UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-K

 

 

(Mark one)

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

 

For the fiscal year ended December 31, 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: 0-26824

 

 

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.)
     

931 Village Boulevard, Suite 905

West Palm Beach, FL

  33409
(Address of principal executive offices)   (Zip Code)

 

Registrant’s telephone number, including area code: (561) 855-1626

 

 

Securities registered under Section 12(b) of the Act:

None

 

Securities registered under Section 12(g) of the Act:

Common Stock, $0.0001 Par Value

Warrants to Purchase Common Stock, $0.0001 Par Value

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. [  ] Yes [X] No

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. [  ] Yes [X] No

 

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 [X] No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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). [X]Yes [  ] No

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [  ]

 

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.

 

Large accelerated filer [  ] Accelerated filer [  ]
Non-accelerated filer [X] 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 Act). [  ] Yes [X] No

 

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter.

 

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2018 was $2,941,747.

 

As of September 10, 2019, the registrant had 7,508,936,775 shares of Common Stock outstanding.

 

 

 

 
 

 

RENNOVA HEALTH, INC.
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2018

TABLE OF CONTENTS

 

  Page
PART I    
Item 1. Business 3
Item 1A. Risk Factors 15
Item 1B. Unresolved Staff Comments 28
Item 2. Properties 28
Item 3. Legal Proceedings 29
Item 4. Mine Safety Disclosures 30
PART II  
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 30
Item 6. Selected Financial Data 32
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 32
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 47
Item 8. Financial Statements and Supplementary Data 47
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 48
Item 9A. Controls and Procedures 48
Item 9B. Other Information 49
PART III  
Item 10. Directors, Executive Officers and Corporate Governance 49
Item 11. Executive Compensation 51
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 53
Item 13. Certain Relationships and Related Transactions, and Director Independence 55
Item 14. Principal Accounting Fees and Services 57
PART IV  
Item 15. Exhibits and Financial Statement Schedules 57
SIGNATURES 58

 

 2 
 

 

RENNOVA HEALTH, INC.

ANNUAL REPORT ON FORM 10-K

For the Fiscal Year Ended December 31, 2018

 

PART I

 

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

 

Certain statements made in this Annual Report on Form 10-K are “forward-looking statements” (within the meaning of the Private Securities Litigation Reform Act of 1995) regarding the plans and objectives of management for future operations. Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements of the Registrant to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. The forward-looking statements included herein are based on current expectations that involve numerous risks and uncertainties. The Registrant’s plans and objectives are based, in part, on assumptions involving the continued expansion of business. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond the control of the Registrant. Although the Registrant believes its assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove to be inaccurate and, therefore, there can be no assurance the forward-looking statements included in this Report will prove to be accurate. Considering the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by the Registrant or any other person that the objectives and plans of the Registrant will be achieved.

 

The forward-looking statements included in this Form 10-K and referred to elsewhere are related to future events, our strategies or future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may,” “should,” “believe,” “anticipate,” “future,” “potential,” “estimate,” “encourage,” “opportunity,” “growth,” “leader,” “expect,” “intend,” “plan,” “expand,” “focus,” “through,” “strategy,” “provide,” “offer,” “allow,” “commitment,” “implement,” “result,” “increase,” “establish,” “perform,” “make,” “continue,” “can,” “ongoing,” “include” or the negative of such terms or comparable terminology. All forward-looking statements included in this Form 10-K are based on information available to us as of the filing date of this report, and the Company assumes no obligation to update any such forward-looking statements, except as required by law. Our actual results could differ materially from the forward-looking statements. Important factors that could cause actual results to differ materially from expectations reflected in our forward-looking statements include those described in Item 1A, “Risk Factors.”

 

Item 1. Business

 

Rennova Health, Inc. (together with its subsidiaries, “Rennova”, “we” or the “Company”) is a provider of health care services for healthcare providers, patients and individuals. Beginning in 2011 the Company owned and operated a number of clinical diagnostics laboratories which focused on the provision of urine toxicology diagnostics to the substance abuse sector. The majority of the Company’s business was conducted in Florida. The Company invested in and developed a suite of software products to complement its diagnostics business and create an additional revenue stream. The Company also expanded its diagnostics business to include certain genetic diagnostics and interpretation of diagnostic outcomes in the cancer and pharmacogenomics sector. Adverse market conditions in the Company’s core diagnostics business in 2015 and 2016 caused a significant downturn in revenue and cash generation and caused the Company to reconsider its activities and direction. In late 2016 the Company decided to pursue the opportunity acquire and operate clusters of rural hospitals and is currently focused on implementing this business model. In 2018, the Company focused on and operated two synergistic divisions: 1) Clinical diagnostics and 2) Hospital operations. Hospital operations have become the principle business of Rennova. The Company now owns and operates three hospitals, a physician’s office in Tennessee and a rural clinic in Kentucky. The facilities are, Big South Fork Medical Center, which we opened on August 8, 2017 in Oneida Tennessee, Jamestown Regional Medical Center located in Jamestown Tennessee, which includes a doctor’s practice, the assets of which were acquired in the second quarter of 2018, pursuant to the terms of a definitive asset purchase agreement that we entered into on January 31, 2018 and Jellico Community Hospital in Jellico, Tennessee and an outpatient clinic in Williamsburg, Kentucky, the assets of which we acquired on March 5, 2019, as more fully discussed below. We believe that our approach will produce a more sustainable business model and the capture of multiple revenue streams from medical providers, patients and hospital services.

 

On July 12, 2017, we announced plans to spin off our Advanced Molecular Services Group (“AMSG”) and in the third quarter 2017 our Board of Directors voted unanimously to spin off the Company’s wholly-owned subsidiary, Health Technology Solutions, Inc. (“HTS”), as independent publicly traded companies by way of tax-free distributions to the Company’s stockholders. While these spin offs have taken longer than anticipated, completion of these spin offs is now expected to occur in the first quarter of 2020. The spin offs are subject to numerous conditions, including effectiveness of Registration Statements on Form 10 to be filed with the Securities and Exchange Commission, and consents, including under various funding agreements previously entered into by the Company. A record date to determine those stockholders entitled to receive shares in the spin offs should be approximately 30 to 60 days prior to the dates of the spin offs. The strategic goal of the spin offs is to create three public companies, each of which can focus on its own strengths and operational plans. In addition, after the spin offs, each company will provide a distinct and targeted investment opportunity.

 

We have reflected the amounts relating to AMSG and HTS as disposal groups classified as held for sale and included in discontinued operations in the Company’s accompanying consolidated financial statements. Prior to being classified as held for sale, AMSG had been included in the Decision Support and Informatics division, except for the Company’s subsidiary, Alethea Laboratories, Inc., which had been included in the Clinical Laboratories division and HTS had been included in the Company’s Supportive Software Solutions division. The Company believes it will be able to recognize the expenditures to date with regard to AMSG and HTS, which are in excess of $20 million, as an investment after the spin offs are complete.

 

 3 
 

 

We received approximately $9.0 million and $15.7 million in cash from issuances of debentures and warrants during 2018 and 2017, respectively (see Note 9 to the consolidated financial statements), $3.3 million and $4.8 million from related parties in 2018 and 2017, respectively (see Notes 8, 9 and 10 to the consolidated financial statements), $4.0 million of proceeds on October 30, 2017 from the issuance of our convertible preferred stock (see Note 13 to the consolidated financial statements) and $0.8 million in 2018 from the sale of stock we owned (see Note 18). Subsequent to December 31, 2018 and through September 27, 2019, we received $3.8 million from issuances of debentures as more fully discussed below and $1.6 million from the issuance of a promissory note, which is more fully discussed in Note 21 to the consolidated financial statements, and $9.9 million in advances from Mr. Diamantis, a member of our board of directors, which were used to repay obligations under a prepaid forward purchase contract related to an accounts receivable financing as more fully discussed below. In addition, subsequent to December 31, 2018 and through September 10, 2019, Mr. Diamantis loaned the Company $6.5 million, of which $1.9 million was used for fees and expenses incurred in connection with the settlement of the prepaid forward purchase contract, $0.7 million was used to purchase Jellico Community Hospital in March 2019 and the remainder was used for working capital purposes.

 

Our net loss from continuing operations for the year ended December 31, 2018 was $13.6 million, as compared to $50.9 million for the same period a year ago. The change is primarily due to a reduction in the loss from continuing operations before other income and expense and income taxes of $2.9 million, the change in fair value and the value of derivative liabilities, which provided a gain of $13.7 million in 2018 versus a loss of $12.4 million in 2017, a gain on bargain purchase associated with the acquisition of Jamestown Regional Medical Center in June 2018 of $7.6 million and an increase in other income of $0.6 million in 2018.

 

History and Development of the Company

 

Medytox Solutions, Inc. (“Medytox”) was organized on July 20, 2005 under the laws of the State of Nevada. In the first half of 2011, Medytox’s management elected to reorganize as a holding company, and Medytox established and acquired a number of companies in the medical service and software sector between 2011 and 2014.

 

On November 2, 2015, pursuant to the terms of the Agreement and Plan of Merger, dated as of April 15, 2015, by and among CollabRx, Inc. (“CollabRx”), CollabRx Merger Sub, Inc. (“Merger Sub”), a direct wholly-owned subsidiary of CollabRx formed for the purpose of the merger, and Medytox, Merger Sub merged with and into Medytox, with Medytox as the surviving company and a direct, wholly-owned subsidiary of CollabRx (the “Merger”). Prior to closing, the Company amended its certificate of incorporation to change its name to Rennova Health, Inc. This transaction was accounted for as a reverse merger in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and, as such, the historical financial statements of Medytox became the historical financial statements of the Company.

 

Common Stock Listing

 

On November 3, 2015, the common stock of Rennova Health, Inc. commenced trading on The NASDAQ Capital Market under the symbol “RNVA.” Prior to that date, our common stock was listed on The NASDAQ Capital Market under the symbol “CLRX.”

 

On April 18, 2017, the Company was notified by NASDAQ that the stockholders’ equity balance reported on the Company’s Form 10-K for the year ended December 31, 2016 fell below the $2.5 million minimum requirement for continued listing under The NASDAQ Capital Market’s Listing Rule 5550(b)(1) (the “Rule”). In accordance with the Rule, the Company submitted a plan to NASDAQ outlining how it intended to regain compliance. On August 17, 2017, NASDAQ notified the Company that its plan to correct the stockholders’ equity deficiency did not contain sufficient evidence to support a correction being achieved in the required time frame. The Company appealed this decision to a Hearing Panel which, on October 23, 2017, maintained this position and denied the Company a continued listing. Effective October 25, 2017, the Company’s common stock (RNVA) and warrants to purchase common stock (RNVAW) were no longer listed on The NASDAQ Capital Market but began trading on the OTCQB instead.

 

Reverse Stock Splits

 

On February 7, 2017, the Company’s Board of Directors approved an amendment to the Company’s Certificate of Incorporation to effect a 1-for-30 reverse stock split of the Company’s shares of common stock effective February 22, 2017, on September 21, 2017, the Company’s Board of Directors approved an amendment to the Company’s Certificate of Incorporation to effect a 1-for-15 reverse stock split effective October 5, 2017, and on November 5, 2018, the Company’s Board of Directors approved an amendment to the Company’s Certificate of Incorporation to effect a 1-for-500 reverse stock split effective November 12, 2018 (the “Reverse Stock Splits”). The stockholders of the Company had approved these amendments to the Company’s Certificate of Incorporation on December 22, 2016 for the February 22, 2017 reverse stock split, on September 20, 2017 for the October 5, 2017 reverse stock split and on August 22, 2018 for the November 12, 2018 reverse stock split. In each of these cases, the Company’s stockholders had granted authorization to the Board of Directors to determine in its discretion the specific ratio, subject to limitations, and the timing of the reverse splits within certain specified effective dates.

 

 4 
 

 

As a result of the Reverse Stock Splits, every 30 shares of the Company’s then outstanding common stock was combined and automatically converted into one share of the Company’s common stock on February 22, 2017, every 15 shares of the Company’s then outstanding common stock was combined and automatically converted into one share of the Company’s common stock on October 5, 2017 and every 500 shares of the Company’s common stock was combined and automatically converted into one share of the Company’s common stock on November 12, 2018. In addition, the conversion and exercise prices of all of the Company’s outstanding preferred stock, common stock purchase warrants, stock options, restricted stock, equity incentive plans and convertible notes payable were proportionately adjusted at the applicable reverse split ratio in accordance with the terms of such instruments. In addition, proportionate voting rights and other rights of common stockholders were not affected by the Reverse Stock Splits, other than as a result of the rounding up of fractional shares in the February reverse split and the payment of cash in lieu of fractional shares in the October and November reverse splits, as no fractional shares were issued in connection with the Reverse Stock Splits.

 

All share, per share and capital stock amounts as of and for the years ended December 31, 2018 and 2017 have been restated to give effect to the Reverse Stock Splits.

 

In addition, 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 and the par value of the Company’s common stock was decreased from $0.01 per share to $.0001 per share. No additional change was made to the terms of the Company’s common stock as a result of the November 12, 2018 reverse stock split and no change was made to the authorized preferred stock, which remains at 5,000,000 shares of preferred stock, par value $0.01 per share.

 

Recent Developments

 

Asset Acquisitions of Jellico Community Hospital and CarePlus Center

 

On March 5, 2019, the Company closed an asset purchase agreement (the “Purchase Agreement”) whereby it acquired certain assets related to an acute care hospital located in Jellico, Tennessee and an outpatient clinic located in Williamsburg, Kentucky. The hospital is known as Jellico Community Hospital and the clinic is known as the CarePlus Center. The hospital and the clinic and their associated assets were acquired from Jellico Community Hospital, Inc. and CarePlus Rural Health Clinic, LLC, respectively.

 

Jellico Community Hospital is a fully operational 54-bed acute care facility that offers comprehensive services, including diagnostic imaging, radiology, surgery (general, gynecological and vascular), nuclear medicine, wound care and hyperbaric medicine, intensive care, emergency care and physical therapy. The CarePlus Center offers sophisticated testing capabilities and compassionate care, all in a modern, patient-friendly environment. Services include diagnostic imaging services, x-ray, mammography, bone densitometry, computed tomography (CT), ultrasound, physical therapy and laboratory services on a walk-in basis.

 

The purchase price was approximately $658,537. This purchase price was made available by Christopher Diamantis, a director of the Company. Diligence, legal and other costs associated with the acquisition are estimated to be approximately $250,000, meaning the total cost of acquisition to the Company is approximately $908,000.

 

Annual net revenues of these businesses in recent years have been approximately $12,000,000, with government payors, including Medicare and Medicaid, accounting for in excess of 70% of the payor mix. The Company does not expect that payor mix to change in the new future.

 

 5 
 

 

Share Issuances

 

Subsequent to December 31, 2018 and through September 10, 2019, the Company issued an aggregate of 7,380,369,502 shares of common stock for conversions of preferred stock and the cashless exercise of warrants.

 

2019 Debenture Offerings

 

The Company issued debentures on February 24, 2019 in the aggregate principal amount of $300,000, on March 27, 2019 in the aggregate principal amount of $300,000 and on May 12, 2019 in the aggregate principal amount of $500,000. All of these debentures were guaranteed by Mr. Diamantis, a director of the Company, and were due on June 3, 2019. In addition, the Company issued debentures on June 5, 2019 in the aggregate principal amount of $125,000 and on June 7, 2019 in the aggregate principal amount of $200,000. These debentures were also guaranteed by Mr. Diamantis and were due on July 20, 2019.

 

On June 13, 2019 the Company closed an offering of $1,250,000 aggregate principal amount of debentures with certain existing institutional investors pursuant to the terms of a Bridge Debenture Agreement, dated as of June 13, 2019 ( the “June 13 Agreement”) and received proceeds of $1,250,000. The June 13 Agreement provided that on or prior to June 30, 2019, at the mutual election of the Company and the investors, the investors could purchase an additional $1,250,000 principal amount on the same terms and conditions as provided in the June 13 Agreement. Under the June 13 Agreement, the maturity dates of the debentures issued on February 24, 2019, March 27, 2019, May 12, 2019, June 5, 2019 and June 7, 2019 were extended to December 31, 2019 and the terms were changed such that they have the same interest terms as contained in the June 13, 2019 debentures, as more fully discussed below.

 

On June 21, 2019, the Company and the investors agreed that the Company would issue, and the investors would purchase, $250,000 principal amount of debentures and on June 24, 2019 the Company and the investors agreed that the Company would issue, and the investors would purchase, an additional $1,020,000 aggregate principal amount of debentures. In connection with the issuances of the June 21, 2019 and June 24, 2019 debentures, the Company received total proceeds of $1,270,000.

 

The June 13, 2019, June 21, 2019 and June 24, 2019 debentures (collectively, “the June 2019 Debentures”) are secured and guaranteed by the Company’s subsidiaries on the same terms as provided in the Securities Purchase Agreement, dated as of August 31, 2017. At the Company’s option, the June 2019 Debentures may also be exchanged for shares of the Company’s Series I-2 Convertible Preferred Stock under the terms of the previously-announced Exchange Agreement, dated as of October 30, 2017. Commencing on August 17, 2019, the June 2019 Debentures shall bear interest on the outstanding principal amount at a rate of 2.5% per month (increasing to 5% per month on October 12, 2019), payable quarterly beginning on October 1, 2019. All overdue accrued and unpaid interest shall entail a late fee equal to the lesser of 24% per annum or the maximum rate permitted by applicable law. Christopher Diamantis is a guarantor of the June 2019 Debentures.

 

Promissory Note

 

On September 27, 2019, the Company issued a promissory note to a lender in the principal amount of $1.9 million and received proceeds of $1.6 million. The first principal payment of $1.0 million is due on or before November 8, 2019 and the remaining $0.9 million is due on or before December 26, 2019. The note does not bear interest except upon the occurrence of an event of default (as defined in the note). The note is unsecured and is guaranteed by Mr. Diamantis.

 

Accounts Receivable Factoring Arrangements

 

Subsequent to December 31, 2018 and through September 10, 2019, the Company entered into five accounts receivable factoring arrangements as more fully discussed in Note 21 to the consolidated financial statements.

 

Accounts Receivable Financing (Prepaid Forward Purchase Contract)

 

As previously announced, on March 31, 2016 the Company entered into an agreement to sell certain of its accounts receivable. The agreement was originally scheduled to mature on March 31, 2017, which date was extended to March 31, 2018 by an amendment on March 24, 2017. Also, what the counterparty was to receive was amended to equal (a) the $5,000,000 purchase price plus a 20% per annum investment return thereon, plus (b) $500,000, plus (c) the product of (i) the proceeds received from the accounts receivable, minus the amount set forth in clauses (a) and (b), multiplied by 40%. In connection with this extension, the counterparty received a fee of $1,000,000. On April 2, 2018, the Company, the purchaser and Christopher Diamantis, a director of the Company, 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 purchaser received a fee of $100,000. The counterparty instituted an arbitration proceeding under the agreement with regard to the outstanding balance. In December 2018, the Company, Mr. Diamantis and the counterparty entered into a preliminary settlement agreement in connection with the arbitration, with the terms of the settlement agreement revised on March 31, 2019. Under the terms of the settlement agreement, the Company and Mr. Diamantis agreed to pay the counterparty $2,000,000 on or before April 5, 2019 and an additional $7,694,685 plus interest at 10% per annum on or before May 20, 2019. These terms were subsequently amended and on April 5, 2019 and May 31, 2019, Mr. Diamantis, a director of the Company made payments totaling $5,000,000 on behalf of the Company. A final payment of $4,937,105 was agreed to be made on or before July 28, 2019. Mr. Diamantis made that payment on behalf of the Company on July 26, 2019. The Company and Mr. Diamantis have now complied with all of their obligations under the settlement agreement. As a result, the Company is now obligated to repay Mr. Diamantis a total of $9,937,105. To date, the Company has not recovered any proceeds from the disputed accounts receivable.

 

 6 
 

 

Our Services

 

We are a healthcare enterprise that delivers products and services to healthcare providers, their patients and individuals. We operate in two synergistic divisions: 1) Hospital operations; and 2) Clinical diagnostics services through our clinical laboratory. We aspire to create a more sustainable relationship with our customers by offering needed and interoperable solutions to capture multiple revenue streams from medical providers, patients and hospital services.

 

Hospital Operations

 

We believe that the acquisition or development of rural hospitals will create a stable revenue base from a needed service and believe that we can expand the sales of our products and services to surrounding medical providers and doctors’ groups, as well as realize the potential for significant synergistic opportunities with our Clinical Laboratory Operations business segment.

 

Scott County Community Hospital (DBA Big South Fork Medical Center)

 

On January 13, 2017, we closed on an asset purchase agreement to acquire certain assets related to Scott County Community Hospital, based in Oneida, Tennessee (the “Oneida Assets”). The Oneida Assets include a 52,000 square foot hospital building and 6,300 square foot professional building on approximately 4.3 acres. Scott County Community Hospital is classified as a Critical Access Hospital (rural) with 25 beds, a 24/7 emergency department, operating rooms and a laboratory that provides a range of diagnostic services. Scott County Community Hospital closed in July 2016 in connection with the bankruptcy filing of its parent company, Pioneer Health Services, Inc. We acquired the Oneida Assets out of bankruptcy for a purchase price of $1.0 million. The hospital, which has been renamed Big South Fork Medical Center, became operational on August 8, 2017.

 

Jamestown Regional Medical Center

 

On January 31, 2018, the Company entered into an asset purchase agreement to acquire certain assets related to an acute care hospital located in Jamestown, Tennessee, referred to as Jamestown Regional Medical Center. The purchase was completed on June 1, 2018. The hospital was acquired by a newly formed subsidiary, Jamestown TN Medical Center, Inc., and is an 85-bed facility of approximately 90,000 square feet on over eight acres of land, which offers a 24-hour Emergency Department with two spacious trauma bays and seven private exam rooms, inpatient and outpatient medical services and a Progressive Care Unit which provides telemetry services. The acquisition also included a separate physician practice which now operates under Rennova as Mountain View Physician Practice, Inc. Jamestown is located 38 miles west of our from Big South Fork Medical Center.

 

Jellico Medical Center

 

On March 5, 2019, the Company closed an asset purchase agreement (the “Purchase Agreement”) whereby it acquired certain assets related to an acute care hospital located in Jellico, Tennessee and an outpatient clinic located in Williamsburg, Kentucky. The hospital is known as Jellico Community Hospital and the clinic is known as the CarePlus Center. The hospital and the clinic and their associated assets were acquired from Jellico Community Hospital, Inc. and CarePlus Rural Health Clinic, LLC, respectively.

 

Jellico Community Hospital is a fully operational 54-bed acute care facility that offers comprehensive services, including diagnostic imaging, radiology, surgery (general, gynecological and vascular), nuclear medicine, wound care and hyperbaric medicine, intensive care, emergency care and physical therapy. Jellico is located 33 miles east of our Big South Fork Medical Center. The CarePlus Center offers sophisticated testing capabilities and compassionate care, all in a modern, patient-friendly environment. Services include diagnostic imaging services, x-ray, mammography, bone densitometry, computed tomography (CT), ultrasound, physical therapy and laboratory services on a walk-in basis.

 

The purchase price was approximately $658,537. This purchase price was made available by Christopher Diamantis, a director of the Company. Diligence, legal and other costs associated with the acquisition are estimated to be approximately $250,000, meaning the total cost of acquisition to the Company is approximately $908,000.

 

Annual net revenues of these businesses in recent years have been approximately $12,000,000, with government payors, including Medicare and Medicaid, accounting for in excess of 70% of the payor mix. The Company does not expect that payor mix to change in the new future.

 

Our hospital operations began on August 8, 2017, following the receipt of the required licenses and regulatory approvals and generated revenues of approximately $14.4 million during 2018 and approximately $0.9 million during the period from August 8, 2017 to December 31, 2017. Management determined that because Big South Fork Medical Center was reopened after being closed and contracts with payers had to be negotiated and implemented during the first months of operation, they would recognize a 20% collection rate for the period to December 31, 2017, until there was adequate collection history to analyze and confirm anticipated collections. During 2018, based on collection history achieved, management recognized a 17% collection rate for all of our hospitals.

 

Clinical Diagnostics

 

Prior to our focus on hospital operations, our principal focus had been clinical laboratory blood and urine testing services, with a particular emphasis on the provision of urine drug toxicology testing to physicians, clinics and rehabilitation facilities in the United States. Testing services to physicians, clinics and rehabilitation facilities represented approximately 0.9%% and 71.6% of our revenues for the years ended December 31, 2018 and 2017, respectively. We believe that we are responding to the challenges faced by today’s healthcare providers to adopt paper free and interoperable systems, and to market demand for solutions by strategically expanding our offering of diagnostics services to include a full suite of clinical laboratory services. The drug and alcohol rehabilitation and pain management sectors provide an existing and sizable target market, where the need for our services already exists and opportunity is being created by a continued secular growth and need for compliance. This sector has been fraught with difficulties over the past number of years as payers reduce reimbursement and cover for diagnostics in this sector. The lack of consistency between payer’s policies and their requirement for proof of medical necessity has created uncertainty for ordering physicians and testing laboratories and their ability to receive payment. In the first quarter of 2018, we reduced the number of laboratories we operate to one facility in Palm Beach County, Florida.

 

 7 
 

 

The Company owns and operates the following products and services to support its business objectives and to enable it to offer these services to its customers:

 

Medytox Diagnostics, Inc. (“MDI”)

 

Through our Clinical Laboratory Improvement Amendments (“CLIA”) certified laboratory, Rennova offers toxicology, clinical pharmacogenetics and esoteric testing. Rennova seeks to provide these testing services with superior logistics and specimen integrity, competitive turn-around times and excellent customer service.

 

Clinical Laboratory Operations

 

The Company, through its wholly-owned MDI subsidiary, owns and operates the following clinical laboratory:

 

Laboratory   Location
EPIC Reference Labs, Inc.   Riviera Beach, FL

 

During 2017 and 2018, the Company experienced a substantial decline in the volume of samples processed at its laboratories and continued difficulty in receiving reimbursement for certain diagnostics. As a result, in an effort to reduce costs, the Company is currently operating its Clinical Laboratory Operations business segment out of its EPIC Reference Labs, Inc. (“EPIC”) laboratory, and cost reduction efforts are continuing in response to the operating losses incurred. MDI formed EPIC as a wholly-owned subsidiary on January 29, 2013 to provide reference, confirmation and clinical testing services. The Company acquired necessary equipment and licenses in order to allow EPIC to test urine for drugs and medication monitoring. Operations at EPIC began in January 2014 using approximately 2,500 square feet and the premises has since been expanded to occupy approximately 12,500 square feet.

 

The Company’s Medytox Medical Marketing & Sales, Inc. subsidiary was formed on March 9, 2013 as a wholly-owned subsidiary to provide marketing, sales, and customer service exclusively for our clinical laboratories.

 

Marketing Strategy

 

Rennova provides a suite of products and services to the medical services sector. We endeavor to be a single source for multiple business solutions that serve the medical services industry. The Company intends to expand, through its acquisition and subsequent integration of businesses, into a robust business model providing an extensive range of services to medical providers that demonstrate improved patient care and outcomes.

 

Competition

 

The healthcare industry is highly competitive among hospitals and other healthcare providers for patients, affiliations with physicians and acquisitions. The most significant competition our hospitals, and any other hospitals we may acquire, face comes from hospitals that provide more complex services, and other healthcare providers, including outpatient surgery, orthopedic, oncology and diagnostic centers that also compete for patients. Our hospitals, our competitors, and other healthcare industry participants are increasingly implementing physician alignment strategies, such as acquiring physician practice groups, employing physicians and participating in ACOs or other clinical integration models, which may impact our competitive position. In addition, increasing consolidation within the payor industry, vertical integration efforts involving payors and healthcare providers, and cost-reduction strategies by large employer groups and their affiliates may impact our ability to contract with payors on favorable terms and otherwise affect our competitive position.

 

The Company competes in a fragmented diagnostics industry split between independently-owned and physician-owned laboratories. There are three predominant players in the industry that operate as full-service clinical laboratories (processing blood, urine and other tissue). In addition, the competition ranges from smaller privately-owned laboratories (3-6 employees) to large publicly-traded laboratories with significant market capitalizations.

 

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Governmental Regulation

 

Overview

 

The healthcare industry is governed by an extremely complex framework of federal, state and local laws, rules and regulations, and there continue to be federal and state proposals that would, and actions that do, impose limitations on government and private payments to providers. In addition, there regularly are proposals to increase co-payments and deductibles from program and private patients. Facilities also are affected by controls imposed by government and private payors designed to reduce admissions and lengths of stay. Such controls include what is commonly referred to as “utilization review”. Utilization review entails the review of a patient’s admission and course of treatment by a third party. Historically, utilization review has resulted in a decrease in certain treatments and procedures being performed. Utilization review is required in connection with the provision of care which is to be funded by Medicare and Medicaid and is also required under many managed care arrangements.

 

Many states have enacted, or are considering enacting, additional measures that are designed to reduce their Medicaid expenditures and to make changes to private healthcare insurance. Various states have applied, or are considering applying, for a waiver from current Medicaid regulations in order to allow them to serve some of their Medicaid participants through managed care providers. These proposals also may attempt to include coverage for some people who presently are uninsured, and generally could have the effect of reducing payments to hospitals, physicians and other providers for the same level of service provided under Medicaid.

 

Healthcare Facility Regulation

 

Certificate of Need Requirements

 

A number of states require approval for the purchase, construction or expansion of various healthcare facilities, including findings of need for additional or expanded healthcare services. Certificates of Need (“CONs”), which are issued by governmental agencies with jurisdiction over applicable healthcare facilities, are at times required for capital expenditures exceeding a prescribed amount, changes in bed capacity or the addition of services and certain other matters. Tennessee, the state in which we currently operate our hospitals, has a CON law that applies to such facilities. States periodically review, modify and revise their CON laws and related regulations. Any violation of state CON laws can result in the imposition of civil sanctions or the revocation of licenses for such facilities. We are unable to predict whether our hospitals will be able to obtain any CONs that may be necessary to accomplish their business objectives in any jurisdiction where such certificates of need are required. Violation of these state laws may result in the imposition of civil sanctions or the revocation of licenses for such facilities. In addition, future healthcare facility acquisitions also may occur in states that require CONs.

 

Future healthcare facility acquisitions also may occur in states that do not require CONs or which have less stringent CON requirements than the state in which Rennova currently operates its hospitals. Any healthcare facility operated by the Company in such states may face increased competition from new or expanding facilities operated by competitors, including physicians.

 

Utilization Review Compliance and Hospital Governance

 

Healthcare facilities are subject to, and comply with, various forms of utilization review. In addition, under the Medicare prospective payment system, each state must have a peer review organization to carry out a federally mandated system of review of Medicare patient admissions, treatments and discharges in hospitals. Medical and surgical services and physician practices are supervised by committees of staff doctors at each healthcare facility, are overseen by each healthcare facility’s local governing board, the primary voting members of which are physicians and community members, and are reviewed by quality assurance personnel. The local governing boards also help maintain standards for quality care, develop long-range plans, establish, review and enforce practices and procedures and approve the credentials and disciplining of medical staff members.

 

Emergency Medical Treatment and Active Labor Act

 

The Emergency Medical Treatment and Active Labor Act (“EMTALA”) is a federal law that requires any hospital that participates in the Medicare program to conduct an appropriate medical screening examination of every person who presents to the hospital’s emergency department for treatment and, if the patient is suffering from an emergency medical condition or is in active labor, to either stabilize that condition or make an appropriate transfer of the patient to a facility that can handle the condition. The obligation to screen and stabilize emergency medical conditions exists regardless of a patient’s ability to pay for treatment. There are severe penalties under EMTALA if a hospital fails to screen or appropriately stabilize or transfer a patient or if the hospital delays appropriate treatment in order to first inquire about the patient’s ability to pay. Penalties for violations of EMTALA include civil monetary penalties and exclusion from participation in the Medicare program, the Medicaid program or both. In addition, an injured patient, the patient’s family or a medical facility that suffers a financial loss as a direct result of another hospital’s violation of the law can bring a civil suit against that other hospital. Although we believe that our hospitals comply with EMTALA, we cannot predict whether the Centers for Medicare & Medicaid Services (“CMS”) will implement new requirements in the future and whether our hospitals will be able to comply with any new requirements.

 

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General Healthcare Regulations

 

Drugs and Controlled Substances

 

Various licenses and permits are required by our hospitals to dispense narcotics. They are required to register our dispensing operations for permits and/or licenses with, and comply with certain operating and security standards of, the United States DEA, the Food and Drug Administration (“FDA”), state health departments and other state agencies.

 

Fraud and Abuse, Anti-Kickback and Self-Referral Regulations

 

Participation in the Medicare and/or Medicaid programs is heavily regulated by federal statutes and regulations. If we fail to comply substantially with the numerous federal laws governing such activities, our participation in the Medicare and/or Medicaid programs may be terminated and/or civil or criminal penalties may be imposed. For example, a hospital may lose its ability to participate in the Medicare and/or Medicaid programs if it:

 

  makes claims to Medicare and/or Medicaid for services not provided or misrepresents actual services provided in order to obtain higher payments;
     
  pays money to induce the referral of patients or the purchase of items or services where such items or services are reimbursable under a federal or state health program;
     
  fails to report or repay improper or excess payments; or
     
  fails to provide appropriate emergency medical screening services to any individual who comes to a hospital’s campus or otherwise fails to properly treat and transfer emergency patients.

 

Hospitals continue to be one of the primary focus areas of the Office of the Inspector General (“OIG”) of the United States and other governmental fraud and abuse programs and the OIG has issued and periodically updated compliance program guidance for hospitals. Each federal fiscal year, the OIG also publishes a General Work Plan that provides a brief description of the activities that the OIG plans to initiate or continue with respect to the programs and operations of the Department of Health and Human Services (“HHS”) and details the areas that the OIG believes are prone to fraud and abuse.

 

Sections of the Anti-Fraud and Abuse Amendments to the Social Security Act, commonly known as the “anti-kickback” statute, prohibit certain business practices and relationships that might influence the provision and cost of healthcare services reimbursable under Medicare, Medicaid, TriCare or other healthcare programs, including the payment or receipt of remuneration for the referral of patients whose care will be funded by Medicare or other government programs. Sanctions for violating the anti-kickback statute include criminal penalties and civil sanctions, including fines and possible exclusion from future participation in government programs, such as Medicare and Medicaid. HHS has issued regulations that create safe harbors under the anti-kickback statute. A given business arrangement that does not fall within an enumerated safe harbor is not per se illegal; however, business arrangements that fail to satisfy the applicable safe harbor criteria are subject to increased scrutiny by enforcement authorities.

 

The Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) broadened the scope of the fraud and abuse laws by adding several criminal statutes that are not related to receipt of payments from a federal healthcare program. HIPAA created civil penalties for proscribed conduct, including upcoding and billing for medically unnecessary goods or services. These laws cover all health insurance programs, private as well as governmental. In addition, HIPAA broadened the scope of certain fraud and abuse laws, such as the anti-kickback statute, to include not just Medicare and Medicaid services, but all healthcare services reimbursed under a federal or state healthcare program. Finally, HIPAA established enforcement mechanisms to combat fraud and abuse. These mechanisms include a bounty system where a portion of the payment recovered is returned to the government agencies, as well as a whistleblower program, where a portion of the payment received is paid to the whistleblower. HIPAA also expanded the categories of persons that may be excluded from participation in federal and state healthcare programs.

 

There is increasing scrutiny by law enforcement authorities, the OIG, the courts and the U.S. Congress of arrangements between healthcare providers and potential referral sources to ensure that the arrangements are not designed as mechanisms to exchange remuneration for patient-care referrals and opportunities. Investigators also have demonstrated a willingness to look behind the formalities of a business transaction and to reinterpret the underlying purpose of payments between healthcare providers and potential referral sources. Enforcement actions have increased, as is evidenced by highly publicized enforcement investigations of certain hospital activities.

 

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In addition, provisions of the Social Security Act, known as the Stark Act, also prohibit physicians from referring Medicare and Medicaid patients to providers of a broad range of designated health services with which the physicians or their immediate family members have ownership or certain other financial arrangements. Certain exceptions are available for employment agreements, leases, physician recruitment and certain other physician arrangements. A person making a referral, or seeking payment for services referred, in violation of the Stark Act is subject to civil monetary penalties; restitution of any amounts received for illegally billed claims; and/or exclusion from future participation in the Medicare program, which can subject the person or entity to exclusion from future participation in state healthcare programs.

 

Further, if any physician or entity enters into an arrangement or scheme that the physician or entity knows or should have known has the principal purpose of assuring referrals by the physician to a particular entity, and the physician directly makes referrals to such entity, then such physician or entity could be subject to a civil monetary penalty. Compliance with and the enforcing of penalties for violations of these laws and regulations is changing and increasing. For example, CMS has issued a “self-referral disclosure protocol” for hospitals and other providers that wish to self-disclose potential violations of the Stark Act and attempt to resolve those potential violations and any related overpayment liabilities at levels below the maximum penalties and amounts set forth in the statute. In light of the provisions of the Affordable Care Act that created potential liabilities under the federal False Claims Act (discussed below) for failing to report and repay known overpayments and return an overpayment within 60 days of the identification of the overpayment or the date by which a corresponding cost report is due, whichever is later, hospitals and other healthcare providers are encouraged to disclose potential violations of the Stark Act to CMS. It is likely that self-disclosure of Stark Act violations will increase in the future. Finally, many states have adopted or are considering similar legislative proposals, some of which extend beyond the Medicaid program, to prohibit the payment or receipt of remuneration for the referral of patients and physician self-referrals regardless of the source of the payment for the care.

 

The Federal False Claims Act and Similar State Laws

 

The Federal False Claims Act prohibits providers from, among other things, knowingly submitting false or fraudulent claims for payment to the federal government. The False Claims Act defines the term “knowingly” broadly, and while simple negligence generally will not give rise to liability, submitting a claim with reckless disregard to its truth or falsity can constitute the “knowing” submission of a false or fraudulent claim for the purposes of the False Claims Act. The “qui tam” or “whistleblower” provisions of the False Claims Act allow private individuals to bring actions under the False Claims Act on behalf of the government. These private parties are entitled to share in any amounts recovered by the government, and, as a result, the number of “whistleblower” lawsuits that have been filed against providers has increased significantly in recent years. When a private party brings a qui tam action under the False Claims Act, the defendant will generally not be aware of the lawsuit until the government makes a determination whether it will intervene and take a lead in the litigation. If a provider is found to be liable under the False Claims Act, the provider may be required to pay up to three times the actual damages sustained by the government plus mandatory civil monetary penalties for each separate false claim. The government has used the False Claims Act to prosecute Medicare and other government healthcare program fraud such as coding errors, billing for services not provided, submitting false cost reports, and providing care that is not medically necessary or that is substandard in quality.

 

HIPAA Transaction, Privacy and Security Requirements

 

HIPAA and federal regulations issued pursuant to HIPAA contain, among other measures, provisions that have required the Company to implement modified or new computer systems, employee training programs and business procedures. The federal regulations are intended to encourage electronic commerce in the healthcare industry, provide for the confidentiality and privacy of patient healthcare information and ensure the security of healthcare information.

 

A violation of the HIPAA regulations could result in civil money penalties per standard violated. HIPAA also provides for criminal penalties and one year in prison for knowingly and improperly obtaining or disclosing protected health information, up to five years in prison for obtaining protected health information under false pretenses and up to ten years in prison for obtaining or disclosing protected health information with the intent to sell, transfer or use such information for commercial advantage, personal gain or malicious harm. Since there is limited history of enforcement efforts by the federal government at this time, it is difficult to ascertain the likelihood of enforcement efforts in connection with the HIPAA regulations or the potential for fines and penalties, which may result from any violation of the regulations.

 

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HIPAA Privacy Regulations

 

HIPAA privacy regulations protect the privacy of individually identifiable health information. The regulations provide increased patient control over medical records, mandate substantial financial penalties for violation of a patient’s right to privacy and, with a few exceptions, require that an individual’s individually identifiable health information only be used for healthcare-related purposes. These privacy standards apply to all health plans, all healthcare clearinghouses and healthcare providers, such as our hospitals, that transmit health information in an electronic form in connection with standard transactions, and apply to individually identifiable information held or disclosed by a covered entity in any form. These standards impose extensive administrative requirements on our hospitals and require compliance with rules governing the use and disclosure of such health information, and they require our facilities to impose these rules, by contract, on any business associate to whom we disclose such information in order to perform functions on our behalf. In addition, our hospitals are subject to any state laws that are more restrictive than the privacy regulations issued under HIPAA. These laws vary by state and could impose stricter standards and additional penalties.

 

The HIPAA privacy regulations also require healthcare providers to implement and enforce privacy policies to ensure compliance with the regulations and standards. We believe all of our facilities are in compliance with current HIPAA privacy regulations.

 

HIPAA Electronic Data Standards

 

The Administrative Simplification Provisions of HIPAA require the use of uniform electronic data transmission standards for all healthcare related electronic data interchange. These provisions are intended to streamline and encourage electronic commerce in the healthcare industry. Among other things, these provisions require us to use standard data formats and code sets established by HHS when electronically transmitting information in connection with certain transactions, including health claims and equivalent encounter information, healthcare payment and remittance advice and health claim status.

 

The HHS regulations establish electronic data transmission standards that all healthcare providers and payors must use when submitting and receiving certain electronic healthcare transactions. The uniform data transmission standards are designed to enable healthcare providers to exchange billing and payment information directly with the many payors thereby eliminating data clearinghouses and simplifying the interface programs necessary to perform this function. We believe that our management information systems comply with HIPAA’s electronic data regulations and standards.

 

HIPAA Security Standards

 

The Administrative Simplification Provisions of HIPAA require the use of a series of security standards for the protection of electronic health information. The HIPAA security standards rule specifies a series of administrative, technical and physical security procedures for covered entities to use to assure the confidentiality of electronic protected health information. The standards are delineated into either required or addressable implementation specifications.

 

HIPAA National Provider Identifier

 

HIPAA also required HHS to issue regulations establishing standard unique health identifiers for individuals, employers, health plans and healthcare providers to be used in connection with standard electronic transactions. All healthcare providers, including our hospitals, were required to obtain a new National Provider Identifier (“NPI”) to be used in standard transactions instead of other numerical identifiers by May 23, 2007. Our hospitals implemented use of a standard unique healthcare identifier by utilizing their employer identification number. HHS has not yet issued proposed rules that establish the standard for unique health identifiers for health plans or individuals. Once these regulations are issued in final form, we expect to have approximately one to two years to become fully compliant, but cannot predict the impact of such changes at this time. We cannot predict whether our facilities may experience payment delays during the transition to the new identifiers. HHS is currently working on the standards for identifiers for health plans; however, there are currently no proposed timelines for issuance of proposed or final rules. The issuance of proposed rules for individuals is on hold indefinitely.

 

Medical Waste Regulations

 

Our operations, especially our hospitals, generate medical waste that must be disposed of in compliance with federal, state and local environmental laws, rules and regulations. Our operations are also generally subject to various other environmental laws, rules and regulations. Based on our current level of operations, we do not anticipate that such compliance costs will have a material adverse effect on our cash flows, financial position or results of operations.

 

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Compliance Program

 

The Company continuously evaluates and monitors its compliance with all Medicare, Medicaid and other rules and regulations. The objective of the Company’s compliance program is to develop, implement and update compliance safeguards as necessary. Emphasis is placed on developing and implementing compliance policies and guidelines, personnel training programs and various monitoring and audit procedures to attempt to achieve implementation of all applicable rules and regulations.

 

The Company seeks to conduct its business in compliance with all statutes, regulations, and other requirements applicable to its operations. The health care industry is, however, subject to extensive regulation, and many of these statutes and regulations have not been interpreted by the courts. There can be no assurance that applicable statutes and regulations will not be interpreted or applied by a prosecutorial, regulatory or judicial authority in a manner that would adversely affect the Company. Potential sanctions for violation of these statutes and regulations include significant civil and criminal penalties, fines, exclusions from participation in government health care programs and the loss of various licenses, certificates and authorizations, necessary to operate as well as potential liabilities from third-party claims, all of which could have a material adverse effect on the Company’s business.

 

Professional Liability

 

As part of our business, our hospitals are subject to claims of liability for events occurring in the ordinary course of operations. To cover a portion of these claims, professional malpractice liability insurance and general liability insurance are maintained in amounts which are commercially available and believed to be sufficient for operations as currently conducted, although some claims may exceed the scope or amount of the coverage in effect.

 

Environmental Regulation

 

We believe we are in substantial compliance with applicable federal, state and local environmental regulations. To date, compliance with federal, state and local laws regulating the discharge of material into the environment or otherwise relating to the protection of the environment have not had a material effect upon our results of operations, financial condition or competitive position. Similarly, we have not had to make material capital expenditures to comply with such regulations.

 

Clinical Laboratory Regulations

 

The CLIA are regulations that include federal standards applicable to all U.S. facilities or sites that test human specimens for health assessment or to diagnose, prevent, or treat disease. The Centers for Disease Control and Prevention (“CDC”), in partnership with CMS and the Food and Drug Administration (“FDA”), supports the CLIA program and clinical laboratory quality. CLIA requires that all clinical laboratories meet quality assurance, quality control and personnel standards. Laboratories also must undergo proficiency testing and are subject to inspections.

 

Standards for testing under CLIA are based on the complexity of the tests performed by the laboratory, with tests classified as “high complexity,” “moderate complexity,” or “waived.” Laboratories performing high complexity testing are required to meet more stringent requirements than moderate complexity laboratories. Laboratories performing only waived tests, which are tests determined by the FDA to have a low potential for error and requiring little oversight, may apply for a certificate of waiver exempting them from most of the requirements of CLIA. All Company laboratory facilities hold CLIA certificates to perform high complexity testing. The sanctions for failure to comply with CLIA requirements include suspension, revocation or limitation of a laboratory’s CLIA certificate, which is necessary to conduct business, cancellation or suspension of the laboratory’s approval to receive Medicare and/or Medicaid reimbursement, as well as significant fines and/or criminal penalties. The loss or suspension of a CLIA certification, imposition of a fine or other penalties, or future changes in the CLIA law or regulations (or interpretation of the law or regulations) could have a material adverse effect on the Company.

 

In addition to compliance with the federal regulations, the Company is also subject to state and local laboratory regulation. CLIA provides that a state may adopt laboratory regulations different from or more stringent than those contained in Federal law and a number of states have implemented their own laboratory requirements. State laws may require that laboratory personnel meet certain qualifications, specify certain quality controls, or require maintenance of certain records. There are a number of states that have even more stringent requirements with which lab personnel must comply to obtain state licensure or a certificate of qualification.

 

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The FDA has regulatory responsibility over instruments, test kits, reagents and other devices used by clinical laboratories. The FDA has issued draft guidance regarding FDA regulation of laboratory-developed tests (“LDTs”), but if or how the draft guidance will be implemented is uncertain. On November 18, 2016, the FDA announced it would not release final guidance at this time and instead would continue to work with stakeholders, the new administration and Congress to determine the right approach, and on January 3, 2017, the FDA released a discussion paper outlining a possible risk-based approach for FDA and CMS oversight of LTDs. Later in 2017, the FDA indicated that Congress should enact legislation to address improved oversight of diagnostics, including LTDs, rather than the FDA addressing the issue through administrative proposals. There are many other regulatory and legislative proposals that would increase general FDA oversight of clinical laboratories and LDTs. The outcome and ultimate impact of such proposals on the business is difficult to predict at this time. Our point of collection testing devices are regulated by the FDA. The FDA has authority to take various administrative and legal actions for non-compliance, such as fines, product suspension, warning letters, injunctions and other civil and criminal sanctions. We make every good faith effort to exercise proactive monitoring and review of pending legislation and regulatory action.

 

Reimbursement under the Medicare program for clinical diagnostic laboratory services is subject to a clinical laboratory fee schedule that sets the maximum amount payable in each Medicare carrier’s jurisdiction. This clinical laboratory fee schedule is updated annually. Laboratories bill the program directly for covered tests performed on behalf of Medicare beneficiaries. State Medicaid programs are prohibited from paying more than the Medicare fee schedule limit for clinical laboratory services furnished to Medicaid recipients.

 

In addition to reimbursement rates, the Company is also impacted by changes in coverage policies. Congressional action in 1997 required the Department of Health and Human Services (“HHS”) to adopt uniform coverage, administration and payment policies for many of the most commonly performed lab tests using a negotiated rulemaking process. The negotiated rulemaking committee established uniform policies limiting Medicare coverage for certain tests to patients with specified medical conditions or diagnoses, replacing local Medicare coverage policies which varied around the country. The final rules generally became effective in 2002, and the use of uniform policies improves the Company’s ability to obtain necessary billing information in some cases, but Medicare, Medicaid and private payer diagnosis code requirements and payment policies continue to negatively impact the Company’s ability to be paid for some of the tests it performs. Further, some payers require additional information to process claims or have implemented prior authorization policies, which delay or prohibit payment. Due to the range of payers and policies, the extent of this impact continues to be difficult to quantify.

 

The Company believes that it is in compliance with all applicable laboratory requirements. The Company’s laboratory has continuing programs to ensure that its operations meet all such regulatory requirements, but no assurances can be given that the Company’s laboratory will pass all future licensure or certification inspections. We embrace compliance as an integral part of our culture and we consistently promote that culture of ethics and integrity.

 

Payment for Services

 

In each of 2018 and 2017, the Company’s Hospital Operations derived over 60% of their net sales directly from the Medicare and Medicaid programs. The Company’s Hospital Operations depend significantly on continued participation in these programs and in other government healthcare programs. In recent years, both governmental and private sector payers have made efforts to contain or reduce health care costs, including reducing reimbursement for services.

 

Following an inspection at Jamestown Regional Medical Center on February 5, 2019, the hospital was informed on February 15 that several conditions of participation in its Medicare agreement were deficient. The hospital was informed that if the deficiencies where not corrected by May 16 the Medicare agreement would terminate. A follow-up inspection on May 15 resulted in the determination that the hospital had failed to adequately correct the deficiencies highlighted and a notice of involuntary termination was issued that was effective on June 12, 2019. A significant percentage of patients at Jamestown Regional Medical Center are covered by Medicare and without any ability to get paid for these services the Company suspended operations at the hospital. On June 10, 2019 the Company hired a new CEO to oversee the reopening of the hospital and took steps to re-enter the Medicare program. The hospital received initial approval of its application to reactivate the Medicare agreement in August and is currently planning the reopening of the hospital.

 

In 2018 and 2017, the Company’s Clinical Laboratory Operations derived less than 10% and 16%, respectively, of their net sales directly from the Medicare and Medicaid programs.

 

Employees

 

As of August 31, 2019, we have 309 employees for our continuing operations, of which 178 are full time. Of our total employees from continuing operations, two are assigned to Clinical Laboratory Operations, four are assigned to corporate administration and 303 are assigned to our Hospital Operations. In addition, we have eight employees associated with our discontinued operations. We continue to adjust our number of employees to achieve efficiencies and cost savings where applicable.

 

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Available Information

 

We are required to file Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q with the Securities and Exchange Commission (“SEC”) on a regular basis and are required to disclose certain material events in a Current Report on Form 8-K. All reports of the Company filed with the SEC are available free of charge through the SEC’s Web site at http://www.sec.gov. In addition, the public may read and copy materials filed by the Company at the SEC’s Public Reference Room located at 100 F Street, N.E., Washington, D.C. 20549. The public may also obtain additional information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

 

Item 1A. Risk Factors

 

An investment in our securities is highly speculative and subject to numerous and substantial risks. These risks include those set forth herein. You should carefully consider the risks and uncertainties described below and the other information in this Annual Report before you decide to invest in our securities. If any of the following events actually occur, our business could be materially harmed. In such case, the value of your investment may decline and you may lose all or part of your investment. You should not invest in our securities unless you can afford the loss of your entire investment.

 

Although our financial statements have been prepared on a going concern basis, we have recently accumulated significant losses and have negative cash flows from operations that could adversely affect our ability to refinance existing indebtedness or raise additional capital to fund our operations or limit our ability to react to changes in the economy or our industry. Restrictive covenants in the agreements governing our indebtedness may adversely affect us. These or additional risks or uncertainties not presently known to us, or that we currently deem immaterial, raise substantial doubt about our ability to continue as a going concern.

 

If we are unable to improve our liquidity position we may not be able to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments that might result if we are unable to continue as a going concern and, therefore, be required to realize our assets and discharge our liabilities other than in the normal course of business, which could cause investors to suffer the loss of all or a substantial portion of their investment.

 

We have accumulated significant losses and have negative cash flows from operations, and at December 31, 2018, we had a working capital deficit and stockholders’ deficit of $39.3 million and $39.2 million, respectively. For the years ended December 31, 2018 and 2017, we incurred net losses attributable to common stockholders in the amount of $245.9 million and $108.5 million, respectively. In addition, our cash position is critically deficient, critical payments are not being made in the ordinary course of business, and we have indebtedness for which we do not have the financial resources to satisfy, all of which raises substantial doubt about our ability to continue as a going concern.

 

The Company plans to spin off AMSG and HTS as independent publicly traded companies by way of tax-free distributions to the Company’s stockholders. While these spin offs have taken longer than anticipated, completion of these spin offs is now expected to occur in the first quarter of 2020. The spin offs are subject to numerous conditions, including effectiveness of Registration Statements on Form 10 to be filed with the Securities and Exchange Commission, and consents, including under various funding agreements previously entered into by the Company. A record date to determine those stockholders entitled to receive shares in the spin offs should be approximately 30 to 60 days prior to the dates of the spin offs. The strategic goal of the spin offs is to create three public companies, each of which can focus on its own strengths and operational plans. In addition, after the spin offs, each company will provide a distinct and targeted investment opportunity.

 

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In accordance with ASC 205-20 and having met the criteria for “held for sale”, we have 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 to the consolidated financial statements.

 

Our hospital operations provided services to over 13,349 and 3,747 patients and recognized approximately $88.0 million and $2.0 million of gross revenues during 2018 and 2017, respectively. On March 5, 2019, we acquired certain assets of Jellico Community Hospital and CarePlus Center. On August 15, 2019, the Company received notice from CMS that the change of ownership for Jellico was effective from March 1, 2019, enabling the hospital, after almost six months of ownership, to bill and get paid for services since March 1, 2019.

 

The Company’s core business is now rural hospitals which is a specialized marketplace with a requirement for capable and knowledgeable management. The Company’s current financial condition may make it difficult to attract and maintain adequate expertise in its management team to successfully operate the Company’s hospitals.

 

Following an inspection at Jamestown Regional Medical Center on February 5, 2019, the hospital was informed on February 15 that several conditions of participation in the CMS-approved Medicare accreditation program were deficient. The hospital was informed that if the deficiencies where not corrected by May 16 the Medicare agreement would terminate. A follow-up inspection on May 15 resulted in the determination that the hospital had failed to adequately correct the deficiencies highlighted and a notice of involuntary termination was issued that was effective on June 12, 2019. The Company has taken steps to re-enter the Medicare program and has received initial approval of its application to reactivate the Medicare agreement.

 

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

 

The proposed spin offs of our Advanced Molecular Services Group and Health Technology Solutions are subject to various risks and uncertainties and may not be completed on the terms or timeline currently contemplated, if at all, and will involve significant time and expense, which could harm our business, results of operations and financial condition.

 

In 2017, we announced plans to separate our AMSG and HTS businesses as independent, publicly-traded companies. While these spin offs have taken longer than expected, the spin offs are now expected to be completed in the first quarter of 2020, subject to satisfaction of certain conditions. Unanticipated developments could delay, prevent or otherwise adversely affect one or both of these proposed spin offs, including but not limited to disruptions in general market conditions or potential problems, delays or difficulties in satisfying conditions and obtaining approvals and clearances or litigation or other legal proceedings that may arise as a result of the proposed spin offs. In addition, consummation of the spin offs will require final approval from our Board of Directors. Therefore, we cannot assure that we will be able to complete the spin offs on the terms or on the timeline that we announced, if at all.

 

We will incur significant expenses in connection with the spin offs, and such costs and expenses may be greater than we anticipate. In addition, completion of the spin offs will require a significant amount of management time and effort which may disrupt our business or otherwise divert management’s attention from other aspects of our business operations. Any such difficulties could adversely affect our business, results of operations and financial condition.

 

The proposed spin offs may not achieve some or all of the anticipated benefits.

 

If the spin offs are completed, there is uncertainty as to whether the anticipated operational, financial and strategic benefits of the spin offs will be achieved. There can be no assurance that the combined value of the common stock of the publicly-traded companies will be equal to or greater than what the value of our common stock would have been had the proposed separations not occurred. The combined value of the common stock of the companies could be lower than anticipated for a variety of reasons, including, but not limited to, the inability of the new spin off companies to operate and compete effectively as independent entities, and the stock price of the common stock of each of the companies could experience periods of volatility. If we fail to achieve the anticipated benefits of the spin offs, our stock price could decline.

 

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If either spin off does not qualify as a transaction that is generally tax-free for U.S. federal income tax purposes, we and our stockholders could be subject to significant tax liabilities.

 

We intend to obtain an opinion of outside counsel regarding the qualification of the distribution in each spin off, together with certain related transactions, as a transaction that is generally tax-free for U.S. federal income tax purposes. The opinion will be based on and rely on, among other things, certain facts and assumptions, as well as certain representations, statements and undertakings of Rennova and the new spin off company, including those relating to the past and future conduct of Rennova and the new spin off company. If any of these facts, assumptions, representations, statements or undertakings are, or become, inaccurate or incomplete, or if we or the new spin off company breach any of their respective covenants in the separation documents, the opinion of counsel may be invalid and the conclusions reached therein could be jeopardized. It is also possible that the U.S. Internal Revenue Service, or the IRS, could determine that the distribution in the spin off, together with certain related transactions, is taxable for U.S. federal income tax purposes if it determines that any of these facts, assumptions, representations, statements or undertakings are incorrect or have been violated or if it disagrees with the conclusions in the opinion of counsel. An opinion of counsel is not binding on the IRS or any court and there can be no assurance that the IRS will not challenge the conclusions reached in the opinion. If the distribution in the spin off, together with certain related transactions, is ultimately determined to be taxable, we and our stockholders that are subject to U.S. federal income tax could incur significant tax liabilities.

 

Our common stock is no longer listed on the NASDAQ.

 

On April 18, 2017, we were notified by NASDAQ that the stockholders’ equity balance reported on our Form 10-K for the year ended December 31, 2016 fell below the $2.5 million minimum requirement for continued listing under The NASDAQ Capital Market’s Listing Rule 5550(b)(1) (the “Rule”). In accordance with the Rule, we submitted a plan to NASDAQ outlining how we intended to regain compliance. On August 17, 2017, NASDAQ notified us that our plan to correct the stockholders’ equity deficiency did not contain sufficient evidence to support a correction being achieved in the required time frame. We appealed this decision to a Hearing Panel which, on October 23, 2017, maintained this position and denied us a continued listing. Effective October 25, 2017, our common stock (RNVA) and warrants to purchase common stock (RNVAW) were no longer listed on The NASDAQ Capital Market but began trading on the OTCQB instead. The OTCQB is an electronic quotation system that displays real-time quotes, last sale prices, and volume information for many over the counter securities that are not listed on a national securities exchange. OTCQB quotations for our common stock and common stock warrant prices may not represent the true market value of our common stock.

 

Our acquisitions of the Big South Fork Medical Center, Jamestown Regional Medical Center, Jellico Community Hospital and CarePlus Center do not provide assurance that the acquired operations will be accretive to our earnings or otherwise improve our results of operations.

 

Acquisitions, such as that of Big South Fork Medical Center, which was acquired in January of 2017 and that began operations on August 8, 2017, Jamestown Regional Medical Center, which was acquired on June 1, 2018, and Jellico Community Hospital and CarePlus Center acquired in March 2019, involve the integration of previously separate businesses into a common enterprise in which it is envisioned that synergistic operations will result in improved financial performance. However, realization of these envisioned results is subject to numerous risks and uncertainties, including but not limited to:

 

  Diversion of management time and attention from daily operations;
  Difficulties integrating the acquired business, technologies and personnel into our business;
  Potential loss of key employees, key contractual relationships or key customers of the acquired business; and
  Exposure to unforeseen liabilities of the acquired business

 

There is no assurance that the acquisitions of the Big South Fork Medical Center, Jamestown Regional Medical Center, Jellico Community Hospital or CarePlus Center will be accretive to our earnings or otherwise improve our results of operations.

 

We have decided to alter our business model to focus on hospital acquisition and development which may not succeed if we are unable to effectively compete for patients. Local residents could use other hospitals and healthcare providers.

 

The healthcare industry is highly competitive among hospitals and other healthcare providers for patients, affiliations with physicians and acquisitions. The most significant competition our hospitals face comes from hospitals that provide more complex services as well as other healthcare providers, including outpatient surgery, orthopedic, oncology and diagnostic centers that also compete for patients. Our hospitals, our competitors, and other healthcare industry participants are increasingly implementing physician alignment strategies, such as acquiring physician practice groups, employing physicians and participating in accountable care organizations (ACOs) or other clinical integration models, which may impact our competitive position. In addition, increasing consolidation within the payor industry, vertical integration efforts involving payors and healthcare providers, and cost-reduction strategies by large employer groups and their affiliates may impact our ability to contract with payors on favorable terms and otherwise affect our competitive position.

 

We expect these competitive trends to continue. If we are unable to compete effectively with other hospitals and other healthcare providers, local residents may seek healthcare services at providers other than our hospitals and affiliated businesses.

 

 17 
 

 

Our results of operations may be adversely affected if the Patient Protection and Affordable Care Act (“ACA”) is repealed, replaced or otherwise changed.

 

The ACA has increased the number of people with health care insurance. It also has reduced Medicare and Medicaid reimbursements. Numerous proposals continue to be discussed in Congress and the administration to repeal, amend or replace the law. We cannot predict whether any such repeal, amend or replace proposals, or any parts of them, will become law and, if they do, what their substance or timing will be. There is uncertainty whether, when and how the ACA may be changed, what alternative provisions, if any, will be enacted, the timing of enactment and implementation of any alternative provisions and the impact of any alternative provisions on providers as well as other healthcare industry participants. In addition, in December 2018 a federal judge in Texas issued a decision finding the ACA unconstitutional. This decision is on appeal but it creates further uncertainty about the future of the law. Efforts to repeal or change the ACA or implement other initiatives intended to reform healthcare delivery and financial systems may have an adverse effect on our business and results of operations.

 

The industry trend towards value-based purchasing may negatively impact our revenues.

 

There is a trend in the healthcare industry toward “value-based” purchasing of healthcare services. These value-based purchasing programs include both public reporting of quality data and preventable adverse events tied to the quality and efficiency of care provided by facilities. Governmental programs including Medicare and Medicaid currently require providers under such programs to report certain quality data to receive full reimbursement updates. In addition, Medicare does not reimburse for care related to certain preventable adverse events. Many large commercial payors currently require providers under such programs to report quality data and several commercial payors do not reimburse providers under such programs for certain preventable adverse events.

 

We expect value-based purchasing programs, including programs that condition reimbursement on patient outcome measures, to become more common and to involve a higher percentage of reimbursement amounts. We are unable at this time to predict how this trend will affect our results of operations, but it could negatively impact our financial condition or results of operations.

 

General economic conditions.

 

Much healthcare spending is discretionary and can be significantly impacted by economic downturns. When patients are experiencing personal financial difficulties or have concerns about general economic conditions, they may choose to defer or forego elective surgeries and other non-emergent procedures, which are generally more profitable lines of business for hospitals. In addition, employers may impose or patients may select a high-deductible insurance plan or no insurance at all, which increases a hospital’s dependence on self-pay revenue. Moreover, a greater number of uninsured patients may seek care in our emergency rooms.

 

We are unable to quantify the specific impact of current or recent economic conditions on our business, however we believe that the economic conditions in the service areas in which our hospitals operate may have an adverse impact on our operations. Such impact can be expected to continue to affect not only the healthcare decisions of our patients and potential patients but could also have an adverse impact on the solvency of certain managed care providers and other counterparties to transactions with us.

 

Healthcare plans have taken steps to control the utilization and reimbursement of healthcare services.

 

We also face efforts by non-governmental third-party payers, including healthcare plans, to reduce utilization and reimbursement for healthcare services.

 

The healthcare industry has experienced a trend of consolidation among healthcare insurance plans and payers, resulting in fewer but larger insurance plans with significant bargaining power to negotiate fee arrangements with healthcare providers. These healthcare plans, and independent physician associations, may demand that providers accept discounted fee structures or assume all or a portion of the financial risk associated with providing services to their members through capped payment arrangements. There are also an increasing number of patients enrolling in consumer driven products and high deductible plans that involve greater patient cost-sharing.

 

The increased consolidation among healthcare plans and payers increases the potential adverse impact of not being, or ceasing to be, a contracted provider with any such insurer. The ACA includes provisions, including ones regarding the creation of healthcare exchanges, which may encourage healthcare insurance plans to increase exclusive contracting.

 

We expect continuing efforts to reduce reimbursements, to impose more stringent cost controls and to reduce utilization of services. These efforts, including future changes in third-party payer rules, practices and policies or ceasing to be a contracted provider to many healthcare plans, have had and may continue to have a material adverse effect on our business.

 

 18 
 

 

Unless we raise sufficient funds, we will not be able to succeed in our business model.

 

During the years ended December 31, 2018 and 2017 and through the date of this report, we have relied on the sale of our equity securities, loans from a related party and convertible debentures to fund our operations. We generated negative cash flow from operating activities for the years ended December 31, 2018 and 2017. If this trend were to continue and we are unable to raise sufficient capital to fund our operations through other sources, our business will be adversely affected, and we may not be able to continue as a going concern (see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, “Liquidity and Capital Resources”). There can be no assurances that we will be able to raise sufficient funds on terms that are acceptable to us, or at all, to fund our operations under our current business model.

 

Some of our operations are subject to federal and state laws prohibiting “kickbacks” and other laws designed to prohibit payments for referrals and eliminate healthcare fraud.

 

Federal and state anti-kickback and similar laws prohibit payment, or offers of payment, in exchange for referrals of products and services for which reimbursement may be made by Medicare or other federal and state healthcare programs. Some state laws contain similar prohibitions that apply without regard to the payer of reimbursement for the services. Under a federal statute, known as the “Stark Law” or “self-referral” prohibition, physicians, subject to certain exceptions, are prohibited from referring their Medicare or Medicaid program patients to providers with which the physicians or their immediate family members have a financial relationship, and the providers are prohibited from billing for services rendered in violation of Stark Law referral prohibitions. Violations of the federal Anti-Kickback Law and Stark Law may be punished by civil and criminal penalties, and/or exclusion from participation in federal health care programs, including Medicare and Medicaid. States may impose similar penalties. The ACA significantly strengthened provisions of the Federal False Claims Act and Anti-Kickback Law provisions, and other health care fraud provisions, leading to the possibility of greatly increased qui tam suits by private citizen “relators” for perceived violations of these laws. There can be no assurance that our activities will not come under the scrutiny of regulators and other government authorities or that our practices will not be found to violate applicable laws, rules and regulations or prompt lawsuits by private citizen relators under federal or state false claims laws.

 

Federal officials responsible for administering and enforcing the healthcare laws and regulations have made a priority of eliminating healthcare fraud. For example, the ACA includes significant new fraud and abuse measures, including required disclosures of financial arrangements with physician customers, lower thresholds for violations and increased potential penalties for violations. Federal funding available for combating health care fraud and abuse generally has increased. While we seek to conduct our business in compliance with all applicable laws and regulations, many of the laws and regulations applicable to our business, particularly those relating to billing and reimbursement of services and those relating to relationships with physicians, hospitals and patients, contain language that has not been interpreted by courts. We must rely on our interpretation of these laws and regulations based on the advice of our counsel and regulatory or law enforcement authorities may not agree with our interpretation of these laws and regulations and may seek to enforce legal remedies or penalties against us for violations.

 

From time to time we may need to change our operations, particularly pricing or billing practices, in response to changing interpretations of these laws and regulations, or regulatory or judicial determinations with respect to these laws and regulations. These occurrences, regardless of their outcome, could damage our reputation and harm important business relationships that we have with healthcare providers, payers and others. Furthermore, if a regulatory or judicial authority finds that we have not complied with applicable laws and regulations, we would be required to refund amounts that were billed and collected in violation of such laws and regulations. In addition, we may voluntarily refund amounts that were alleged to have been billed and collected in violation of applicable laws and regulations. In either case, we could suffer civil and criminal damages, fines and penalties, exclusion from participation in governmental healthcare programs and the loss of licenses, certificates and authorizations necessary to operate our business, as well as incur liabilities from third-party claims, all of which could harm our operating results and financial condition.

 

Moreover, regardless of the outcome, if we or physicians or other third parties with whom we do business are investigated by a regulatory or law enforcement authority we could incur substantial costs, including legal fees, and our management may be required to divert a substantial amount of time to an investigation.

 

To enhance compliance with applicable health care laws, and mitigate potential liability in the event of noncompliance, regulatory authorities, such as the OIG, have recommended the adoption and implementation of a comprehensive health care compliance program that generally contains the elements of an effective compliance and ethics program described in Section 8B2.1 of the United States Sentencing Commission Guidelines Manual, and for many years the OIG has made available a model compliance program. In addition, certain states require that health care providers that engage in substantial business under the state Medicaid program have a compliance program that generally adheres to the standards set forth in the Model Compliance Program. Also, under the ACA, the U.S. Department of Health and Human Services, or HHS, will require suppliers, such as the Company, to adopt, as a condition of Medicare participation, compliance programs that meet a core set of requirements. While we have adopted, or are in the process of adopting, healthcare compliance and ethics programs that generally incorporate the OIG’s recommendations, and training our applicable employees in such compliance, having such a program can be no assurance that we will avoid any compliance issues.

 

 19 
 

 

We conduct our business in a heavily regulated industry and changes in regulations or violations of regulations could, directly or indirectly, harm our operating results and financial condition.

 

The healthcare industry is highly regulated and there can be no assurance that the regulatory environment in which we operate will not change significantly and adversely in the future. Areas of the regulatory environment that may affect our ability to conduct business include, without limitation:

 

  federal and state laws applicable to billing and claims payment;
  federal and state laws relating to licensure;
  federal and state anti-kickback laws;
  federal and state false claims laws;
  federal and state self-referral and financial inducement laws, including the federal physician anti-self-referral law, or the Stark Law;
  coverage and reimbursement levels by Medicare and other governmental payors and private insurers;
  HIPAA, along with the revisions to HIPAA as a result of the Health Information Technology for Economic and Clinical Health Act (“HITECH”), and analogous state laws;
  federal and state regulation of privacy, security, electronic transactions and identity theft;
  federal, state and local laws governing the handling, transportation and disposal of medical and hazardous waste;
  Occupational Safety and Health Administration rules and regulations;
  changes to laws, regulations and rules as a result of the ACA; and
  changes to other federal, state and local laws, regulations and rules, including tax laws.

 

These laws and regulations are extremely complex and in many instances, there are no significant regulatory or judicial interpretations of these laws and regulations. Any determination that we have violated these laws or regulations, or the public announcement that we are being investigated for possible violations of these laws or regulations, could harm our operating results and financial condition. In addition, a significant change in any of these laws or regulations may require us to change our business model in order to maintain compliance with these laws or regulations, which could harm our operating results and financial condition.

 

Failure to comply with complex federal and state laws and regulations related to submission of claims for services can result in significant monetary damages and penalties and exclusion from the Medicare and Medicaid programs.

 

We are subject to extensive federal and state laws and regulations relating to the submission of claims for payment for services, including those that relate to coverage of our services under Medicare, Medicaid and other governmental health care programs, the amounts that may be billed for our services and to whom claims for services may be submitted.

 

Our failure to comply with applicable laws and regulations could result in our inability to receive payment for our services or result in attempts by third-party payers, such as Medicare and Medicaid, to recover payments from us that have already been made. Submission of claims in violation of certain statutory or regulatory requirements can result in penalties, including substantial civil money penalties for each item or service billed to Medicare in violation of the legal requirement, and exclusion from participation in Medicare and Medicaid. Government authorities may also assert that violations of laws and regulations related to submission or causing the submission of claims violate the federal False Claims Act (“FCA”) or other laws related to fraud and abuse, including submission of claims for services that were not medically necessary. Violations of the FCA could result in enormous economic liability. The FCA provides that all damages are trebled. For example, we could be subject to FCA liability if it was determined that the services we provided were not medically necessary and not reimbursable, particularly if it were asserted that we contributed to the physician’s referrals of unnecessary services to us. It is also possible that the government could attempt to hold us liable under fraud and abuse laws for improper claims submitted by an entity for services that we performed if we were found to have knowingly participated in the arrangement that resulted in submission of the improper claims.

 

We continuously conduct internal audits on current and historical billings to protect against errors related to any of the above. One of these audits has led us to retain an independent consulting firm to assess if any violations to the foregoing regulations have occurred in the historical billings by our laboratories. If the review determines that any overpayment was received, we will inform the relative party and make arrangements to repay any overpayment.

 

 20 
 

 

Our hospitals are subject to potential claims for professional liability, including existing or potential claims based on the acts or omissions of third parties, which claims may not be covered by insurance.

 

Our hospitals are subject to potential claims for professional liability (medical malpractice) in connection with their operations, as well as potentially acquired or discontinued operations. To cover such claims, professional malpractice liability insurance and general liability insurance are maintained in amounts believed to be sufficient for operations, although some claims may exceed the scope or amount of the coverage in effect. The assertion of a significant number of claims, either within a self-insured retention (deductible) or individually or in the aggregate in excess of available insurance, could have a material adverse effect on our results of operations or financial condition. Premiums for professional liability insurance have historically been volatile and we cannot assure you that professional liability insurance will continue to be available on terms acceptable to us, if at all. The operations of hospitals also depend on the professional services of physicians and other trained healthcare providers and technicians in the conduct of their respective operations, including independent laboratories and physicians rendering diagnostic and medical services. There can be no assurance that any legal action stemming from the act or omission of a third party provider of healthcare services would not be brought against one of our hospitals, resulting in significant legal expenses in order to defend against such legal action or to obtain a financial contribution from the third party whose acts or omissions occasioned the legal action.

 

Our success depends on our ability to attract and retain qualified healthcare professionals. A shortage of qualified healthcare professionals could weaken our ability to deliver healthcare services.

 

Our hospitals’ operations are dependent on the efforts, ability and experience of healthcare professionals, such as physicians, nurses, therapists, pharmacists and lab technicians. Each hospital’s success has been, and will continue to be, influenced by its ability to attract and retain these skilled employees. A shortage of healthcare professionals, the loss of some or all of its key employees or the inability to attract or retain sufficient numbers of qualified healthcare professionals could cause the operating performance of one or more of our hospitals to decline.

 

A significant portion of our revenue is dependent on Medicare and Medicaid payments and possible reductions in Medicare or Medicaid payments or the implementation of other measures to reduce reimbursements may reduce our revenues.

 

A significant portion of our consolidated revenues are derived from the Medicare and Medicaid programs, which are highly regulated and subject to frequent and substantial changes. Over 60% of consolidated net patient revenues were derived from the Medicare and Medicaid programs for the year ended December 31, 2018. Previous legislative changes have resulted in, and future legislative changes may result in, limitations on and reduced levels of payment and reimbursement for a substantial portion of hospital procedures and costs.

 

Future healthcare legislation or other changes in the administration or interpretation of governmental healthcare programs may have a material adverse effect on our consolidated business, financial condition, results of operations or prospects.

 

Failure to timely or accurately bill for our services could have a material adverse effect on our business.

 

Billing for medical services is extremely complicated and is subject to extensive and non-uniform rules and administrative requirements. Depending on the billing arrangement and applicable law, we bill various payers, such as patients, insurance companies, Medicare, Medicaid, physicians, hospitals and employer groups. Changes in laws and regulations could increase the complexity and cost of our billing process. Additionally, auditing for compliance with applicable laws and regulations as well as internal compliance policies and procedures adds further cost and complexity to the billing process. Further, our billing systems require significant technology investment and, as a result of marketplace demands, we need to continually invest in our billing systems.

 

Missing, incomplete, or incorrect information on requisitions adds complexity to and slows the billing process, creates backlogs of unbilled requisitions, and generally increases the aging of accounts receivable and bad debt expense. Failure to timely or correctly bill may lead to our not being reimbursed for our services or an increase in the aging of our accounts receivable, which could adversely affect our results of operations and cash flows. Failure to comply with applicable laws relating to billing or even having to pay back amounts incorrectly billed and collected could lead to various penalties, including: (1) exclusion from participation in CMS and other government programs; (2) asset forfeitures; (3) civil and criminal fines and penalties; and (4) the loss of various licenses, certificates and authorizations necessary to operate our business, any of which could have a material adverse effect on our results of operations or cash flows.

 

There have been times when our accounts receivable have increased at a greater rate than revenue growth and, therefore, have adversely affected our cash flows from operations. We have taken steps to implement systems and processing changes intended to improve billing procedures and related collection results. However, we cannot assure that our ongoing assessment of accounts receivable will not result in the need for additional provisions. Such additional provisions, if implemented, could have a material adverse effect on our operating results.

 

 21 
 

 

Our operations may be adversely impacted by the effects of extreme weather conditions, natural disasters such as hurricanes and earthquakes, health pandemics, hostilities or acts of terrorism and other criminal activities.

 

Our operations are always subject to adverse impacts resulting from extreme weather conditions, natural disasters, health pandemics, hostilities or acts of terrorism or other criminal activities. Such events may result in a temporary decline in the number of patients who seek our services or in our employees’ ability to perform their job duties. In addition, such events may temporarily interrupt our ability to provide our services. The occurrence of any such event and/or a disruption of our operations as a result may adversely affect our results of operations.

 

Increased competition, including price competition, could have a material adverse impact on our net revenues and profitability.

 

We operate in a business that is characterized by intense competition. Our major competitors include large national hospitals that possess greater name recognition, larger customer bases, and significantly greater financial resources and employ substantially more personnel than we do. Many of our competitors have long established relationships. Although our hospitals operate in communities where they are currently the only general acute care hospital, they face substantial competition from other hospitals. Although these competing hospitals may be many miles away, patients in these markets may migrate to these competing hospitals as a result of local physician referrals, managed care plan incentives or personal choices. We cannot assure you that we will be able to compete successfully with such entities in the future.

 

The healthcare business is intensely competitive both in terms of price and service. Pricing of services is often one of the most significant factors used by patients, health care providers and third-party payers in selecting a provider. As a result of the healthcare industry undergoing significant consolidation, larger providers are able to increase cost efficiencies. This consolidation results in greater price competition. We may be unable to increase cost efficiencies sufficiently, if at all, and as a result, our net earnings and cash flows could be negatively impacted by such price competition. We may also face competition from companies that do not comply with existing laws or regulations or otherwise disregard compliance standards in the industry. Additionally, we may also face changes in fee schedules, competitive bidding for services or other actions or pressures reducing payment schedules as a result of increased or additional competition. Additional competition, including price competition, could have a material adverse impact on our net revenues and profitability.

 

Failure to maintain the security of customer-related information or compliance with security requirements could damage the Company’s reputation with customers, and cause it to incur substantial additional costs and to become subject to litigation.

 

Pursuant to HIPAA and certain similar state laws, we must comply with comprehensive privacy and security standards with respect to the use and disclosure of protected health information. Under the HITECH amendments to HIPAA, HIPAA was expanded to require certain data breach notifications, to extend certain HIPAA privacy and security standards directly to business associates, to heighten penalties for noncompliance and to enhance enforcement efforts. If the Company does not comply with existing or new laws and regulations relating to protecting the privacy and security of personal or health information, it could be subject to monetary fines, civil penalties or criminal sanctions.

 

The Company receives certain personal and financial information about its customers. In addition, the Company depends upon the secure transmission of confidential information over public networks, including information permitting cashless payments. While we take reasonable and prudent steps to protect this information, a compromise in the Company’s security systems that results in customer personal information being obtained by unauthorized persons or the Company’s failure to comply with security requirements for financial transactions could adversely affect the Company’s reputation with its customers and others, as well as the Company’s results of operations, financial condition and liquidity. It could also result in litigation against the Company or the imposition of penalties.

 

Failure of the Company to comply with emerging electronic transmission standards could adversely affect our business.

 

The failure of our IT systems to keep pace with technological advances may significantly reduce our revenues or increase our expenses. Public and private initiatives to create healthcare information technology (“HCIT”) standards and to mandate standardized clinical coding systems for the electronic exchange of clinical information could require costly modifications to our existing HCIT systems. While we do not expect HCIT standards to be adopted or implemented without adequate time to comply, if we fail to adopt or delay in implementing HCIT standards, we could lose customers and business opportunities.

 

 22 
 

 

Compliance with the HIPAA security regulations and privacy regulations may increase the Company’s costs.

 

The HIPAA privacy and security regulations, including the expanded requirements under HITECH, establish comprehensive federal standards with respect to the use and disclosure of protected health information by health plans, healthcare providers and healthcare clearinghouses, in addition to setting standards to protect the confidentiality, integrity and security of protected health information. The regulations establish a complex regulatory framework on a variety of subjects, including:

 

  the circumstances under which the use and disclosure of protected health information are permitted or required without a specific authorization by the patient, including but not limited to treatment purposes, activities to obtain payments for the Company’s services, and its healthcare operations activities;
  a patient’s rights to access, amend and receive an accounting of certain disclosures of protected health information;
  the content of notices of privacy practices for protected health information;
  administrative, technical and physical safeguards required of entities that use or receive protected health information; and
  the protection of computing systems maintaining Electronic Personal Health Information (“ePHI”).

 

The Company has implemented policies and procedures related to compliance with the HIPAA privacy and security regulations, as required by law. The privacy and security regulations establish a “floor” and do not supersede state laws that are more stringent. Therefore, the Company is required to comply with both federal privacy and security regulations and varying state privacy and security laws. In addition, for healthcare data transfers from other countries relating to citizens of those countries, the Company may also be required to comply with the laws of those other countries. The federal privacy regulations restrict the Company’s ability to use or disclose patient identifiable data, without patient authorization, for purposes other than payment, treatment or healthcare operations (as defined by HIPAA), except for disclosures for various public policy purposes and other permitted purposes outlined in the privacy regulations. HIPAA, as amended by HITECH, provides for significant fines and other penalties for wrongful use or disclosure of protected health information in violation of the privacy and security regulations, including potential civil and criminal fines and penalties. Due to the enactment of HITECH and an increase in the amount of monetary financial penalties, government enforcement has also increased. It is not possible to predict what the extent of the impact on business will be, other than heightened scrutiny and emphasis on compliance. If the Company does not comply with existing or new laws and regulations related to protecting the privacy and security of health information it could be subject to significant monetary fines, civil penalties or criminal sanctions. In addition, other federal and state laws that protect the privacy and security of patient information may be subject to enforcement and interpretations by various governmental authorities and courts resulting in complex compliance issues. For example, the Company could incur damages under state laws pursuant to an action brought by a private party for the wrongful use or disclosure of confidential health information or other private personal information.

 

Health care reform and related programs (e.g. Health Insurance Exchanges), changes in government payment and reimbursement systems, or changes in payer mix, including an increase in capitated reimbursement mechanisms and evolving delivery models, could have a material adverse impact on the Company’s net revenues, profitability and cash flow.

 

Our services are billed to private patients, Medicare, Medicaid, commercial clients, managed care organizations (“MCOs”) and third-party insurance companies. Bills may be sent to different payers depending on the medical insurance benefits of a particular patient. Increases in the percentage of services billed to government and managed care payers could have an adverse impact on the Company’s net revenues.

 

A portion of the third-party insurance fee-for-service revenues are collectible from patients in the form of deductibles, copayments and coinsurance. As patient cost-sharing increases, collectability may be impacted.

 

In addition, Medicare and Medicaid and private insurers have increased their efforts to control the cost, utilization and delivery of health care services. Measures to regulate health care delivery have resulted in reduced prices, added costs and decreased utilization as well as increased complexity and new regulatory and administrative requirements. Changes to, or repeal of, the ACA, the health care reform legislation passed in 2010, also may continue to affect coverage, reimbursement and utilization of services, as well as administrative requirements, in ways that are currently unpredictable.

 

The Company expects efforts to impose reduced reimbursement, more stringent payment policies and utilization and cost controls by government and other payers to continue. If the Company cannot offset additional reductions in the payments it receives for its services by reducing costs, increasing the number of patients treated and/or introducing new procedures, it could have a material adverse impact on the Company’s net revenues, profitability and cash flows.

 

As an employer, health care reform legislation also contains numerous regulations that will require the Company to implement significant process and record keeping changes to be in compliance. These changes increase the cost of providing healthcare coverage to employees and their families. Given the limited release of regulations to guide compliance, as well as potential changes to or repeal of the ACA, the exact impact to employers including the Company is uncertain.

 

 23 
 

 

A failure to identify and successfully close and integrate strategic acquisition targets could have a material adverse impact on the Company’s business objectives and its net revenues and profitability.

 

Part of the Company’s strategy involves deploying capital in investments that enhance the Company’s business, which includes pursuing strategic acquisitions to strengthen the Company’s capabilities and increase its presence in key geographic areas. However, the Company cannot assure that it will be able to identify acquisition targets that are attractive to the Company or that are of a large enough size to have a meaningful impact on the Company’s operating results. Furthermore, the successful closing and integration of a strategic acquisition entails numerous risks, including, among others:

 

  failure to obtain regulatory clearance;
  loss of key customers or employees;
  difficulty in consolidating redundant facilities and infrastructure and in standardizing information, including lack of complete integration;
  unidentified regulatory problems;
  failure to maintain the quality of services that such companies have historically provided;
  coordination of geographically-separated facilities and workforces; and
  diversion of management’s attention from the present core business of the Company.

 

The Company cannot assure that current or future acquisitions, if any, or any related integration efforts will be successful, or that the Company’s business will not be adversely affected by any future acquisitions, including with respect to net revenues and profitability. Even if the Company is able to successfully integrate the operations of businesses that it may acquire in the future, the Company may not be able to realize the benefits that it expects from such acquisitions.

 

Adverse results in material litigation matters or governmental inquiries could have a material adverse effect upon the Company’s business and financial condition.

 

The Company may become subject in the ordinary course of business to material legal action related to, among other things, intellectual property disputes, professional liability, contracts and employee-related matters, as well as inquiries and requests for information from governmental agencies and bodies and Medicare or Medicaid payors requesting comment and/or information on allegations of billing irregularities, billing and pricing arrangements, privacy practices and other matters that are brought to their attention through billing audits or third parties. The healthcare industry is subject to substantial Federal and state government regulation and audit. Legal actions could result in substantial monetary damages as well as damage to the Company’s reputation with customers, which could have a material adverse effect upon its business.

 

As a company with limited capital and human resources, we anticipate that more of management’s time and attention will be diverted from our business to ensure compliance with regulatory requirements than would be the case with a company that has well established controls and procedures. This diversion of management’s time and attention may have a material adverse effect on our business, financial condition and results of operations.

 

In the event we identify significant deficiencies or material weaknesses in our internal control over financial reporting that we cannot remediate in a timely manner, or if we are unable to receive a positive attestation from our independent registered public accounting firm with respect to our internal control over financial reporting when we are required to do so, investors and others may lose confidence in the reliability of our financial statements. If this occurs, the trading price of our common stock, if any, and ability to obtain any necessary equity or debt financing could suffer. In addition, in the event that our independent registered public accounting firm is unable to rely on our internal control over financial reporting in connection with its audit of our financial statements, and in the further event that it is unable to devise alternative procedures in order to satisfy itself as to the material accuracy of our financial statements and related disclosures, we may be unable to file our periodic reports with the SEC. This would likely have an adverse effect on the trading price of our common stock, if any, and our ability to secure any necessary additional financing, and could result in the delisting of our common stock. In such event, the liquidity of our common stock would be severely limited and the market price of our common stock would likely decline significantly.

 

An inability to attract and retain experienced and qualified personnel could adversely affect the Company’s business.

 

The loss of key management personnel or the inability to attract and retain experienced and qualified employees by the Company could adversely affect the business. The success of the Company is dependent in part on the efforts of key members of its management team.

 

 24 
 

 

Failure in the Company’s information technology systems or delays or failures in the development and implementation of updates or enhancements to those systems could significantly delay billing and otherwise disrupt the Company’s operations or customer relationships.

 

The Company’s business and customer relationships depend, in part, on the continued performance of its information technology systems. Despite network security measures and other precautions, the Company’s information technology systems are potentially vulnerable to physical or electronic break-ins, computer viruses and similar disruptions. Sustained system failures or interruption of the Company’s systems in one or more of its operations could disrupt the Company’s ability to conduct its business. Breaches with respect to protected health information could result in violations of HIPAA and analogous state laws, and risk the imposition of significant fines and penalties. Failure of the Company’s information technology systems could adversely affect the Company’s business, profitability and financial condition.

 

Increasing health insurance premiums and co-payments or high deductible health plans may cause individuals to forgo health insurance and avoid medical attention, either of which may reduce demand for our products and services.

 

Health insurance premiums, co-payments and deductibles have generally increased in recent years. These increases may cause individuals to forgo health insurance, as well as medical attention. This behavior may reduce demand for services at our hospitals.

 

Our business has substantial indebtedness.

 

We currently have, and will likely continue to have, a substantial amount of indebtedness. Our indebtedness could, among other things, make it more difficult for us to satisfy our debt and other obligations, require us to use a large portion of our cash flow from operations to repay and service our debt or otherwise create liquidity problems, limit our flexibility to adjust to market conditions and place us at a competitive disadvantage. As of December 31, 2018, we had total debt outstanding, excluding the effects of derivative liabilities and unamortized discounts, of approximately $26.9 million, all of which is short term and of which certain payments are past due. In addition, our capital lease obligations were approximately $0.8 million at December 31, 2018, of which a majority of payments are past due.

 

Our ability to meet our obligations depends on our future performance and capital raising activities, which will be affected by financial, business, economic and other factors, many of which are beyond our control. If our cash flow and capital resources prove inadequate to allow us to pay the principal and interest on our debt, and meet our other obligations, we could face substantial liquidity problems and might be required to dispose of material assets or operations, restructure or refinance our debt, which we may be unable to do on acceptable terms, and forego attractive business opportunities. In addition, the terms of our existing or future debt agreements may restrict us from pursuing any of these alternatives.

 

Failure to achieve and maintain an effective system of internal control over financial reporting may result in our not being able to accurately report our financial results. As a result, current and potential shareholders could lose confidence in our financial reporting, which would harm our business and the trading price of our stock.

 

Our management has determined that as of December 31, 2018, we did not maintain effective internal control over financial reporting based on criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework as a result of material weaknesses in our internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. If the results of our remediation efforts regarding our material weaknesses are not successful, or if additional material weaknesses or significant deficiencies are identified in our internal control over financial reporting, our management will be unable to report favorably as to the effectiveness of our internal control over financial reporting and/or our disclosure controls and procedures, and we could be required to further implement expensive and time-consuming remedial measures and potentially lose investor confidence in the accuracy and completeness of our financial reports, which could have an adverse effect on our stock price and potentially subject us to litigation.

 

Hardware and software failures, delays in the operation of computer and communications systems, the failure to implement new systems or system enhancements to existing systems or cyber security breaches may harm the Company.

 

The Company’s success depends on the efficient and uninterrupted operation of its computer and communications systems. A failure of the network or data gathering procedures could impede the processing of data, delivery of databases and services and day-to-day management of the business and could result in the corruption or loss of data. While certain operations have appropriate disaster recovery plans in place, we currently do not have sufficient redundant facilities to provide IT capacity in the event of a system failure. Despite any precautions the Company may take, damage from fire, floods, hurricanes, power loss, telecommunications failures, computer viruses, break-ins, cybersecurity breaches and similar events at our computer facilities could result in interruptions in the flow of data to the servers and from the servers to clients.

 

 25 
 

 

In addition, any failure by the computer environment to provide required data communications capacity could result in interruptions in service. In the event of a delay in the delivery of data, the Company could be required to transfer data collection operations to an alternative provider of server hosting services. Such a transfer could result in delays in the ability to deliver products and services to clients. Additionally, significant delays in the planned delivery of system enhancements, improvements and inadequate performance of the systems once they are completed could damage the Company’s reputation and harm the business. Finally, long-term disruptions in the infrastructure caused by events such as natural disasters, the outbreak of war, the escalation of hostilities, acts of terrorism (particularly involving cities in which the Company has offices) and cybersecurity breaches could adversely affect the business. Although the Company carries property and business interruption insurance, the coverage may not be adequate to compensate for all losses that may occur.

 

Provisions of Delaware law and our organizational documents may discourage takeovers and business combinations that our stockholders may consider in their best interests, which could negatively affect our stock price.

 

Provisions of Delaware law and our certificate of incorporation and bylaws may have the effect of delaying or preventing a change in control of the Company or deterring tender offers for our common stock that other stockholders may consider in their best interests.

 

Our certificate of incorporation authorizes us to issue up to 5,000,000 shares of preferred stock in one or more different series with terms to be fixed by our board of directors. Stockholder approval is not necessary to issue preferred stock in this manner. Issuance of these shares of preferred stock could have the effect of making it more difficult and more expensive for a person or group to acquire control of us, and could effectively be used as an anti-takeover device.

 

Our bylaws provide for an advance notice procedure for stockholders to nominate director candidates for election or to bring business before an annual meeting of stockholders, including proposed nominations of persons for election to our board of directors, and require that special meetings of stockholders be called only by our chairman of the board, chief executive officer, president or the board pursuant to a resolution adopted by a majority of the board.

 

The anti-takeover provisions of Delaware law and provisions in our organizational documents may prevent our stockholders from receiving the benefit from any premium to the market price of our common stock offered by a bidder in a takeover context. Even in the absence of a takeover attempt, the existence of these provisions may adversely affect the prevailing market price of our common stock if they are viewed as discouraging takeover attempts in the future.

 

As a public company, we incur significant administrative workload and expenses.

 

As a public company with common stock listed on the OTCQB, we must comply with various laws, regulations and requirements, including certain provisions of the Sarbanes-Oxley Act of 2002, as well as rules implemented by the SEC. Complying with these statutes, regulations and requirements, including our public company reporting requirements, continues to occupy a significant amount of the time of our board of directors and management and involves significant accounting, legal and other expenses. We will need to hire additional accounting personnel to handle these responsibilities, which will increase our operating costs. Furthermore, these laws, regulations and requirements could make it more difficult or more costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of these requirements could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive officers.

 

New laws and regulations as well as changes to existing laws and regulations affecting public companies, including the provisions of the Sarbanes-Oxley Act of 2002 and rules adopted by the SEC, would likely result in increased costs to us as we respond to their requirements. We are investing resources to comply with evolving laws and regulations, and this investment may result in increased general and administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities.

 

We do not intend to pay cash dividends on our common stock in the foreseeable future.

 

We have never declared or paid cash dividends on our common stock and certain of our financing agreements, while outstanding, prohibit us from declaring or paying cash dividends without approval which may not be granted. In addition, we anticipate that we will retain our earnings, if any, for future growth and therefore do not anticipate paying any cash dividends in the foreseeable future. Accordingly, our stockholders will not realize a return on their investment unless the trading price of our common stock appreciates, which is uncertain and unpredictable.

 

 26 
 

 

We may use our stock to pay, to a large extent, for future acquisitions or for the repayment of debt, which would be dilutive to investors.

 

We may choose to use additional stock to pay, to a large extent, for future acquisitions or for the repayment of debt, and believe that doing so will enable us to retain a greater percentage of our operating capital to pay for operations and marketing. Price and volume fluctuations in our stock might negatively impact our ability to effectively use our stock to pay for acquisitions, or could cause us to offer stock as consideration for acquisitions on terms that are not favorable to us and our stockholders. If we did resort to issuing stock in lieu of cash for acquisitions or the repayment of debt under unfavorable circumstances, it would result in increased dilution to investors.

 

Our common stock is subject to substantial dilution and we have obtained our stockholders’ approval to effect a discretionary reverse split of our common stock.

 

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

 

The following table presents the dilutive effect of our various potential common shares as of September 10, 2019:

 

   September 10, 2019 
Common shares outstanding   7,508,936,775 
Dilutive potential shares:     
Stock options   77 
Warrants   634,525,355,377 
Convertible debt   30,570,395,193 
Convertible preferred stock   83,791,788,355 
Total dilutive potential common shares, including outstanding common stock   756,396,475,777 

 

As of September 10, 2019, the Company lacked a sufficient number of authorized shares of common stock to cover all potentially dilutive common shares outstanding. On September 10, 2019, the closing price of the Company’s common stock was $0.0001 per share. Continued conversions and exercises of the Company’s outstanding securities into common stock have further depressed the market price of its common stock and have caused corresponding decreases of the exercise and conversion prices of much of the remaining convertible securities due to their anti-dilution provisions.

 

On October 4, 2019, the Board of Directors authorized the issuance and sale of certain shares of Series K Convertible Preferred Stock to Alcimede LLC pursuant to the terms of an Exchange Agreement. The Board considered all options to secure additional financing required to continue operations and determined this authorization to be necessary to secure needed financing in the required time frame. As a result of this authorization, as of the date of filing this report, the Company believes that it has the ability to have sufficient authorized shares of its common stock to cover all potentially dilutive common shares outstanding.

 

 27 
 

 

The success of our hospitals depends upon their ability to maintain good relationships with physicians and, if a hospital is unable to successfully maintain good relationships with physicians, admissions and outpatient revenues may decrease and operating performance could decline.

 

Because physicians generally direct the majority of hospital admissions and outpatient services, a hospital’s success is, in part, dependent upon the number and quality of physicians on the medical staffs, the admissions and referrals practices of the physicians and the ability to maintain good relations with physicians. If one or more of our hospitals is unable to successfully maintain good relationships with physicians, admissions may decrease and operating performance could decline.

 

Our hospital operations are dependent on the local economies and the surrounding areas in which they operate. A significant deterioration in those economies could cause a material adverse effect on our hospitals’ businesses.

 

Each of our hospital operations is dependent upon the local economy where it is located. A significant deterioration in that economy would negatively impact the demand for the hospital’s services, as well as the ability of patients and other payers to pay for service as rendered.

 

On June 1, 2018, we acquired certain assets related to our Jamestown Regional Medical Center. This hospital is 38 miles west of our Big South Fork Medical Center. On March 5, 2019, we acquired certain assets related to Jellico Community Hospital and CarePlus Center. Jellico Community Hospital is 33 miles east of our Big South Fork Medical Center, and CarePlus is nearby in Kentucky. Although the Company believes the synergies of management and services in a close geographic location will create numerous efficiencies for the Company, it has exposed the Company to a much greater degree to the effects of the economy in that one area.

 

Item 1B. Unresolved Staff Comments

 

Not applicable.

 

Item 2. Properties

 

The table below summarizes certain information as to our principal facilities as of September 10, 2019:

 

Location  Purpose  Type of Occupancy
Riviera Beach, Florida(1)  Laboratory  Leased through December 31, 2019
Oneida, Tennessee(2)  Medical Facility and Laboratory  Owned
Jamestown, Tennessee(2)  Medical Facility  Owned
Jellico Community Hospital(2)  Medical Facility  Leased through April 30, 2025
CarePlus Center(2)  Medical Facility 

As long as center remains in location

 

  (1) Clinical Laboratory Operations segment.
  (2) Hospital Operations segment.

 

In addition to the leases listed above, the Company leased its Corporate offices, which were located in West Palm Beach, Florida. The Company vacated the premises in June 2019 and has not paid certain amounts due under the lease. The lease term expires on February 29, 2020. The lessor has sued the Company in connection with the nonpayment and the Company is in process of negotiating a settlement with the lessor.

 

The table below summarizes certain information as to facilities used by our discontinued operations as of September 10, 2019:

 

Location  Purpose  Type of Occupancy
Orange City, Florida(1)  Offices  Month to month

 

  (1) HTS - Discontinued operations.

 

We believe that each of our facilities as presently equipped has the production capacity for its currently foreseeable level of operations.

 

 28 
 

 

Item 3. Legal Proceedings

 

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. In July 2019, the Companies and EPIC Reference Labs, Inc., filed suit against Cigna Health for failure to pay claims for laboratory services provided. Cigna Health, in turn, sued for improper billing practices. Both cases are in the early stages.

 

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

 

In February 2016, the Company received notice that the Internal Revenue Service (the “IRS”) placed a lien against Medytox Solutions, Inc. and its subsidiaries relating to unpaid 2014 taxes due, plus penalties and interest, in the amount of $5.0 million. The Company paid $0.1 million toward its 2014 tax liability in March 2016. The Company filed its 2015 Federal tax return on March 15, 2016 and the accompanying election to carryback the reported net operating losses was filed in April 2016. On August 24, 2016, the lien was released, and in September of 2016 the Company received a refund from the IRS in the amount of $1.9 million. In November of 2016, the IRS commenced an audit of the Company’s 2015 Federal tax return. Based upon the audit results, the Company has made provisions of approximately $1.0 million as a liability in its financial statements as well as an estimated $0.6 million of receivables for an additional refund that it believes is due.

 

On September 27, 2016, a tax warrant was issued against the Company by the Florida Department of Revenue (the “DOR”) for unpaid 2014 state income taxes in the approximate amount of $0.9 million, including penalties and interest. The Company has made payments to reduce the amount owed to approximately $443,000, and entered into a Stipulation Agreement with the DOR allowing the Company to make monthly installments until July 2019. As of July 2019, the remaining estimated balance of $390,000 was not paid in a lump sum. The Company intends to renegotiate another Stipulation agreement. However, there can be no assurance the Company will be successful. The remaining balance accrued of $460,089 remained outstanding to the DOR at December 31, 2018.

 

In December of 2016, TCS-Florida, L.P. (“Tetra”), filed suit against the Company for failure to make the required payments under an equipment leasing contract that the Company had with Tetra. On January 3, 2017, Tetra received a Default Judgment against the Company in the amount of $2.6 million, representing the balance owed on the leases, as well as additional interest, penalties and fees. In January and February of 2017, the Company made payments to Tetra relating to this judgment aggregating to $0.7 million, and on February 15, 2017, the Company entered into a forbearance agreement with Tetra whereby the remaining $1.9 million due would be paid in 24 equal monthly installments. The Company has not maintained the payment schedule to Tetra. As a result of this default, in May 2018, Tetra and the Company agreed to dispose of certain equipment and the proceeds from the sale have been applied to the outstanding balance. The balance owed to Tetra at December 31, 2018 was $0.5 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. On January 24, 2017, DeLage received a default judgment against the Company in the approximate amount of $1.0 million, representing the balance owed on the lease, as well as additional interest, penalties and fees. The Company recognized this amount in its consolidated financial statements as of December 31, 2016. On February 8, 2017, a Stay of Execution was filed and under its terms the balance due will be paid in variable monthly installments through January of 2019, with an implicit interest rate of 4.97%. The Company and DeLage have now disposed of certain equipment and reduced the balance owed to DeLage. A balance of $0.2 million remains outstanding at December 31, 2018.

 

 29 
 

 

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

 

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

 

The counterparty to a prepaid forward purchase agreement entered into by the Company on March 31, 2016, as amended, filed an arbitration proceeding under the agreement with regard to the outstanding balance. Subsequent to December 31, 2018, Mr. Diamantis advanced the Company $9.9 million, which was used to repay all obligations under the prepaid forward purchase agreement, as more fully discussed in Notes 8 and 21 to the accompanying consolidated financial statements.

 

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

 

The Company, as well as many of our subsidiaries, are defendants in a case filed in Broward County Circuit Court by TCA Global Credit Master Fund, L.P. The plaintiff alleges a breach by Medytox Solutions, Inc. of its obligations under a debenture and claims damages of approximately $2,030,000 plus interest, costs and fees. The Company and the other subsidiaries are sued as alleged guarantors of the debenture. The complaint was filed on August 1, 2018. The Company has recorded the principal balance and interest owed under the debentures agreement for the period ended December 31, 2018. The Company and all defendants have filed a motion to dismiss the complaint, but have not recorded any potential liability related to any further damages.

 

On September 13, 2018, Laboratory Corporation of America sued EPIC Reference Labs, Inc., a subsidiary of the Company, in Palm Beach County Circuit Court for amounts claimed to be owed of approximately $148,000. The Company has recorded the amount owed in accrued expenses at December 31, 2018. The court awarded a judgment against EPIC Reference Labs, Inc. in May 2019 for approximately $155,000.

 

In July 2019, Roche Diagnostics Corporation sued EPIC Reference Labs, Inc., in the Circuit Court for Palm Beach County claiming approximately $240,000 under an agreement to purchase laboratory supplies. This suit is in the early stages.

 

In August 2019, EPIC Reference Labs, Inc. and Medytox Solutions, Inc. were sued by Beckman Coulter, Inc. in the same court under an agreement to purchase laboratory supplies. The plaintiff claims damages of approximately $106,000. This case is in the early stages.

 

In July 2019, the landlord of Medytox Solutions, Inc. received a judgment in the amount of approximately $413,000 in connection with failure to pay under an office lease in West Palm Beach, Florida.

 

In February 2018, Techlogix, Inc. received a judgment of approximately$72,000 against the Company and HTS in the Superior Court of Middlesex County Massachusetts.

 

Following the Company’s decision to suspend operations at Jamestown Regional Medical Center in June 2019 a number of vendors remain unpaid. A number have initiated or threatened legal actions. The Company believes it will come to satisfactory arrangements with these parties as it works towards reopening the hospital. On June 10, 2019 the Company hired a new CEO to oversee the reopening of the hospital and took steps to re-enter the Medicare program. The hospital received initial approval of its application to reactivate the Medicare agreement in August and is currently planning the reopening of the hospital. Negotiations with vendors are ongoing.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

 

Since October 25, 2017, our common stock has been traded on the OTCQB under the symbol “RNVA”. From November 3, 2015 to October 24, 2017, our common stock was listed on The NASDAQ Capital Market under the symbol “RNVA”. The following table sets forth the high and low sales prices per share of our common stock as reported on the OTCQB or The NASDAQ Capital Market, as the case may be, for the periods indicated, as adjusted to reflect the Reverse Stock Splits. Such quotations represent inter-dealer prices without retail markup, markdown or commission and may not necessarily represent actual transactions:

 

Quarter Ended  High   Low 
March 31, 2017  $30,075.00   $10,500.00 
June 30, 2017  $12,675.00   $2,700.00 
September 30, 2017  $3,000.00   $1,425.00 
December 31, 2017  $1,350.00   $15.00 
March 31, 2018  $20.00   $2.15 
June 30, 2018  $14.55   $0.95 
September 30, 2018  $1.40   $0.15 
December 31, 2018  $0.15   $.0012 

 

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Holders

 

As of September 10, 2019, there were 36 holders of record of the Company’s common stock, which excludes stockholders whose shares are held in nominee or street name by brokers.

 

Dividend Distributions

 

We have never declared or paid any cash dividends on our common stock, nor do we anticipate any cash dividends on our common stock in the foreseeable future. Certain of our financing agreements prohibit the payment of cash dividends. The holders of our preferred stock receive dividends at the same time any dividend is paid on shares of common stock in an amount equal to the amount such holder would have received if such shares of preferred stock were converted into common stock. The Series J Preferred Stock is entitled to 8% per annum cumulative dividends at the discretion of the Company’s Board of Directors. No dividends have been declared by the Board as of December 31, 2018.

 

The Company intends to retain earnings, if any, to finance the development and expansion of its business. Future dividend policy will be subject to the discretion of the Board of Directors and will be contingent upon future earnings, if any, the Company’s financial condition, capital requirements, general business conditions, restrictions under the Company’s financing agreements and other factors. Therefore, there can be no assurance that any dividends of any kind will ever be paid on the Company’s common stock.

 

Equity Compensation Plan Information

 

On September 25, 2013, the Company’s board of directors approved and adopted the Medytox Solutions, Inc. 2013 Incentive Compensation Plan (the “Plan”). The Plan was approved by the holders of a majority of the Company’s voting stock on November 22, 2013. The Plan provided for the grant of shares of common stock, options, performance shares, performance units, restricted stock, stock appreciation rights and other awards. Options to purchase shares of common stock and restricted shares of common stock were granted to the Company’s employees and consultants under the Plan. As a result of the Merger, this Plan was cancelled. Any grants issued prior to the cancellation remain in force, as adjusted pursuant to the terms of the Merger.

 

2007 Incentive Award Plan

 

The Company’s 2007 Equity Participation Plan (“2007 Equity Plan”), as amended, which became available upon the completion of the Merger, authorized an aggregate of 50 million shares of common stock to be available for grant pursuant to the 2007 Equity Plan. The 2007 Equity Plan provided for the grant of incentive stock options, nonqualified stock options, restricted stock, stock appreciation rights, performance shares, performance stock units, dividend equivalents, stock payments, deferred stock, restricted stock units, other stock-based awards, and performance-based awards. The option exercise price of all stock options granted pursuant to the 2007 Equity Plan was not less than 100% of the fair market value of the common stock on the date of grant. Stock options may be exercised as determined by the Board, but in no event after the tenth anniversary of the date of grant, provided that a vested nonqualified stock option may be exercised up to 12 months after the optionee’s death. Awards granted under the 2007 Equity Plan were generally subject to vesting at the discretion of the Compensation Committee of the Board of Directors. The 2007 Equity Plan terminated pursuant to its terms in September 2017. Grants made prior to the date of termination will remain outstanding until exercised, forfeited or expired pursuant to the terms of each grant.

 

The following table provides information regarding the status of our existing equity compensation plans at December 31, 2018:

 

Plan Category  (a) Number of securities to be issued upon exercise of outstanding options, warrants
and rights
   (b) Weighted average
exercise price of outstanding options, warrants and
rights(1)  
   (c) Number of shares remaining available for future issuances under equity compensation plans (excluding shares reflected in column (a) 
             
Equity compensation plans approved by stockholders   77   $1,036,374     
                
Equity compensation plans not approved by stockholders             n/a  
                
Total   77   $1,036,374     

 

n/a - not applicable.

(1) See Note 14 of the consolidated financial statements for additional information about weighted average exercise prices.

 

 31 
 

 

Recent Sales of Unregistered Securities

 

None.

 

Item 6. Selected Financial Data.

 

Not applicable.

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

The following discussion of our financial condition and results of operations should be read together with our consolidated financial statements and the notes thereto included elsewhere in this report. This discussion contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1996. Such statements consist of any statement other than a recitation of historical fact and can be identified by the use of forward-looking terminology such as “may,” “expect,” “anticipate,” “intend” or “estimate” or the negative thereof or other variations thereof or comparable terminology. The reader is cautioned that all forward-looking statements are speculative, and there are certain risks and uncertainties that could cause actual events or results to differ from those referred to in such forward-looking statements (see Item 1A, “Risk Factors”).

 

COMPANY OVERVIEW

 

Medytox Solutions, Inc. (“Medytox”) was organized on July 20, 2005 under the laws of the State of Nevada. In the first half of 2011, Medytox’s management elected to reorganize as a holding company, and Medytox established and acquired a number of companies in the medical service and software sector between 2011 and 2014.

 

On November 2, 2015, pursuant to the terms of the Agreement and Plan of Merger, dated as of April 15, 2015, by and among CollabRx, Inc. (“CollabRx”), CollabRx Merger Sub, Inc. (“Merger Sub”), a direct wholly-owned subsidiary of CollabRx formed for the purpose of the merger, and Medytox, Merger Sub merged with and into Medytox, with Medytox as the surviving company and a direct, wholly-owned subsidiary of CollabRx (the “Merger”). Prior to closing, the Company amended its certificate of incorporation to change its name to Rennova Health, Inc. This transaction was accounted for as a reverse merger in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and, as such, the historical financial statements of Medytox became the historical financial statements of the Company.

 

Rennova is a healthcare enterprise that delivers products and services to healthcare providers, their patients and individuals. We operate in two synergistic divisions: 1) Clinical diagnostics through our clinical laboratory; and 2) Hospital operations through our Big South Fork Medical Center, which opened on August 8, 2017, and our Jamestown Regional Medical Center located in Jamestown Tennessee, including a doctor’s practice, the assets of which were acquired in the second quarter of 2018. In addition, on March 5, 2019, we closed an asset purchase agreement whereby we acquired certain assets related to an acute care hospital located in Jellico, Tennessee and an outpatient clinic located in Williamsburg, Kentucky. We aspire to create a more sustainable relationship with our customers by offering needed and interoperable solutions to capture multiple revenue streams from medical providers, patients and hospital services.

 

Our Services

 

We are a healthcare enterprise that delivers products and services to healthcare providers, their patients and individuals. We operate in two synergistic divisions: 1) Hospital Operations; and 2) Clinical diagnostics services through our Clinical Laboratory Operations. During 2017, we decided to spin off two of our business divisions as more fully discussed below under the heading “Discontinued Operations.”

 

Our Hospital Operations represented approximately 99.1% and 28.4% of our revenues for the years ended December 31, 2018 and 2017, respectively. Our hospital operations began with the opening of our Big South Fork Medical Center on August 8, 2017, following the receipt of the required licenses and regulatory approvals, and generated revenues of approximately $14.4 million during 2018 and approximately $0.9 million during the period from August 8, 2017 to December 31, 2017. Management determined that because Big South Fork Medical Center, which is more fully discussed below, was reopened after being closed and contracts with payers had to be negotiated and implemented during the first months of operation, they would recognize a 20% collection rate for the period to December 31, 2017 until there was adequate collection history to analyze and confirm anticipated collections. During 2018, based on collection history achieved, management recognized a 17% collection rate for our hospitals.

 

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On January 13, 2017, we closed on an asset purchase agreement to acquire certain assets related to Scott County Community Hospital, based in Oneida, Tennessee (the “Oneida Assets”). The Oneida Assets include a 52,000-square foot hospital building and 6,300 square foot professional building on approximately 4.3 acres. Scott County Community Hospital is classified as a Critical Access Hospital (rural) with 25 beds, a 24/7 emergency department, operating rooms and a laboratory that provides a range of diagnostic services. Scott County Community Hospital closed in July 2016 in connection with the bankruptcy filing of its parent company, Pioneer Health Services, Inc. We acquired the Oneida Assets out of bankruptcy for a purchase price of $1.0 million. The hospital, which has since been renamed Big South Fork Medical Center, became operational on August 8, 2017.

 

On January 31, 2018, the Company entered into an asset purchase agreement to acquire from Community Health Systems, Inc. certain assets related to an acute care hospital located in Jamestown, Tennessee, referred to as Jamestown Regional Medical Center. The purchase was completed on June 1, 2018 for a purchase price of $0.7 million. The hospital was acquired by a newly formed subsidiary, Jamestown TN Medical Center, Inc., and is an 85-bed facility of approximately 90,000 square feet on over eight acres of land, which offers a 24-hour Emergency Department with two spacious trauma bays and seven private exam rooms, inpatient and outpatient medical services and a Progressive Care Unit which provides telemetry services. The acquisition also included a separate physician practice which now operates under Rennova as Mountain View Physician Practice, Inc. Jamestown is located 38 miles west of Big South Fork Medical Center

 

In addition, on March 5, 2019, we closed an asset purchase agreement (the “Purchase Agreement”) whereby we acquired certain assets related to an acute care hospital located in Jellico, Tennessee and an outpatient clinic located in Williamsburg, Kentucky. The hospital is known as Jellico Community Hospital and the clinic is known as the CarePlus Center. The hospital and the clinic and their associated assets were acquired from Jellico Community Hospital, Inc. and CarePlus Rural Health Clinic, LLC, respectively.

 

Jellico Community Hospital is a fully operational 54-bed acute care facility that offers comprehensive services, including diagnostic imaging, radiology, surgery (general, gynecological and vascular), nuclear medicine, wound care and hyperbaric medicine, intensive care, emergency care and physical therapy. Jellico is 33 miles east of Big South Fork Medical Center. The CarePlus Center offers sophisticated testing capabilities and compassionate care, all in a modern, patient-friendly environment. Services include diagnostic imaging services, x-ray, mammography, bone densitometry, computed tomography (CT), ultrasound, physical therapy and laboratory services on a walk-in basis.

 

The purchase price was approximately $658,537. This purchase price was made available by Christopher Diamantis, a director of the Company. Diligence, legal and other costs associated with the acquisition are estimated to be approximately $250,000, meaning the total cost of acquisition to the Company is approximately $908,000. Annual net revenues in recent years have been approximately $12,000,000, with government payors, including Medicare and Medicaid, accounting for in excess of 70% of the payor mix. The Company does not expect that payor mix to change in the new future.

 

Going forward, we expect our Hospital Operations to provide us with a stable revenue base, as well as the potential for significant synergistic opportunities with our Clinical Laboratory Operations business segment.

 

Prior to our focus on our Hospital Operations, our principal line of business had been clinical laboratory blood and urine testing services, with a particular emphasis on the provision of urine drug toxicology testing to physicians, clinics and rehabilitation facilities in the United States. Testing services to physicians, clinics and rehabilitation facilities represented approximately 1.6% and 71.6% of our revenues for the years ended December 31, 2018 and 2017, respectively.

 

Discontinued Operations

 

On July 12, 2017, the Company announced plans to spin off its Advanced Molecular Services Group (“AMSG”) and in the third quarter 2017 the Company’s Board of Directors voted unanimously to spin off the Company’s wholly-owned subsidiary, Health Technology Solutions, Inc. (“HTS”), as independent publicly traded companies by way of tax-free distributions to the Company’s stockholders. While these spin offs have taken longer than anticipated, completion of these spin offs is now expected to occur in the first quarter of 2020. The spin offs are subject to numerous conditions, including effectiveness of Registration Statements on Form 10 to be filed with the Securities and Exchange Commission, and consents, including under various funding agreements previously entered into by the Company. A record date to determine those stockholders entitled to receive shares in the spin offs should be approximately 30 to 60 days prior to the dates of the spin offs. The strategic goal of the spin offs is to create three public companies, each of which can focus on its own strengths and operational plans. In addition, after the spin offs, each company will provide a distinct and targeted investment opportunity.

 

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The Company has reflected the amounts relating to AMSG and HTS as disposal groups classified as held for sale and included in discontinued operations in the Company’s accompanying consolidated financial statements. Prior to being classified as held for sale, AMSG had been included in the Decision Support and Informatics division, except for the Company’s subsidiary, Alethea Laboratories, Inc., which had been included in the Clinical Laboratories division and HTS had been included in the Company’s Supportive Software Solutions division. The segment disclosures included in our results of operations presented below no longer include amounts relating to AMSG and HTS following the reclassification to discontinued operations.

 

Outlook

 

We believe that the addition of our Hospital Operations to our business model offers a more predictable and stable revenue base, as well as the potential for significant synergistic opportunities with our Clinical Laboratory Operations business segment. To date, our focus is on rural hospitals, which provide a much-needed service to their local communities. These hospitals reduce our reliance on commission based sales employees to generate sales. We currently operate two hospitals and a doctor’s office practice in the same general geographic location, which has created numerous efficiencies in purchasing, staffing and provision of needed services to the local communities. We expect that the addition of our third hospital and an acute care center will allow us to continue to generate stable revenues and synergistic opportunities. We are confident that this is a sustainable model we can continue to grow through acquisition and development and believe that we can benefit from the compliance and IT and software capabilities we already have in place.

 

Our Clinical Laboratory Operations revenues have decreased significantly over the past few years. This decline in revenues has had a material adverse impact on our liquidity, results of operations and financial condition, and is the result of lower third-party reimbursement and while we secured numerous in-network contracts with payers our status in many cases is as an “out of network” service provider. These trends have impacted our entire industry, and have been accompanied by allegations of irregularities in the practices of a number of our competitors and substance abuse facilities. In response, we have put in place a robust compliance program that we are implementing in all facets of our business.

 

We believe that our ability to grow our clinical laboratory revenues and return this division to profitability is dependent on our ability to secure additional “in-network” contracts with insurance companies and other third-party payers, which will then ensure adequate and timely payment for the toxicology, clinical pharmacogenetics and other testing services we perform. These third-party payers are now generally unwilling to reimburse service providers who are not part of their network, a departure from prior industry practices and a trend that has accelerated during the past two years. While we have made some progress in securing “in network” contracts with payers during the past two years, it has not been reflected in our revenues for the years ended December 31, 2018 and 2017. However, we do anticipate that significant new opportunities to become credentialed with certain large third-party payers will arise in fiscal 2019, which would have a significant positive impact on our future revenues. In addition, we have made a number of changes to our onboarding policies and procedures to ensure that, on a going forward basis, substantially all services that we performed will be reimbursable.

 

We believe that a successful spin off AMSG and HTS as two independent publicly traded companies by way of tax-free distributions to the Company’s stockholders would allow each to focus on its own strengths and operational plans. In addition, after the spin offs, each company will provide a distinct and targeted investment opportunity. The Company believes it will be able to recognize the expenditures to date with regard to AMSG and HTS, which are in excess of $20 million, as an investment after the spin offs are complete.

 

We received approximately $9.0 million and $15.7 million in cash from issuances of debentures and warrants during 2018 and 2017, respectively, (see Note 9 to the consolidated financial statements), $3.3 million and $4.3 million from related parties in 2018 and 2017, respectively (see Notes 8, 9 and 10 to the consolidated financial statements), $4.0 million of proceeds on October 30, 2017 from the issuance of our convertible preferred stock (see Note 13 to the consolidated financial statements) and $0.8 million in 2018 from the sale of stock we owned (see Note 18 to the consolidated financial statements). Subsequent to December 31, 2018 and through September 27, 2019, we received $3.8 million from issuances of debentures, $1.6 million from the issuance of a promissory note and $9.9 million in advances from our director, Mr. Diamantis, which were used to repay obligations under a prepaid forward purchase contract (see Note 8 to the consolidated financial statements). In addition, subsequent to December 31, 2018 and through September 10, 2019, we received $6.5 million in loans from Mr. Diamantis and we entered into five accounts receivable factoring arrangements as more fully discussed in Note 21 to our consolidated financial statements.

 

Our net loss from continuing operations for the year ended December 31, 2018 was $13.6 million, as compared to $50.9 million for the same period of a year ago. The change is primarily due to a reduction in the loss from continuing operations before other income and expense and income taxes of $2.9 million, the change in fair value and the value of derivative liabilities, which provided a gain of $13.7 million in 2018 versus a loss of $12.4 million in 2017, the gain on bargain purchase associated with the acquisition of Jamestown Regional Medical Center in June 2018 of $7.5 million and an increase in other income of $0.6 million in 2018.

 

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RESULTS OF OPERATIONS

 

Critical Accounting Policies and Estimates

 

Our discussion and analysis of financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make a number of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Such estimates and assumptions affect the reported amounts of revenues and expenses during the reporting period. We base our estimates on historical experiences and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions and conditions. We continue to monitor significant estimates made during the preparation of our financial statements. On an ongoing basis, we evaluate estimates and assumptions based upon historical experience and various other factors and circumstances. We believe our estimates and assumptions are reasonable in the circumstances; however, actual results may differ from these estimates under different future conditions.

 

We have identified the policies and significant estimation processes discussed below as critical to our business and to the understanding of our results of operations. For a detailed application of these and other accounting policies, see Note 2 to the accompanying audited consolidated financial statements as of and for the year ended December 31, 2018.

 

Revenue Recognition

 

Hospital Operations

 

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, related to revenue recognition. We adopted the new standard effective January 1, 2018, using the full retrospective method. The adoption of the new standard did not have an impact on our recognition of net revenues for any periods prior to adoption. The most significant impact of adopting the new standard is to the presentation of our consolidated income statements, where we no longer present the provision for doubtful accounts as a separate line item and our revenues are presented net of estimated contract and related allowances. We also do not present “allowances for doubtful accounts” on our consolidated balance sheets as a result of the adoption of the new standard.

 

Our revenues generally relate to contracts with patients in which our performance obligations are to provide health care services to the patients. Revenues are recorded during the period our obligations to provide health care services are satisfied. Our performance obligations for inpatient services are generally satisfied over periods that average approximately five days, and revenues are recognized based on charges incurred in relation to total expected charges. Our performance obligations for outpatient services are generally satisfied over a period of less than one day. The contractual relationships with patients, in most cases, also involve a third-party payer (Medicare, Medicaid, managed care health plans and commercial insurance companies, including plans offered through the health insurance exchanges) and the transaction prices for the services provided are dependent upon the terms provided by (Medicare and Medicaid) or negotiated with (managed care health plans and commercial insurance companies) the third-party payers. The payment arrangements with third-party payers for the services we provide to the related patients typically specify payments at amounts less than our standard charges. Medicare generally pays for inpatient and outpatient services at prospectively determined rates based on clinical, diagnostic and other factors. Services provided to patients having Medicaid coverage are generally paid at prospectively determined rates per discharge, per identified service or per covered member. Agreements with commercial insurance carriers, managed care and preferred provider organizations generally provide for payments based upon predetermined rates per diagnosis, per diem rates or discounted fee-for-service rates. Management continually reviews the contractual estimation process to consider and incorporate updates to laws and regulations and the frequent changes in managed care contractual terms resulting from contract renegotiations and renewals. Our revenues are based upon the estimated amounts we expect to be entitled to receive from patients and third-party payers. Estimates of contractual allowances under managed care and commercial insurance plans are based upon the payment terms specified in the related contractual agreements. Revenues related to uninsured patients and uninsured copayment and deductible amounts for patients who have health care coverage may have discounts applied (uninsured discounts and contractual discounts). We also record estimated implicit price concessions (based primarily on historical collection experience) related to uninsured accounts to record self-pay revenues at the estimated amounts we expect to collect.

 

Laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation. Estimated reimbursement amounts are adjusted in subsequent periods as cost reports are prepared and filed and as final settlements are determined (in relation to certain government programs, primarily Medicare, this is generally referred to as the “cost report” filing and settlement process). There were no adjustments to estimated Medicare and Medicaid reimbursement amounts and disproportionate-share funds related primarily to cost reports filed during 2018 and 2017.

 

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The Emergency Medical Treatment and Labor Act (“EMTALA”) requires any hospital participating in the Medicare program to conduct an appropriate medical screening examination of every person who presents to the hospital’s emergency room for treatment and, if the individual is suffering from an emergency medical condition, to either stabilize the condition or make an appropriate transfer of the individual to a facility able to handle the condition. The obligation to screen and stabilize emergency medical conditions exists regardless of an individual’s ability to pay for treatment. Federal and state laws and regulations require, and our commitment to providing quality patient care encourages, us to provide services to patients who are financially unable to pay for the health care services they receive. Patients treated at hospitals for non-elective care, who have income at or below 200% of the federal poverty level, were eligible for charity care. The federal poverty level is established by the federal government and is based on income and family size. Because we do not pursue collection of amounts determined to qualify as charity care, they are not reported in revenues. We provide discounts to uninsured patients who do not qualify for Medicaid or charity care. In implementing the uninsured discount policy, we may first attempt to provide assistance to uninsured patients to help determine whether they may qualify for Medicaid, other federal or state assistance, or charity care. If an uninsured patient does not qualify for these programs, the uninsured discount is applied.

 

The collection of outstanding receivables for Medicare, Medicaid, managed care payers, other third-party payers and patients is our primary source of cash and is critical to our operating performance. The primary collection risks relate to uninsured patient accounts, including patient accounts for which the primary insurance carrier has paid the amounts covered by the applicable agreement, but patient responsibility amounts (deductibles and copayments) remain outstanding. Implicit price concessions relate primarily to amounts due directly from patients. Estimated implicit price concessions are recorded for all uninsured accounts, regardless of the aging of those accounts. Accounts are written off when all reasonable internal and external collection efforts have been performed. The estimates for implicit price concessions are based upon management’s assessment of historical writeoffs and expected net collections, business and economic conditions, trends in federal, state and private employer health care coverage and other collection indicators. Management relies on the results of detailed reviews of historical write offs and collections at facilities that represent a majority of our revenues and accounts receivable (the “hindsight analysis”) as a primary source of information in estimating the collectability of our accounts receivable. We perform the hindsight analysis quarterly, utilizing rolling twelve-months accounts receivable collection and write off data. We believe our quarterly updates to the estimated implicit price concession amounts at each of our hospital facilities provide reasonable estimates of our revenues and valuations of our accounts receivable.

 

Clinical Laboratory Operations

 

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.

 

In applying the new revenue standard, (“ASU”) 2014-09, “Revenue from Contracts with Customers (Topic 606), using the full retrospective approach for all periods presented, no prior-period adjustment has been determined. This includes but is not limited to disaggregated revenue information, contract asset and liability information, including significant changes from the 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.

 

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Total gross revenues were reduced by approximately $9.4 million and $1.5 million for bad debt for the years ended December 31, 2018 and 2017, respectively. As required by the new standard, after bad debt and contractual and related allowance adjustments to revenues of $73.5 million and $20.9 million, for the years ended December 31, 2018 and 2017, respectively, we reported net revenues of $14.5 million and $3.1 million. We continue to review the provision for bad debt and contractual allowances.

 

Contractual Allowances and Doubtful Accounts Policy

 

Accounts receivable are reported at realizable value, net of allowances for credits and doubtful accounts, which are estimated and recorded in the period the related revenue is recorded. The Company has a standardized approach to estimating and reviewing the collectability of its receivables based on a number of factors, including the period they have been outstanding. Historical collection and payer reimbursement experience is an integral part of the estimation process related to allowances for contractual credits and doubtful accounts. In addition, the Company regularly assesses the state of its billing operations in order to identify issues which may impact the collectability of these receivables or reserve estimates. Receivables deemed to be uncollectible are charged against the allowance for doubtful accounts at the time such receivables are written-off. Recoveries of receivables previously written-off are recorded as credits to the allowance for doubtful accounts. Revisions to the allowances for doubtful accounts estimates are recorded as an adjustment to provision for bad debts.

 

Impairment or Disposal of Long-Lived Assets

 

The Company accounts for the impairment or disposal of long-lived assets according to FASB ASC Topic 360, Property, Plant and Equipment (“ASC 360”). ASC 360 clarifies the accounting for the impairment of long-lived assets and for long-lived assets to be disposed of, including the disposal of business segments and major lines of business. Long-lived assets are reviewed when facts and circumstances indicate that the carrying value of the asset may not be recoverable. When necessary, impaired assets are written down to estimated fair value based on the best information available. Estimated fair value is generally based on either appraised value or measured by discounting estimated future cash flows. Considerable management judgment is necessary to estimate discounted future cash flows. Accordingly, actual results could vary significantly from such estimates.

 

At December 31, 2018, we recorded an asset impairment charge of $0.2 million for an intangible asset acquired in the Jamestown Regional Medical Center acquisition in 2018. In 2017, we recorded a goodwill impairment charge of $1.0 million related to the acquisition of Genomas, Inc. Genomas, Inc. is part of AMSG and is included in our discontinued operations.

 

Derivative Financial Instruments and Fair Value

 

We account for warrants issued in conjunction with the issuance of common stock and certain convertible debt instruments in accordance with the guidance contained in ASC Topic 815, Derivatives and Hedging (“ASC 815”) and ASC Topic 480, Distinguishing Liabilities from Equity (“ASC 480”). For warrant instruments and conversion options embedded in promissory notes that are not deemed to be indexed to the Company’s own stock, we classified such instruments as liabilities at their fair values at the time of issuance and adjusted the instruments to fair value at each reporting period. These liabilities were subject to re-measurement at each balance sheet date until extinguished either through conversion or exercise, and any change in fair value was recognized in our statement of operations. The fair values of these derivative and other financial instruments had been estimated using a Black-Scholes model and other valuation techniques.

 

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

 

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

 

The amendments in Part II of this Update replace the indefinite deferral of certain guidance in Topic 480 with a scope exception. This has the benefit of improving the readability of the Codification and reducing the complexity associated with navigating the guidance in Topic 480.

 

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.

 

The amendments in Part II of this Update do not require any transition guidance because those amendments do not have an accounting effect.

 

We have determined that this amendment had a material impact on our consolidated financial statements and we have 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 our first fiscal quarter of 2017. The remaining $15 million was offset to additional paid in capital (discount on convertible debenture). Additionally, we 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 as a result of the down round provision feature. In addition, a $231.8 million deemed dividend was recorded in 2018 as a result of the application of this amendment.

 

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

 

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

 

Stock Based Compensation

 

We account for Stock-Based Compensation under ASC 718 “Compensation – Stock Compensation”, which addresses the accounting for transactions in which an entity exchanges its equity instruments for goods or services, with a primary focus on transactions in which an entity obtains employee services in share-based payment transactions. ASC 718 requires measurement of the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. Incremental compensation costs arising from subsequent modifications of awards after the grant date must be recognized.

 

The Company accounts for stock-based compensation awards to non-employees in accordance with ASC 505-50, Equity-Based Payments to Non-Employees. Under ASC 505-50, the Company determines the fair value of the options, warrants or stock-based compensation awards granted as either the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. Any stock options or warrants issued to non-employees are recorded in expense and additional paid-in capital in stockholders’ equity/(deficit) over the applicable service periods using variable accounting through the vesting dates based on the fair value of the options or warrants at the end of each period.

 

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Year ended December 31, 2018 compared to year ended December 31, 2017

 

The following table summarizes the results of our consolidated continuing operations for the years ended December 31, 2018 and 2017:

 

   Year Ended December 31, 
   2018   2017 
   $   %   $   % 
Net revenues  $14,548,690    100.0%  $3,088,216    100.0%
Operating expenses:                    
Direct costs of revenue   11,509,507    79.1%   948,838    30.7%
General and administrative expenses   14,821,606    101.9%   15,757,527    510.2%
Sales and marketing expenses   4,554    0.0%   742,637    24.0%
Asset impairment   173,799    1.2%   -    0.0%
Depreciation and amortization   1,263,844    8.7%   1,715,321    55.5%
Loss from continuing operations   (13,224,620)   -90.9%   (16,076,107)   -520.6%
Interest expense   (21,532,678)   -148.0%   (21,432,285)   -694.0%
Other income   672,972    4.6%   38,342    1.2%
Change in fair value of derivative instruments   13,696,214    94.1%   (42,702,815)   -1382.8%
Gain on extinguishment of debt   -    0.0%   42,702,815    1382.8%
Gain on bargain purchase   7,566,670    52.0%   -    0.0%
Value of convertible liabilities   -    0.0%   (12,435,250)   -402.7%
Provision for income taxes   766,070    5.3%   1,015,724    32.9%
Net loss from continuing operations  $(13,587,512)   -93.4%  $(50,921,024)   -1648.9%

 

Net Revenues

 

Consolidated net revenues were $14.5 million for the year ended December 31, 2018, as compared to $3.1 million for the year ended December 31, 2017, an increase of $11.4 million. The increase in net revenues was due to revenue from Jamestown Regional Medical Center, which was acquired on June 1, 2018 and a full year of revenue from the Big South Fork Medical Center, which we began operating on August 8, 2017. The increase in Hospital revenue of $13.5 million was offset by a $2.1 million decrease in Clinical Laboratory Operations revenue for 2018 compared to 2017. The 2018 and 2017 net revenues include bad debt expense elimination of $9.4 million and $1.5 million, respectively, for doubtful accounts. Bad debt and contractual and related allowance adjustments to revenues were of $73.5 million and $20.9 million, for the years ended December 31, 2018 and 2017, respectively.

 

Direct Costs of Revenue

 

Direct costs of revenue increased by $10.5 million for the year ended December 31, 2018, as compared the year ended December 31, 2017. The increase is related to our Hospital Operations.

 

General and Administrative Expenses

 

General and administrative expenses decreased by $1.0 million, or 5.9%, for the year ended December 31, 2018, as compared to the same period of a year ago. The change is primarily due to Hospital Operations, which increased by $3.4 million, offset by the $2.3 million reduction in expenses associated with our Clinical Laboratory Operations as a result of the significant reduction in the number of laboratory facilities to one, thereby reducing the number of employees and the related operating expenses, as well as a decrease in our Corporate general and administrative expenses of a $2.0 million primarily due to the Company taking cost cutting measures due to its financial condition.

 

Sales and Marketing Expenses

 

The decrease in sales and marketing expenses of $0.7 million for the year ended December 31, 2018, as compared to the year ended December 31, 2017 was primarily due to a reduction in sales employee and contractor compensation expenses in the amount of $0.7 million, as well as reduced travel, advertising and commissionable collections related to the decline of our Clinical Laboratory Operations revenues.

 

Asset Impairment

 

We determined that a non-compete intangible asset that was acquired in the Jamestown Regional Medical Center acquisition on June 1, 2018 was impaired and, accordingly, we recorded an impairment charge of $0.2 million in 2018.

 

 40 
 

 

Depreciation and Amortization Expenses

 

Depreciation and amortization expense decreased by $0.5 million during the year ended December 31, 2018, as compared with the year ended December 31, 2017, as we sold some Clinical Laboratory Operations equipment in 2018 and some of our property and equipment became fully depreciated during 2017. We expect our depreciation and amortization expense to increase going forward as a result of the fixed assets associated with our hospital acquisitions.

 

Loss from Operations Before Other Income (Expense) and Income Taxes

 

Our operating loss decreased by approximately $2.9 million for the year ended December 31, 2018, as compared to same period a year ago. We realized a reduced operating loss at our Clinical Laboratory Operations, and a reduction in Corporate general and administration expenses, partially offset by an increase in operating loss at our Hospital Operations.

 

Interest Expense

 

Interest expense for the year ended December 31, 2018 was $21.5 million, as compared to $21.4 million for the year ended December 31, 2017. Interest expense for the year ended December 31, 2018 included $17.6 million for the amortization of debt discount and deferred financial costs related to convertible debentures and warrants. Interest expense in the year ended December 31, 2017 included a $8.6 million non-cash interest charge related to the issuance of convertible debentures and warrants during the period, and $10.4 million for the amortization of debt discount and deferred financing costs.

 

Other Income and Gain on Bargain Purchase

 

Other income increased by $0.6 million for the year ended December 31, 2018, as compared to the year ended December 31, 2017 due primarily to a gain on sale of Clinical Laboratory Operations’ fixed assets. Gain on bargain purchase was $7.6 million for the year ended December 31, 2018 resulting from real property assets acquired in the Jamestown Regional Medical Center acquisition on June 1, 2018.

 

Change in Fair Value of Derivative Instruments and Gain on Extinguishment of Debt

 

The $13.7 million of income from the change in fair value of derivative instruments for the year ended December 31, 2018 is primarily due to the increase in the spread between the price of our common stock and the exercise/conversion prices of derivatives. For the year ended December 31, 2017, we recorded a $42.7 million gain on the extinguishment of debt, fully offset by a loss of $42.7 million due to the change in fair value of debt as a result of the adoption of ASU 2017-11.

 

Value of Convertible Liabilities

 

The $12.4 million value of derivative liabilities recorded in the year ended December 31, 2017 related to convertible debentures and warrants that were issued during the period.

 

Provision for Income Taxes

 

The provision for income taxes for the year ended December 31, 2018 of $0.8 million was comparable to the $1.0 million provision for income taxes for the year ended December 31, 2017. The provision for income taxes for the year ended December 31, 2018 resulted from the completion of the Federal income tax audit for 2015.

 

Net Loss from Continuing Operations

 

Our net loss from continuing operations decreased by $37.3 million, to $13.6 million for the year ended December 31, 2018, as compared to $50.9 million for the year ended December 31, 2017. Loss from continuing operations before other income and expense and income taxes improved by $2.9 million for the year ended December 31, 2018 as compared to 2017. Also contributing to the decrease was the revaluation of our derivative instruments in the year ended December 31, 2018 resulting in a net gain of $13.7 million versus a loss of $12.4 million in valuation of convertible liabilities during 2017, a $7.6 million bargain purchase gain related to the Jamestown Regional Medical Center acquisition on June 1, 2018 and $0.6 million of other income in 2018 primarily due to a gain on the sale of fixed assets We have made progress in expanding into a wider and more varied market place with our Hospital Operations, and that combined with aggressive consolidation and cost cutting is expected to reduce the losses incurred in the future.

 

 41 
 

 

The following table presents key financial metrics for our Hospital Operations segment:

 

   Year Ended December 31,         
Hospital Operations  2018   2017   Change   % 
                 
Net revenues  $14,417,676   $877,898   $13,539,778    1542.3%
Operating expenses:                    
Direct costs of revenue   11,286,278    84,808    11,201,470    13208.0%
General and administrative expenses (1)   8,893,785    5,514,793    3,378,992    61.3%
Asset impairment   173,799    -    173,799    0.0%
Depreciation and amortization   498,352    78,836    419,516    532.1%
                     
Loss from operations  $(6,434,538)  $(4,800,539)  $(1,633,999)   34.0%
                     

Number of Patients Served

   13,349    3,747    9,602    256.3%
                     

Key Operating Measures – Net revenues per patient served:

  $1,080.06   $234.29   $845.76    361.0%
                     

Key Operating Measures - Direct Costs per patient served:

  $845.48   $22.63   $822.84    3635.5%

 

Our hospital operations began on August 8, 2017.

 

1 During our start up period in 2017 the separation of direct costs per patient and general and administrative expenses had not been completed. As this exercise was completed in 2018, we began to reduce the general and administrative costs and increase our direct costs of revenue per patient.

 

 42 
 

 

The following table presents key financial and operating metrics for our Clinical Laboratory Operations segment:

 

   Year Ended December 31,         
Clinical Laboratory Operations  2018   2017   Change   % 
                 
Net revenues  $131,014   $2,210,318   $(2,079,304)   -94.1%
Operating expenses:                    
Direct costs of revenue   223,229    821,535    (598,306)   -72.8%
General and administrative expenses   1,386,285    3,687,329    (2,301,044)   -62.4%
Sales and marketing expenses   4,554    734,268    (729,714)   -99.4%
Depreciation and amortization   764,445    1,639,954    (875,509)   -53.4%
                     
Loss from operations  $(2,247,499)  $(4,672,768)  $2,425,269    -51.9%
                     
Key Operating Measures - Revenues:                    
Insured tests performed   3,593    44,458    (40,865)   -91.9%
Net revenue per insured test  $36.46   $49.72   $(13.25)   -26.7%
Revenue recognition percent of gross billings   11.0%   15.0%   -4.0%     
                     
Key Operating Measures - Direct Costs:                    
Total samples processed   4,560    5,545    (985)   -17.8%
Direct costs per sample  $48.95   $148.16   $(99.20)   -67.0%

 

The reduction in insured tests performed in 2018 negatively impacted our revenues by $2.5 million, while the decrease in net revenue per insured test negatively impacted our revenues by $0.4 million. The decrease in direct costs per sample resulted in a $1.1 million decrease in direct costs of revenue, while the decrease in the number of samples processed resulted in a $0.5 million reduction in direct costs of revenue.

 

The decrease in general and administrative expenses is primarily due to the reduction in employee compensation and related costs, as we significantly reduced our headcount.

 

The following table presents key financial metrics for our Corporate group:

 

   Year Ended December 31,         
Corporate  2018   2017   Change   % 
                 
Operating expenses:                    
General and administrative expenses  $4,541,536   $6,550,553   $(2,009,017)   -30.7%
Direct costs of revenue   -    42,496    (42,496)   -100.0%
Sales and marketing expenses   -    8,369    (8,369)   -100.0%
Depreciation and amortization   1,047    1,382    (335)   -24.2%
                     
Loss from operations  $(4,542,583)  $(6,602,800)  $2,060,217    -31.2%

 

The decrease in general and administrative expenses is mainly the result of a reduction in employee compensation and related costs, as we significantly reduced our headcount throughout 2018 and 2017 in response to the decline in revenues in our Clinical Laboratory Operations and our former Supportive Software segment, and a $0.3 million decrease in stock compensation expense.

 

 43 
 

 

LIQUIDITY AND CAPITAL RESOURCES

 

For the years ended December 31, 2018 and 2017, we financed our operations primarily from the sale of our equity securities, the issuance of debentures and short-term advances from related parties. Future cash needs for working capital, capital expenditures and potential acquisitions will require management to seek additional equity or obtain additional credit facilities. The sale of additional equity will result in additional dilution to our stockholders. A portion of our cash may be used to acquire or invest in complementary businesses or products or to obtain the right to use complementary technologies. From time to time, in the ordinary course of business, we evaluate potential acquisitions of such businesses, products or technologies.

 

At December 31, 2018, we had $7,000 cash on hand from continuing operations, a working capital deficit of $39.3 million and a stockholders’ deficit of $39.2 million. In addition, we incurred a loss from continuing operations of $13.6 million for the year ended December 31, 2018. As of the date of this report, our cash position is deficient; and payments for our operations in the ordinary course are not being made. Our fixed operating expenses include payroll, rent, capital lease payments and other fixed expenses, as well as the costs required to operate Big South Fork Medical Center, which began operations on August 8, 2017, and Jamestown Regional Medical Center, which was acquired on June 1, 2018. Our fixed operating expenses were approximately $2.0 million per month for the year ended December 31, 2018.

 

We received approximately $9.0 million and $15.7 million in cash from the issuances of debentures and warrants during 2018 and 2017, respectively, $3.3 million and $4.8 million from related parties in 2018 and 2017, respectively, $4.0 million of proceeds on October 30, 2017 from the issuance of our convertible preferred stock and $0.8 million in 2018 from the sale of stock we owned. Subsequent to December 31, 2018 and through September 27, 2019, we received $3.8 million from the issuances of debentures, $1.6 million from the issuance of a promissory note, $9.9 million in advances from our director, Mr. Diamantis, in connection with the settlement of a prepaid forward purchase contract. In addition, subsequent to December 31, 2018 and through September 10, 2019, we received $6.5 million in loans from Mr. Diamantis and we entered into five accounts receivable factoring arrangements. The subsequent events are more fully discussed in Notes 8 and 21 to the consolidated financial statements

 

During 2018, the holders of Senior Secured Original Issue Discount Convertible Debentures due September 19, 2019 (the “September Debentures”), which were offered pursuant to the terms of a Securities Purchase Agreement, dated as of August 31, 2017, between us and certain of our existing institutional investors, exchanged a portion of the September Debentures for shares of our Series I-2 Preferred Stock as follows:

 

On February 9, 2018, the holders exchanged a portion of the September Debentures for shares of the Series I-2 Preferred Stock for the first time. On that date, the holders elected to exchange an aggregate of $1,384,556 principal amount of September Debentures and the Company issued an aggregate 1,730.7 shares of its Series I-2 Preferred Stock. On July 16, 2018, 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 2018, the holder converted 1,286.141 shares of its Series I-2 Preferred Stock into 106,335,991 shares of the Company’s common stock.

 

During 2018, 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 Company recognized stock-based compensation in the amount of $477,933 for the grant of such restricted stock based on a valuation of $3.35 per share.

 

The Company had 128,567,273 and 39,502 shares of common stock issued and outstanding at December 31, 2018 and December 31, 2017, respectively. During the year ended December 31, 2018, the Company issued an aggregate of 4,221,601 shares of its common stock upon conversion of $6.7 million of the principal amount of the debentures that were issued in March 2017.

 

The Company also issued 17,788,579 shares of common stock upon the exercise on a cashless basis of 106,006,177 warrants and 40,000 shares of common stock were issued upon the conversion of 50 shares of its Series H Preferred Stock.

 

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 aggregate proceeds of $5,500,000 in the offerings. The terms of these debentures are the same as those issued under the previously-announced Securities Purchase Agreement, dated as of August 31, 2017, (the “Purchase Agreement”). On July 16, 2018, August 2, 2018, September 6, 2018 and November 8, 2018, the Company entered into Additional Issuance Agreements (the “Issuance Agreements”), with two existing institutional investors of the Company. Under the Issuance Agreements, the Company issued $4.3 million aggregate principal amount of Senior Secured Original Issue Discount Convertible Debentures due September 19, 2019 and received aggregate proceeds of $3.5 million. The conversion terms of these debentures are the same as those issued in September 2017 under the Purchase Agreement, with the exception of the floor conversion price, which is $.052 per share. At the Company’s option, these debentures may also be exchanged for shares of the Company’s Series I-2 Preferred Stock under the terms of the Exchange Agreements.

 

 44 
 

 

The Debentures were issued in reliance on the exemption from registration contained in Section 4(a)(2) of the Securities Act and by Rule 506 of Registration D promulgated thereunder as a transaction by an issuer not involving a public offering.

 

As of December 31, 2018, we were party to legal proceedings, which are presented in Note 16 to the accompanying consolidated financial statements.

 

The following table presents our capital resources as of December 31, 2018 and December 31, 2017:

 

   December 31, 2018   December 31, 2017   Change 
             
Cash  $6,870   $-   $6,870 
Working capital deficit   (39,293,904)   (33,931,294)   5,362,610
Total debt, excluding discounts and derivative liabilities   26,918,305    25,306,412    1,611,893 
Capital lease obligations   762,208    2,079,137    (1,316,929)
Stockholders’ deficit  $(39,167,864)  $(40,613,461)  $(1,445,597)

 

The following table presents the major sources and uses of cash for the years ended December 31, 2018 and 2017:

 

   Year Ended December 31,     
   2018   2017   Change 
             
Cash used in operations  $(7,678,730)  $(17,713,547)  $10,034,817 
Cash (used in) provided by investing activities   662,577    (492,537)   1,155,114 
Cash provided by financing activities   7,023,024    18,135,911    (11,112,887)
                
Net change in cash   6,870    (70,173)   77,043 
Cash and cash equivalents, beginning of the year   -    70,173    (70,173)
Cash and cash equivalents, end of the year  $6,870   $-   $6,870 

 

The components of cash used in operations for the years ended December 31, 2018 and 2017 are presented in the following table:

 

   Year Ended December 31,     
   2018   2017   Change 
             
Net loss from continuing operations  $(13,587,512)  $(50,921,024)  $37,333,512 
Non-cash adjustments to income   (2,054,462)   33,623,373    (35,677,835)
Accounts receivable   (2,840,437)   80,033   (2,920,470)
Inventory   234,194    (236,914)   471,108 
Accounts payable, check issued in excess of bank balance and accrued expenses   10,493,697    2,920,134    7,573,563 
Loss from discontinued operations   (434,843)   (4,276,918)   3,842,075 
Other   882,246    637,975    244,271 
Net cash used in operating activities   (7,307,117)   (18,173,341)   10,866,244 
Cash (used in) provided by discontinued operations   (371,613)   459,794    (831,407)
Cash used in operations  $(7,678,730)  $(17,713,547)  $10,304,817 

 

 45 
 

 

Cash provided by investing activities for the year ended December 31, 2018 of $0.7 million is due to the sale of property and equipment of $0.7 million, the sale of shares of stock that we owned of $0.8 million, offset by cash of $0.6 million used to acquire Jamestown Regional Medical Center and $0.2 million used to purchase property and equipment. The use of cash for the year ended December 31, 2017 of $1.4 million is due to the purchase of the Oneida Assets and other purchases of property and equipment.

 

Cash provided by financing activities for the year ended December 31, 2018 of $7.0 million consists of $9.0 million from the issuances of debentures, and $3.3 million from related party loans and advances, offset by $4.0 million of repayments of related party loan and advances and $1.3 million of payments of capital lease obligations. Cash provided by financing activities for the year ended December 31, 2017 consists of $4.0 million received from the issuance of preferred stock, and $15.7 million from the issuance of debentures and warrants, partially offset by $0.5 million of related party payments, net of advances, and repayment of capital lease obligations in the amount of $1.7 million.

 

We need to raise additional funds immediately and continue to do so until we begin to realize positive cash flow from operations.

 

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

 

The terms of certain of the warrants, convertible preferred stock and convertible debentures issued by the Company provide for reductions in the per share exercise prices of the warrants and the per share conversion prices of the debentures and preferred stock (if applicable and subject to a floor in certain cases), in the event that the Company issues common stock or common stock equivalents (as that term is defined in the agreements) at an effective exercise/conversion price that is less than the then exercise/conversion prices of the outstanding warrants, preferred stock or debentures, as the case may be. In addition, the majority of these equity-based securities contain exercise or conversion prices that vary based upon the price of the Company’s common stock on the date of exercise/conversion (see Notes 9, 12 and 13 to the accompanying consolidated financial statements). These provisions have resulted in significant dilution of the Company’s common stock and have given rise to reverse splits of the Company’s common stock. As a result of these down round provisions, the potential common stock equivalents totaled 749 billion as of September 10, 2019.

 

OTHER MATTERS

 

Inflation

 

We do not believe inflation has a significant effect on the Company’s operations at this time.

 

Off-Balance Sheet Arrangements

 

Under SEC regulations, we are required to disclose the Company’s off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company’s financial condition, results of operations, liquidity, capital expenditures or capital resources that are material to investors. Off-balance sheet arrangements consist of transactions, agreements or contractual arrangements to which any entity that is not consolidated with us is a party, under which we have:

 

  Any obligation under certain guarantee contracts.
     
  Any retained or contingent interest in assets transferred to an unconsolidated entity or similar arrangement that serves as credit, liquidity or market risk support to that entity for such assets.
     
  Any obligation under a contract that would be accounted for as a derivative instrument, except that it is both indexed to the Company’s stock and classified in stockholder’s equity in the Company’s statement of financial position.

 

 46 
 

 

  Any obligation arising out of a material variable interest held by us in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to us, or engages in leasing, hedging or research and development services with us.

 

As of December 31, 2018, the Company had no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on the Company’s financial condition, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

 

De-Listing of the Company’s Common Stock

 

On April 18, 2017, the Company was notified by NASDAQ that the stockholders’ equity balance reported on the Company’s Form 10-K for the year ended December 31, 2016 fell below the $2.5 million minimum requirement for continued listing under The NASDAQ Capital Market’s Listing Rule 5550(b)(1) (the “Rule”). In accordance with the Rule, the Company submitted a plan to NASDAQ outlining how it intended to regain compliance. On August 17, 2017, NASDAQ notified the Company that its plan to correct the stockholders’ equity deficiency did not contain sufficient evidence to support a correction being achieved in the required time frame. The Company appealed this decision to a Hearing Panel which, on October 23, 2017, maintained this position and denied the Company a continued listing. Effective October 25, 2017, the Company’s common stock (RNVA) and warrants to purchase common stock (RNVAW) were no longer listed on The NASDAQ Capital Market but began trading on the OTCQB instead.

 

Item 7A. Quantitative and Qualitative Disclosures about Market Risk.

 

Not applicable.

 

Item 8. Financial Statements and Supplementary Data.

 

 47 
 

 

RENNOVA HEALTH, INC.

CONSOLIDATED FINANCIAL STATEMENTS

For the Years Ended December 31, 2018 and 2017

 

Index to Financial Statements

 

RENNOVA HEALTH, INC. PAGE
Reports of Independent Registered Public Accounting Firms F-2
Consolidated Financial Statements  
Consolidated Balance Sheets as of December 31, 2018 and 2017 F-4
Consolidated Statements of Operations for the Years Ended December 31, 2018 and 2017 F-5
Consolidated Statements of Stockholders’ Deficit for the Years Ended December 31, 2018 and 2017 F-6 - F-7
Consolidated Statements of Cash Flows for the Years Ended December 31, 2018 and 2017 F-8
Notes to Consolidated Financial Statements F-9 - F-45

 

 F-1 
 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and

Stockholders of Rennova Health, Inc.

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheet of Rennova Health, Inc. (the Company) as of December 31, 2018, and the related consolidated statements of operations, stockholders’ deficit, and cash flows for the year ended December 31, 2018, and the related notes (collectively referred to as the financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018, and the result of its operations and its cash flows for the year ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.

 

Consideration of the Company’s Ability to Continue as a Going Concern

 

The accompanying Consolidated Financial Statements have been prepared assuming that the Company will continue as a going concern. As shown in the accompanying consolidated financial statements, the Company has significant net losses, cash flow deficiencies, negative working capital and an accumulated deficit. Those conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans regarding those matters are described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.

 

/s/ Haynie & Company

 

Salt Lake City, Utah

October 18, 2019

We have served as the Company’s auditor since 2018.

 

 F-2 
 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Shareholders and the Board of Directors of

Rennova Health, Inc.

 

Opinion on the Financial Statements

 

We have audited the accompanying Consolidated Balance Sheet of Rennova Health, Inc. (the Company) as of December 31, 2017, the related Consolidated Statements of Operations, Stockholders’ Deficit, and Cash Flows for the year ended December 31, 2017, and the related notes (collectively referred to as the “Consolidated Financial Statements”). In our opinion, the Consolidated Financial Statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017, and the results of its operations and its cash flows for the year ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.

 

Going Concern

 

The accompanying Consolidated Financial Statements have been prepared assuming that the Company will continue as a going concern. As shown in the accompanying Consolidated Financial Statements, the Company has significant net losses, cash flow deficiencies, negative working capital and accumulated deficit. Those conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans regarding those matters are described in Note 1. The Consolidated Financial Statements do not include any adjustments that might result from the outcome of this uncertainty.

 

/s/ Green & Company, CPAs

Green & Company, CPAs

 

Tampa, FL 33618

April 24, 2018

 

 F-3 
 

 

RENNOVA HEALTH, INC.

CONSOLIDATED BALANCE SHEETS

 

   December 31, 2018   December 31, 2017 
         
ASSETS          
Current assets:          
Cash  $6,870   $- 
Accounts receivable, net   3,811,749    971,312 
Inventory   453,402    236,914 
Prepaid expenses and other current assets   78,820    9,842 
Income tax refunds receivable   631,077    1,940,845 
Current assets of AMSG and HTS classified as held for sale   140,352    226,732 
Total current assets   5,122,270    3,385,645 
           
Property and equipment, net   8,526,904    2,695,440 
Intangibles, net   259,443    - 
Deposits   278,864    180,875 
Non-current assets of AMSG and HTS classified as held for sale   11,819    28,834 
           
Total assets  $14,199,300   $6,290,794 
           
LIABILITIES AND STOCKHOLDERS’ DEFICIT          
Current liabilities:          
Accounts payable (includes related parties amount of $0.4 million and $0.2 million, respectively)  $

8,155,955

   $4,179,336 
Checks issued in excess of bank balance   

109,695

    

9,342

 
Accrued expenses (includes related parties amount of $0.3 million and $0.1 million, respectively)   

10,711,281

    4,967,405 
Income taxes payable   1,400,651    1,971,592 
Current portion of notes payable   7,083,505    6,957,830 
Current portion of notes payable, related parties   800,000    1,128,500 
Current portion of capital lease obligations   730,665    2,079,137 
Current portion of debentures   12,776,316    1,615,693 
Derivative liabilities   350,260    12,435,250 
Current liabilities of AMSG and HTS classified as held for sale   2,297,846    1,972,854 
Total current liabilities   44,416,174    37,316,939 
           
Other liabilities:          
Debentures, net of current portion   -    3,752,022 
Capital lease obligations, net of current portion   31,543    - 
           
Total liabilities   44,447,717    41,068,961 
           
Commitments and contingencies          
           
Redeemable Preferred Stock - Series I-1   5,835,294    5,835,294 
Redeemable Preferred Stock - Series I-2   3,084,153    - 
           
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, 128,567,273 and 39,502 shares issued and outstanding   12,857    4 
Additional paid-in-capital   375,845,883    128,549,458 
Accumulated deficit   (415,046,606)   (169,180,425)
Total stockholders’ deficit   (39,167,864)   (40,613,461)
Total liabilities and stockholders’ deficit  $14,199,300   $6,290,794 

 

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

 

 F-4 
 

 

RENNOVA HEALTH, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

 

   For the Years Ended December 31, 
   2018   2017 
         
Net revenues  $14,548,690   $3,088,216 
           
Operating expenses:          
Direct costs of revenue   11,509,507    948,838 
General and administrative   14,821,606    15,757,527 
Sales and marketing expenses   4,554    742,637 
Asset impairment   173,799    - 
Depreciation and amortization   1,263,844    1,715,321 
Total operating expenses   27,773,310    19,164,323 
           

Loss from continuing operations before other income (expense) and income taxes

   (13,224,620)   (16,076,107)
           
Other income (expense):          
Other income   672,972    38,342 
Gain on bargain purchase   7,566,670    - 
Change in fair value of derivative instruments   13,696,214    (42,702,815)
Gain on extinguishment of debt   -    42,702,815 
Value of convertible liabilities   -    (12,435,250)
Interest expense   (21,532,678)   (21,432,285)
Total other income (expense), net   403,178    (33,829,193)
           
Net loss from continuing operations before income taxes   (12,821,442)   (49,905,300)
           
Provision for income taxes   766,070    1,015,724 
           
Net loss from continuing operations   (13,587,512)   (50,921,024)
           
Net loss from discontinued operations   (434,843)   (4,276,918)
           
Net loss   (14,022,355)   (55,197,942)
Deemed dividend from trigger of down round provision feature   (231,843,826)   (53,341,619)
Net loss to common shareholders  $(245,866,181)  $(108,539,561)
           
Net loss per common share:          
Basic and diluted: continuing operations  $(24.49)  $(22,587.23)
Basic and diluted: discontinued operations   (0.04)  $(926.54)
           
Total Basic and diluted  $(24.53)  $(23,513.77)

Weighted average number of common shares

outstanding during the period:

          
Basic and diluted   10,022,180    4,616 

 

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

 

 F-5 
 

 

RENNOVA HEALTH, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT

For the year ended December 31, 2018

 

   Preferred Stock       Additional       Total 
   (see Note 10)   Common Stock   Paid in   Accumulated   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 I-2 Preferred stock into common stock   -    -    106,335,991    10,634    1,502,471    -    1,513,105 
Conversion of Series H Preferred Stock into common stock   (50)   -    40,000    4    (4)   -    - 
Common stock issued in cashless exercise of warrants   -    -    17,788,579    1,779    4,617,371    -    4,619,150 
Shares issued in settlement of notes payable   250,000    2,500    -    -    247,500    -    250,000 
Exchange of convertible debentures for Series I-2 Preferred Stock   -    -    -    -    1,420    -    1,420 
Conversion of debentures into common stock   -    -    4,221,601    422    8,127,622    -    8,128,044 
Stock based compensation   -    -    -    -    285,992    -    285,992 
Deemed dividend from trigger of down round provision feature   -    -    -    -    231,843,826    (231,843,826)   - 
Restricted stock issued to employees   -    -    142,667    14    477,919    -    477,933 
Shares returned to treasury   -    -    (123)   -    -    -    - 
Adjust for fractional shares in reverse stock split   -    -    (944)   -    -    -    - 
Beneficial conversion feature of convertible debentures   -    -    -    -    192,308    -    192,308 
Net loss   -    -    -    -    -    (14,022,355)   (14,022,355)
Balance at December 31, 2018   2,000,225   $20,002    128,567,273   $12,857   $375,845,883   $(415,046,606)  $(39,167,864)

 

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

 

 F-6 
 

 

RENNOVA HEALTH, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT

For the year ended December 31, 2017

 

   Preferred Stock
(see Note 10)
   Common Stock   Additional paid-in   Accumulated   Total Stockholders’ 
   Shares   Amount   Shares   Amount   capital   Deficit   Deficit 
Balance at December 31, 2016   10,234   $102    373   $-   $45,754,866   $(60,640,864)  $(14,885,896)
Conversion of preferred stock into common stock   (7,785)   (78)   742    -    78    -    - 
Preferred stock issued for business acquisition   1,750,000    17,500    -    -    156,597    -    174,097 
Common stock issued in exchange for warrants   -    -    1,330    -    697,485    -    697,485 
Shares issued in settlement of notes payable and warrants   -    -    53    -    440,000    -    440,000 
Exchange of preferred stock for convertible debentures   (2,174)   (22)   -    -    (2,173,978)   -    (2,174,000)
Conversion of debentures into common stock   -    -    36,571    4    7,306,310    -    7,306,314 
Rounding up of common shares in connection with reverse stock split   -    -    1    -    -    -    - 
Reduction in common stock in connection with reverse stock split   -    -    (5)   -    (6,675)   -    (6,675)
Common stock granted to employees   -    -    -    -    -    -    - 
Discount on convertible debentures   -    -    -    -    252,143    -    252,143 
Warrants and beneficial conversion features related to the issuance of convertible notes   -    -    -    -    24,177,258    -    24,177,258 
Stock based compensation   -    -    -    -    58,278    -    58,278 
Deemed dividend from trigger of down round provision feature   -    -    -    -    53,341,619    (53,341,619)   - 
Restricted stock issued to employees        -    364    -    244,768    -    244,768 
Common stock issued for services and severance   -    -    83    -    161,003    -    161,003 
Shares returned to treasury             (10)   -         -    - 
Beneficial conversion feature of Series 1-1 preferred stock   -    -    -    -    (1,860,294)   -    (1,860,294)
Net loss   -    -    -    -    -    (55,197,942)   (55,197,942)
Balance at December 31, 2017   1,750,275   $17,502    39,502   $4   $128,549,458   $(169,180,425)  $(40,613,461)

 

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

 

 F-7 
 

 

RENNOVA HEALTH, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

    For the Years Ended December 31, 
    2018    2017 
Cash flows used in operating activities:          
Net loss from continuing operations  $(13,587,512)  $(50,921,024)
Adjustments to reconcile net loss to net cash used in operations:          
Depreciation and amortization   1,263,844    1,715,321 
Non-cash gain on derivative instruments   -    (2,803)
Stock issued for services   477,933    161,003 
Stock-based compensation   285,992    303,046 
Non-cash interest expense   -    8,649,232 
Amortization of debt discount   17,558,008    10,412,324 
Non-cash settlement of debt   -    (50,000)
Gain on extinguishment of debt   -    (42,702,815)
Change in fair value of derivative instruments   (13,696,214)   42,702,815 
Value of convertible liabilities   -    12,435,250 
Gain on purchase of Jamestown Medical Center   (7,566,670)   - 
Asset impairment   173,799    - 
Gain on disposal of equipment under capital lease   (551,155)   - 
Loss from discontinued operations   (434,843)   (4,276,918)
Changes in operating assets and liabilities:          
Accounts receivable   (2,840,437)   80,033 
Prepaid expenses and other current assets   237,561    136,951 
Inventory   234,194    (236,914)
Security deposits   (94,143)   (45,728)
Accounts payable and checks issued in excess of bank balance