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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark one)

 

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

 

For the quarterly period ended June 30, 2021

 

OR

 

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

 

For the transition period from ______ to ______.

 

Commission File Number: 001-35141

 

RENNOVA HEALTH, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   68-0370244
(State or other jurisdiction
of incorporation or organization)
 

(IRS Employer

Identification No.)

     

400 S. Australian Avenue, Suite 800

West Palm Beach, FL

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

 

(561) 855-1626

(Registrant’s telephone number, including area code)

 

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

 

Title of Each Class   Trading
Symbol(s)
  Name of each exchange on which registered
None   None   None

 

Securities registered pursuant to Section 12(g) of the Act:

 

Common Stock, $0.0001 Par Value

 

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

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒    No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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 Smaller reporting company
  Emerging growth company

 

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

 

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

 

As of August 11, 2021, the registrant had 29,350,000 shares of its Common Stock, $0.0001 par value, outstanding.

 

 

 

   

 

 

RENNOVA HEALTH, INC. AND SUBSIDIARIES

FORM 10-Q

 

June 30, 2021

TABLE OF CONTENTS

 

    Page No.
PART I – FINANCIAL INFORMATION   3
       
Item 1. Financial Statements  

3

  Condensed Consolidated Balance Sheets as of June 30, 2021 (unaudited) and December 31, 2020   3
  Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2021 and 2020 (unaudited)   4
  Condensed Consolidated Statements of Changes in Stockholders’ Deficit for each of the quarters in the periods ended June 30, 2021 and 2020 (unaudited)   5
  Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2021 and 2020 (unaudited)   7
  Notes to Condensed Consolidated Financial Statements (unaudited)   8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations   35
Item 3. Quantitative and Qualitative Disclosures About Market Risk   44
Item 4. Controls and Procedures   44
       
PART II – OTHER INFORMATION   45
       
Item 1. Legal Proceedings   45
Item 1A. Risk Factors   45
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds   45
Item 3. Defaults Upon Senior Securities   45
Item 4. Mine Safety Disclosures   45
Item 5. Other Information   45
Item 6. Exhibits   45
     
SIGNATURES   46

 

2

 

 

RENNOVA HEALTH, INC.

PART I - FINANCIAL INFORMATION

Part 1. Financial Statements.

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   June 30,   December 31, 
   2021   2020 
    (unaudited)      
ASSETS          
Current assets:          
Cash  $199,632   $25,353 
Accounts receivable, net   -    499,454 
Inventory   490,988    445,415 
Prepaid expenses and other current assets   175,162    148,522 
Income tax refunds receivable   1,139,226    1,420,251 
Current assets of discontinued operations   -    184,510 
Total current assets   2,005,008    2,723,505 
           
Property and equipment, net   7,515,703    7,814,435 
Intangibles, net   259,443    259,443 
Investments   8,500,000    - 
Deposits   282,163    263,621 
Right-of-use assets   910,541    1,000,272 
Non-current assets of discontinued operations   152,298    200,815 
           
Total assets  $19,625,156   $12,262,091 
           
LIABILITIES AND STOCKHOLDERS’ DEFICIT          
Current liabilities:          
Accounts payable (includes related party amounts of $0.4 million and $0.3 million, respectively)  $15,969,902   $14,251,851 
Checks issued in excess of bank account balance   203,784    84,760 
Accrued expenses (includes related party amounts of $0.3 million and $0.2 million, respectively)   17,975,899    19,135,569 
Income taxes payable   1,157,812    1,438,837 
Current portion of notes payable   6,394,997    4,786,976 
Current portion of note payable, related party   2,627,000    2,097,000 
Current portion of finance lease obligations   249,985    249,985 
Current portion of debentures   12,690,539    12,690,539 
Current portion of right-of-use operating lease obligations   217,937    172,952 
Derivative liabilities   455,336    455,336 
Current liabilities of discontinued operations   1,532,782    3,814,245 
Total current liabilities   59,475,973    59,178,050 
           
Other liabilities:          
Notes payable, net of current portion   797,007    1,196,256 
Right-of-use operating lease obligations, net of current portion   692,604    827,320 
Non-current liabilities of discontinued operations   -    78,217 
Total liabilities   60,965,584    61,279,843 
           
Commitments and contingencies   -    - 
           
Stockholders’ deficit:          
Series H preferred stock, $0.01 par value, 14,202 shares authorized, 10 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 L preferred stock, $0.01 par value, 250,000 shares authorized, 250,000 shares issued and outstanding   2,500    2,500 
Series M preferred stock, $0.01 par value, 30,000 shares authorized, 21,380 and 22,000 shares issued and outstanding, respectively   214    220 
Series N preferred stock, $0.01 par value, 50,000 shares authorized, 16,369 and 29,434 shares issued and outstanding, respectively   163    294 
Series O preferred stock, $0.01 par value, 10,000 shares authorized, 2,750 and 0 shares issued and outstanding, respectively   28    - 
Common stock, $0.0001 par value, 10,000,000,000 shares authorized, 10,000,000 and 39,648 shares issued and outstanding, respectively   1,000    4 
Additional paid-in-capital   971,608,828    819,498,236 
Accumulated deficit   (1,012,970,661)   (868,536,506)
Total stockholders’ deficit   (41,340,428)   (49,017,752)
Total liabilities and stockholders’ deficit  $19,625,156   $12,262,091 

 

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

 

3

 

 

RENNOVA HEALTH, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

 

   2021   2020   2021   2020 
   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2021   2020   2021   2020 
                 
Net revenues  $928,849   $2,069,019   $278,157   $3,910,109 
                     
Operating expenses:                   
Direct costs of revenues   1,269,302    2,669,112    2,866,400    5,345,649 
General and administrative expenses   2,105,888    2,399,391    4,896,367    5,332,405 
Depreciation and amortization   193,640    181,091    378,864    345,798 
Total operating expenses   3,568,830    5,249,594    8,141,631    11,023,852 
Loss from continuing operations before other income (expense) and income taxes   (2,639,981)   (3,180,575)   (7,863,474)   (7,113,743)
                     
Other income (expense):                    
Other income/expense, net   2,008,597    6,895,827    4,486,246    6,790,061 
Gain from legal settlements, net   31,050    1,096,613    22,190    1,096,613 
Interest expense   (889,763)   (2,658,510)   (1,802,387)   (5,548,770)
Total other income (expense), net   1,149,884    5,333,930    2,706,049    2,337,904 
                     
Net income (loss) from continuing operations before income taxes   (1,490,097)   2,153,355    (5,157,425)   (4,775,839)
                     
Benefit from income taxes   -    -    -    (1,118,485)
                     
Net income (loss) from continuing operations   (1,490,097)   2,153,355    (5,157,425)   (3,657,354)
                     
Loss from discontinued operations   (165,737)   (31,727)   (392,403)   (12,796)
Gain on sale   10,727,152    -    10,727,152    - 
                     
Total income (loss) from discontinued operations   10,561,415   (31,727)   10,334,749   (12,796)
Net income (loss)   9,071,318    2,121,628    5,177,324    (3,670,150)
Deemed dividends   (99,253,330)   (3,150,368)   (149,611,479)   (3,150,368)
Net loss available to common stockholders  $(90,182,012)  $(1,028,740)  $

 

(144,434,155

)  $(6,820,518)
                     
Net loss per share of common stock available to common stockholders- basic and diluted:                    
Continuing operations  $(13.78)  $(1,007.08)  $(40.74)  $(6,904.38)
Discontinued operations   1.44   (32.05)   2.72   (12.98)
Total basic and diluted  $(12.34)  $(1,039.13)  $(38.02)  $(6,917.36)
Weighted average number of shares of common stock outstanding during the period:                    
Basic and diluted   7,310,286    990    3,799,062    986 

 

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

 

4

 

 

RENNOVA HEALTH, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT

For each of the quarters in the period ended June 30, 2021

(unaudited)

 

   Shares   Amount   Shares   Amount   capital   Deficit   Deficit 
   Preferred Stock   Common Stock   Additional paid-in-   Accumulated    Total Stockholders’ 
   Shares   Amount   Shares   Amount   capital   Deficit   Deficit 
Balance at December 31, 2020   2,051,444   $20,514    39,648   $4   $819,498,236   $(868,536,506)  $(49,017,752)
Conversion of Series N Preferred Stock into common stock   (4,177)   (42)   435,082    44    (2)   -    - 
Deemed dividends                       50,358,149    (50,358,149)    - 
Net loss   -    -    -    -    -    (3,893,994)   (3,893,994)
Balance at March 31, 2021   2,047,267   $20,472    474,730   $48   $869,856,383   $(922,788,649)  $(52,911,746)
Conversion of Series M Preferred Stock into common stock   (620)   (6)   450,000    45    (39)   -    - 
Conversion of Series N Preferred Stock into common stock   (8,888)   (89)   9,075,270    907    (818)   -    - 
Issuance of Series O Preferred Stock   2,750    28    -    -    2,499,972    -    2,500,000 
Deemed dividends                       99,253,330    (99,253,330)   - 
Net income   -    -    -    -    -    9,071,318    9,071,318 
Balance at June 30, 2021   2,040,509   $20,405    10,000,000   $1,000   $971,608,828   $(1,012,970,661)  $(41,340,428)

 

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

 

5

 

 

RENNOVA HEALTH, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT

For each of the quarters in the period ended June 30, 2020

(unaudited)

 

   Preferred Stock   Common Stock   Additional paid-in-   Accumulated   Total Stockholders’ 
   Shares   Amount   Shares   Amount   capital   Deficit  

Deficit

 
Balance at December 31, 2019   2,000,010   $20,000    965   $-   $510,402,293   $(586,942,014)  $(76,519,721)
Conversion of Series I-2 Preferred Stock into common stock   -    -    25    -    25,000    -    25,000 
Net loss   -    -    -    -    -    (5,791,778)   (5,791,778)
Balance at March 31, 2020   2,000,010   $20,000    990   $-   $510,427,293   $(592,733,792)  $(82,286,499)
Exchange of Series K Preferred Stock for Series L Preferred Stock   (250,000)   (2,500)   -    -    -    -    (2,500)
Issuance of Series L Preferred Stock   250,000    2,500    -    -    -    -    2,500 
Issuance of Series M Preferred Stock in exchange for related party loans and accrued interest   22,000    220    -    -    21,999,780    -    22,000,000 
Deemed dividend from issuance of Series M Preferred Stock   -    -    -    -    -    (3,150,368)   (3,150,368)
Net income   -    -    -    -    -    2,121,628    2,121,628 
Balance at June 30, 2020   2,022,010   $20,220    990   $-   $532,427,073   $(593,762,532)  $(61,315,239)

 

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

 

6

 

 

RENNOVA HEALTH, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

   2021   2020 
   Six Months Ended June 30, 
   2021   2020 
         
Cash flows from operating activities:          
Net loss from continuing operations  $(5,157,425)  $(3,657,354)
Adjustments to reconcile net loss to net cash (used in) provided by operations:          
Depreciation and amortization   378,864    345,798 
Amortization of debt discount   27,630    63,695 
Net gain from legal settlements   (22,190)   (1,096,613)
Other income from federal government provider relief funds   (4,400,000)   (7,483,830)
Loss on sales of accounts receivable under sale agreements   -    249,500 
Income (loss) from discontinued operations   10,334,749   (12,796)
Gain on sale of discontinued operations   (10,727,152)   - 
Changes in operating assets and liabilities:          
Accounts receivable   920,577    1,328,369 
Inventory   (45,573)   (75,732)
Prepaid expenses and other current assets   (26,640)   (16,935)
Security deposits   (18,542)   9,872 
Change in right-of-use assets   89,731    (160,421)
Accounts payable and checks issued in excess of bank balances   1,837,074    (1,973,633)
Accrued expenses   3,126,033    4,492,549 
Change in right-of-use operating lease obligations   (89,731)   118,899 
Income tax assets and liabilities   -    (1,118,485)
Net cash used in operating activities of continuing operations   (3,772,595)   (8,987,117)
Net cash provided by (used in) operating activities of discontinued operations   40,098    (136,313)
Net cash used in operating activities   (3,732,497)   (9,123,430)
           
Cash flows from investing activities:          
Purchases of property and equipment   (80,132)   (10,435)
Net cash used in investing activities of continuing operations   (80,132)   (10,435)
           
Cash flows from financing activities:          
Proceeds from issuance of related party note payable and advances   890,000    4,595,553 
Payment on related party note payable and advances   (360,000)   (3,251,387)
Payments of debentures   -    (720,000)
Proceeds from issuances of notes payable   1,245,000    1,077,116 
Payments on notes payable   (100,508)   (793,715)
Proceeds from sale of accounts receivable under sales agreement   -    465,000 
Receivables paid under accounts receivable sales agreements   (247,986)   (1,073,854)
Proceeds from issuance of Series O Preferred Stock   2,500,000    - 
Federal government provider relief funds   -    7,483,830 
Proceeds from Paycheck Protection Program notes payable   -    2,264,200 
Payments on capital lease obligations   -    (100,707)
Net cash provided by financing activities of continuing operations   3,926,506    9,946,036 
Net cash provided by (used in) financing activities of discontinued operations   60,402    (18,256)
Net cash provided by financing activities   3,986,908    9,927,780 
           
Net change in cash   174,279    793,915 
           
Cash at beginning of period   25,353    16,933 
           
Cash at end of period  $199,632   $810,848 

 

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

 

7

 

 

RENNOVA HEALTH, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Six Months Ended June 30, 2021 and 2020

(unaudited)

 

Note 1 – Organization and Summary of Significant Accounting Policies

 

Description of Business

 

Rennova Health, Inc. (“Rennova”, together with its subsidiaries, the “Company”, “we”, “us” or “our”) is a provider of health care services. The Company owns one operating hospital in Oneida, Tennessee, a hospital located in Jamestown, Tennessee that it plans to reopen and operate, a physician’s office in Jamestown, Tennessee that it plans to reopen and a rural clinic in Kentucky. The Company’s operations consist of only one business segment.

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements were prepared using generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Regulation S-X. Accordingly, these financial statements do not include all information or notes required by generally accepted accounting principles for annual financial statements and should be read in conjunction with the consolidated financial statements as filed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020. In the opinion of management, the unaudited condensed consolidated financial statements included herein contain all adjustments necessary to present fairly the Company’s consolidated financial position as of June 30, 2021, the results of its operations and changes in stockholders’ deficit for the three and six months ended June 30, 2021 and 2020 and its cash flows for the six months ended June 30, 2021 and 2020. Such adjustments are of a normal recurring nature. The results of operations for the six months ended June 30, 2021 may not be indicative of results for the year ending December 31, 2021.

 

Principles of Consolidation

 

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

 

Comprehensive Loss

 

During the three and six months ended June 30, 2021 and 2020, comprehensive loss was equal to the net loss amounts presented in the accompanying unaudited condensed consolidated statements of operations.

 

Reclassifications

 

Certain items in the statement of operations for the six months ended June 30, 2021 were reclassified for comparison purposes.

 

Use of Estimates

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates and assumptions include the estimates of fair values of assets acquired and liabilities assumed in business combinations, including hospital acquisitions, the fair values of consideration received from the sale of subsidiaries, reserves and write-downs related to receivables and inventories, the recoverability of long-lived assets, the valuation allowance relating to the Company’s deferred tax assets, the valuation of equity and derivative instruments, deemed dividends and debt discounts, among others. Actual results could differ from those estimates and would impact future results of operations and cash flows.

 

Cash and Cash Equivalents

 

The Company considers all highly liquid temporary cash investments with an original maturity of three months or less to be cash equivalents.

 

8

 

 

Reverse Stock Splits

 

On July 22, 2020, the Company’s Board of Directors approved an amendment to the Company’s Certificate of Incorporation to effect a 1-for-10,000 reverse stock split effective July 31, 2020 and on July 8, 2021, the Company’s Board of Directors approved an amendment to the Company’s Certificate of Incorporation to effect a 1-for-1,000 reverse stock split effective July 16, 2021 (the “Reverse Stock Splits”). The holders of a majority of the total voting power of the Company’s securities had approved these amendments to the Company’s Certificate of Incorporation on May 7, 2020 for the July 31, 2020 reverse stock split and on June 15, 2021 for the July 16, 2021 reverse stock split. In both 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.

 

As a result of the Reverse Stock Splits, every 10,000 shares of the Company’s common stock then outstanding was combined and automatically converted into one share of the Company’s common stock on July 31, 2020 and every 1,000 shares of the Company’s then outstanding common stock was combined and automatically converted into one share of the Company’s common stock on July 16, 2021. In addition, the conversion and exercise prices of all of the Company’s outstanding preferred stock, common stock purchase warrants, stock options and convertible debentures 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 payment of cash in lieu of fractional shares as no fractional shares were issued in connection with the Reverse Stock Splits.

 

The par value and other terms of the common stock were not affected by the Reverse Stock Splits. The authorized capital of the Company of 10,000,000,000 shares of common stock and 5,000,000 shares of preferred stock were also unaffected by the Reverse Stock Splits. All share, per share and capital stock amounts and common stock equivalents presented herein have been restated where appropriate to give effect to the Reverse Stock Splits.

 

Sale of Health Technology Solutions, Inc. and Advanced Molecular Services, Inc.

 

On June 25, 2021, the Company sold its subsidiaries, Health Technology Solutions, Inc. (“HTS”) and Advanced Molecular Services, Inc. (“AMSG”), including their subsidiaries, to VisualMED Clinical Solutions Corp. (“VisualMED”). HTS and AMSG held Rennova’s software and genetic testing interpretation divisions.

 

In consideration for the shares of HTS and AMSG and the elimination of intercompany debt among the Company and HTS and AMSG, VisualMED issued the Company 14,000 shares of its Series B Non-Voting Convertible Preferred Stock (the “VisualMED Series B Preferred Stock”). The number of shares of VisualMED Series B Preferred Stock will be subject to a post-closing adjustment. Each share of VisualMED Series B Preferred Stock has a stated value of $1,000 and is convertible into that number of shares of VisualMED common stock equal to the stated value divided by 90% of the average closing price of the VisualMED common stock during the 10 trading days immediately prior to the conversion date. Conversion of the VisualMED Series B Preferred Stock, however, is subject to the limitation that no conversion can be made to the extent the holder’s beneficial interest (as defined pursuant to the terms of the VisualMED Series B Preferred Stock) in the common stock of VisualMED would exceed 4.99%. The shares of the VisualMED Series B Preferred Stock may be redeemed by VisualMED upon payment of the stated value of the shares plus any accrued declared and unpaid dividends.

 

As a result of the sale, the Company has recorded the VisualMED Series B Preferred Stock as a long-term asset valued at $8.5 million at June 30, 2021 and a gain on the sale of HTS and AMSG of $10.7 million in the six months ended June 30, 2021, of which $8.5 million resulted from the value of the VisualMED Series B Preferred Stock and $2.2 million resulted from the transfer to VisualMED of the net liabilities of HTS and AMSG. See Note 14 for a discussion of the assumptions used in the valuation of the VisualMed Series B Preferred Stock.

 

The financial results of HTS and AMSG, including the gain on sale, are reflected as discontinued operations in the Company’s consolidated financial statements. See Note 14.

 

Revenue Recognition

 

We recognize revenue in accordance with Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers (Topic 606),” including subsequently issued updates. This series of comprehensive guidance has replaced all existing revenue recognition guidance. There is a five-step approach outlined in the standard. In determining revenue, we first identify the contract according to the scope of ASU Topic 606 with the following criteria:

 

  The parties have approved the contract either in writing; orally by acknowledgement; or implicitly, based on customary business practices.
  Each party’s rights and the contract’s payment terms are identified.
  The contract has commercial substance.
  Collection is probable.

 

9

 

 

We review our calculations for the realizability of gross 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 and within our service offerings. 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.

 

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 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 net 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. Net 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 the three and six months ended June 30, 2021 and 2020.

 

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

 

The collection of outstanding receivables for Medicare, Medicaid, managed care payers, other third-party payers and patients is our primary source of cash and is critical to our operating performance. The primary collection risks relate to uninsured patient accounts, including patient accounts for which the primary insurance carrier has paid the amounts covered by the applicable agreement, but patient responsibility amounts (deductibles and copayments) remain outstanding. Implicit price concessions relate primarily to amounts due directly from patients. Estimated implicit price concessions are recorded for all uninsured accounts, regardless of the aging of those accounts. Accounts are written off when all reasonable internal and external collection efforts have been performed. The estimates for implicit price concessions are based upon management’s assessment of historical write offs and expected net collections, business and economic conditions, trends in federal, state and private employer health care coverage and other collection indicators. Management relies on the results of detailed reviews of historical write-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 accounts receivable collection and write off data. We believe our quarterly updates to the estimated contractual allowance amounts and to the estimated implicit price concessions at each of our facilities provide reasonable estimates of our net revenues and valuation of our accounts receivable. For the three months ended June 30, 2021 and 2020, we recorded estimated contractual allowances of $4.0 million and $8.4 million, respectively, and estimated implicit price concessions of $1.3 million and $2.7 million, respectively. For the six months ended June 30, 2021 and 2020, we recorded estimated contractual allowances of $9.5 million and $18.9 million, respectively, and estimated implicit price concessions of $4.3 million and $4.0 million, respectively. These amounts have been recorded as to enable us to record our net revenues and accounts receivable at the estimated amounts we expect to collect. The estimated accounts receivable collection rate had been reduced to a lower percentage of gross revenue for the six months ended June 30, 2021 due to serving only emergency room patients during the first four months of the period. Inpatient services typically deliver higher collection rates and the absence of inpatient services meant that the Company was dependent on revenue from emergency room services, which is typically at a lower percentage of gross revenue. Inpatient services reopened in May 2021.

 

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Contractual Allowances and Doubtful Accounts Policy

 

Accounts receivable are reported at realizable value, net of contractual allowances and estimated implicit price concessions (also referred to as 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 allowances and doubtful accounts. In addition, the Company regularly assesses the state of its billing operations in order to identify issues which may impact the 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 are recorded as an adjustment to revenues. As required by Topic 606, after estimated implicit price concessions and contractual and related allowance adjustments to revenues of $5.3 million and $11.1 million, respectively, for the three months ended June 30, 2021 and 2020, we reported net revenues of $0.9 million and $2.1 million, respectively. After estimated implicit price concessions and contractual and related allowance adjustments to revenues of $13.8 million and $22.9 million, respectively, for the six months ended June 30, 2021 and 2020, we reported net revenues of $0.3 million and $3.9 million, respectively. We continue to review the provisions for implicit price concessions and contractual allowances. See Note 4 – Accounts Receivable.

 

Leases in Accordance with ASU No. 2016-02

 

We account for leases in accordance with ASU No. 2016-02, Leases (Topic 842) as updated, which requires leases with durations greater than 12 months to be recognized on the balance sheet. Upon adoption in 2019, we elected the package of transition provisions available which allowed us to carryforward our historical assessments of (1) whether contracts are or contain leases, (2) lease classification and (3) initial direct costs. We lease property and equipment under finance and operating leases. For leases with terms greater than 12 months, we record the related right-of-use assets and right-of-use obligations at the present value of lease payments over the term. We do not separate lease and non-lease components of contracts. Our operating and finance leases are more fully discussed in Note 9.

 

Impairment or Disposal of Long-Lived Assets

 

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

 

The Company did not record an asset impairment charge during the three and six months ended June 30, 2021 and 2020.

 

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Fair Value Measurements

 

We define fair value 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, we consider the principal or most advantageous market in which we would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability, such as inherent risk, transfer restrictions and credit risk. We apply the following fair value 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 – Quoted prices in active markets for identical assets or liabilities.

 

Level 2 – Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

Level 3 – Inputs that are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability.

 

We applied the Level 3 fair value hierarchy in determining the fair value of the VisualMed Series B Preferred Stock on June 30, 2021 as more fully discussed in Note 14.

 

Derivative Financial Instruments, Including the Adoption of ASU 2017-11

 

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 (loss) 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 stockholders 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).

 

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 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. The incremental value of warrants as a result of the down round provisions of $99.3 million and $149.6 million were recorded as deemed dividends for the three and six months ended June 30, 2021, respectively. We did not record deemed dividends as a result of the down round provisions during the three and six months ended June 30, 2020, however, we did record a deemed dividend during the three and six months ended June 30, 2020 as a result of the issuance of our Series M Convertible Preferred Stock (the “Series M Preferred Stock”) as more fully discussed in Note 11. See Note 10 for an additional discussion of derivative financial instruments.

 

Income Taxes

 

Income taxes are accounted for under the liability method of accounting for income taxes. Under the liability method, future tax liabilities and assets are recognized for the estimated future tax consequences attributable to differences between the amounts reported in the financial statement carrying amounts of assets and liabilities and their respective tax bases. Future tax assets and liabilities are measured using enacted or substantially enacted income tax rates expected to apply when the asset is realized or the liability settled. The effect of a change in income tax rates on future income tax liabilities and assets is recognized in income in the period that the change occurs. Future income tax assets are recognized to the extent that they are considered more likely than not to be realized. When projected future taxable income is insufficient to provide for the realization of deferred tax assets, the Company recognizes a valuation allowance.

 

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In accordance with U.S. GAAP, the Company is required to determine whether a tax position of the Company is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax benefit to be recognized is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Derecognition of a tax benefit previously recognized could result in the Company recording a tax liability that would reduce net assets. Based on its analysis, the Company has determined that it has not incurred any liability for unrecognized tax benefits as of June 30, 2021 and December 31, 2020.

 

Earnings (Loss) Per Share

 

The Company reports earnings (loss) per share in accordance with ASC Topic 260, “Earnings Per Share,” which establishes standards for computing and presenting earnings (loss) per share. Basic earnings (loss) per share of common stock is calculated by dividing net earnings (loss) available to common stockholders by the weighted-average shares of common stock outstanding during the period, without consideration of common stock equivalents. Diluted earnings (loss) per share is calculated by adjusting the weighted-average shares of common stock outstanding for the dilutive effect of common stock equivalents, including stock options and warrants outstanding for the period as determined using the treasury stock method. For purposes of the diluted net loss per share calculation, common stock equivalents are excluded from the calculation when their effect would be anti-dilutive. Therefore, basic and diluted net loss per share applicable to common stockholders is the same for periods with a net loss available to common stockholders. See Note 3 for the computation of the loss per share for the three and six months ended June 30, 2021 and 2020.

 

Note 2 – Liquidity and Financial Condition

 

Jamestown Regional Medical Center

 

Following an inspection at Jamestown Regional Medical Center it was determined that several conditions of participation in its Medicare agreement were deficient and the hospital failed to adequately correct the deficiencies. As a result, on June 12, 2019, Jamestown Regional Medical Center’s Medicare agreement was terminated. 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. The Company plans to reopen the hospital upon securing adequate capital to do so. The reopening plans have also been disrupted by the coronavirus (“COVID-19”) pandemic and the timing of the reopening has been delayed and is now intended that the re-opening process will be initiated in before the end of 2021.

 

Jellico Community Hospital

 

Effective March 5, 2019, the Company acquired certain assets related to Jellico Community Hospital. On March 1, 2021, the Company closed Jellico Community Hospital, after the city of Jellico issued a 30-day termination notice for the lease of the building. The closure reduced operating losses and the monthly cash deficit for the Company. The collections of receivables for the hospital have been negatively impacted by the closure and mean a significant shortfall in the amount required to satisfy liabilities at the facility.

 

Impact of the Pandemic

 

COVID-19 was declared a global pandemic by the World Health Organization on March 11, 2020. We have been closely monitoring the COVID-19 pandemic and its impact on our operations and we have taken steps intended to minimize the risk to our employees and patients. These steps have increased our costs and our revenues have been significantly adversely affected. Demand for hospital services has substantially decreased. As more fully discussed in Note 6, we have received Paycheck Protection Program (“PPP”) loans. We have also received Health and Human Services (“HHS”) Provider Relief Funds from the federal government as more fully discussed below. If the COVID-19 pandemic continues for a further extended period, we expect to incur significant losses and additional financial assistance may be required. Going forward, the Company is unable to determine the extent to which the COVID-19 pandemic will continue to affect its business. The nature and effect of the COVID-19 pandemic on our balance sheet and results of operations will depend on the severity and length of the pandemic in our service areas; government activities to mitigate the pandemic’s effect; regulatory changes in response to the pandemic, especially those affecting rural hospitals; and existing and potential government assistance that may be provided.

 

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HHS Provider Relief Funds

 

The Company received Provider Relief Funds from the United States Department of HHS provided to eligible healthcare providers out of the $100 billion Public Health and Social Services Emergency Fund provided for in the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”). The funds were allocated to eligible healthcare providers for expenses and lost revenue attributable to the COVID-19 pandemic. The funds were being released in tranches, and HHS partnered with UnitedHealth Group to distribute the initial $30 billion in funds by direct deposit to providers. As of June 30, 2021, our facilities have received approximately $12.4 million in relief funds. The fund payments are grants, not loans, and HHS will not require repayment, but the funds must be used only for grant approved purposes. Based on an analysis of the compliance and reporting requirements of the Provider Relief Funds and the impact of the pandemic on our operating results through June 30, 2021,we have recognized the full amount of these funds as income as of June 30, 2021 of which $7.5 million and $0.5 million was recognized during the second and third quarters of 2020, respectively, and $2.5 million and $1.9 million was recognized as income during the first and second quarters of 2021, respectively.

 

On September 19, 2020, HHS issued a Post-Payment Notice of Reporting Requirements (the “September 19, 2020 Notice”), which indicates that providers may recognize reimbursement for healthcare-related expenses, as defined therein, attributable to coronavirus that another source has not reimbursed and is not obligated to reimburse. Additionally, amounts received from HHS that are not fully expended on eligible healthcare-related expenses may be recognized as reimbursement for lost revenues, represented as a negative change in year-over-year net patient care operating income. Providers may apply payments to lost revenues up to the amount of the 2019 net gain from healthcare-related sources or, for entities that reported a negative net operating gain in 2019, receipts from HHS may be recognized up to a net zero gain/loss in 2020. On October 22, 2020, HHS issued an updated Post-Payment Notice of Reporting Requirements and a Reporting Requirements Policy Update (together, the “October 22, 2020 Notice”), which includes two primary changes: (1) the definition of lost revenue is changed to refer to the negative year-over-year difference in 2019 and 2020 actual revenue from patient care related sources as opposed to the negative year-over-year change in net patient care operating income, and (2) the definition of reporting entities is broadened to include the parent of one or more subsidiary tax identification numbers that received general distribution payments, entities having providers associated with it that provide diagnoses, testing or treatment for cases of COVID-19, or entities that can otherwise attest to the terms and conditions. As codified in the October 22, 2020 Notice, the Company’s estimate of pandemic relief funds as of June 30, 2021 includes the allocation of certain general funds among subsidiaries. Regarding the amended definition of lost revenues, such change served to increase amounts eligible to be recognized as income, as compared to the September 19, 2020 Notice. As evidenced by the October 22, 2020 Notice, HHS’ interpretation of the underlying terms and conditions of such payments, including auditing and reporting requirements, continues to evolve. On January 15, 2021, the government issued “General and Targeted Distribution Post-Payment Notice of Reporting Requirements,” (the “January 15, 2021 Notice”), which again provides guidance on reporting instructions and use of funds. Additional guidance or new and amended interpretations of existing guidance on the terms and conditions of such payments may result in changes in the Company’s estimate of amounts for which the terms and conditions are reasonably assured of being met, and any such changes may be material. Additionally, any such changes may result in derecognition of amounts previously recognized, which may be material.

 

As of June 30, 2021, the Company’s estimate of the amount for which it is reasonably assured of meeting the underlying terms and conditions was updated based on, among other things, the September 19, 2020 Notice, the October 22, 2020 Notice, the January 15, 2021 Notice and the Company’s results of operations during 2020 and the six months ended June 30, 2021. The Company believes that it was appropriate to recognize as income the full amount of the funds received, which were $12.4 million, as of June 30, 2021.

 

Going Concern

 

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

 

As reflected in the unaudited condensed consolidated financial statements, the Company had a working capital deficit and an accumulated deficit of $57.5 million and $1.0 billion, respectively, at June 30, 2021. In addition, the Company had a loss from continuing operations before other income (expense) and income taxes of approximately $2.6 million and $3.2 million for the three months ended June 30, 2021 and 2020, respectively, and a loss from continuing operations before other income (expense) and income taxes of $7.9 million and $7.1 million, for the six months ended June 30, 2021 and 2020, respectively. Cash used in operating activities was $3.7 million and $9.1 million for the six months ended June 30, 2021 and 2020, respectively. As of the date of this report, our cash is deficient and payments for our operations in the ordinary course are not being made. The continued losses and other related factors, including the payment defaults under the terms of outstanding notes payable and debentures as more discussed in Notes 6 and 7, raise substantial doubt about the Company’s ability to continue as a going concern for twelve months from the filing date of this report.

 

14

 

 

The Company’s unaudited condensed consolidated financial statements are prepared assuming the Company can continue as a going concern, which contemplates continuity of operations through realization of assets, and the settling of liabilities in the normal course of business. As more fully discussed in Note 1, on June 25, 2021, the Company sold HTS and AMSG to VisualMED and the Company received VisualMED’s Series B Preferred Stock valued at $8.5 million as consideration for the sale (subject to post-closing adjustments). In addition, $2.2 million of net liabilities of HTS and AMSG were transferred to VisualMED. The Company has reflected the assets and liabilities relating to HTS and AMSG held prior to the sale as part of discontinued operations. In addition, during 2020, the Company announced plans to sell its clinical laboratory, EPIC Reference Labs, Inc., and as a result, EPIC Reference Labs, Inc.’s operations have been included in discontinued operations for all periods presented. The Company has been unable to find a buyer for EPIC Reference Labs, Inc. and, therefore, effective June 30, 2021, it has ceased all efforts to sell the company. Discontinued operations are more fully discussed in Note 14.

 

On March 1, 2021, the Company closed Jellico Community Hospital, after the city of Jellico issued a 30-day termination notice for the lease of the building. Jellico Community Hospital had been operating at a loss since it was acquired by the Company in March 2019. The Company’s core operating businesses are now a rural hospital and CarePlus Center and a hospital and physician’s office that it plans to reopen and operate. Rural hospitals are 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 these businesses.

 

There can be no assurance that the Company will be able to achieve its business plan, which is to acquire and operate clusters of rural hospitals, raise any additional capital or secure the additional financing necessary to implement its current operating plan. The ability of the Company to continue as a going concern is dependent upon its ability to raise adequate capital to fund its operations and repay its outstanding debt and other past due obligations, fully align its operating costs, increase its revenues, and eventually regain profitable operations. The unaudited condensed consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

 

Note 3 – Loss Per Share

 

Basic loss per share is computed by dividing the loss available to common stockholders by the weighted-average number of shares of common stock outstanding during the period. Basic loss per share excludes potential dilution of securities or other contracts to issue shares of common stock. Diluted loss per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the income of the Company. For each of the three and six months ended June 30, 2021 and 2020, basic loss per share is the same as diluted loss per share.

 

The following table sets forth the computation of the Company’s basic and diluted net loss per share available to common stockholders during the three and six months ended June 30, 2021 and 2020:

 

     2021     2020     2021     2020 
   Three Months Ended June 30,   Six Months Ended June 30, 
   2021   2020   2021   2020 
Numerator                
Net income (loss) from continuing operations  $(1,490,097)  $2,153,355   $(5,157,425)  $(3,657,354)
Deemed dividends   (99,253,330)   (3,150,368)   (149,611,479)   (3,150,368)
Net loss available to common stockholders, continuing operations   (100,743,427)   (997,013)   (154,768,904)   (6,807,722)
Net income (loss) from discontinued operations   10,561,415   (31,727)   10,334,044   (12,796)
Net loss available to common stockholders  $(90,182,012)  $(1,028,740)  $(144,434,155)  $(6,820,518)
                     
Denominator                    
Basic and diluted weighted average shares of common stock outstanding   7,310,286    990    3,799,062    986 
                     
Loss per share available to common stockholders, basic and diluted:                    
Continuing operations  $(13.78)  $(1,007.08)  $(40.74)  $(6,904.38)
Discontinued operations   1.44  (32.05)  2.72  (12.98)
Total basic and diluted  $(12.34)  $(1,039.13)  $(38.02)  $(6,917.36)

 

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Diluted loss per share excludes all dilutive potential shares if their effect is anti-dilutive. As of June 30, 2021 and 2020, the following potential common stock equivalents were excluded from the calculation of diluted loss per share as their effect was anti-dilutive:

   June 30, 
   2021   2020 
Warrants   122,395,632    63,467 
Convertible preferred stock   85,852,763    16,761 
Convertible debentures   5,963,367    1,548 
Stock options   26    26 
    214,211,788    81,802 

 

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, many 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 7, 11 and 12). These provisions have resulted in significant dilution of the Company’s common stock.

 

As a result of these down round provisions, the potential common stock and common stock equivalents totaled 4.7 billion at August 11, 2021, as more fully discussed in Note 16. See Note 11 regarding a discussion of the number of shares of the Company’s authorized common stock.

 

Note 4 – Accounts Receivable and Income Tax Refunds Receivable

 

Accounts receivables at June 30, 2021 (unaudited) and December 31, 2020 consisted of the following:

 

   June 30,   December 31, 
   2021   2020 
         
Accounts receivable  $13,110,044   $16,922,576 
Less:          
Allowance for contractual obligations   (7,660,569)   (13,185,843)
Allowance for doubtful accounts   (4,147,145)   (1,513,827)
Accounts receivable owed under sales agreements   (1,302,330)   (1,723,452)
Accounts receivable, net  $-   $499,454 

 

The allowance for contractual obligations reflected in the table above decreased as a percentage of accounts receivable to 58% at June 30, 2021 compared to 78% at December 31, 2020. The allowance is based on historical contractual allowance rates. The decrease in the percentage of contractual obligations to accounts receivable was due to rate changes.

 

Estimated implicit price concessions deducted from revenues for the three months ended June 30, 2021 and 2020 were $1.3 million and $2.7 million, respectively, and for the six months ended June 30, 2021 and 2020 were $4.3 million and $4.0 million, respectively. The allowance for doubtful accounts deducted from accounts receivable was $4.1 million at June 30, 2021 compared to $1.5 million at December 31, 2020, an increase of $2.6 million. The increase was due to updates to estimated collection rates and the closure of Jellico Community Hospital. The Company’s policy is to write off accounts receivable balances against the allowance for implicit price concessions once an accounts receivable ages past a specified number of days.

 

Accounts Receivable Sales Agreements

 

During the year ended December 31, 2020, the Company entered into six accounts receivable sales agreements under which the Company sold an aggregate of $3.3 million of accounts receivable on a non-recourse basis for an aggregate purchase price paid to the Company of $2.2 million, less $0.1 million of origination fees. Accordingly, the Company recorded a loss on the sales of $1.2 million during the year ended December 31, 2020. As of June 30, 2021 and December 31, 2020, $1.5 million and $1.7 million, respectively, was outstanding and owed under the accounts receivable sales agreements. As of June 30, 2021, $1.3 million was recorded as a reduction of accounts receivable and $0.2 million was recorded in accrued expenses. The $0.2 million that was recorded in accrued expenses (see Note 5) represents the portion sold in excess of the balance of accounts receivable recorded by the Company as due on June 30, 2021.

 

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On January 29, 2020, the Company entered into a secured installment promissory note (the “Ponte Note”) in the principal amount of $1.2 million, less $0.1 million in origination fees, the proceeds of which were used to satisfy in full the amounts due under accounts receivable sales agreements entered into during 2019. The Ponte Note is more fully discussed in Note 6.

 

Income Tax Refunds Receivable

 

As of June 30, 2021 and December 31, 2020, the Company had $1.1 million and $1.4 million, respectively, of income tax refunds receivable. During 2020, the U.S. Congress approved the CARES Act, which allowed a five-year carryback privilege for federal net operating tax losses that arose in a tax year beginning in 2018 and through 2020. As a result, during the year ended December 31, 2020, the Company recorded approximately $1.1 million in refunds from the carryback of certain of its federal net operating losses. In addition, during the year ended December 31, 2020, the Company recorded $0.3 million in refunds related to other net operating loss carryback adjustments. During the six months ended June 30, 2021, the Company received income tax refunds of $0.3 million, which represented income tax refunds associated with the CARES Act. No refunds were received during the six months ended June 30, 2020. The Company used the $0.3 million of refunds that it received in the six months ended June 30, 2021 to repay a portion of the amount that it owes for federal income tax liabilities that arose from an audit of the Company’s 2015 Federal tax return as more fully discussed in Note 13. The Company’s income taxes are more fully discussed in Note 15 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

 

Note 5 – Accrued Expenses

 

Accrued expenses at June 30, 2021 (unaudited) and December 31, 2020 consisted of the following:

 

   June 30,   December 31, 
  2021   2020 
Accrued payroll and related liabilities  $9,133,513   $8,263,940 
HHS Provider Relief Funds (See Note 2)   -    4,400,000 
Accrued interest   6,357,858    4,728,942 
Accrued legal   1,047,318    1,097,318 
Amounts owed under accounts receivable sales  agreements in excess of accounts receivable (See Note 4)   173,137    - 
Other accrued expenses   1,264,073    645,369 
Accrued expenses  $17,975,899   $19,135,569 

 

Accrued payroll and related liabilities at June 30, 2021 and December 31, 2020 included approximately $2.7 million and $2.5 million, respectively, for penalties associated with approximately $5.0 million and $4.4 million of accrued past due payroll taxes as of June 30, 2021 and December 31, 2020, respectively.

 

Note 6 – Notes Payable

 

The Company and its subsidiaries are party to a number of loans with third parties and affiliates. At June 30, 2021 (unaudited) and December 31, 2020, notes payable consisted of the following:

 

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Notes Payable – Third Parties

 

   June 30, 2021   December 31, 2020 
         
Loan payable to TCA Global Master Fund, L.P. (“TCA”) in the original principal amount of $3 million at 16% interest (the “TCA Debenture”). Principal and interest payments due in various installments through December 31, 2017  $1,741,893   $1,741,893 
           
Notes payable to CommerceNet and Jay Tenenbaum in the original principal amount of $500,000, bearing interest at 6% per annum (the “Tegal Notes”). Principal and interest payments due annually from July 12, 2015 through July 12, 2017   291,559    297,068 
           
Note payable to Anthony O’Killough dated September 27, 2019 in the original principal amount of $1.9 million. Interest is due only upon event of default. Issued net of $0.3 million of debt discount and $0.1 million of financing fees. Payment due in installments through November 2020.   1,450,000    1,450,000 
           
Notes payable under the Paycheck Protection Program (“PPP) issued on April 20, 2020 through May 1, 2020 bearing interest at a rate of 1% per annum. To the extent not forgiven, principal and interest payments are due monthly beginning sixteen months from the date of issuance and the notes mature 40 months from the date of issuance.   2,385,922    2,385,921 
           
The Ponte Note dated January 29, 2020, less original issue discount of $0.1 million, non-interest bearing, payable in weekly installment payments ranging from $22,500 to $34,000 due on or before February 5, 2020 through on or before October 21, 2020, the maturity date.   50,000    108,350 
           
Notes payable dated January 31, 2021 and February 16, 2021 due six months from the date of issuance bearing interest at 10% for the period outstanding.   245,000    - 
           
Warrant pre-payment promissory notes dated February 25, 2021, April 9, 2021, April 16, 2021 and April 22, 2021, non-interest bearing, $1,100,000 aggregate principal amount, issued with $100,000 of original issue discounts and payable 12 months from the date of issuance   1,027,630    - 
           
    7,192,004    5,983,232 
Less current portion   (6,394,997)   (4,786,976)
Notes payable - third parties, net of current portion  $797,007   $1,196,256 

 

The Company did not make the required monthly principal and interest payments due under the TCA Debenture for the period from October 2016 through March 2017. In addition, TCA entered into an inter-creditor agreement with the purchasers of the convertible debentures (see Note 7), which sets forth rights, preferences and priorities with respect to the security interests in the Company’s assets. On September 19, 2017, the Company entered into a new agreement with TCA, which extended the repayment schedule through December 31, 2017. The remaining debt to TCA remains outstanding and TCA has made a demand for payment. In May 2020, the SEC appointed a Receiver to close down the TCA Global Master Fund, L.P. over allegations of accounting fraud. The amount recorded by the Company as being owed to TCA was based on TCA’s application of prior payments made by the Company. The Company believes that prior payments of principal and interest may have been applied to unenforceable investment banking and other fees and charges. It is the Company’s position that the amount owed to TCA is less than the amount set forth above.

 

The Company did not make the second annual principal payment under the Tegal Notes that was due on July 12, 2016. On November 3, 2016, the Company received a default notice from the holders of the Tegal Notes demanding immediate repayment of the outstanding principal at that time of $341,612 and accrued interest of $43,000. On December 7, 2016, the Company received a breach of contract complaint with a request for the entry of a default judgment (see Note 13). On April 23, 2018, the holders of the Tegal Notes received a judgment against the Company. As of June 30, 2021, the Company has paid $50,051 of principal amount of these notes.

 

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 $1.5 million, which was net of a $0.3 million original issue discount and $0.1 million in financing fees. The first principal payment of $1.0 million was due on November 8, 2019 and the remaining $0.9 million was due on December 26, 2019. These payments were not made. In February 2020, the note holder sued the Company and Mr. Diamantis, as guarantor, in New York State Supreme Court for the County of New York, for approximately $2.2 million for non-payment of the promissory note. Mr. Diamantis was a former member of the Company’s Board of Directors. In May 2020, the Company, Mr. Diamantis, as guarantor, and the note holder entered into a Stipulation providing for a payment of a total of $2.2 million (which included accrued “penalty” interest as of that date) in installments through November 1, 2020. As of June 30, 2021, $450,000 has been paid in cash and $2.1 million ($1.4 million of principal and $0.6 million of accrued penalty interest), remains past due. The Stipulation is more fully discussed in Note 13.

 

18

 

 

As of April 20, 2020 and through May 1, 2020, the Company and its subsidiaries received PPP loan proceeds in the form of promissory notes (the “PPP Notes”) in the aggregate amount of approximately $2.4 million. The PPP Notes and accrued interest are forgivable as long as the borrower uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels. The amount of loan forgiveness will be reduced if the borrower terminates employees or reduces salaries. No collateral or guarantees were provided in connection with the PPP Notes. The unforgiven portion of the PPP Notes is payable over two years at an interest rate of 1.0% per annum, with a deferral of payments for the first sixteen months. Beginning sixteen months from the dates of issuance, the Company is required (if not forgiven) to make monthly payments of principal and interest to the lenders. The aggregate monthly payment of all of the PPP Notes would be approximately $0.1 million. The Company believes that it has used the proceeds for purposes consistent with the PPP. While the Company currently believes that its use of the loan proceeds has met the conditions for forgiveness of the loans, it cannot assure you that it has not taken actions that could cause the Company to be ineligible for forgiveness of the loans, in whole or in part. The Company is in the process of applying for forgiveness of the PPP Notes.

 

On January 29, 2020, the Company entered into the Ponte Note in the principal amount of $1.2 million. Pursuant to the Ponte Note, weekly installment payments ranging from $22,500 to $34,000 were due on or before February 5, 2020 through on or before October 21, 2020, the maturity date. The Ponte Note, which was issued with an original issue discount in the amount of approximately $0.1 million, is non-interest bearing and subject to a late-payment fee of 10%. The Company did not make certain installment payments due under the note and accordingly it recorded a $9,850 late payment penalty and incurred certain legal fees in connection with the payment default. On May 5, 2021, the Company entered into a settlement agreement with the holder under which the Company agreed to pay $125,000 in full satisfaction of the note of which $75,000 was paid in the six months ended June 30, 2021. The remaining balance of $50,000 is due in two monthly payments of $25,000 in July 2021 and August 2021.

 

On each of February 25, 2021, April 9, 2021, April 16, 2021 and April 22, 2021, the Company entered into agreements with certain institutional investors for warrant prepayment promissory notes with an aggregate principal amount of $1.1 million. The Company received proceeds of $1.0 million from the payees and, accordingly, it recorded a total of $0.1 million in original issue discount of which, $4,795 and $27,630 was amortized in the three and six months ended June 30, 2021, respectively. The payees may at their option apply all or any portion of the principal amount outstanding to the exercise of any common stock warrants of the Company. The notes are unsecured and they mature 12 months from the date of issuance. The notes do not bear interest but an interest rate of 18% will be applied to the outstanding principal commencing five days after any event of default that results in their acceleration.

 

Note Payable – Related Party

 

   June 30, 2021   December 31, 2020 
   (unaudited)     
         
Note payable to Christopher Diamantis due on demand and bearing interest at 10% on the majority of amounts loaned  $2,627,000   $2,097,000 
           
Total note payable, related party   2,627,000    2,097,000 
           
Less current portion of note payable, related party   (2,627,000)   (2,097,000)
Total note payable, related party, net of current portion  $-   $- 

 

During the six months ended June 30, 2021 and 2020, Mr. Christopher Diamantis, a former member of our Board of Directors, loaned the Company $0.9 million and $4.6 million, respectively, the majority of which was for working capital purposes. During the six months ended June 30, 2021 and 2020, the Company repaid $0.4 and $3.3 million of the loans from Mr. Diamantis, respectively, and on June 30, 2020, the Company exchanged the total amount owed to Mr. Diamantis on that date for outstanding loans and accrued interest, net of repayments, which totaled approximately $18.8 million, for shares of the Company’s Series M Preferred Stock. The Series M Preferred Stock is more fully discussed in Note 11.

 

During the three months ended June 30, 2021 and 2020, the Company accrued interest of $36,000 and $0.2 million, respectively, on the loans from Mr. Diamantis and during the six months ended June 30, 2021 and 2020, it accrued interest of $0.1 million and $0.5 million, respectively, on the loans from Mr. Diamantis. As of June 30, 2021 and December 31, 2020, accrued interest on the loans from Mr. Diamantis totaled $0.3 million and $0.2 million, respectively. Interest accrues on loans from Mr. Diamantis at a rate of 10% on the majority of the amounts loaned. In addition, Mr. Diamantis incurs interest expenses as a result of borrowing money from third parties to lend to the Company. Therefore, the Company reimburses Mr. Diamantis for a certain portion of the third party interest he incurs.

 

19

 

 

Note 7 – Debentures

 

The carrying amount of all outstanding debentures as of June 30, 2021and December 31, 2020 is as follows:

 

   June 30, 2021   December 31, 2020 
    (unaudited)     
Debentures  $12,690,539   $12,690,539 
Less current portion   (12,690,539)   (12,690,539)
Debentures, net of current portion  $-   $- 

 

Payment of all outstanding debentures totaling $12.7 million, including late-payment penalties, at December 31, 2020 was past due by the debentures’ original terms. The debentures bear interest at the rate of 18% per annum and are secured by a first priority lien on all of the Company’s assets. The terms of the outstanding debentures as of December 31, 2020 are more fully described in Note 9 to the Company’s consolidated financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2020. Certain of these debentures were issued with warrants to purchase shares of the Company’s common stock. Outstanding warrants are more fully discussed in Note 11.

 

The Company accrued interest expense on outstanding debentures during the three months ended June 30, 2021 and 2020 of $0.6 million and $1.9 million, respectively, and during the six months ended June 30, 2021 and 2020 of $1.1 million and $3.9 million, respectively.

 

On June 30, 2021, as adjusted for the Reverse Stock Splits, $2.6 million of principal amount of outstanding debentures were convertible into 5.9 million shares of the Company’s common stock at a price of $0.4407 per share and $5.6 million of outstanding debentures were convertible on that date into 0.1 million shares of the Company’s common stock at a conversion price of $52.00. The remaining outstanding debentures of $4.5 million are non-convertible.

 

See Notes 3 and 11 for a discussion of the dilutive effect of the outstanding convertible debentures and warrants as of June 30, 2021 and Note 16 for the dilutive effect of outstanding convertible debentures and warrants as of August 11, 2021.

 

Note 8 – Related Party Transaction

 

Alcimede LLC (“Alcimede”) billed $0.1 million and $0.1 million for consulting fees for the three months ended June 30, 2021 and 2020, respectively, and $0.2 million and $0.2 million for consulting fees for the six months ended June 30, 2021 and 2020, respectively. Seamus Lagan, the Company’s President and Chief Executive Officer, is the sole manager of Alcimede (also see Note 11).

 

The terms of the foregoing transaction and the transactions discussed in Note 6 and 11 are not necessarily indicative of those that would have been agreed to with unrelated parties for similar transactions.

 

Note 9 – Finance and Operating Lease Obligations

 

We lease property and equipment under finance and operating leases. For leases with terms greater than 12 months, we record the related right-of-use assets and right-of-use obligations at the present value of lease payments over the term. We do not separate lease and non-lease components of contracts.

 

Generally, we use our most recent agreed upon borrowing interest rate at lease commencement as our interest rate, as most of our operating leases do not provide a readily determinable implicit interest rate.

 

20

 

 

The following table presents our lease-related assets and liabilities at June 30, 2021 and December 31, 2020:

 

   Balance Sheet Classification 

June 30,

2021

  

December 31,

2020

 
            
Assets:             
Operating leases  Right-of-use operating lease assets  $910,541   $1,000,272 
Finance leases  Property and equipment, net   249,985    249,985 
              
Total lease assets     $1,160,526   $1,250,257 
              
Liabilities:             
Current:             
Operating leases  Right-of-use operating lease obligations  $217,937   $172,952 
Finance leases  Current liabilities   249,985    249,985 
Noncurrent:             
Operating leases  Right-of-use operating lease obligations   692,604    827,320 
              
Total lease liabilities     $1,160,526   $1,250,257 
              
Weighted-average remaining term:             
Operating leases      3.92 years    4.17 years 
Finance leases      0 years    0 years 
Weighted-average discount rate:             
Operating leases      13.0%   13.0%
Finance leases      4.9%   4.9%

 

The following table presents certain information related to lease expense for finance and operating leases for the three months and six months ended June 30, 2021 and 2020:

 

    Three Months Ended June 30, 2021    Three Months Ended June 30, 2020    Six Months Ended June 30, 2021    Six Months Ended June 30, 2020 
Finance lease expense:                   
Finance lease expense: Depreciation/amortization of leased assets  $-   $10,539   $-   $26,349 
Finance lease expense: Interest on lease liabilities   -    46,503    -    93,012 
Operating leases:                    
Operating leases: Short-term lease expense (1)   34,033    69,235    106,583    169,942 
                     
Total lease expense  $34,033   $126,277   $106,693   $289,303 

 

(1) Expenses are included in general and administrative expenses in the consolidated statements of operations.

 

Other Information

 

The following table presents supplemental cash flow information for the six months ended June 30, 2021 and 2020:

 

   Six Months Ended
June 30, 2021
   Six Months Ended
June 30, 2020
 
Cash paid for amounts included in the measurement of lease liabilities:          
Operating cash flows for operating leases  $102,152   $73,812 
Operating cash flows for finance leases   -    9,455 
Financing cash flows for finance leases payments  -   100,707 

 

21

 

 

Aggregate future minimum lease payments under right-of-use operating and finance leases are as follows:

 

   Right-of-Use Operating Leases   Finance Leases 
Twelve months ended June 30, 2022  $314,807   $253,776 
Twelve months ended June 30, 2023   339,024    - 
Twelve months ended June 30, 2024   216,239    - 
Twelve months ended June 30, 2025   222,712    - 
Twelve months ended June 30, 2026   74,598    - 
Thereafter   -    - 
Total   1,167,380    253,776 
           
Less interest   (256,839)   (3,791)
Present value of minimum lease payments  $910,541   $249,985 
           
Less current portion of lease obligations   (217,937)   (249,985)
Lease obligations, net of current portion  $692,604   $- 

 

As of June 30, 2021, the Company was in default under its finance lease obligations, therefore, the aggregate future minimum lease payments and accrued interest under this finance lease totaling approximately $0.2 million is deemed to be immediately due.

 

Note 10 – Fair Value Measurements

 

Fair Value Measurements

 

We define fair value 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, we consider the principal or most advantageous market in which we would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability, such as inherent risk, transfer restrictions and credit risk.

 

We apply the following fair value 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 – Quoted prices in active markets for identical assets or liabilities.

 

Level 2 – Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

Level 3 – Inputs that are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability.

 

The estimated fair value of financial instruments was determined by the Company using available market information and valuation methodologies considered to be appropriate. At June 30, 2021 and December 31, 2020, the carrying value of the Company’s accounts receivable, accounts payable and accrued expenses approximated their fair values due to their short-term nature.

 

22

 

 

The following table sets forth the financial assets and liabilities carried at fair value measured on a recurring basis as of June 30, 2021 and December 31, 2020:

 

   Level 1   Level 2   Level 3   Total 
                 
As of December 31, 2020:                    
                     

VisualMED Series B Preferred Stock

  $-   $-   $-   $- 
Embedded conversion option of debenture   -   $-   $455,336   $455,336 
Total  $-   $-   $455,336   $455,336 
                     
As of June 30, 2021:                    
VisualMED Series B Preferred Stock  $

-

   $

-

   $

8,500,000

   $

8,500,000

 
Embedded conversion option of debenture   -    -    455,336    455,336 
Total  $-   $-   $8,955,336   $8,955,336 

 

The fair value of the VisualMED Series B Preferred Stock of $8.5 million as of June 30, 2021 is more fully discussed in Note 14.

 

The Company utilized the following method to value its derivative liability as of June 30, 2021 and December 31, 2020 for an embedded conversion option related to an outstanding debenture valued at $455,336. The Company determined the fair value by comparing the discounted conversion price per share (85% of market price) multiplied by the number of shares issuable at the balance sheet date to the actual price per share of the Company’s common stock multiplied by the number of shares issuable at that date with the difference in value recorded as a liability. There was no change in the value of the embedded conversion option in the three and six months ended June 30, 2021 and 2020 as there was no change in the conversion price terms during the periods.

 

During the three and six months ended June 30, 2021, the conversions of preferred stock triggered a further reduction in the exercise prices of warrants containing ratchet features that had not already ratcheted down to their floor. In accordance with U.S. GAAP, the incremental fair value of the debentures and warrants as a result of the decreases in the conversion/exercise prices was measured using Black Scholes. The following assumptions were utilized in the Black Scholes valuation models for the three months ended June 30, 2021: risk free rates ranging from 0.06% to 0.07%, volatility ranging from 216.72% to 253.20% and terms ranging from .66 year to 1 year. The following assumptions were utilized in the Black Scholes valuation models for the six months ended June 30, 2021: risk free rates ranging from 0.06% to 0.10%, volatility ranging from 213.25% to 253.20% and terms ranging from .66 year to 1.21 years. The incremental fair value of $99.3 million and $149.6 million was recorded as deemed dividends for the three and six months ended June 30, 2021, respectively. No deemed dividends were recorded in the three and six months ended June 30, 2020 as a result of down round provision features as no down round provisions were triggered during the periods. Deemed dividends of $3.2 million were recorded in the three and six months ended June 30, 2020 as a result of the issuance of the Series M Preferred Stock as more fully discussed in Note 11. Deemed dividends are also discussed in Notes 1 and 3.

 

Note 11 – Stockholders’ Deficit

 

Authorized Capital

 

The Company has 10,000,000,000 authorized shares of Common Stock at $0.0001 par value and 5,000,000 authorized shares of Preferred Stock at a par value of $0.01.

 

Preferred Stock

 

The Company has 5,000,000 shares, par value $0.01, of preferred stock authorized. As of June 30, 2021, the Company had outstanding shares of preferred stock consisting of 1,750,000 shares of its Series F Convertible Preferred Stock convertible into one share of the Company’s common stock, 10 shares of its Series H Convertible Preferred Stock convertible into 0.5 million shares of the Company’s common stock, 250,000 shares of its Series L Convertible Preferred Stock (the “Series L Preferred Stock”), 21,380.35 shares of its Series M Preferred Stock, 16,368.88 shares of its Series N Convertible Redeemable Preferred Stock (the “Series N Preferred Stock”), and 2,750 shares of its Series O Convertible Redeemable Preferred Stock (the “Series O Preferred Stock”). The Series L Preferred Stock, the Series M Preferred Stock, the Series N Preferred Stock and the Series O Preferred Stock are more fully described below.

 

23

 

 

Series L Preferred Stock

 

On May 4, 2020, the Company filed a Certificate of Designation with the Secretary of State of the State of Delaware to authorize the issuance of up to 250,000 shares of its Series L Preferred Stock. On May 5, 2020, the Company entered into an exchange agreement with Alcimede. Pursuant to the exchange agreement, the Company issued to Alcimede 250,000 shares of its Series L Preferred Stock in exchange for the 250,000 shares of the Company’s Series K Preferred Stock held by Alcimede. Upon the issuance of the Series L Preferred Stock to Alcimede, the shares of Series K Preferred Stock were cancelled. The Series L Preferred Stock is not entitled to receive any dividends. Each share of the Series L Preferred Stock is convertible into shares of the Company’s common stock at a conversion price equal to the average closing price of the Company’s common stock on the ten trading days immediately prior to the conversion date.

 

Series M Preferred Stock

 

The Company’s Board of Directors has designated 30,000 shares of the 5,000,000 shares of authorized preferred stock as the Series M Preferred Stock. Each share of Series M Preferred Stock has a stated value of $1,000. On June 30, 2020, the Company and Mr. Diamantis entered into an exchange agreement wherein Mr. Diamantis agreed to the extinguishment of the Company’s indebtedness to Mr. Diamantis totaling $18.8 million, including accrued interest, on that date in exchange for 22,000 shares of the Company’s Series M Preferred Stock with a par value of $0.01 per share. As a result of the exchange, the Company recorded a deemed dividend of approximately $3.2 million in the year ended December 31, 2020, which represented the difference between the $18.8 million of debt and accrued interest exchanged and the value of the Series M Preferred Stock of $22.0 million. See Note 6 for a discussion of the Company’s current indebtedness to Mr. Diamantis. The terms of the Series M Preferred Stock were set forth in the Company’s Current Report on Form 8-K filed with the SEC on June 16, 2020.

 

During the six months ended June 30, 2021, the holder converted 619.65 shares of his Series M Preferred Stock, with a stated value of $0.6 million into 450,000 shares of the Company’s common stock.

 

On August 13, 2020, Mr. Diamantis entered into a Voting Agreement and Irrevocable Proxy with the Company, Mr. Lagan and Alcimede (of which Mr. Lagan is the sole manager) pursuant to which Mr. Diamantis granted an irrevocable proxy to Mr. Lagan to vote the Series M Preferred Stock held by Mr. Diamantis, Mr. Diamantis has retained all other rights under the Series M Preferred Stock.

 

Series N Preferred Stock

 

On August 31, 2020, the Company and its debenture holders exchanged, under the terms of the Exchange and Redemption Agreement, certain outstanding debentures and all of the outstanding shares of the Company’s Series I-1 Convertible Preferred Stock (the “Series I-1 Preferred Stock”) and Series I-2 Convertible Preferred Stock (the “Series I-2 Preferred Stock”) for 30,435.52 shares of the Company’s Series N Preferred Stock. The terms of the Series N Preferred Stock were set forth in the Company’s Current Report on Form 8-K filed with the SEC on September 1, 2020.

 

During the year ended December 31, 2020, the holders converted 1,001 shares of their Series N Preferred Stock, with a stated value of $1.0 million, into 38,371 shares of the Company’s common stock. During the six months ended June 30, 2021, the holders converted 13,065.53 shares of their Series N Preferred Stock, with a stated value of $13.1 million, into 9,510,352 shares of the Company’s common stock.

 

Series O Preferred Stock

 

On May 10, 2021, the Company closed an offering of shares of its newly-authorized Series O Preferred Stock. The offering was pursuant to the terms of the Securities Purchase Agreement, dated as of May 10, 2021 (the “Purchase Agreement”), between the Company and certain existing institutional investors of the Company. The Purchase Agreement provides for the issuance of up to 4,400 shares of Series O Preferred Stock at four closings of 1,100 shares each. If all such shares of Series O Preferred Stock are issued, the Company will receive proceeds of $4.0 million.

 

24

 

 

The first closing occurred on May 10, 2021, the second closing occurred on May 18, 2021 and one-half of the third closing was funded on June 29, 2021. As of June 30, 2021, Company issued an aggregate of 2,750 shares of its Series O Preferred Stock and received total proceeds of $2.5 million as a result of the closings.

 

The Series O Preferred Stock, which has been issued for cash, does not contain mandatory redemption or other features that would require it to be presented on the balance sheet outside of equity and, therefore, it qualifies for equity accounting treatment. As a result of the equity accounting treatment, fair value accounting is not required in connection with the issuances of the stock and no gains, losses, derivative liabilities or deemed dividends have been recorded in connection with the issuances of the stock.

 

The terms of the Series O Preferred Stock were set forth in the Company’s Current Report on Form 8-K filed with the SEC on May 11, 2021, in particular:

 

General. The Company’s Board of Directors has designated 10,000 shares of the 5,000,000 authorized shares of preferred stock as the Series O Preferred Stock. Each share of the Series O Preferred Stock has a stated value of $1,000.

 

Voting Rights. Except as provided below or by law, the Series O Preferred Stock shall have no voting rights. However, as long as any shares of Series O Preferred Stock are outstanding, the Company shall not, without the affirmative vote of the holders of a majority of the then outstanding shares of the Series O Preferred Stock, (a) alter or change adversely the powers, preferences or rights given to the Series O Preferred Stock or alter or amend the Certificate of Designation, (b) amend its certificate of incorporation or other charter documents in any manner that adversely affects any rights of the holders, (c) increase the number of authorized shares of the Series O Preferred Stock, or (d) enter into any agreement with respect to any of the foregoing.

 

Dividends. Dividends at the rate per annum of 10% of the stated value per share shall accrue on each outstanding share of Series O Preferred Stock from and after the date of the original issuance of such share of Series O Preferred Stock (the “Series O Preferred Accruing Dividends”). The Series O Preferred Accruing Dividends shall accrue from day to day, whether or not declared, and shall be cumulative and non-compounding; provided, however, that such Series O Preferred Accruing Dividends shall be payable only when, as, and if declared by the Board of Directors. No cash dividends shall be paid on the common stock unless the Series O Preferred Accruing Dividends are paid.

 

Rank. The Series O Preferred Stock ranks with respect to dividends or a liquidation, (i) on parity with the common stock, the Company’s Series H Preferred Stock, the Company’s Series L Preferred Stock, the Company’s Series M Preferred Stock and the Company’s Series N Preferred Stock, (ii) senior to the Company’s Series F Preferred Stock, and (iii) junior to any other class or series of preferred stock of the Company afterwards created and ranking by its terms senior to the Series O Preferred Stock.

 

Conversion. Each share of the Series O Preferred Stock is convertible into shares of the Company’s common stock, at any time and from time to time, at the option of the holder, into that number of shares of common stock determined by dividing the stated value of such share of Series O Preferred Stock, plus any accrued declared and unpaid dividends, by the conversion price. The conversion price is equal to 90% of the lowest VWAP during the 10 trading days immediately prior to the conversion date. Holders of the Series O Preferred Stock are prohibited from converting Series O Preferred Stock into shares of common stock if, as a result of such conversion, the holder, together with its affiliates, would own more than 9.99% of the total number of shares of common stock then issued and outstanding. However, any holder may increase or decrease such percentage to any other percentage not in excess of 9.99%, provided that any increase in such percentage shall not be effective until 61 days after notice to the Company.

 

Liquidation Preference. Upon any liquidation, dissolution or winding up of the Company, the holders of the Series O Preferred Stock shall be entitled to receive an amount equal to the stated value of the Series O Preferred Stock, plus any accrued declared and unpaid dividends thereon and any other fees or liquidated damages then due and owing thereon, for each share of the Series O Preferred Stock before any distribution or payment shall be made on any junior securities.

 

Redemption. At any time the Company shall have the right to redeem all, or any part, of the Series O Preferred Stock then outstanding. The Series O Preferred Stock subject to redemption shall be redeemed by the Company in cash in an amount equal to the stated value of the shares of the Series O Preferred Stock being redeemed plus all accrued declared and unpaid dividends.

 

Common Stock

 

The Company had 10,000,000 and 39,648 shares of its common stock issued and outstanding at June 30, 2021 and December 31, 2020, respectively. During the six months ended June 30, 2021, the Company issued 450,000 shares of its common stock upon the conversion of 619.65 shares of its Series M Preferred Stock and 9,510,352 shares of its common stock upon the conversion of 13,065.53 shares of its Series N Preferred Stock. During the six months ended June 30, 2020, the Company issued 25 shares of its common stock upon the conversion of 21.25 shares of its Series I-2 Preferred Stock.

 

25

 

 

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 the Company’s common stock and a decline in the market price of the common stock. In addition, 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. 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 the Company’s common stock and have given rise to reverse splits of its common stock, including the reverse stock split effected on July 16, 2021, which is more fully discussed in Note 1. See Note 16 for a discussion of the number of shares of the Company’s common stock and common stock equivalents outstanding as of August 11, 2021.

 

On August 13, 2020, Mr. Diamantis entered into the Voting Agreement with the Company, Mr. Lagan and Alcimede (of which Mr. Lagan is the sole manager) pursuant to which Mr. Diamantis granted an irrevocable proxy to Mr. Lagan to vote the Series M Preferred Stock held by Mr. Diamantis. Mr. Diamantis has retained all other rights under the Series M Preferred Stock. Regardless of the number of shares of Series M Preferred Stock outstanding and so long as at least one share of Series M Preferred Stock is outstanding, the outstanding shares of Series M Preferred Stock shall have the number of votes, in the aggregate, equal to 51% of all votes entitled to be voted at any meeting of stockholders or action by written consent. This means that the holders of Series M Preferred Stock have sufficient votes, by themselves, to approve or defeat any proposal voted on by the Company’s stockholders, unless there is a supermajority required under applicable law or by agreement. As a result of the Voting Agreement, as of the date of filing this report, the Company believes that it has the ability to ensure that it has and or can obtain sufficient authorized shares of its common stock to cover all potentially dilutive common shares outstanding.

 

Stock Options

 

The Company maintained and sponsored the Tegal Corporation 2007 Incentive Award Equity Plan (the “2007 Equity Plan”). Tegal Corporation is the prior name of the Company. The 2007 Equity Plan, as amended, provided for the issuance of stock options and other equity awards to the Company’s officers, directors, employees and consultants. The 2007 Equity Plan terminated pursuant to its terms in September 2017. As of June 30, 2021, 26 options were outstanding and exercisable with a weighted average exercise price of $2,992,125 per share. No options were issued, forfeited or expired during the six months ended June 30, 2021. The remaining weighted average contractual term is 4.87 years. The intrinsic value of the options exercisable at each of June 30, 2021 and December 31, 2020 was $0. No compensation expense was recorded in the three and six months ended June 30, 2021 and 2020 as all of the options were fully vested as of December 31, 2019.

 

Warrants

 

The Company, as part of various debt and equity financing transactions, has issued warrants to purchase shares of the Company’s common stock totaling 122.4 million at June 30, 2021. During the six months ended June 30, 2021, as a result of the anti-dilution provisions of outstanding warrants, the exercise prices of certain warrants decreased and they became exercisable into an additional 117.8 million shares of the Company’s common stock. Certain of these warrants were issued in connection with the issuances of the debentures. Debentures are more fully discussed in Note 7.

 

Included in the warrants outstanding at June 30, 2021, were warrants issued in connection with the debentures issued in March 2017. The Company issued these warrants to purchase shares of the Company’s common stock to several accredited investors (the “March Warrants”). At June 30, 2021, these warrants were exercisable into an aggregate of approximately 108.9 million shares of the Company’s common stock. The March Warrants were issued to the investors in three tranches, Series A Warrants, Series B Warrants and Series C Warrants. At June 30, 2021, the Series A Warrants were exercisable for 40.8 million shares of the Company’s common stock. They were exercisable upon issuance and have a term of exercise equal to five years. At June 30, 2021, the Series B Warrants were exercisable for 26.1 million shares of the Company’s common stock and are exercisable until March 31, 2022. At June 30, 2021, the Series C Warrants were exercisable for 42.0 million shares of the Company’s common stock and have a term of five years provided such warrants shall only vest if, when and to the extent that the holders exercise the Series B Warrants. At June 30, 2021, the Series A, Series B and Series C Warrants each have an exercise price of $0.4407 per share, which reflects adjustments pursuant to their terms. The March Warrants are subject to “full ratchet” and other customary anti-dilution protections. During the three and six months ended June 30, 2021, reductions in the exercise prices of the March Warrants have given rise to deemed dividends as more fully discussed in Notes 1, 3 and 10.

 

The number of warrants issued and outstanding as well as the exercise prices of the warrants reflected in the table below have been adjusted to reflect the full ratchet and other dilutive and down round provisions pursuant to the warrant agreements. As a result of the full ratchet provisions of the majority of the outstanding warrants (subject to a floor in some cases), subsequent issuances of the Company’s common stock or common stock equivalents at prices below the then current exercise prices of the warrants have resulted in increases in the number of shares issuable pursuant to the warrants and decreases in the exercise prices of the warrants.

 

26

 

 

The following summarizes the information related to the number of shares of common stock issuable under outstanding warrants during the six months ended June 30, 2021:

 

  

Number of Shares of Common Stock Issuable for

Warrants

  

Weighted

average exercise price

 
Balance at December 31, 2020   4,571,165   $19.99 

Increase in number of shares of common stock issuable under warrants during the period as a result of down round provisions

   117,824,467      
Balance at June 30, 2021   122,295,632   $0.7465 

 

See above and Notes 1, 3, 10, 11 and 16 for a discussion of the dilutive effect on the Company’s common stock as a result of the outstanding warrants.

 

Note 12 – Supplemental Disclosure of Cash Flow Information

 

   2021   2020 
   Six Months Ended June 30, 
   2021   2020 
Cash paid for interest  $-   $9,455 
Cash paid for income taxes  $281,025   $- 
           
Non-cash investing and financing activities:          
Preferred stock of VisualMED received from the sale of HTS and AMSG  $8,500,000   $- 
Net liabilities of HTS and AMSG transferred to VisualMED   2,227,152    - 
Series I-2 Preferred Stock converted into common stock   -    25,000