss) from discontinued operations   115,787    (2,752,173)
Changes in operating assets and liabilities:          
Accounts receivable   (5,648,343)   828,450 
Inventory   25,066    (73,732)
Prepaid expenses and other current assets   85,185    6,592 
Security deposits   27,857    (14,559)
Accounts payable   3,497,210    1,378,419 
Accrued expenses   3,728,038    2,067,818 
Income tax assets and liabilities   (12,243)   (451,997)
Net cash used in operating activities of continuing operations   (6,493,672)   (11,343,204)
Net cash used in discontinued operations   (628,154)   (449,925)
Net cash used in operating activities   (7,121,826)   (11,793,129)
           
Cash flows provided by (used in) investing activities:          
Purchase of Jamestown Regional Medical Center, net of cash acquired   (668,983)   - 
Sale of property and equipment   433,612    - 
Purchase of property and equipment   (103,387)   (1,554,499)
Net cash used in investing activities of continuing operations   (338,758)   (1,554,499)
Net cash provided by investing activities of discontinued operations   800,000    1,936 
Net cash provided by (used in) investing activities   461,242    (1,552,563)
           
Cash flows provided by financing activities:          
Proceeds from issuance of related party notes payable and advances   -   3,805,000 
Proceeds from issuance of debentures   8,000,000    15,742,500 
Payments on related party notes payable and advances   (428,500)    (3,860,000)
Payments on notes payable   (256,481)   (1,042,524)
Payments on capital lease obligations   (654,435)   (1,342,970)
Net cash provided by financing activities of continuing operations   6,660,584    13,302,006 
Net cash used in financing activities of discontinued operations   -    - 
Net cash provided by financing activities   6,660,584    13,302,006 
           
Net increase (decrease) in cash   -    (43,686)
           
Cash at beginning of period   -    70,173 
           
Cash at end of period  $-   $26,487 

 

The accompanying notes are an integral part of these condensed unaudited consolidated financial statements.

 

 6 
 

 

RENNOVA HEALTH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

Note 1 – Organization and Summary of Significant Accounting Policies

 

Description of Business

 

Rennova Health, Inc. (“Rennova”), together with its subsidiaries (the “Company”, “we”, “us” or “our”), is a vertically integrated provider of healthcare related products and services. The Company’s principal lines of business are (i) hospital operations; and (ii) clinical laboratory operations. The Company presents its financial results based upon these two business segments, which are more fully discussed in Note 16.

 

Reverse Stock Split

 

On September 18, 2018, the Company amended its Certificate of Incorporation to have the authority to issue 10,000,000,000 shares of Common Stock, par value $.0001 per share, and 5,000,000 shares of Preferred Stock, par value $0.01 per share.

 

On November 5, 2018, the Board of Directors of the Company approved an amendment to the Company’s Certificate of Incorporation, to effect a 1-for-500 reverse stock split of the Company’s shares of common stock to be effective on November 12, 2018. As a result of this reverse stock split, every 500 shares of the Company’s pre-reverse split common stock were combined and reclassified into one share of the Company’s common stock. The par value and other terms of the common stock were not affected by the reverse stock split.

 

All outstanding preferred shares, stock options, warrants, and equity incentive plans immediately prior to the reverse stock split will generally be appropriately adjusted by dividing the number of shares of common stock into which the preferred shares, stock options, warrants and equity incentive plans of the common stock are exercisable or convertible by 500 and multiplying the exercise or conversion price by 500, as a result of the reverse stock split.

 

All share, per share, and capital stock amounts for all periods presented have been restated to give effect to the reverse stock splits and the Certificate of Incorporation.

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements were prepared using generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Regulation S-X. Accordingly, these financial statements do not include all information or notes required by generally accepted accounting principles for annual financial statements and should be read in conjunction with the consolidated financial statements as filed on the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, filed with the Securities and Exchange Commission on April 24, 2018. In the opinion of management, the unaudited condensed consolidated financial statements included herein contain all adjustments necessary to present fairly the Company’s consolidated financial position as of September 30, 2018, and the results of its operations and cash flows for the interim periods presented. Such adjustments are of a normal recurring nature. The results of operations for the three and nine months ended September 30, 2018 may not be indicative of results for the year ending December 31, 2018.

 

 7 
 

 

RENNOVA HEALTH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

Principles of Consolidation

 

The accompanying condensed consolidated financial statements which have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) include the accounts of Rennova and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in the consolidation.

 

Reclassification

 

The Company has reclassified certain amounts in the 2017 condensed consolidated financial statements to be consistent with the 2018 presentation. These principally relate to classification of certain revenues, cost of revenues and related segment data, as well as balance sheet classifications to assets and liabilities held for sale. Reclassifications relating to the discontinued operations of Advanced Molecular Services Group (AMSG) and Health Technology Solutions (HTS) are described further in Note 18. The reclassifications had no impact on operations or cash flows for the three and nine months ended September 30, 2017. In addition, certain prior year balances have been reclassified to conform to the current period presentation.

 

Comprehensive Income (Loss)

 

During the three and nine months ended September 30, 2018 and 2017, comprehensive income (loss) was equal to the net income (loss) amounts presented in the accompanying condensed consolidated statements of operations.

 

 8 
 

 

RENNOVA HEALTH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

Use of Estimates

 

Management makes estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent liabilities at the date of the condensed consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates and assumptions include the estimates of fair values of assets acquired and liabilities assumed in business combinations, reserves and write-downs related to receivables and inventories, the recoverability of long-lived assets, the valuation allowance relating to the Company’s deferred tax assets, valuation of equity and derivative instruments, and debt discounts and the valuation of the assets and liabilities acquired in the acquisition of hospitals.

 

Revenue Recognition

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers (Topic 606),” including subsequently issued updates. This series of comprehensive guidance has replaced all existing revenue recognition guidance and became effective for us beginning January 1, 2018. There is a five-step approach outlined in the standard. Entities are permitted to apply the new standard under the full retrospective method, subject to certain practical expedients, or the modified retrospective method that requires the application of the guidance only to contracts that are uncompleted on the date of initial application.

 

In determining revenue, we first identify the contract according to the scope of Accounting Standard Codification (“ASC’) 606 with the following criteria:

 

  The parties have approved the contract either in writing through the acknowledgement or consent of the patient responsibility or consent form; orally by acknowledgement or by scheduled appointment; or implicitly, based on the hospital’s customary business practices (outpatient services, inpatient, emergency room visits, for example).
  Each party’s rights and the contract’s payment terms are identified.
  The contract has commercial substance.
  Collection is probable.

 

Based on the new standard for revenue recognition, bad debt is now treated similar to contractual allowance, and directly reduces sales revenue. The Company reduced gross revenues by $3.1 million for bad debt for the nine months ended September 30, 2018, for the Oneida hospital, which began operations in August 2017, and for the Jamestown Regional Medical Center, which was acquired on June 1, 2018. As required by the new standard, after bad debt and contractual allowance adjustments to revenues of $13.0 million for the nine months ended September 30, 2018, the Company reported net revenues for the three and nine months ended September 30, 2018 of $5.0 million and $9.9 million, respectively. The Company continues to review its provision for bad debt and contractual allowance.

 

Service revenues are generated from laboratory testing services and hospital revenues.

 

Laboratory testing services include chemical diagnostic tests such as blood analysis and urine analysis. Laboratory service revenues are recognized at the time the testing services are performed and billed and are reported at their estimated net realizable amounts. Net service revenues are determined utilizing gross service revenues net of contractual adjustments and discounts. Even though it is the responsibility of the patient to pay for laboratory service bills, most individuals in the U.S. have an agreement with a third-party payer such as a commercial insurance provider, Medicaid or Medicare to pay all or a portion of their healthcare expenses; most of the services provided by us are to patients covered under a third-party payer contract. In most cases, the Company is provided the third-party billing information and seeks payment from the third party in accordance with the terms and conditions of the third-party payer for health service providers like us. Each of these third-party payers may differ not only in terms of rates, but also with respect to terms and conditions of payment and providing coverage (reimbursement) for specific tests. Estimated revenues are established based on a series of procedures and judgments that require industry specific healthcare experience and an understanding of payer methods and trends. Despite follow up billing efforts, the Company does not currently anticipate collection of a significant portion of self-pay billings, including the patient responsibility portion of the billing for patients covered by third party payers. The Company currently does not have any capitated agreements.

 

 9 
 

 

RENNOVA HEALTH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

For hospital goods and or services, net revenues are determined utilizing gross revenues net of contractual adjustments and discounts and are recognized when the goods and services are delivered. Even though it is the responsibility of the patient to pay for goods and services rendered, most individuals have an agreement with a third-party payer such as a commercial insurance provider, Medicaid or Medicare to pay all or a portion of their healthcare expenses.

 

The hospitals ensure that the collection of substantially all the consideration to which they are entitled to is probable. The hospitals have established the transaction price for providing goods or services to a patient through historical cash collection and current data from each identified payer class. This may include the effects of variable consideration such as discounts and price concessions and may be less than the stated contract price, whether applied on a contract-by-contract basis or by using a portfolio approach. The ultimate transaction price reflects explicit price concessions. The hospitals have an obligation to provide medically necessary or emergency services regardless of a patient’s intent or ability to pay. In determining collectability, the evaluation is based on experience or the contract portfolio approach with either a specific patient or a class of similar patients.

 

The hospitals and the laboratory service practice the full retrospective approach of all the reporting periods presented under the new standard and disclose any adjustment to prior-period information. No such prior-period adjustment has been determined to date.

 

This includes but is not limited to disaggregated revenue information, contract asset and liability information, including significant changes from prior year, and judgments, and changes in judgment, that significantly affect the determination of the amount of revenue and timing.

 

We review our calculations for the realizability of gross service revenues monthly to make certain that we are properly allowing for the uncollectable portion of our gross billings and that our estimates remain sensitive to variances and changes within our payer groups. The contractual allowance calculation is made based on historical allowance rates for the various specific payer groups monthly with a greater weight being given to the most recent trends; this process is adjusted based on recent changes in underlying contract provisions. This calculation is routinely analyzed by us based on actual allowances issued by payers and the actual payments made to determine what adjustments, if any, are needed.

 

Derivative Liabilities

 

The Company applies ASC Topic 815-40, “Derivatives and Hedging,” which provides a two-step model to determine whether a financial instrument or an embedded feature is indexed to an issuer’s own stock and thus able to qualify for the scope exception in ASC 815-10-15-74. This standard triggers liability accounting on all instruments and embedded features exercisable at strike prices based on future equity-linked instruments issued at a lower rate. Using the criteria in ASC 815, the Company determines which instruments or embedded features that require liability accounting and records the fair values as a derivative liability. The changes in the values of the derivative liabilities are shown in the accompanying consolidated statements of operations as “Change in Fair Value of Derivative Instruments.”

 

In July 2017, the FASB issued ASU 2017-11 “Earnings Per Share (Topic 260) Distinguishing Liabilities from Equity (Topic 480) Derivatives and Hedging (Topic 815).” The amendments in Part I of this Update change the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. The amendments also clarify existing disclosure requirements for equity-classified instruments. As a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. For freestanding equity classified financial instruments, the amendments require entities that present earnings per share (EPS) in accordance with Topic 260 to recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common shareholders in basic EPS. Convertible instruments with embedded conversion options that have down round features are now subject to the specialized guidance for contingent beneficial conversion features (in Subtopic 470-20, Debt—Debt with Conversion and Other Options), including related EPS guidance (in Topic 260). The amendments in Part II of this Update recharacterize the indefinite deferral of certain provisions of Topic 480 that now are presented as pending content in the Codification, to a scope exception. Those amendments do not have an accounting effect.

 

 10 
 

 

RENNOVA HEALTH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

Under current GAAP, an equity-linked financial instrument with a down round feature that otherwise is not required to be classified as a liability under the guidance in Topic 480 is evaluated under the guidance in Topic 815, Derivatives and Hedging, to determine whether it meets the definition of a derivative. If it meets that definition, the instrument (or embedded feature) is evaluated to determine whether it is indexed to an entity’s own stock as part of the analysis of whether it qualifies for a scope exception from derivative accounting. Generally, for warrants and conversion options embedded in financial instruments that are deemed to have a debt host (assuming the underlying shares are readily convertible to cash or the contract provides for net settlement such that the embedded conversion option meets the definition of a derivative), the existence of a down round feature results in an instrument not being considered indexed to an entity’s own stock. This results in a reporting entity being required to classify the freestanding financial instrument or the bifurcated conversion option as a liability, which the entity must measure at fair value initially and at each subsequent reporting date.

 

The amendments in this Update revise the guidance for instruments with down round features in Subtopic 815-40, Derivatives and Hedging—Contracts in Entity’s Own Equity, which is considered in determining whether an equity-linked financial instrument qualifies for a scope exception from derivative accounting. An entity still is required to determine whether instruments would be classified in equity under the guidance in Subtopic 815-40 in determining whether they qualify for that scope exception. If they do qualify, freestanding instruments with down round features are no longer classified as liabilities and embedded conversion options with down round features are no longer bifurcated.

 

For entities that present EPS in accordance with Topic 260, and when the down round feature is included in an equity-classified freestanding financial instrument, the value of the effect of the down round feature is treated as a dividend when it is triggered and as a numerator adjustment in the basic EPS calculation. This reflects the occurrence of an economic transfer of value to the holder of the instrument, while alleviating the complexity and income statement volatility associated with fair value measurement on an ongoing basis. Convertible instruments are unaffected by the Topic 260 amendments in this Update.

 

Those amendments in Part 1 of this Update are a cost savings relative to current GAAP. This is because, assuming the required criteria for equity classification in Subtopic 815-40 are met, an entity that issued such an instrument no longer measures the instrument at fair value at each reporting period (in the case of warrants) or separately accounts for a bifurcated derivative (in the case of convertible instruments) based on the existence of a down round feature. For convertible instruments with embedded conversion options that have down round features, applying specialized guidance such as the model for contingent beneficial conversion features rather than bifurcating an embedded derivative also reduces cost and complexity. Under that specialized guidance, the issuer recognizes the intrinsic value of the feature only when the feature becomes beneficial instead of bifurcating the conversion option and measuring it at fair value each reporting period.

 

The amendments in Part II of this Update replace the indefinite deferral of certain guidance in Topic 480 with a scope exception and do not require any transition guidance because those amendments do not have an accounting effect. This has the benefit of improving the readability of the Codification and reducing the complexity associated with navigating the guidance in Topic 480.

 

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. For all other entities, the amendments in Part I of this Update are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. 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 amendments in Part 1 of this Update should be applied in either of the following ways: 1. Retrospectively to outstanding financial instruments with a down round feature by means of a cumulative-effect adjustment to the statement of financial position as of the beginning of the first fiscal year and interim period(s) in which the pending content that links to this paragraph is effective; or 2. Retrospectively to outstanding financial instruments with a down round feature for each prior reporting period presented in accordance with the guidance on accounting changes in paragraphs 250-10-45-5 through 45-10.

 

 11 
 

 

RENNOVA HEALTH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

The Company has determined that this amendment had a material impact on its consolidated financial statements and has early adopted this accounting standard update. The cumulative effect of the adoption of ASU 2017-11 resulted in the reclassification of the derivative liability recorded of $56 million and the reversal of $41 million of interest expense recorded in the Company’s first fiscal quarter of 2017. The remaining $16 million was offset to additional paid in capital (discount on convertible debenture). Additionally, the Company recognized a deemed dividend from the trigger of the down round provision feature of $53.3 million. A $51 million deemed dividend was recorded retrospectively as of the beginning of the issuance of the debentures issued in March 2017 where the initial derivative liability was recorded because of the down round provision feature.

 

Earnings (Loss) Per Share

 

The Company reports earnings (loss) per share in accordance with ASC Topic 260, “Earnings Per Share,” which establishes standards for computing and presenting earnings per share. Basic earnings (loss) per share of common stock is calculated by dividing net earnings (loss) allocable to common stockholders by the weighted-average shares of common stock outstanding during the period, without consideration of common stock equivalents. Diluted earnings (loss) per share is calculated by adjusting the weighted-average shares of common stock outstanding for the dilutive effect of common stock equivalents, including stock options and warrants outstanding for the period as determined using the treasury stock method. For purposes of the diluted net loss per share calculation, common stock equivalents are excluded from the calculation when their effect would be anti-dilutive. The gain associated with the change in fair value of the derivative liabilities and the unamortized discounts associated with dilutive convertible debentures, are deducted from net income, the numerator, as a result of the inclusion of dilutive securities in the common stock equivalents, the denominator. Therefore, basic and diluted net loss per share applicable to common stockholders is the same for periods with a net loss. See Note 3 for the computation of earnings (loss) per share for the three and nine months ended September 30, 2018 and 2017.

 

Note 2 – Liquidity and Financial Condition

 

Under ASU, 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40) (“ASC 205-40”), the Company has the responsibility to evaluate whether conditions and/or events raise substantial doubt about its ability to meet its future financial obligations as they become due within one year after the date that the financial statements are issued. As required by ASC 205-40, this evaluation shall initially not take into consideration the potential mitigating effects of plans that have not been fully implemented as of the date the financial statements are issued. Management has assessed the Company’s ability to continue as a going concern in accordance with the requirement of ASC 205-40.

 

As reflected in the condensed consolidated financial statements, the Company had a working capital deficit and an accumulated deficit of $30 million and $191.0 million, respectively, at September 30, 2018. In addition, the Company had a loss from operations of approximately $3.9 million and cash used in operating activities of $7.1 million for the nine months ended September 30, 2018. The reduced loss from operations was primarily driven by a positive change in fair value of derivative instruments in the amount of $13.7 million and a gain on bargain purchase in the amount of $7.7 million. See Note 17. 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 condensed consolidated financial statements are prepared assuming the Company can continue as a going concern, which contemplates continuity of operations through realization of assets, and the settling of liabilities in the normal course of business. Initial cost savings were realized by reducing the number of laboratory facilities to one for most of its toxicology diagnostics, thereby reducing the number of employees and associated operating expenses. During 2017, the Company’s Board of Directors voted unanimously to spinoff 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 spinoffs is expected to occur during the second half of 2018. The spinoffs are subject to numerous conditions, including effectiveness of Registration Statements on Form 10 to be filed with the Securities and Exchange Commission and consents, including under various funding agreements previously entered by the Company. The intent of the spinoffs 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.

 

During the nine months ended September 30, 2018, the Company completed several private placement offerings with institutional investors for $9.9 million in principal less original issue discounts of an aggregate of $1.9 million and received proceeds totaling $8,000,000. As more fully discussed in Note 20, from October 1, 2018 to November 9, 2018, the Company completed additional private placement offerings for $1.2 million in principal and received $1 million in total proceeds.

 

 12 
 

 

RENNOVA HEALTH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

There can be no assurance that the Company will be able to achieve its business plan, raise any additional capital or secure the additional financing necessary to implement its current operating plan. The ability of the Company to continue as a going concern is dependent upon its ability to significantly reduce its operating costs, increase its revenues, and eventually regain profitable operations. The accompanying consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

 

Note 3 – Earnings (Loss) Per Share

 

The following table sets forth basic and diluted earnings (loss) per share for the periods presented:

 

   Three Months Ended September 30,   Nine Months Ended September 30, 
   2018   2017   2018   2017 
Numerator:                    
Net income (loss) from continuing operations  $97,356,081   $(9,817,278)  $(3,965,798)  $(28,419,936)
Net income (loss) from discontinued operations   (159,430)   (1,007,959)   115,787    (2,752,168)
Deduct dividends   (17,942,578)   (2,280,280)   (17,942,578)   (53,341,619)
Net income (loss) to common shareholders - Basic   79,254,074    (13,105,517)   (21,792,589)   (84,513,723)
Deduct change in fair value of derivative liabilities to the extent effect is dilutive   (109,305,331)   -    -    - 
Amortized discounts associated with dilutive convertible debentures  $(7,303,912)  $-   $-   $- 
Change in warrant value   (11,376)   -    -    - 
Adjusted net loss from continuing operations  $(37,366,546)  $(13,105,517)  $(21,792,589)  $(84,513,723)
Add back dividends   17,942,578    2,280,280    17,942,578    53,341,619 
Add Net loss from discontinued operations   159,430    1,007,959    (115,787)   2,752,168 
Net loss to common shareholders - dilutive  $(19,264,537)  $(9,817,278)  $(3,965,798)  $(28,419,936)
Denominator:                    
Weighted average number of common shares outstanding during the period:                    
Basic   5,531,767    2,405    2,550,632    1,367 
Common stock equivalents:                    
Warrants   64,315,740    -    -    - 
Convertible preferred stock   9,505,156    -    -    - 
Convertible debentures   175,301,554    -    -    - 
Diluted   254,654,217    2,405    2,550,632    1,367 
Net income (loss) per common share- continuing operations:                    
Basic  $17.60   $(4,083)  $(1.55)  $(20,793)
Diluted  $(0.08)  $(4,083)  $(1.55)  $(20,793)
Net income (loss) per common share- discontinued operations:                    
Basic  $(0.03)  $(419)  $0.05   $(2,014)
Diluted  $(0.00)  $(419)  $0.05   $(2,014)
Total per share net income (loss) to common shareholders:                    
Basic  $14.33   $(5,450)  $(1.55)  $(61,832)
Diluted  $(0.08)  $(5,450)  $(1.55)  $(61,832)

 

Diluted loss per share as reflected in the table above excludes all dilutive potential shares if their effect is anti-dilutive. For the nine months ended September 30, 2018 and 2017, the following table sets forth the computation of the following potential common stock equivalents excluded from the calculation of diluted loss per share as their effect was anti-dilutive:

 

 13 
 

 

RENNOVA HEALTH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

   Nine Months Ended September 30, 
   2018   2017 
Warrants   463,449,767    35,977 
Convertible preferred stock   68,344,495    142 
Convertible debentures   214,222,495    8,708 
Stock options   77    77 
    746,016,834    44,904 

 

Note 4 – Accounts Receivable

 

Accounts receivable at September 30, 2018 (unaudited) and December 31, 2017 consisted of the following:

 

  

September 30, 2018

  

December 31, 2017

 
Accounts receivable - laboratory services  $2,448,120   $1,478,451 
Accounts receivable - hospital operations   27,535,665    8,593,747 
Total accounts receivable   29,983,785    10,072,198 
Less:          
Allowance for discounts – laboratory services   (2,302,331)   (1,177,054)
Allowance for discounts - hospital operations   (20,085,750)   (6,936,429)
Allowance for bad debts   (976,049)   (987,403)
Accounts receivable, net  $6,619,655   $971,312 

 

Note 5 – Property and Equipment

 

Property and equipment at September 30, 2018 (unaudited) and December 31, 2017 consisted of the following:

 

  

September 30, 2018

  

December 31, 2017

 
Medical equipment  $2,196,358   $696,195 
Land   550,700    - 
Building   6,478,284    1,359,472 
Equipment   437,029    476,548 
Equipment under capital leases   742,745    4,686,736 
Furniture   244,828    222,824 
Leasehold improvements   1,303,131    1,303,131 
Vehicles   56,624    196,534 
Computer equipment   224,447    226,441 
Software   724,126    631,033 
    12,958,272    9,798,914 
Less accumulated depreciation   (3,821,278)   (7,103,474)
Property and equipment, net  $9,136,994   $2,695,440 

 

On January 13, 2017, the Company completed an asset purchase agreement to acquire certain assets related to Scott County Community Hospital, based in Oneida, Tennessee (the “Hospital Assets”). The Hospital Assets include a 52,000 square foot hospital building and 6,300 square foot professional building on approximately 4.3 acres. Scott County Community Hospital, which has since been renamed as Big South Fork Medical Center, is classified as a Critical Access Hospital (rural). The Company acquired the Hospital Assets out of bankruptcy for a purchase price of $1.0 million, and the purchase price has been recorded as property and equipment in the Company’s condensed consolidated balance sheet. The Company opened the hospital on August 8, 2017.

 

On January 31, 2018, the Company entered into a purchase agreement to acquire certain assets and liabilities related to Jamestown Regional Medical Center. The purchase was completed on June 1, 2018. The Company has valued the net assets acquired, subject to completion of a valuation study, at approximately $7.1 million, of which $6.5 million was recorded as property and equipment. The purchase is more fully discussed in Notes 1 and 6.

 

 14 
 

 

RENNOVA HEALTH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

Depreciation expense on property and equipment was $0.1 million and $0.4 million for the three months ended September 30, 2018 and 2017, respectively, and $0.8 million and $1.2 million for the nine months ended September 30, 2018 and 2017, respectively.

 

Management periodically reviews the valuation of long-lived assets, including property and equipment, for potential impairment. Management did not recognize any impairment of these assets during the three and nine months ended September 30, 2018 and 2017.

 

Note 6 – Acquisitions

 

Purchase Agreement Re Jamestown Regional Medical Center

 

On June 1, 2018, the Company acquired a business engaging in acute hospital care located in Jamestown, Tennessee under an asset purchase agreement. The acquisition also included a separate physician practice which now operates under the Company as Mountain View Physician Practice, Inc.

 

Pursuant to the asset purchase agreement, by and among the Company and Jamestown TN Medical Center, Inc., and HMA Fentress County Hospital, LLC, Jamestown HMA Physician Management, LLC and CHS/Community Health Systems, Inc. (the “Sellers”), the purchase price paid for the transaction was an aggregate of $668,983 which includes closing costs of $35,735 paid for in cash consideration to the Sellers.

 

The preliminary fair value of the purchase consideration paid to the Sellers was allocated to the net tangible and intangible assets acquired. The Company accounted for the acquisition as a business combination under U.S. GAAP. In accordance with the acquisition method of accounting under ASC Topic 805, “Business Combinations,” (“ASC 805”) the assets acquired, and liabilities assumed were recorded as of the acquisition date, at their respective fair values and consolidated with those of the Company.

 

The Company is currently undertaking a valuation study to determine the fair value of the assets acquired. The preliminary estimated fair value of the net assets acquired, and liabilities assumed is approximately $8.4 million. The excess of the aggregate fair value of the net tangible assets acquired over the purchase price is currently estimated to be $7.7 million and has been treated as a gain on bargain purchase in accordance with ASC 805. In addition, during the measurement period or until the valuation study is complete, the provisional amounts used for the purchase price allocation are subject to adjustments for a period not to exceed one year from the acquisition date. As a result, upon completion of the valuation study, the gain on bargain purchase presented below may be increased or decreased. The preliminary purchase price allocation was based, in part, on management’s knowledge of HMA Fentress County General Hospital and Jamestown HMA Physician Management, LLC.

 

The following table shows the preliminary allocation of the purchase price of Jamestown Regional Medical Center to the acquired identifiable assets acquired, and liabilities assumed:

 

 

Total purchase price  $668,983 
Tangible and intangible assets acquired, and liabilities assumed at estimated fair value:     
Cash  $- 
Inventories   450,682 
Prepaids and deposits   310,385 
Property and equipment   7,347,468 
Intangible assets   486,716 
Accrued expenses   (193,966)
Net tangible and intangible assets acquired  $8,401,285 
Gain on bargain purchase  $7,732,302 

 

 15 
 

 

RENNOVA HEALTH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

The total cost relating to the acquisition was approximately $1,100,000. This includes $668,983, which was paid in cash consideration to the sellers, closing costs of $35,735, legal costs of approximately $115,000, and other diligence related costs, which were expensed as of September 30, 2018.

 

As prescribed by Regulation S-X of the Securities and Exchange Commission, within seventy-five days of the acquisition of a significant business, separate audited pre-acquisition historical financial statements are required to be filed. An audit of the Jamestown Regional Medical Center’s financial statements was deemed necessary based on the guidance applicable to our financial statements and based on the acquisition’s significance to the Company’s financial statements prior to completion. On August 25, 2018, the Company engaged our auditors, Haynie & Company to perform the required audit. As of the date of the filing of this report, the Company has not met this filing requirement.

 

The following presents the unaudited pro-forma combined results of operations of the Company and Jamestown Regional Medical Center as if the acquisition had occurred on January 1, 2017.

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2017   2018   2017 
   (unaudited)   (unaudited) 
Net revenue  $4,606,295   $15,367,565   $13,042,346 
Net income (loss) from continuing operations   (10,581,164)   (6,098,958)   (30,956,920)
Net income (loss)   (11,589,123)   (5,983,171)   (33,709,088)
Deemed dividend from trigger of down round provision feature   (2,280,280)   (17,942,578)   (53,341,619)
Net income (loss) to common shareholders  $(13,869,403)  $(23,925,749)  $(87,050,707)
                
Net income (loss) per common share:               
Basic continuing operations  $(4,400.39)  $(2.39)  $(22,648.83)
Diluted continuing operations  $(4,400.39)  $(2.39)  $(22,648.83)
Basic net income (loss)  $(5,767.87)  $(9.38)  $(63,688.40)
Diluted net loss  $(5,767.87)  $(9.38)  $(63,688.40)
Weighted average number of common shares outstanding during the period:               
Basic   2,405    2,550,632    1,367 
Diluted   2,405    2,550,632    1,367 

 

The unaudited pro-forma results of operations are presented for information purposes only. The unaudited pro-forma results of operations are not intended to present actual results that would have been attained had the acquisition been completed as of January 1, 2017 or to project potential operating results as of any future date or for any future periods.

 

 16 
 

 

RENNOVA HEALTH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

Note 7 – Accrued Expenses

 

Accrued expenses at September 30, 2018 (unaudited) and December 31, 2017 consisted of the following:

 

  

September 30, 2018

  

December 31, 2017

 
Commissions payable  $15,985   $24,470 
Sales Tax Payable   2,337    - 
Accrued payroll and related liabilities   3,684,320    897,088 
Property Tax   154,426    - 
Accrued interest   3,377,732    2,636,057 
Other accrued expenses   1,673,503    1,409,790 
Total accrued expenses  $8,908,303   $4,967,405 

 

Note 8 – Notes Payable

 

The Company and its subsidiaries are party to a number of loans with affiliates and unrelated parties. At September 30, 2018 (unaudited) and December 31, 2017, notes payable consisted of the following:

 

Notes Payable – Third Parties

 

  

September 30, 2018

  

December 31, 2017

 
Loan payable under prepaid forward purchase contract  $5,000,000   $5,000,000 
           
Loan payable to TCA Global Master Fund, LP (“TCA”) in the original principal amount of $3 million at 16% interest (the “TCA Debenture”). Principal and interest payments due in various installments through December 31, 2017.   1,359,737    1,616,218 
           
Notes payable to CommerceNet and Jay Tenenbaum in the original principal amount of $500,000, bearing interest at 6% per annum (the “Tegal Notes”). Principal and interest payments due annually from July 12, 2015 through July 12, 2017.   341,612    341,612 
           
    6,701,349    6,957,830 
Less current portion   (6,701,349)   (6,957,830)
Notes payable - third parties, net of current portion  $-   $- 

 

On March 31, 2016, the Company entered into an agreement to pledge certain of its accounts receivable as collateral against a prepaid forward purchase contract, whereby the Company received consideration in the amount of $5.0 million. The receivables had an estimated collectable value of $8.7 million, which had been adjusted down to approximately $1.5 million on the Company’s balance sheet as of December 31, 2016 and $0 as of December 31, 2017. In exchange for the consideration received, the counterparty received the right to: (i) a 20% per annum investment return from the Company on the consideration, with a minimum repayment term of six months and minimum return of $0.5 million, (ii) all payments recovered from the accounts receivable up to $5.25 million, if paid in full within six months, or $5.5 million, if not paid in full within six months, and (iii) 20% of all payments of the accounts receivable in excess of amounts received in (i) and (ii). On March 31, 2017, to the extent that the counterparty had not been paid $6.0 million, the Company was required to pay the difference.

 

Christopher Diamantis, a director of the Company, guaranteed the Company’s obligation. On March 24, 2017, the Company, the counterparty and Mr. Diamantis, as guarantor, entered into an amendment to extend the Company’s obligation to March 31, 2018. Also, what the counterparty is to receive was amended to equal (a) the $5,000,000 purchase price plus a 20% per annum investment return thereon, plus (b) $500,000, plus (c) the product of (i) the proceeds received from the accounts receivable, minus the amount set forth in clauses (a) and (b), multiplied by 40%. In connection with this extension, the counterparty received a fee of $1,000,000. On April 2, 2018, the Company, the counterparty and Mr. Diamantis, as guarantor, entered into a second amendment to extend further the Company’s obligation to May 30, 2018. In connection with this further extension, the counterparty received a fee of $100,000. To date, the Company has not recovered any payments against the accounts receivable and the full balance is now payable. The counterparty has instituted an arbitration proceeding under the agreement with regard to the outstanding balance. As of November 14, 2018, the Company has not made a payment under this agreement and the full balance is now payable. The Company does not have the financial resources to satisfy this amount.

 

 17 
 

 

RENNOVA HEALTH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

The Company did not make the required monthly principal and interest payments due under the TCA Debenture for the period from October 2016 through March 2017. On February 2, 2017, the Company made a payment to TCA in the amount of $0.4 million, which was applied to accrued and unpaid interest and fees, including default interest, as of the date of payment. On March 21, 2017, the Company made a payment to TCA in the amount of $0.75 million, of which approximately $0.1 million was applied to accrued and unpaid interest and fees in accordance with the terms of the TCA Debenture. Also on March 21, 2017, the Company entered into a letter agreement with TCA, which (i) waived any payment defaults through March 21, 2017; (ii) provided for the $0.75 million payment discussed above; (iii) set forth a revised repayment schedule whereby the remaining principal plus interest aggregating to approximately $2.6 million was to be repaid in various monthly installments from April of 2017 through September of 2017; and (iv) provided for payment of an additional service fee in the amount of $150,000, which was due on June 27, 2017, the day after the effective date of the registration statement filed by the Company; which amount is reflected in accrued expenses in the accompanying condensed consolidated balance sheet at December 31, 2017. In addition, TCA entered into an inter-creditor agreement with the purchasers of the convertible debentures (see Note 9) which sets forth rights, preferences and priorities with respect to the security interests in the Company’s assets. On September 19, 2017, the Company entered into a new agreement with TCA, which extended the repayment schedule through December 31, 2017. The principal balance as of September 30, 2018, was reduced from $1.6 million to $1.4 million, with interest accrued of approximately $145,000. The remaining debt to TCA remains outstanding and TCA has made a demand for payment. The parties are currently working to amend the TCA Debenture to extend the maturity although there can be no assurance that the parties will agree to any such extension.

 

The Company did not make the principal payments under the Tegal Notes that were due on July 12, 2016. On November 3, 2016, the Company received a default notice from the holders of the Tegal Notes demanding immediate repayment of the outstanding principal of $341,612 and accrued interest of $43,000. On December 7, 2016, the Company received a breach of contract complaint with a request for the entry of a default judgment (see Note 15). On April 23, 2018, the holders of the Tegal Notes received a judgment against the Company. To date, the Company has yet to repay this amount.

 

Notes Payable – Related Parties

 

  

September 30, 2018

  

December 31, 2017

 
Loan payable to Alcimede LLC, bearing interest at 6% per annum, with all principal and interest due on August 2, 2018  $-   $168,500 
           
Loan payable to Christopher Diamantis   450,000    960,000 
    450,000    1,128,500 
Less current portion   (450,000)   (1,128,500)
Total notes payable - related parties, net of current portion  $-   $- 

 

On February 3, 2015, the Company borrowed $3.0 million from Alcimede LLC (“Alcimede”). Seamus Lagan, the Company’s President and Chief Executive Officer, is the sole manager of Alcimede. The note had an interest rate of 6% and was originally due on February 2, 2016. Alcimede later agreed to extend the maturity date of the loan to August 2, 2017. On June 29, 2015, Alcimede exercised options granted in October 2012 to purchase shares of the Company’s common stock, and the loan outstanding was reduced in satisfaction of the aggregate exercise price of $2.5 million. In August of 2016, $0.3 million was repaid by the Company through the issuance of shares of common stock. In March of 2017, the Company and Mr. Lagan agreed that a payment made to Alcimede in the amount of $50,000 would be deducted from the outstanding balance of the note. On August 2, 2017, the Company and Alcimede agreed to further extend the maturity date of the loan to August 2, 2018. On July 23, 2018, the Company issued preferred stock to Alcimede and part of the consideration was full settlement of this loan as more fully discussed in Note 20.

 

During the nine months ended September 30, 2018, the Company borrowed $3.1 million from Christopher Diamantis and repaid $2.6 million. The loan payable balance including interest was $0.5 million on September 30, 2018.

 

 18 
 

 

RENNOVA HEALTH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

Note 9 – Debentures

 

The carrying amount of all outstanding debentures as of September 30, 2018 (unaudited), and December 31, 2017 is as follows:

 

  

September 30, 2018

  

December 31, 2017

 
Debentures  $17,837,502   $17,720,082 
Discount on Debentures   (7,284,194)   (12,127,634)
Deferred financing fees   (19,717)   (224,733)
    10,533,591    5,367,715 
Less current portion   (10,533,591)   (1,615,693)
Debentures  $-   $3,752,022 

 

Payment on all outstanding debentures as of September 30, 2018 is due as follows:

 

Period ended September 30,    
2018  $2,027,502 
2019  $15,810,000 
   $17,837,502 

 

February 2017 Offering

 

On February 2, 2017, the Company issued $1.6 million aggregate principal amount of Original Issue Discount Convertible Debentures due three months from the date of issuance (the “February Debentures”) and warrants to purchase an aggregate of 13 shares of common stock, which can be exercised at any time after August 17, 2017 at an exercise price of $19,350 per share (the “February Warrants”), to an accredited investor for a purchase price of $1.5 million. On March 21, 2017, the February Debentures were exchanged for $2.5 million of exchange debentures as more fully discussed below.

 

March 2017 Offerings

 

On March 21, 2017, the Company issued $10.85 million aggregate principal amount of Senior Secured Original Issue Discount Convertible Debentures due March 21, 2019 (the “Convertible Debentures”). The Company received net proceeds from this transaction in the approximate amount of $8.4 million. The Company used $3.8 million of the net proceeds to repay a loan from Mr. Diamantis as more fully discussed in Note 10 and $0.75 million of the net proceeds to make the partial repayment on the TCA Debenture. The remainder of the net proceeds were used for general corporate purposes. In conjunction with the issuance of the Convertible Debentures, the holder of the February Debentures exchanged these debentures for $2.5 million of new debentures (the “Exchange Debentures” and, collectively with the Convertible Debentures, the “March Debentures”) on the same terms as, and pari passu with, the Convertible Debentures and warrants. The Company recorded non-cash interest expense in the amount of $0.4 million as a result of this exchange. Additionally, the holders of an aggregate of $2.2 million stated value of the Company’s Series H Convertible Preferred Stock (the “Series H Preferred Stock”) exchanged such preferred stock into $2.7 million principal amount of Exchange Debentures and warrants. The March Debentures contain a 24% original issue discount, have no regularly scheduled interest payments except in the event of a default and have a maturity date of March 21, 2019.

 

In connection with the March Debentures the Company issued warrants to purchase shares of the Company’s common stock to several accredited investors. At September 30, 2018, these warrants were exercisable into an aggregate of approximately 382.3 million shares of common stock. The warrants were issued to the investors in three tranches, Series A Warrants, Series B Warrants and Series C Warrants (collectively, the “March Warrants”). At September 30, 2018, the Series A Warrants are exercisable for 146.6 million shares of the Company’s common stock. They are immediately exercisable and have a term of exercise equal to five years. At September 30, 2018, the Series B Warrants are immediately exercisable for 90.1 million shares of the Company’s common stock and were initially exercisable for a period of 18 months. During the three months ended September 30, 2018, the Company extended the exercise period for 180 days and recorded an additional discount on the March Debentures of approximately $8.3 million as a result of the extension. The Series C Warrants are exercisable for 145.6 million shares of the Company’s common stock and have a term of five years provided such warrants shall only vest if, when and to the extent that the holders exercise the Series B Warrants. At September 30, 2018, the Series A, Series B and Series C Warrants each have an exercise price of $0.1275 per share, which reflects adjustments pursuant to their terms. The Series A, Series B and Series C Warrants are subject to “full ratchet” and other customary anti-dilution protections.

 

 19 
 

 

RENNOVA HEALTH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

The March Debentures are convertible into shares of the Company’s common stock, at a conversion price which has been adjusted pursuant to the terms of the March Debentures to $0.1275 per share as of September 30, 2018, due to prices at which the Company has subsequently issued shares of common stock. The Convertible Debentures began to amortize monthly commencing on the 90th day following the closing date. The Exchange Debentures began to amortize monthly on the closing date. On each monthly amortization date, the Company may elect to repay 5% of the original principal amount of the March Debentures in cash or, in lieu thereof, the conversion price of such debentures will thereafter be 85% of the volume weighted average price at the time of conversion. In the event the Company does not elect to pay such amortization amounts in cash, each investor, in their sole discretion, may increase the conversion amount subject to the alternative conversion price by up to four times the amortization amount. The March Debentures contain customary affirmative and negative covenants. The conversion prices are subject to reset in the event of offerings or other issuances of common stock, or rights to purchase common stock, at a price below the then conversion price, as well as other customary anti-dilution protections as more fully described in the debentures.

 

On October 30, 2017, the Company agreed to amend the March Debentures and March Warrants to remove the floor in the anti-dilution provisions therein. The conversion price of the March Debentures and the exercise price of the March Warrants as of September 30, 2018 stated above reflect the amendment as well as other adjustments for dilutive issuances, which triggered the down round provisions in the March Debentures and March Warrants. The March Debentures are secured by all the Company’s assets and are guaranteed by substantially all of the Company’s subsidiaries. Between March 22, 2017 and September 30, 2018, holders of the March Debentures converted an aggregate of $13,982,758 of these debentures into 3,923,251 shares of common stock.

 

The exercise prices of the March Warrants issued relating to the March Debentures are subject to reset in the event of offerings or other issuances of common stock, or rights to purchase common stock, at a price below the then exercise price, as well as other customary anti-dilution protections. Because of these provisions, both the March Debentures and the March Warrants were deemed to be not indexed to the Company’s common stock, and the Company recognized derivative liabilities for the embedded conversion feature of the March Debentures and the March Warrants in the original amount of $15.3 million and $41.3 million, respectively. The Company recognized a discount for 100% of the principal value of the March Debentures and non-cash interest expense in the amount of $43.7 million regarding the recognition of these derivative liabilities. Because of the adoption of ASU 2017-11 in the second quarter of 2017, the interest expense and derivative liability originally recognized were adjusted and extinguished during the three months ended September 30, 2017. See Note 1 for the adoption of ASU 2017-11 for the retrospective adjustments made to the Company’s condensed consolidated financial statements with respect to the derivative liabilities associated with these debentures and warrants.

 

June 2017 Offerings

 

In June 2017, the Company issued debentures due three months from the date of issuance in two issuances (collectively, the “June Debentures”) and warrants to purchase an aggregate of 200 shares of common stock (67 warrants in the June 2, 2017 transaction and 133 in the June 22, 2017 transaction), which can be exercised at any time after nine months at an exercise price of $2,925 per share for the June 2, 2017 warrants and $2,850 per share for the June 22, 2017 warrants (collectively the “June Warrants”), to accredited investors for a purchase price of $1,902,700 and proceeds to the Company of $1.5 million. The Company recorded a discount on the debentures of $107,700 which has been fully amortized. As more fully discussed below, on July 17, 2017, the June Debentures were exchanged.

 

July 2017 Offerings

 

On July 17, 2017, the Company closed an offering of $4,136,862 aggregate principal amount of Original Issue Discount Debentures due October 17, 2017 (the “July Debentures”) and warrants to purchase an aggregate of 283 shares of common stock (the “July Warrants”) for consideration of $2,000,000 in cash and the exchange of the full $1,902,700 aggregate principal amount of the June Debentures. The July Debentures were guaranteed by substantially all the subsidiaries of the Company pursuant to a Subsidiary Guarantee in favor of the holders of the July Debentures. As more fully discussed below, on September 19, 2017, the July Debentures were exchanged for $6.4 million of exchange debentures.

 

The July Warrants are exercisable into shares of the Company’s common stock at any time from and after six months from the closing date at an exercise price of $2,815 per common share (subject to adjustment). The July Warrants will terminate five years after they become exercisable.

 

 20 
 

 

RENNOVA HEALTH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

September 2017 Offerings

 

On September 19, 2017, the Company closed an offering of $2,604,000 principal amount of Senior Secured Original Issue Discount Convertible Debentures due September 19, 2019 (the “New Debentures”) and three series of warrants to purchase an aggregate of 34,677,585 shares of the Company’s common stock (the “Series A Warrants,” the “Series B Warrants,” and the “Series C Warrants,” and collectively, the “September Warrants”). The offering was pursuant to the terms of a Securities Purchase Agreement, dated as of August 31, 2017 (the “Purchase Agreement”), between the Company and certain existing institutional investors of the Company. The Company received proceeds of $2,100,000 from the offering.

 

Also on September 19, 2017, the Company closed exchanges by which the holders of the Company’s July Debentures exchanged $4,136,862 principal amount of such debentures for $6,412,136 principal number of new debentures on the same items as, and pari passu with, the New Debentures (the “September Exchange Debentures” and, together with the New Debentures, the “September Debentures”). The Company recorded non-cash interest expense in the amount of $1.0 million because of this exchange. All issuance amounts of the September Debentures reflect a 24% original issue discount.

 

The September Debentures contain customary affirmative and negative covenants. The conversion price is subject to “full ratchet” and other customary anti-dilution protections as more fully described in the debentures. The September Debentures may be converted at any time into shares of the Company’s common stock. Originally, the September Debentures begin to amortize monthly commencing on October 1, 2017, and for the first three amortization dates, the amortization amount was $100,000. On October 19, 2017, the September Debentures were amended so that they began to amortize immediately. On each monthly amortization date, the Company may elect to repay 5% of the original principal amount of September Debentures in cash or, in lieu thereof, the conversion price of such September Debentures shall thereafter be 85% of the volume weighted average price at the time of conversion, but not less than the floor of $.78 per share. In the event the Company does not elect to pay such amortization amounts in cash, each investor, in their sole discretion, may increase the conversion amount subject to the alternative conversion price by up to four times the amortization amount. On October 30, 2017, the Company entered into exchange agreements (“Exchange Agreements”) with the holders of the September Debentures to provide that the holders may, from time to time, exchange their September Debentures for shares of a newly-authorized Series I-2 Convertible Preferred Stock of the Company (the “Series I-2 Preferred Stock”). On February 8, 2018, $1,384,556 of the September Debentures were exchanged for 1,730.1 shares of Series I-2 Preferred Stock and the Company recorded a loss on the exchange of $651,562. On July 16, 2018, $1,741,580 of the September Debentures were exchanged for 2,176.9 shares of Series I-2 Preferred Stock and the Company recorded a loss on the exchange of $819,561. The Series I-2 Preferred Stock is more fully discussed in Note 13.

 

At September 30, 2018, the Series A Warrants are exercisable for an aggregate of 11,559,195 shares of the Company’s common stock. They are immediately exercisable and have a term of exercise equal to five years. The Series B Warrants are exercisable for an aggregate of 11,559,195 shares of the Company’s common stock and are exercisable for a period of 18 months commencing immediately. At September 30, 2018, the Series C Warrants are exercisable for an aggregate of 11,559,195 shares of the Company’s common stock, and have a term of five years provided such Series C Warrants shall only vest if, when and to the extent that the holders exercise the Series B Warrants. The September Warrants have a fixed exercise price, subject to a floor of $0.78 per share. At September 30, 2018, the exercise price was $0.78 per share, which reflects adjustments made pursuant to their terms due to the down round provisions in the September Warrants. The September Warrants are subject to “full ratchet” and other customary anti-dilution protections.

 

The Company’s obligations under the September Debentures are secured by a security interest in all of the Company’s and its subsidiaries’ assets, pursuant to the terms of the Security Agreement, dated as of March 20, 2017.

 

2018 Offerings

 

On March 5, 2018, May 14, 2018, May 21, 2018 and June 28, 2018, the Company closed offerings of $6,810,000 aggregate principal amount of Senior Secured Original Issue Discount Convertible Debentures due September 19, 2019. The Company received proceeds of $5,500,000 in the offerings net of the original issue discount of $1,310,000. On July 16, 2018, August 2, 2018, and September 6, 2018, the Company entered into Additional Issuance Agreements (the “Issuance Agreements”), with two existing institutional investors of the Company. Under the Issuance Agreements, the Company issued $3.1 million aggregate principal amount of Senior Secured Original Issue Discount Convertible Debentures due September 19, 2019 and received proceeds of $2.5 million. The conversion terms of these debentures are the same as those issued in September 2017 under the Purchase Agreement, dated as of August 31, 2017, as more fully described above, with the exception of the floor conversion price, which is $.052 per share. These debentures may also be exchanged for shares of the Company’s Series I-2 Preferred Stock under the terms of the Exchange Agreements.

 

During the year ended December 31, 2017 and the nine months ended September 30, 2018, the Company realized approximately $23.7 million in proceeds from the issuances of the debentures and warrants. At September 30, 2018, the unamortized discounts were $7.3 million. These discounts represent original issue discounts, the relative fair value of the warrants issued with the debentures and the relative fair value of the beneficial conversion features of the debentures. During the nine months ended September 30, 2018 and 2017, the Company recorded approximately $16.0 million and approximately $14.7 million, respectively, of non-cash interest and amortization of debt discount expense primarily in connection with the debentures and warrants.

 

 21 
 

 

RENNOVA HEALTH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

See Note 13 for summarized information related to warrants issued and the activity during the nine months ended September 30, 2018 and 2017.

 

See Notes 3 and 13 for a discussion of the dilutive effect of the outstanding debentures and warrants as of September 30, 2018.

 

Note 10 – Related Party Transactions

 

In addition to the transactions discussed in Note 8, the Company had the following related party transactions during the nine months ended September 30, 2018 and 2017:

 

In January and February of 2017, the Company received advances aggregating $3.6 million from Christopher Diamantis, a director of the Company. The advances, along with $0.5 million of previously accrued but unpaid interest, were due on demand, bearing interest at 10% per annum. The Company used the advances to pay the purchase price for the Hospital Assets and for general corporate purposes. On March 7, 2017, the Company issued a promissory note to Mr. Diamantis in the amount of $0.5 million relating to these advances received in 2017, plus accrued and unpaid interest of $0.5 million (and together with the advances and accrued interest the “2017 Diamantis Note”). In the nine months ended September 30, 2018, the Company has paid $251,000 of the accrued interest. In conjunction with the issuance of the 2017 Diamantis Note, the Company also issued to Mr. Diamantis warrants to purchase 55 shares of the Company’s common stock, exercisable at $7,500. The 2017 Diamantis Note was repaid on March 21, 2017 with the proceeds received from the issuance of the Convertible Debentures (see Note 9).

 

Monarch Capital, LLC (“Monarch”) billed the Company for consulting fees delivered in 2017, pursuant to a consulting agreement in the amount of $0.1 million. While the agreement expired on August 31, 2017, the balance remains outstanding at September 30, 2018. Michael Goldberg, a director of the Company up until his resignation effective April 24, 2017, is the Managing Director of Monarch.

 

Alcimede billed the Company $0.1 million and $0.1 million for consulting fees pursuant to a consulting agreement for the three months ended September 30, 2018 and 2017, respectively. Alcimede billed $0.3 million and $0.2 million for the nine months ended September 30, 2018 and 2017, respectively. Seamus Lagan, the Company’s President and Chief Executive Officer, is the sole manager of Alcimede (see Note 8).

 

Note 11 – Capital Lease Obligations

 

The Company leases various assets under capital leases expiring through 2020 as follows. At September 30, 2018 (unaudited) and December 31, 2017, capital lease equipment consisted of the following:

 

  

September 30, 2018

  

December 31, 2017

 
Medical equipment  $742,745   $4,686,736 
Less accumulated depreciation   (618,931)   (3,842,443)
           
Net  $123,815   $844,293 

 

As of September 30, 2018, the Company is in default of substantially all its lease obligations, therefore the aggregate future minimum rentals and accrued interest under capital leases in the amount of $988,936 are deemed to be due. The significant reduction in the leased assets at September 30, 2018 from December 31, 2017, was due to the sale and or surrender of certain leased medical equipment relating to our laboratory operations which have significantly decreased in size over the past 24 months.

 

In December 2016, several lawsuits were filed for past due lease payment obligations. In January 2017, default judgements were issued against the Company aggregating to $3.5 million, including default interest, late fees, penalties and other fees (see Note 15). Additionally, the Company recognized additional interest expense of $0.6 million to recognize the additional obligations under these leases.

 

Note 12 – Redeemable Preferred Stock

 

The Company has 5,000,000 authorized shares of Preferred Stock at a par value of $0.01. Issuances of the Company’s Preferred Stock included as part of stockholders’ deficit are discussed in Note 13. The following is a summary of the issuances of the Company’s Redeemable Preferred Stock.

 

 22 
 

 

RENNOVA HEALTH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

Series I-1 Convertible Preferred Stock

 

On October 30, 2017, the Company closed an offering of $4,960,000 stated value of 4,960 shares of a newly-authorized Series I-1 Convertible Preferred Stock (the “Series I-1 Preferred Stock”). Each share of Series I-1 Preferred Stock has a stated value of $1,000. The offering was pursuant to the terms of the Securities Purchase Agreement, dated as of October 30, 2017 (the “Purchase Agreement”), between the Company and certain existing institutional investors of the Company. The Company received proceeds of $4.0 million from the offering. The Purchase Agreement gives the investors the right to participate in up to 50% of any offering of common stock or common stock equivalents by the Company. In the event of any such offering, the investors may also exchange all or some of their Series I-1 Preferred Stock for such new securities on an $0.80 stated value of Series I-1 Preferred Stock for $1.00 of new subscription amount basis. Each share of Series I-1 Preferred Stock is convertible into shares of the Company’s common stock at any time at the option of the holder at a conversion price equal to the lesser of (i) $1.00, subject to adjustment, and (ii) 85% of the lesser of the volume weighted average market price of the common stock on the day prior to conversion or on the day of conversion. The conversion price is subject to “full ratchet” and other customary anti-dilution protections as more fully described in the Certificate of Designation of the Series I-1 Preferred Stock. Upon the occurrence of certain Triggering Events, as defined in the Certificate of Designation of the Series I-1 Preferred Stock, the holder shall, in addition to any other right it may have, have the right, at its option, to require the Company to either redeem the Series I-1 Preferred Stock in cash or in certain circumstance in shares of common stock at the redemption prices set forth in the Certificate of Designation.

 

Series I-2 Convertible Preferred Stock

 

On October 30, 2017, the Company entered into Exchange Agreements with the holders of the September Debentures to provide that the holders may, from time to time, exchange their September Debentures for shares of a newly-authorized Series I-2 Preferred Stock. The exchange agreements permitted the holders of the September Debentures to exchange specified principal amounts of the September Debentures on various closing dates starting on December 2, 2017, as more fully discussed in Note 9. At the holder’s option each holder may reduce the principal amount of September Debentures exchanged on any particular closing date, or elect not to exchange any September Debentures at all on a closing date. If a holder does choose to exchange less principal amount of September Debentures, or no September Debentures at all, it can carry forward such lesser amount to a future closing date and then exchange more than the originally specified principal amount for that later closing date. For each $0.80 of principal amount of September Debenture surrendered to the Company at any closing date, the Company will issue the holder a share of Series I-2 Preferred Stock with a stated value of $1.00. Each share of Series I-2 Preferred Stock is convertible into shares of the Company’s common stock at any time at the option of the holder at a conversion price equal to the lesser of (i) $1.00, subject to adjustment, and (ii) 85% of the lesser of the volume weighted average market price of the common stock on the day prior to conversion or on the day of conversion. The conversion price is subject to “full ratchet” and other customary anti-dilution protections as more fully described in the Certificate of Designation of the Series I-2 Preferred Stock. From December 2, 2017 through March 1, 2018, any exchange under the Exchange Agreements was at the option of the holder. Subsequent to March 2018, any exchange is at the option of the Company.

 

The Company’s board of directors has designated up to 21,346 shares of the 5,000,000 authorized shares of preferred stock as the Series I-2 Preferred Stock. Each share of Series I-2 Preferred Stock has a stated value of $1,000. Upon the occurrence of certain Triggering Events (as defined in the Certificate of Designation of the Series I-2 Preferred Stock), the holder shall, in addition to any other right it may have, have the right, at its option, to require the Company to either redeem the Series I-2 Preferred Stock in cash or in certain circumstance in shares of common stock at the redemption prices set forth in the Certificate of Designation.

 

On February 9, 2018, the holders exercised their right to exchange a portion of the September Debentures for shares of the Series I-2 Preferred Stock for the first time. On that date, the holders elected to exchange an aggregate of $1,384,556 principal amount of September Debentures and the Company issued an aggregate 1,730.7 shares of its Series I-2 Preferred Stock. On July 16, 2018, under the Exchange Agreements with the holders of the September Debentures, the holders exchanged a portion of the September Debentures for shares of the Company’s Series I-2 Preferred Stock. On that date, the holders elected to exchange an aggregate of $1,741,580 principal amount of the September Debentures and the Company issued an aggregate of 2,176.975 shares of its Series I-2 Preferred Stock. In July 2018, the holder converted 538.137 shares of Series I-2 Preferred Stock into 1,764,927 shares of the Company’s common stock.

 

 23 
 

 

RENNOVA HEALTH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

Note 13 – Stockholders’ Deficit

 

Preferred Stock

 

The Company has 5,000,000 shares, par value $0.01, of preferred stock authorized. As of September 30, 2018, the Company had outstanding shares of preferred stock consisting of shares of its Series I-1 Preferred Stock and shares of Series I-2 Preferred Stock (both of which are more fully discussed in Note 12), 215 shares of its Series G Preferred Stock, 10 shares of its Series H Preferred Stock and 1,750,000 shares of its Series F Convertible Preferred Stock. On June 28, 2018, 50 shares of the Series H Preferred Stock were converted into 40,000 shares of the Company’s common stock.

 

The rights of the Series F, G, and H preferred stock are disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017. The Series G and H preferred stock are convertible into shares of the Company’s common stock at a price equal to 85% of the volume weighted average price of the Company’s common stock at the time of conversion. The Series F Preferred Stock is convertible into shares of the Company’s common stock at a fixed price of $14,625 per share.

 

On July 20, 2018, the Company filed a Certificate of Designation with the Secretary of State of the State of Delaware to authorize the issuance of up to 250,000 shares of its Series J Convertible Preferred Stock (the “Series J Preferred Stock”). On July 23, 2018, the Company entered into an Exchange Agreement (the “Agreement”) with Alcimede, of which Seamus Lagan, our Chief Executive Officer, is the sole manager. Pursuant to the Agreement, the Company issued to Alcimede 250,000 shares of the Series J Preferred Stock in exchange for the cancellation of the outstanding principal and interest owed by the Company to Alcimede under the Note, dated February 5, 2015, and the cancellation of certain amounts owed by the Company to Alcimede under a consulting agreement between the parties. The total amount of consideration paid by Alcimede to the Company equaled $250,000. Each share of the Series J Preferred Stock has a stated value of $1.00. The conversion price is equal to the average closing price of the Company’s common stock on the 10 trading days immediately prior to the conversion date. Each holder of the Series J Preferred Stock is entitled to vote on all matters submitted to a vote of the holders of the Company’s common stock. With respect to a vote of stockholders, no later than September 30, 2018 only, to approve either or both of a reverse stock split of the Company’s common stock and an increase in the authorized shares of common stock from three billion shares to up to ten billion shares, each share of the Series J Preferred Stock had the whole number of votes equal to 24 shares of common stock. With respect to all other matters, and from and after October 1, 2018, each share of the Series J Preferred Stock is entitled to the whole number of votes equal to the number of common shares into which it is then convertible. The full terms of the Series J Preferred Stock are listed in the Certificate of Designations filed as Exhibit 3.16 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 24, 2018.

 

Common Stock

 

On May 9, 2018, the Company held a Special Meeting of Stockholders, in part, to approve an amendment to the Company’s Certificate of Incorporation, as amended, to increase the number of authorized shares of common stock from 500,000,000 to 3,000,000,000 shares. The proposal was approved and on May 9, 2018 the Company filed an amendment to its Certificate of Incorporation to increase its authorized common stock to 3,000,000,000 shares.

 

On September 18, 2018, the Company amended its Certificate of Incorporation to have the authority to issue 10,000,000,000 shares of Common Stock, par value $.0001 per share, and 5,000,000 shares of Preferred Stock, par value $0.01 per share. 

 

The Company had 7,365,881 and 39,502 shares of common stock issued and outstanding at September 30, 2018 and December 31, 2017, respectively. During the nine months ended September 30, 2018, the Company:

 

  issued an aggregate of 3,886,680 shares of its common stock upon conversion of $6.7 million of the principal amount of the March 2017 Debentures. The value of the common stock issued was based on the fair value of the stock at the time of issuance;
     
  issued 1,492,228 shares of common stock upon exercise of 5,906,177 warrants, on a cashless basis;
     
  issued 40,000 shares of common stock upon the conversion of 50 shares of its Series H Preferred stock as discussed above; and
     
  issued 1,764,927 shares of common stock upon the conversion of 538.137 shares its Series I-2 Preferred stock;

 

Restricted Stock

 

On August 14, 2017, the Board of Directors, based on the recommendation of the Compensation Committee of the Board and in accordance with the provisions of the 2007 Equity Plan, approved grants to employees and directors of the Company of an aggregate of 364 shares of restricted common stock of the Company. The grants fully vested on the first anniversary of the date of grant, subject to the grantee’s continued status as an employee or director on the vesting date.

 

During the nine months ended September 30, 2018:

 

  122 shares of the restricted stock were forfeited by their terms and returned to treasury.
     
  the Company issued an aggregate of 142,667 shares of restricted stock to employees and directors, based upon the recommendation of the Compensation Committee of the Board. The grants fully vested immediately. The Company recognized stock-based compensation in the amount of $477,933 for the grant of such restricted stock based on a valuation of $3.35 per share. In addition, the Company recorded $189,209 of compensation expense related to restricted stock issued in 2017. The value of the common stock issued was based on the fair value of the stock at the time of issuance.

 

 24 
 

 

RENNOVA HEALTH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

Stock Options

 

During the nine months ended September 30, 2018 and 2017, the Company recorded approximately $72,590 and $34,081, respectively, as stock compensation expense from the amortization of stock options issued in prior periods. As of September 30, 2018, the weighted average remaining contractual life was 7.6 years for options outstanding and exercisable. The intrinsic value of options exercisable at September 30, 2018 and 2017 was $0. As of September 30, 2018, the remaining expense is approximately $58,796 over the remaining amortization period which is 0.53 years under the Company’s 2007 Equity Plan. The Company estimates forfeiture and volatility using historical information. The risk-free interest rate is based on the implied yield available on U.S. Treasury zero-coupon issues over the equivalent lives of the options. The expected life of the options represents the estimated period using the simplified method. The Company has not paid cash dividends on its common stock and no assumption of dividend payment(s) is made in the model.

 

The following table summarizes the Company’s stock option activity for the nine months ended September 30, 2018:

 

  

Number

of options

  

Weighted-

average

exercise price

  

Weighted-

average

contractual

term (Yrs.)

 
Outstanding at December 31, 2017   77   $1,036,374    8 
Granted   -    -      
Expired   -    -      
Forfeit   -    -      
Exercised   -    -      
Outstanding at September 30, 2018   77   $1,036,374    8 
Exercisable at September 30, 2018   66   $1,186,581      

 

Warrants

 

The Company, as part of various debt and equity financing transactions, has issued warrants to purchase shares of the Company’s common stock. The following summarizes the information related to warrants issued and the activity during the nine months ended September 30, 2018: 

 

   Number of warrants  

Weighted

average

exercise price

 
Balance at December 31, 2017   38,961,036   $2.48 
Warrants issued during the period   -   $- 
Increases due to dilution   433,154,987   $0.67 
Warrants exercised during the period   (5,906,177)  $0.17 
Warrants expired during the period   (2,760,079)  $- 
Balance at September 30, 2018   463,449,767   $0.21 

 

 25 
 

 

RENNOVA HEALTH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

Common Stock and Common Stock Equivalents

 

The Company has outstanding options, warrants, convertible preferred stock and convertible debentures. Exercise of the options and warrants, and conversions of the convertible preferred stock and debentures could result in substantial dilution of our common stock and a decline in its market price. In addition, the terms of certain of the warrants, convertible preferred stock, and convertible debentures issued by us provide for reductions in the per share exercise prices of the warrants. These terms also provide for reductions in the per share conversion prices of the debentures and preferred stock (if applicable and subject to a floor in certain cases), in the event that we issue common stock or common stock equivalents (as that term is defined in the agreements), at an effective exercise/conversion price that is less than the then exercise/conversion prices of the outstanding warrants, preferred stock and debentures. These provisions, as well as the issuances of debentures and preferred stock with conversion prices that vary based upon the price of our common stock on the date of conversion, have resulted in significant dilution of our common stock and have given rise to reverse splits of our common stock.

 

The following table presents the dilutive effect of our various potential common shares as of September 30, 2018:

 

   

September 30, 2018

 
Common shares outstanding    

7,365,881

 
Dilutive potential shares:        
Stock options     77  
Warrants    

463,449,767

 
Convertible debt    

214,222,493

 
Convertible preferred stock    

68,344,495

 
Total dilutive potential common shares, including outstanding common stock    

753,382,713

 

 

As of November 9, 2018, the Company had sufficient authorized shares of its common stock to cover all potentially dilutive common shares outstanding.

 

Note 14 – Supplemental Disclosure of Cash Flow Information

 

The supplemental cash flow information for the nine months ended September 30, 2018 and 2017 (unaudited) is as follows:

 

   Nine Months Ended September 30, 
   2018   2017 
Cash paid for interest  $302,308   $1,106,835 
Cash paid for income taxes  $20,000   $506,313 
           
Acquisition of Jamestown Regional Medical Center:          
Cash  $-   $- 
Inventory  $450,682   $- 
Prepaid expenses and other current assets  $310,385   $- 
Property and equipment  $7,347,468   $- 
Intangible assets  $486,716   $- 
Accrued expenses  $(193,966)  $- 
           
Non-cash investing and financing activities:          
Exchange of preferred stock for convertible debentures and warrants  $-   $10,734,336 
Cashless exercise of warrants  $4,619,150   $- 
Exchange of convertible debentures for convertible debentures and warrants  $-   $- 
Exchange of debentures for Series I-2 Preferred Stock  $1,420   $- 
Services and severance settled through issuance of common stock  $-   $161,003 
Note payable, warrants, and accrued expenses settled through issuance of common stock  $-   $440,000 
Note payable and accrued expenses settled through issuance of Series J Preferred Stock  $250,000    - 
Exchange of Series H Preferred Stock for debentures  $-   $2,695,760 
Series F Preferred Stock issued for business acquisition  $-   $174,097 
Debentures converted into common stock  $8,085,342   $4,064,162 
OID from issuance of debentures  $1,920,000   $- 
Conversions of shares of Preferred Stock into common stock  $633,100   $- 
Conversions of shares of Series H Preferred Stock into common stock  $50,000   $- 
Deemed dividend for trigger of down round provision feature  $17,942,578   $53,341,619 

 

 26 
 

 

RENNOVA HEALTH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

Note 15 – Commitments and Contingencies

 

Legal Matters

 

From time to time, the Company may be involved in a variety of claims, lawsuits, investigations and proceedings related to contractual disputes, employment matters, regulatory and compliance matters, intellectual property rights and other litigation arising in the ordinary course of business. The Company operates in a highly regulated industry which may inherently lend itself to legal matters. Management is aware that litigation has associated costs and that results of adverse litigation verdicts could have a material effect on the Company’s financial position or results of operations. Management, in consultation with legal counsel, has addressed known assertions and predicted unasserted claims below.

 

Biohealth Medical Laboratory, Inc. and PB Laboratories, LLC (the “Companies”) filed suit against CIGNA Health in 2015 alleging that CIGNA failed to pay claims for laboratory services the Companies provided to patients pursuant to CIGNA - issued and CIGNA - administered plans. In 2016, the U.S. District Court dismissed part of the Companies’ claims for lack of standing. The Companies appealed that decision to the Eleventh Circuit Court of Appeals, which in late 2017 reversed the District Court’s decision and found that the Companies have standing to raise claims arising out of traditional insurance plans as well as self-funded plans. The Company continues to consider its options in this matter.

 

The Company’s Epinex Diagnostics Laboratories, Inc. subsidiary was sued in a California state court by two former employees who alleged that they were wrongfully terminated, as well as for a variety of unpaid wage claims. The parties entered into a settlement agreement of this matter on July 29, 2016 for approximately $0.2 million, and the settlement was consummated on August 25, 2016. In October of 2016, the plaintiffs in this matter filed a motion with the court seeking payment for attorneys’ fees in the approximate amount of $0.7 million. On March 24, 2017, the court granted plaintiffs’ motion for payment of attorneys’ fees in the amount of $0.3 million, and the Company accrued this amount in its condensed consolidated financial statements. Additionally, the Company is seeking indemnification for these amounts from Epinex Diagnostics, Inc., the seller of Epinex Diagnostic Laboratories, Inc., pursuant to a Stock Purchase Agreement entered into by and among the parties.

 

In February 2016, the Company received notice that the Internal Revenue Service (the “IRS”) placed a lien against Medytox Solutions, Inc. and its subsidiaries relating to unpaid 2014 taxes due, plus penalties and interest, in the amount of $5.0 million. The Company paid $0.1 million toward its 2014 tax liability in March 2016. The Company filed its 2015 Federal tax return on March 15, 2016 and the accompanying election to carryback the reported net operating losses was filed in April 2016. On August 24, 2016, the lien was released, and in September of 2016 the Company received a refund from the IRS in the amount of $1.9 million. In November of 2016, the IRS commenced an audit of the Company’s 2015 Federal tax return. The Company is currently unable to predict the outcome of the audit or any liability to the Company that may result from the audit and made provisions of approximately $2.0 million as a liability in its financial statements as well as an estimated $1.9 million of receivables for an additional refund that it believes is due. The Company expects the audit and all tax related matters to be concluded before the end of 2018.

 

On September 27, 2016, a tax warrant was issued against the Company by the Florida Department of Revenue (the “DOR”) for unpaid 2014 state income taxes in the approximate amount of $0.9 million, including penalties and interest. The Company has made payments to reduce the amount owed to approximately $443,000, and entered into a Stipulation Agreement with the DOR allowing the Company to make monthly installments until July 2019. If in July 2019, the remaining estimated balance of $390,000 is not paid in lump sum, the Company would have the option to renegotiate another Stipulation agreement. If at any time during the Stipulation period the Company fails to timely file any required tax returns with the DOR or does not meet the payment obligations under the Stipulation Agreement, the entire amount due could be accelerated. The remaining balance of approximately $443,000 remains outstanding to the DOR at September 30, 2018.

 

In December of 2016, TCS-Florida, L.P. (“Tetra”), filed suit against the Company for failure to make the required payments under an equipment leasing contract that the Company had with Tetra (see Note 11). On January 3, 2017, Tetra received a Default Judgment against the Company in the amount of $2.6 million, representing the balance owed on the leases, as well as additional interest, penalties and fees. In January and February of 2017, the Company made payments to Tetra relating to this judgment aggregating to $0.7 million, and on February 15, 2017, the Company entered into a forbearance agreement with Tetra whereby the remaining $1.9 million due would be paid in 24 equal monthly installments. The Company has not maintained the payment schedule to Tetra. As a result of this default, in May 2018, Tetra and the Company agreed to dispose of certain equipment and the proceeds from the sale have been applied to the outstanding balance. The balance owed to Tetra at September 30, 2018 was $0.5 million and the Company remains in default.

 

In December of 2016, DeLage Landen Financial Services, Inc. (“DeLage”), filed suit against the Company for failure to make the required payments under an equipment leasing contract that the Company had with DeLage (see Note 11). On January 24, 2017, DeLage received a default judgment against the Company in the approximate amount of $1.0 million, representing the balance owed on the lease, as well as additional interest, penalties and fees. The Company recognized this amount in its consolidated financial statements as of December 31, 2016. On February 8, 2017, a Stay of Execution was filed and under its terms the balance due will be paid in variable monthly installments through January of 2019, with an implicit interest rate of 4.97%. The Company and DeLage have now disposed of certain equipment and reduced the balance owed to DeLage. A balance of $0.2 million remains outstanding at September 30, 2018.

 

 27 
 

 

RENNOVA HEALTH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

On December 7, 2016, the holders of the Tegal Notes (see Note 8) filed suit against the Company seeking payment for the amounts due under the notes in the aggregate of the principal of $341,612, and accrued interest of $43,000. A request for entry of default judgment was filed on January 24, 2017. On April 23, 2018, the holders of the Tegal Notes received a judgment against the Company. To date, the Company has yet to repay this amount.

 

In November 2017, a former shareholder of Genomas, Phenomas, LLC, filed suit against the Company for payment of a $200,000 note payable by the Company’s subsidiary, Genomas. This note is recorded in the financial statements of the subsidiary and is not payable directly from the Company. The Company has made payments totaling $120,000 against this note and agreed to a payment schedule in order to dismiss the legal action. On November 12, 2018, Phenomas, LLC filed a motion to voluntarily dismisses the suit without prejudice.

 

The counterparty to the prepaid forward purchase agreement entered into by the Company on March 31, 2016, as amended, has filed an arbitration proceeding under the agreement with regard to the outstanding balance. See Note 9. The Company does not have the financial resources to satisfy this amount.

 

Two former employees of the Company’s CollabRx, Inc. subsidiary have filed suits in a California state court in connection with amounts claimed to be owed under their respective employment agreements with the subsidiary. One former employee received a judgment in October 2018 for approximately $253,000. The other former employee’s claim is for approximately $110,000. The Company is considering its options to refute these matters and believes the claims to be frivolous and outside of entitlement and contractual agreements.

 

The Company, as well as many of our subsidiaries, are defendants in a case filed in Broward County Circuit Court by TCA Global Credit Master Fund, L.P. The plaintiff alleges a breach by Medytox Solutions, Inc. of its obligations under a debenture and claims damages of approximately $2,030,000 plus interest, costs and fees. The Company and the other subsidiaries are sued as alleged guarantors of the debenture. The complaint was filed on August 1, 2018. The Company has recorded the principal balance and interest owed under the debentures agreement for the period ended September 30, 2018. The Company and all defendants have filed a motion to dismiss the complaint, but have not recorded any potential liability related to any further damages. The case is in its early stages.

 

On September 13, 2018, Laboratory Corporation of America sued EPIC Reference Laboratories, Inc., a subsidiary of the Company, in Palm Beach County Circuit Court for amounts claimed to be owed of approximately $148,000. The Company has recorded the amount owed in accrued expenses for the period ended September 30, 2018. This case is in its early stages. 

 

Note 16 – Segment Information

 

Operating segments are defined under U.S. GAAP as components of an enterprise for which discrete financial information is available and are evaluated regularly by the enterprise’s chief operating decision maker in determining how to allocate resources and assess performance. The Company operates in two reportable business segments:

 

  Clinical Laboratory Operations, which specializes in providing urine and blood toxicology and pain medication testing to physicians, clinics and rehabilitation facilities in the United States.
     
  Hospital Operations, which reflects the operations of Jamestown Regional Medical Center and Big South Fork Medical Center.

 

The Company’s Corporate expenses reflect consolidated company wide support services such as finance, legal counsel, human resources, and payroll.

 

The Company’s Decision Support and Informatics segment and its Supportive Software Solutions segment are now included in discontinued operations as they have been classified as held for sale as of September 30, 2018. The accounting policies of the reportable segments are the same as those described in Note 1 above and in Note 2 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 filed with the SEC on April 24, 2018.

 

 28 
 

 

RENNOVA HEALTH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

Selected financial information for the Company’s operating segments is as follows:

 

   Three Months Ended September 30,   Nine Months Ended September 30, 
   2018   2017   2018   2017 
Net revenues - External                    
Clinical Laboratory Operations  $17,568   $190,610   $177,890   $949,440 
Hospital Operations   5,021,541    619,478    9,755,099    619,478 
   $5,039,110   $810,088   $9,932,989   $1,568,918 
(Loss) from operations                    
Clinical Laboratory Operations  $(547,041)  $(1,039,118)  $(1,765,395)  $(3,809,147)
Hospital Operations   (1,294,580)   (2,093,805)   (3,998,943)   (3,114,473)
Corporate   (973,954)   (1,369,765)   (3,156,645)   (5,058,569)
Eliminations   -    -    -    - 
   $(2,815,575)  $(4,502,688)  $(8,920,983)  $(11,982,189)
Depreciation and amortization                    
Clinical Laboratory Operations  $112,908   $410,801   $625,877   $1,265,174 

Hospital Operations

   

39,669

    15,436    177,386    15,436 

Corporate

   248    345    810    1006 
Eliminations   -    -    -    - 
   $152,825   $426,582   $804,073   $1,281,616 

 

   September 30, 2018   December 31, 2017 
Total assets          
Clinical Laboratory Operations  $421,478   $1,503,520 
Supportive Software Solutions   1,650,984    2,549,504 
Decision Support and Informatics   38,323    - 
Hospital Operations   16,730,568    3,436,773 
Corporate   4,087,610    255,566 
Eliminations   (3,506,178)   (1,454,569)
Total Assets  $19,422,785   $6,290,794 

 

Note 17 – Derivative Financial Instruments and Fair Value

 

In accordance with ASC 820, “Fair Value Measurements and Disclosures,” the Company applies fair value accounting for all financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis. Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities, which are required to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability, such as risks inherent in valuation techniques, transfer restrictions and credit risk. Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:

 

  Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities that we have the ability to access at the measurement date.

 

 29 
 

 

RENNOVA HEALTH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

  Level 2 applies to assets or liabilities for which there are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly, such as quoted prices for similar assets or liabilities in active markets; or quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets).
     
  Level 3 applies to assets or liabilities for which fair value is derived from valuation techniques in which one or more significant inputs are unobservable, including our own assumptions.

 

The estimated fair value of financial instruments is determined by the Company using available market information and valuation methodologies considered to be appropriate. At September 30, 2018 and December 31, 2017, the carrying value of the Company’s accounts receivable, accounts payable and accrued expenses approximate their fair values due to their short-term nature.

 

The following table sets forth the financial assets and liabilities carried at fair value measured on a recurring basis as of December 31, 2017 and September 30, 2018:

 

   Level 1   Level 2   Level 3   Total 
As of December 31, 2017:                    
Embedded conversion options  $-   $-   $1,577,025   $1,577,025 
Common stock warrants   -    -    10,858,225    10,858,225 
Total  $-   $-   $12,435,250   $12,435,250 
                     
As of September 30, 2018:                    
Embedded conversion options  $-   $-   $357,797