UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark one)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the quarterly period ended
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:
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
(IRS Employer Identification No.) | |
| (Address of principal executive offices) | (Zip Code) |
(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.
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).
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 ☐ |
| 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 ☐
As of November 6, 2023, the registrant had shares of its Common Stock, $0.0001 par value, outstanding.
RENNOVA HEALTH, INC. AND SUBSIDIARIES
FORM 10-Q
September 30, 2023
TABLE OF CONTENTS
| 2 |
RENNOVA HEALTH, INC.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
CONDENSED CONSOLIDATED BALANCE SHEETS
| September 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| (unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Note receivable / receivable from related party | ||||||||
| Inventory | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Income tax refunds receivable | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Intangible asset | ||||||||
| Investment | ||||||||
| Deposits | ||||||||
| Right-of-use assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| Current liabilities: | ||||||||
| Accounts
payable (includes related party amounts of $ | $ | $ | ||||||
| Accrued expenses | ||||||||
| Income taxes payable | ||||||||
| Current portion of notes payable | ||||||||
| Current portion of loan payable, related party | ||||||||
| Current portion of debentures | ||||||||
| Current portion of right-of-use operating lease obligations | ||||||||
| Current portion of finance lease obligation | ||||||||
| Derivative liability | ||||||||
| Current liabilities of discontinued operations | ||||||||
| Total current liabilities | ||||||||
| Right-of-use operating lease obligations, net of current portion | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies | ||||||||
| Stockholders’ deficit: | ||||||||
| Series H preferred stock, $ par value, $ stated value per share, shares authorized, shares issued and outstanding | ||||||||
| Series L preferred stock, $ par value, $ stated value per share, shares authorized, shares issued and outstanding | ||||||||
| Series M preferred stock, $ par value, $ stated value per share, shares authorized, shares issued and outstanding | ||||||||
| Series N preferred stock, $ par value, $ stated value per share, shares authorized, and shares issued and outstanding, respectively | ||||||||
| Series O preferred stock, $ par value, $ stated value per share, shares authorized, and shares issued and outstanding, respectively | ||||||||
| Series P preferred stock, $ par value, $ stated value per share, shares authorized, shares issued and outstanding | ||||||||
| Common stock, $ par value, shares authorized, and shares issued and outstanding, respectively | ||||||||
| Additional paid-in-capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total Rennova’s stockholders’ deficit | ( | ) | ( | ) | ||||
| Noncontrolling interest | ( | ) | ||||||
| Total stockholders’ deficit | ( | ) | ( | ) | ||||
| Total liabilities and stockholders’ deficit | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 3 |
RENNOVA HEALTH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Net revenues | $ | $ | $ | $ | ||||||||||||
| Operating expenses: | ||||||||||||||||
| Direct costs of revenues | ||||||||||||||||
| General and administrative expenses | ||||||||||||||||
| Depreciation and amortization | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Income (loss) from continuing operations before other income (expense), income taxes and net loss attributable to noncontrolling interest | ( | ) | ( | ) | ( | ) | ||||||||||
| Other income (expense): | ||||||||||||||||
| Other income, net | ||||||||||||||||
| Gain from forgiveness of debt | ||||||||||||||||
| Gain (loss) from legal settlements, net | ( | ) | ||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total other income (expense), net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income (loss) from continuing operations before income taxes, including noncontrolling interest | ( | ) | ( | ) | ( | ) | ||||||||||
| Benefit (provision) for income taxes | ( | ) | ||||||||||||||
| Net income (loss) from continuing operations, including noncontrolling interest | ( | ) | ( | ) | ( | ) | ||||||||||
| Net loss from discontinued operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net income (loss), including noncontrolling interest | ( | ) | ( | ) | ( | ) | ||||||||||
| Net loss attributable to noncontrolling interest | ||||||||||||||||
| Net income (loss) attributable to Rennova | ( | ) | ( | ) | ( | ) | ||||||||||
| Deemed dividends | ( | ) | ||||||||||||||
| Net income (loss) available to common stockholders | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||
| Net income (loss) per share of common stock available to common stockholders - basic: | ||||||||||||||||
| Continuing operations | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||
| Discontinued operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total basic | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||
| Net income (loss) per share of common stock available to common stockholders - diluted: | ||||||||||||||||
| Continuing operations | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||
| Discontinued operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total diluted | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||
| Weighted average number of shares of common stock outstanding during the period | ||||||||||||||||
| Basic: | ||||||||||||||||
| Diluted: | ||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 4 |
RENNOVA HEALTH, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIT
For Each of the Quarters in the Nine-Month Period Ended September 30, 2023
(unaudited)
| Preferred Stock | Common Stock | Additional paid-in | Accumulated | Rennova Stockholders’ | Non-controlling | Total Stockholders’ | ||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | capital | Deficit | Deficit | Interest | Deficit | ||||||||||||||||||||||||||||
| Balance at December 31, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | |||||||||||||||||||||||
| Conversion of Series N Preferred Stock into common stock | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Conversion of Series O Preferred Stock into common stock | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Net income | - | - | ||||||||||||||||||||||||||||||||||
| Balance at March 31, 2023 | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Sale of noncontrolling interest | - | - | ||||||||||||||||||||||||||||||||||
| Net income | - | - | ( | ) | ||||||||||||||||||||||||||||||||
| Balance at June 30, 2023 | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Conversions of Series N Preferred Stock into common stock | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Conversion of Series O Preferred Stock into common stock | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Balance at September 30, 2023 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 5 |
RENNOVA HEALTH, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIT
For Each of the Quarters in the Nine-Month Period Ended September 30, 2022
(unaudited)
| Preferred Stock | Common Stock | Additional paid-in- | Accumulated | Total Stockholders’ | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | capital | Deficit | Deficit | ||||||||||||||||||||||
| Balance at December 31, 2021 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||
| Conversion of Series N Preferred Stock into common stock | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
| Issuance of Series P Preferred Stock | - | |||||||||||||||||||||||||||
| Deemed dividends from issuance of Series P Preferred Stock | - | - | ( | ) | ||||||||||||||||||||||||
| Payment of cash in lieu of fractional shares | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||
| Deemed dividends from triggers of down round provisions | - | - | ( | ) | ||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance at March 31, 2022 | ( | ) | ( | ) | ||||||||||||||||||||||||
| Conversion of Series N Preferred Stock into common stock | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
| Conversion of Series O Preferred Stock into common stock | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
| Issuance of Series P Preferred Stock | - | |||||||||||||||||||||||||||
| Deemed dividends from issuance of Series P Preferred Stock | - | - | ( | ) | ||||||||||||||||||||||||
| Deemed dividends from triggers of down round provisions | - | - | ( | ) | ||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance at June 30, 2022 | ( | ) | ( | ) | ||||||||||||||||||||||||
| Conversion of Series F Preferred Stock into common stock | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
| Conversion of Series N Preferred Stock into common stock | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
| Conversion of Series O Preferred Stock into common stock | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance at September 30, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 6 |
RENNOVA HEALTH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(unaudited)
| Nine Months Ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income (loss) from continuing operations, including noncontrolling interest | $ | $ | ( | ) | ||||
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operations: | ||||||||
| Depreciation and amortization | ||||||||
| Non-cash interest income | ( | ) | ( | ) | ||||
| Loss from disposition of property and equipment | ||||||||
| Net (gain) loss from legal settlements | ( | ) | ||||||
| Gain from forgiveness of debt | ( | ) | ( | ) | ||||
| (Income) loss from federal government provider relief funds | ( | ) | ||||||
| Loss from discontinued operations | ( | ) | ( | ) | ||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Inventory | ( | ) | ||||||
| Prepaid expenses and other current assets | ||||||||
| Security deposits | ( | ) | ( | ) | ||||
| Change in right-of-use assets | ||||||||
| Accounts payable | ||||||||
| Accrued expenses | ( | ) | ||||||
| Income taxes payable | ||||||||
| Change in right-of-use operating lease obligations | ( | ) | ( | ) | ||||
| Net cash provided by (used in) operating activities of continuing operations | ( | ) | ||||||
| Net cash provided by (used in) operating activities of discontinued operations | ( | ) | ||||||
| Net cash provided by (used in) operating activities | ( | ) | ||||||
| Cash flows from investing activities: | ||||||||
| Note receivable / receivable from related party | ( | ) | ( | ) | ||||
| Capital expenditures | ( | ) | ( | ) | ||||
| Net cash used in investing activities of continuing operations | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from issuance of related party loan payable | ||||||||
| Payments of related party loan payable | ( | ) | ||||||
| Payments of debentures | ( | ) | ||||||
| Payments of notes payable | ( | ) | ( | ) | ||||
| Receivables paid under accounts receivable sales agreements | ( | ) | ||||||
| Proceeds from issuances of preferred stock | ||||||||
| Proceeds from federal government provider relief funds | ||||||||
| Cash paid for fractional shares in connection with reverse stock split | ( | ) | ||||||
| Net cash (used in) provided by financing activities of continuing operations | ( | ) | ||||||
| Net change in cash | ( | ) | ( | ) | ||||
| Cash at beginning of period | ||||||||
| Cash at end of period | $ | $ | ||||||
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 Three and Nine Months Ended September 30, 2023 and 2022
(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”, “its” 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 and an operating rural health clinic in Kentucky. In addition, the Company owns a subsidiary providing services in the behavioral health sector on the campus of its hospital in Oneida, Tennessee. The Company’s operations consist of only one segment.
Scott County Community Hospital (d/b/a Big South Fork Medical Center)
On
January 13, 2017, we acquired certain assets related to Scott County Community Hospital, based in Oneida, Tennessee (the “Oneida
Assets”). The Oneida Assets include a
CarePlus Clinic
On March 5, 2019, we acquired certain assets related to an outpatient clinic located in Williamsburg, Kentucky, known as CarePlus Clinic. The clinic and its associated assets, which were acquired from CarePlus Rural Health Clinic, LLC, offers compassionate care in a modern, patient-friendly facility. The CarePlus Clinic is located 32 miles northwest of our Big South Fork Medical Center.
Myrtle Recovery Centers, Inc.
In the second quarter of 2022, the Company formed a subsidiary, Myrtle Recovery Centers, Inc. (“Myrtle”), to pursue opportunities in the behavioral health sector, initially in our core, rural markets. We are leveraging our existing physical locations and corporate and regional infrastructure to offer behavioral health services, including substance abuse treatment. Services are provided on either an inpatient, residential basis or an outpatient basis.
On August 10, 2023, Myrtle was granted a license by the Department of Mental Health and Substance Abuse Services of Tennessee to operate an alcohol and drug treatment facility in Oneida Tennessee. The facility, which is located at Rennova’s Big South Fork Medical Center campus, commenced operations and began accepting patients on August 14, 2023. The facility offers alcohol and drug residential detoxification and residential rehabilitation treatment services for up to 30 patients. Myrtle began offering outpatient opiate treatment services at its Oneida facility on November 1, 2023 as more fully discussed in Note 15.
On
April 11, 2023, Myrtle sold shares of its common stock equivalent to a
Jamestown Regional Medical Center
On
June 1, 2018, we acquired from Community Health Systems, Inc. certain assets related to an acute care hospital located in Jamestown,
Tennessee, referred to as Jamestown Regional Medical Center, for a purchase price of $
The Company suspended operations at the hospital and physician practice in June 2019, as a result of the termination of the hospital’s Medicare agreement and other factors. The Company is evaluating whether to reopen the facility as an acute care hospital or as another type of healthcare facility. Jamestown is located 38 miles west of Big South Fork Medical Center.
| 8 |
Basis of Presentation
The 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, 2022. In the opinion of management, the unaudited condensed consolidated financial statements included herein contain all adjustments necessary to present fairly the Company’s consolidated financial position as of September 30, 2023, and the results of its operations and changes in stockholders’ deficit for the three and nine months ended September 30, 2023 and 2022 and its cash flows for the nine months ended September 30, 2023 and 2022. Such adjustments are of a normal recurring nature. The results of operations for the three and nine months ended September 30, 2023 may not be indicative of results for the year ending December 31, 2023.
Principles of Consolidation
The 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 and majority-owned subsidiaries. All intercompany transactions and balances have been eliminated in the consolidation.
Comprehensive Income (Loss)
During the three and nine months ended September 30, 2023 and 2022, comprehensive income (loss) was equal to the net income (loss) amounts presented in the unaudited condensed consolidated statements of operations.
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 consolidated financial statements, and the reported amounts of net 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, contractual allowances and bad debt reserves, the recoverability of long-lived assets, the valuation allowance relating to the Company’s deferred tax assets, the valuations of investments, equity and derivative instruments, deemed dividends, litigation and related reserves, among others. Actual results could differ from those estimates and would impact future results of operations and cash flows.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation.
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.
Revenue Recognition
We recognize revenue in accordance with Accounting Standard Codification (“ASC”), “Revenue from Contracts with Customers (Topic 606),” including subsequently issued updates. Under the accounting guidance, our revenues are presented net of estimated contractual allowances and estimated implicit price concessions. We also do not present “allowances for doubtful accounts” on our balance sheets.
| 9 |
Our revenues 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 averaging approximately three days, and revenues are recognized based on charges incurred. Our performance obligations for outpatient services, including emergency room-related services, are generally satisfied over a period of less than one day. The contractual relationships with patients, in most cases, also involve a third-party payer (Medicare, Medicaid, managed care health plans and commercial insurance companies, including plans offered through the health insurance exchanges) and the transaction prices for the services provided are dependent upon the terms provided by (Medicare and Medicaid) or negotiated with (managed care health plans and commercial insurance companies) the third-party payers. The payment arrangements with third-party payers for the services we provide to the related patients typically specify payments at amounts less than our standard charges. Medicare, because of the Big South Fork Medical Center’s designation as a Critical Access Hospital, generally pays for inpatient and outpatient services at rates related to the hospital’s costs. 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. 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).
As of September 30, 2023, $
The collection of outstanding receivables for Medicare, Medicaid, managed care payers, other third-party payers and patients is our primary source of operating 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.
Contractual Allowances and Doubtful Accounts Policy
Accounts receivable are reported at realizable value, net of estimated 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 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.
During
the three months ended September 30, 2023 and 2022, estimated contractual allowances of $
During
the nine months ended September 30, 2023 and 2022, estimated contractual allowances of $
We continue to review the provisions for implicit price concessions and contractual allowances. See Note 4 – Accounts Receivable.
| 10 |
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”) 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 either based on 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 nine months ended September 30, 2023 and 2022.
Leases in Accordance with ASU No. 2016-02
We account for leases in accordance with Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842), 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 carry forward 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 operating 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. For finance leases, we record the present value of the lease payments as finance lease obligations. We do not separate lease and non-lease components of contracts. Our finance and operating leases are more fully discussed in Note 8.
Fair Value Measurements
In accordance with ASC 820, “Fair Value Measurements and Disclosures,” the Company applies fair value accounting for all financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis. Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities which are required to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability, such as risks inherent in valuation techniques, transfer restrictions and credit risk. Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:
| ● | Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities that we have the ability to access at the measurement date. | |
| ● | Level 2 applies to assets or liabilities for which there are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly, such as quoted prices for similar assets or liabilities in active markets; or quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets). | |
| ● | Level 3 applies to assets or liabilities for which fair value is derived from valuation techniques in which one or more significant inputs are unobservable, including our own assumptions. |
On September 30, 2023 and December 31, 2022, we applied the Level 3 fair value hierarchy in determining the fair value of InnovaQor, Inc.’s Series B-1 Non-Voting Convertible Preferred Stock (the “InnovaQor Series B-1 Preferred Stock”), which is reflected on our condensed consolidated balance sheets as an investment. Also, on September 30, 2023 and December 31, 2022, we applied the Level 3 fair value hierarchy in determining the fair value of a derivative liability for an embedded conversion option of an outstanding convertible debenture. Our determination of fair value is more fully discussed in Note 9.
Derivative Financial Instruments and Fair Value, Including ASU 2017-11 and ASU 2021-04
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 and diluted 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).
| 11 |
In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40), Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options. The FASB issued this update to clarify and reduce diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified after modification or exchange. The guidance clarifies whether an issuer should account for a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange as (1) an adjustment to equity (that is, deemed dividends) and, if so, the related earnings per share (EPS) effects, if any, or (2) an expense and, if so, the manner and pattern of recognition. We adopted this new accounting guidance on January 1, 2022. Under the new guidance, the FASB decided not to include convertible debt instruments in the guidance because ASU No 2016-01, Financial Instruments – Overall (Subtopic 825-10) requires that an entity capture the impact of changes in down round provision features of convertible debt within the fair value of the instruments. During the three and nine months ended September 30, 2023 and 2022, there were no changes in the fair values of the Company’s convertible debentures with down round provision features as these debentures issued in 2018 have floors of $ per share and were not in-the-money during these periods. Debentures are more fully discussed in Note 6.
There
were
In
addition, we recorded deemed dividends of approximately $
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.
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 (or reducing a tax asset) that would reduce net assets. The Company did not have an unrecognized tax benefit at September 30, 2023 and December 31, 2022.
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 preferred stock, convertible debt, stock options and warrants outstanding for the period, with options and warrants determined using the treasury stock method. For purposes of the diluted earnings (loss) per share calculation, common stock equivalents are excluded from the calculation when their effect would be anti-dilutive. See Note 3 for the computation of earnings (loss) per share for the three and nine months ended September 30, 2023 and 2022.
| 12 |
Reverse Stock Split
On
March 15, 2022, the Company effected a
Amendment to Certificate of Incorporation
Effective November 5, 2021, the Company filed an Amendment to its Certificate of Incorporation, as amended, with the Secretary of State of the State of Delaware to provide that the number of authorized shares of the Company’s common stock or preferred stock may be increased or decreased (but not below the number of shares then outstanding) by the affirmative vote of the holders of a majority in voting power of the stock of the Company entitled to vote generally in the election of directors, irrespective of the provisions of Section 242(b)(2) of the General Corporation Law of the State of Delaware (or any successor provision thereto), voting together as a single class, without a separate vote of the holders of the class or classes the number of authorized shares of which are being increased or decreased unless a vote by any holders of one or more series of preferred stock is required by the express terms of any series of preferred stock pursuant to the terms thereof.
Note 2 – Liquidity and Financial Condition
Going Concern
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, Presentation of Financial Statements-Going Concern (Subtopic 205-40) (“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.
At
September 30, 2023, the Company had a working capital deficit and a stockholders’ deficit of $
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. The Company’s current financial condition may make it difficult to attract and maintain adequate expertise in its management team to successfully operate its healthcare facilities.
There can be no assurance that the Company will be able to achieve its business plan, raise any additional capital or secure the additional financing necessary to implement its current operating plan. The ability of the Company to continue as a going concern is dependent upon its ability to raise adequate capital to fund its operations and repay its outstanding debt and other past due obligations, fully align its operating costs, increase its net revenues, and maintain 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.
HHS Provider Relief Funds
The
Company received HHS Provider Relief Funds, which were provided to eligible healthcare providers out of the $
| 13 |
As
of September 30, 2023, the Company’s estimate of the amount for which it is reasonably assured of meeting the underlying terms
and conditions of the grants was based on, among other things, the various notices issued by HHS on September 19, 2020, October 22, 2020,
and January 15, 2021 and the Company’s results of operations during the three and nine months ended September 30, 2023 and the
years ended December 31, 2022, 2021 and 2020. The Company believes that it was appropriate to recognize a net of $
The Company has been served with a qui tam complaint with regards to the use of monies received from HHS Provider Relief Funds, as more fully discussed in Note 12.
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Numerator | ||||||||||||||||
| Net income (loss) from continuing operations | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||
| Deemed dividends | ( | ) | ||||||||||||||
| Net income (loss) available to common stockholders, continuing operations | ( | ) | ( | ) | ( | ) | ||||||||||
| Net loss from discontinued operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net income (loss) available to common stockholders | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||
| Denominator | ||||||||||||||||
| Weighted average number of shares of common stock outstanding during the period - basic | ||||||||||||||||
| Warrants | ||||||||||||||||
| Convertible preferred stock | ||||||||||||||||
| Weighted average number of shares of common stock outstanding during the period - diluted | ||||||||||||||||
| Net income (loss) per share of common stock available to common stockholders - basic: | ||||||||||||||||
| Continuing operations | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||
| Discontinued operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total basic | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||
| Net income (loss) per share of common stock available to common stockholders - diluted: | ||||||||||||||||
| Continuing operations | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||
| Discontinued operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total diluted | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||
| 14 |
For the three months ended September 30, 2023 and 2022, the following potential common stock equivalents were excluded from the calculation of diluted loss per share as their effect was anti-dilutive:
| Three Months September 30, | ||||||||
| 2023 | 2022 | |||||||
| Warrants | ||||||||
| Convertible preferred stock | ||||||||
| Convertible debentures | ||||||||
| Stock options | ||||||||
For the nine months ended September 30, 2023 and 2022, the following potential common stock equivalents were excluded from the calculation of diluted loss per share as their effect was anti-dilutive:
| Nine Months September 30, | ||||||||
| 2023 | 2022 | |||||||
| Warrants | ||||||||
| Convertible preferred stock | ||||||||
| Convertible debentures | ||||||||
| Stock options | ||||||||
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 floors 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 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 6, 9 and 10). These provisions have resulted in significant dilution of the Company’s common stock.
As a result of the Voting Agreement and Irrevocable Proxy (the “Voting Agreement”) discussed in Note 10 and the November 5, 2021 Amendment to the Company’s Certificate of Incorporation, as amended, to provide that the number of authorized shares of the Company’s common stock or preferred stock may be increased or decreased (but not below the number of shares then outstanding) by the affirmative vote of the holders of a majority in voting power of the stock of the Company, which is more fully discussed in Note 1, 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 outstanding rights to acquire potentially dilutive common shares.
As a result of these down round provisions, the potential common stock and common stock equivalents totaled at November 6, 2023. See Note 10 for a discussion of the number of shares of the Company’s authorized common and preferred stock.
Note 4 – Accounts Receivable
Accounts receivable at September 30, 2023 (unaudited) and December 31, 2022 consisted of the following:
| September 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Accounts receivable | $ | $ | ||||||
| Less: | ||||||||
| Allowance for contractual obligations | ( | ) | ( | ) | ||||
| Allowance for doubtful accounts | ( | ) | ( | ) | ||||
| Accounts receivable, net | $ | $ | ||||||
| 15 |
Note 5 – Accrued Expenses
Accrued expenses at September 30, 2023 (unaudited) and December 31, 2022 consisted of the following:
| September 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Accrued payroll and related liabilities | $ | $ | ||||||
| HHS Provider Relief Funds | ||||||||
| Accrued interest | ||||||||
| Accrued legal expenses and settlements | ||||||||
| Medicare cost report settlement reserves | ||||||||
| Other accrued expenses | ||||||||
| Accrued expenses | $ | $ | ||||||
Accrued
payroll and related liabilities included approximately $
As
of December 31, 2022, the Company had Medicare cost reports settlement reserves of $
Note 6 – Debt
At September 30, 2023 (unaudited) and December 31, 2022, debt consisted of the following:
September 30, 2023 | December 31, 2022 | |||||||
| Notes payable- third parties | $ | $ | ||||||
| Loan payable – related party | ||||||||
| Debentures | ||||||||
| Total debt | ||||||||
| Less current portion of debt | ( | ) | ( | ) | ||||
| Total debt, net of current portion | $ | $ | ||||||
At September 30, 2023 (unaudited) and December 31, 2022, notes payable with third parties consisted of the following:
Notes Payable – Third Parties
September 30, 2023 | December 31, 2022 | |||||||
| Notes
payable to CommerceNet and Jay Tenenbaum in the original principal amount of $ | $ | $ | ||||||
| Note
payable to Anthony O’Killough dated September 27, 2019 in the original principal amount of $ | - | |||||||
| Notes
payable to Western Healthcare, LLC dated August 10, 2021, in the aggregate principal amount of $ | 1,026,758 | |||||||
| Less current portion | ( | ) | ( | ) | ||||
| Notes payable - third parties, net of current portion | $ | $ | ||||||
| 16 |
On
December 7, 2016, the holders of the Tegal Notes filed suit against the Company seeking payment for the amounts due under the notes and
accrued interest. On April 23, 2018, the holders of the Tegal Notes received a judgment against the Company in the amount of $
On
September 27, 2019, the Company issued a promissory note payable to Anthony O’Killough in the principal amount of $
On
August 10, 2021, the Company entered into two notes payable to Western Healthcare, LLC in the aggregate principal amount of $
Loan Payable – Related Party
At September 30, 2023 (unaudited) and December 31, 2022, loan payable - related party consisted of the following:
September 30, 2023 | December 31, 2022 | |||||||
| Loan payable to Christopher Diamantis | $ | $ | ||||||
| Less current portion of loan payable, related party | ( | ) | ( | ) | ||||
| Total loan payable, related party, net of current portion | $ | $ | ||||||
Mr.
Diamantis was a member of the Company’s Board of Directors until his resignation on February 26, 2020. During the nine months ended
September 30, 2023 and 2022, Mr. Diamantis loaned the Company $
During
the three months ended September 30, 2023 and 2022, the Company incurred interest expense of $0 and $15,000, respectively, on the loans
from Mr. Diamantis. During the nine months ended September 30, 2023 and 2022, the Company incurred interest expense on the loans from
Mr. Diamantis of $
| 17 |
Debentures
The carrying amount of all outstanding debentures as of September 30, 2023 (unaudited) and December 31, 2022 was as follows:
September 30, 2023 | December 31, 2022 | |||||||
| March 2017 Debenture | $ | $ | ||||||
| 2018 Debentures | ||||||||
| October 2022 Debentures | ||||||||
| Less current portion | ( | ) | ( | ) | ||||
| Debentures, net of current portion | $ | $ | ||||||
March 2017 Debenture
In
March 2017, the Company issued a debenture due in March 2019 (the “March 2017 Debenture”) with a principal balance of
$
On
September 30, 2023, the March 2017 Debenture is convertible into shares of the Company’s common stock, at a conversion price, which
has been adjusted pursuant to its terms, of $
The
March 2017 Debenture was issued with warrants (the “March Warrants”), which are exercisable into shares of the
Company’s common stock until March 21, 2024. During the nine months ended September 30, 2022, the Company recorded $
2018 Debentures
During
2018, the Company closed various offerings of debentures (the “2018 Debentures”) with principal balances aggregating
$
See Notes 3 and 10 for a discussion of the dilutive effect of the outstanding convertible debentures and warrants as of September 30, 2023.
October 2022 Debentures
On
October 12, 2022, the Company issued non-convertible debentures in the amount of $
| 18 |
Note 7 – Related Party Transactions
In addition to the transactions discussed in Notes 6 and 10, the Company had the following related party activity during the three and nine months ended September 30, 2023 and 2022:
Alcimede Limited
Pursuant
to a consulting agreement, Alcimede Limited billed $
InnovaQor, Inc.
In
addition to the investment in InnovaQor’s Series B-1 Preferred Stock (see Notes 1 and 9), at September 30, 2023 and December 31,
2022, the Company had a note receivable / related party receivable resulting from working capital advances to InnovaQor, Inc. (“InnovaQor”)
of approximately $
As
of July 1, 2022, the Company had an outstanding related party receivable from InnovaQor of $
During
the three months ended September 30, 2023 and 2022, the Company contracted with InnovaQor to provide it with ongoing health information
technology-related services totaling approximately $
The terms of the foregoing activities, and those discussed in Notes 6 and 10, are not necessarily indicative of those that would have been agreed to with unrelated parties for similar transactions.
Note 8 – Finance and Operating Lease Obligations
We lease property and equipment under finance and operating leases. For operating 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.
| 19 |
The following table presents our lease-related assets and liabilities at September 30, 2023 (unaudited) and December 31, 2022:
| Balance Sheet Classification | September 30, 2023 | December 31, 2022 | ||||||||
| Assets: | ||||||||||
| Operating leases | Right-of-use operating lease assets | $ | $ | |||||||
| Finance lease | Property and equipment, net | - | ||||||||
| Total lease assets | $ | $ | ||||||||
| Liabilities: | ||||||||||
| Current: | ||||||||||
| Operating leases | Right-of-use operating lease obligations | $ | $ | |||||||
| Finance lease | Finance lease obligation | |||||||||
| Long-term | Right-of-use operating lease obligations | |||||||||
| Total lease liabilities | $ | $ | ||||||||
| Weighted average remaining term: | ||||||||||
| Operating leases | ||||||||||
| Finance lease (1) | ||||||||||
| Weighted average discount rate: | ||||||||||
| Operating leases | % | % | ||||||||
| Finance lease | % | % | ||||||||
The following table presents certain information related to lease expense for finance and operating leases for the three and nine months ended September 30, 2023 and 2022 (unaudited):
| Three
Months Ended September 30, 2023 | Three
Months Ended September 30, 2022 | Nine
Months Ended September 30, 2023 | Nine
Months Ended September 30, 2022 | |||||||||||||
| Finance lease expense: | ||||||||||||||||
| Depreciation/amortization of leased assets | $ | $ | $ | $ | ||||||||||||
| Interest on lease liabilities | ||||||||||||||||
| Operating leases: | ||||||||||||||||
| Short-term lease expense (2) | ||||||||||||||||
| Total lease expense | $ | $ | $ | $ | ||||||||||||
Other Information
The following table presents supplemental cash flow information for the nine months ended September 30, 2023 and 2022 (unaudited):
Nine
Months September
30, | Nine
Months September
30, | |||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||
| Operating cash flows for operating leases | $ | $ | ||||||
| Operating cash flows for finance lease | $ | $ | ||||||
| Financing cash flows for finance lease payments | $ | $ | ||||||
| (1) | |
| (2) |
| 20 |
Aggregate future minimum lease payments under right-of-use operating and finance leases are as follows:
| Right-of-Use Operating Leases | Finance Lease | |||||||
| Twelve months ending September 30: | ||||||||
| 2024 | $ | $ | ||||||
| 2025 | ||||||||
| 2026 | ||||||||
| 2027 | ||||||||
| 2028 | ||||||||
| Thereafter | ||||||||
| Total | ||||||||
| Less interest | ( | ) | ( | ) | ||||
| Present value of minimum lease payments | ||||||||
| Less current portion of lease obligations | ( | ) | ( | ) | ||||
| Lease obligations, net of current portion | $ | $ | ||||||
Note 9 – Fair Value, Derivative Financial Instruments and Deemed Dividends
Fair Value Measurements
The estimated fair value of financial instruments was determined by the Company using available market information and valuation methodologies considered to be appropriate. The fair value measurements accounting guidance is more fully discussed in Note 1. At September 30, 2023 and December 31, 2022, the carrying value of the Company’s accounts receivable, note receivable / receivable from related party, accounts payable and accrued expenses approximated their fair values due to their short-term nature.
The following table sets forth the financial assets and liabilities carried at fair value measured on a recurring basis as of September 30, 2023 (unaudited) and December 31, 2022:
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| As of September 30, 2023: | ||||||||||||||||
| Asset - InnovaQor Series B-1 Preferred Stock | $ | $ | $ | $ | ||||||||||||
| Liability - Embedded conversion option of debenture | ||||||||||||||||
| As of December 31, 2022: | ||||||||||||||||
| Asset - InnovaQor Series B-1 Preferred Stock | $ | $ | $ | $ | ||||||||||||
| Liability - Embedded conversion option of debenture | ||||||||||||||||
InnovaQor Series B-1 Preferred Stock
During
2021, the Company sold several subsidiaries to InnovaQor. As consideration for the sale, the Company received shares of InnovaQor’s
Series B-1 Preferred Stock of which
In
reviewing the fair value of the InnovaQor Series B-1 Preferred Stock, the Company believes that the value recorded at September 30, 2023
and December 31, 2022 of $
| 21 |
Embedded Conversion Option
The
Company utilized the following method to value its derivative liability as of September 30, 2023 and December 31, 2022 for an embedded
conversion option related to an outstanding convertible debenture valued at $
Deemed Dividends
During
the three months ended September 30, 2023 and 2022 and the nine months ended September 30, 2023, there were no triggers of down round
provisions of outstanding warrants and, therefore, no associated deemed dividends were recorded in the periods. During the nine months
ended September 30, 2022, the conversions of preferred stock triggered a reduction in the exercise prices of warrants containing down
round provisions. In accordance with U.S. GAAP, the incremental fair value of the warrants, as a result of the decreases in the exercise
prices, was measured using Black Scholes. The following assumptions were utilized in the Black Scholes valuation models for the nine
months ended September 30, 2022: risk free rates ranging from % to %, volatility ranging from % to % and terms ranging
from to years. Based on the Black Scholes valuations, the incremental value of modifications to warrants as a result of the
down round provisions of $
In
addition, deemed dividends of $
Note 10 – Stockholders’ Deficit
Authorized Capital
The Company has authorized shares of Common Stock at a par value of $ per share and authorized shares of Preferred Stock at a par value of $ per share.
Preferred Stock
As of September 30, 2023, the Company had outstanding shares of preferred stock consisting of shares of its Series H Convertible Preferred Stock (the “Series H Preferred Stock”), shares of its Series L Convertible Preferred Stock (the “Series L Preferred Stock”), shares of its Series M Convertible Redeemable Preferred Stock (the “Series M Preferred Stock”), shares of its Series N Convertible Redeemable Preferred Stock (the “Series N Preferred Stock”), shares of its Series O Convertible Redeemable Preferred Stock (the “Series O Preferred Stock”) and shares of its Series P Preferred Stock. The Company’s outstanding shares of preferred stock do not contain mandatory redemption or other features that would require them to be presented on the balance sheet outside of equity and, therefore, they qualify 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 or derivative liabilities have been recorded in connection with the preferred stock.
Series H Preferred Stock
Each
of the shares of the Series H Preferred Stock has a stated value of $ per share and is convertible into shares of the Company’s
common stock at a conversion price of
Series L Preferred Stock
The
Series L Preferred Stock is held by Alcimede LLC and has a stated value of $ per share. Mr. Lagan is the sole manager of Alcimede
LLC. 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. On September 30, 2023, the Series L Preferred Stock was convertible
into approximately billion shares of the Company’s common stock at a conversion price of $
| 22 |
Series M Preferred Stock
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 him totaling $
The
terms of the Series M Preferred Stock include: (i) each share of the Series M Preferred Stock is convertible into shares of the Company’s
common stock at a conversion price equal to
During
the year ended December 31, 2021, Mr. Diamantis converted a total of shares of his Series M Preferred Stock with a stated value
of $
Series N Preferred Stock
The Company’s Board of Directors has designated shares of the shares of authorized preferred stock as the Series N Preferred Stock. Each share of Series N Preferred Stock has a stated value of $. On August 31, 2020, the Company and its debenture holders exchanged, under the terms of Exchange, Redemption and Forbearance Agreements, certain outstanding debentures and all of the then outstanding shares of the Company’s Series I-1 Convertible Preferred Stock and Series I-2 Convertible Preferred Stock for shares of the Company’s Series N Preferred Stock.
The
terms of the Series N Preferred Stock include: (i) each share of the Series N 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 N Preferred Stock, plus any accrued declared and unpaid dividends, by the conversion
price; (ii) the conversion price is equal to
| 23 |
During
the three months ended September 30, 2023, the holders converted shares of their Series N Preferred Stock with a stated value
of $
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. On September 7, 2021, the Company entered into a second securities
purchase agreement and on October 28, 2021, the Company entered into a third securities purchase agreement. These agreements were between
the Company and certain existing institutional investors of the Company. Under these agreements, the Company issued shares of its
Series O Preferred Stock and it received $
The
terms of the Series O Preferred Stock include: (i) 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; (ii) the conversion price is equal to
During
the three months ended September 30, 2023, the holders converted shares of their Series O Preferred Stock with a stated value of
$
Series P Preferred Stock
On
November 7, 2021, the Company entered into Exchange and Amendment Agreements (the “November 2021 Exchange Agreements”) with
certain institutional investors in the Company wherein the investors agreed to reduce their holdings of $
On
March 11, 2022, under the terms of a securities purchase agreement dated January 31, 2022, the Company issued to the institutional investors
an additional shares of its Series P Preferred Stock for aggregate proceeds of $
| 24 |
The
terms of the Series P Preferred Stock include: (i) each share of the Series P 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 P Preferred Stock, plus any accrued declared and unpaid dividends, by the conversion
price; (ii) the conversion price is equal to
On September 30, 2023, shares of the Company’s Series P Preferred Stock were outstanding and were convertible into billion shares of the Company’s common stock.
Common Stock
The Company had billion and billion shares of its common stock issued and outstanding at September 30, 2023 and December 31, 2022, respectively. During the nine months ended September 30, 2023, the Company issued billion shares of its common stock upon the conversions of shares of its Series N Preferred Stock and billion shares of its common stock upon conversions of shares of its Series O Preferred Stock. During the nine months ended September 30, 2022, the Company issued billion shares of its common stock upon the conversions of shares of its Series N Preferred Stock and billion shares of its common stock upon the conversions of shares of its Series O Preferred Stock.
The Company has outstanding options, warrants, convertible preferred stock and convertible debentures. Exercise of the outstanding 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, which is more fully discussed in Note 1.
On August 13, 2020, Mr. Diamantis entered into the Voting Agreement with the Company, Mr. Lagan and Alcimede LLC (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 discussed above and the November 5, 2021 Amendment to the Company’s Certificate of Incorporation, as amended, to provide that the number of authorized shares of the Company’s common stock or preferred stock may be increased or decreased (but not below the number of shares then outstanding) by the affirmative vote of the holders of a majority in voting power of the stock of the Company, which is more fully discussed in Note 1, 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 outstanding rights to acquire potentially dilutive common shares.
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 September 30, 2023 and December 31, 2022, the Company had stock options outstanding and exercisable with a weighted average exercise price of $ million per share. At September 30, 2023, the weighted average remaining contractual life was years for options outstanding and exercisable. The intrinsic value of options exercisable at September 30, 2023 and December 31, 2022 was $. As of September 30, 2023 and 2022, there was no remaining compensation expense associated with stock options as all of the outstanding options had fully vested as of December 31, 2019.
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Warrants
The Company, as part of financing transactions, has issued warrants to purchase shares of the Company’s common stock exercisable into a total of billion shares at September 30, 2023.
The following summarizes the information related to warrant activity during the nine months ended September 30, 2023:
Number
of Shares
of Common
Stock Issuable
for Warrants | Weighted average
exercise | |||||||
| Balance at December 31, 2022 | $ | |||||||
| Issuance of warrants | ||||||||
| Expiration of warrants | ( | ) | ( | ) | ||||
| Balance at September 30, 2023 | $ | |||||||
Included
in the warrants outstanding at September 30, 2023 were the March Warrants issued in March 2017 in connection with the March 2017 Debenture.
(The March 2017 Debenture is more fully discussed in Note 6.) The Company issued these warrants to purchase shares of the Company’s
common stock to several accredited investors. On September 30, 2023, the March Warrants were exercisable into an aggregate of approximately
billion 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 September 30, 2023, the Series A Warrants were exercisable for
The number of shares of common stock issuable under outstanding warrants and the exercise prices of the warrants as reflected in the table above 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 down round provisions of the outstanding warrants, 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. See, also, Notes 1 and 3 for a discussion of the dilutive effect on the Company’s common stock as a result of the outstanding warrants.
Deemed Dividends
During the nine months ended September 30, 2022, reductions in the exercise prices of the warrants gave rise to deemed dividends. See Note 9 for the assumptions used in the calculations of deemed dividends. Deemed dividends are also discussed under the heading “Preferred Stock” above and in Notes 1 and 3.
Note 11 – Supplemental Disclosure of Cash Flow Information
| Nine Months Ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Cash paid for interest | $ | $ | ||||||
| Cash paid for income taxes | $ | $ | ||||||
| Non-cash investing and financing activities: | ||||||||
| Series F Preferred Stock converted into common stock | $ | $ | ||||||
| Stated value of Series N Preferred Stock converted into common stock | ||||||||
| Stated value of Series O Preferred Stock converted into common stock | ||||||||
| Deemed dividends from issuances of Series P Preferred Stock | ||||||||
| Deemed dividends from trigger of down round provisions of warrants | ||||||||
| Non-cash interest income | ||||||||
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Note 12 – Commitments and Contingencies
Concentration of Credit Risk
Credit risk with respect to accounts receivable is generally diversified due to the large number of patients at its facilities. The Company does have significant receivable balances with government and other payers. Generally, the Company does not require collateral or other security to support accounts receivables. However, the Company continually monitors and evaluates its client acceptance and collection procedures to minimize potential credit risks associated with its accounts receivable and establishes an allowance for uncollectible accounts and as a consequence, believes that its accounts receivable credit risk exposure beyond such allowance is not material to the financial statements.
The Company maintains its cash balances in high credit quality financial institutions. The Company’s cash balances may, at times, exceed the deposit insurance limits provided by the Federal Deposit Insurance Corp.
Legal Matters
From time to time, the Company may be involved in a variety of claims, lawsuits, investigations and proceedings related to contractual disputes, employment matters, regulatory and compliance matters, intellectual property rights and other litigation arising in the ordinary course of business. The Company operates in a highly regulated industry which may inherently lend itself to legal matters. Management is aware that litigation has associated costs and that results of adverse litigation verdicts could have a material effect on the Company’s financial position or results of operations. The Company’s policy is to expense legal fees and expenses incurred in connection with the legal proceedings in the period in which the expense is incurred. Management, in consultation with legal counsel, has addressed known assertions and predicted unasserted claims below.
Biohealth Medical Laboratory, Inc. and PB Laboratories, LLC (the “Companies”) filed suit against CIGNA Health in 2015 alleging that CIGNA failed to pay claims for laboratory services the Companies provided to patients pursuant to CIGNA - issued and CIGNA - administered plans. In 2016, the U.S. District Court dismissed part of the Companies’ claims for lack of standing. The Companies appealed that decision to the Eleventh Circuit Court of Appeals, which in late 2017 reversed the District Court’s decision and found that the Companies have standing to raise claims arising out of traditional insurance plans, as well as self-funded plans. In July 2019, the Companies and EPIC filed suit against CIGNA Health for failure to pay claims for laboratory services provided. Cigna Health, in turn, sued for alleged improper billing practices. The suit remains ongoing but because the Company did not have the financial resources to see the legal action to conclusion it assigned the benefit, if any, from the suit to Mr. Diamantis for his financial support to the Company and assumption of all costs to carry the case to conclusion. The suit is now expected to go to trial in the first quarter of 2024 if not previously settled.
On
September 27, 2016, a tax warrant was issued against the Company by the Florida Department of Revenue (the “DOR”) for
unpaid 2014 state income taxes in the approximate amount of $
On
December 7, 2016, the holders of the Tegal Notes filed suit against the Company seeking payment for the amounts due under the notes and
accrued interest. On April 23, 2018, the holders of the Tegal Notes received a judgment against the Company in the amount of $
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In
July 2019, CHSPSC, the former owners of Jamestown Regional Medical Center, obtained judgments against the Company of $
On
June 30, 2021, the Company entered into a settlement agreement with the Tennessee Bureau of Workers’ Compensation. Per the terms
of the settlement agreement, the Company was obligated to pay a total of $
A
sealed qui tam lawsuit in the US District Court for the Southern District of Florida against the Company was filed in July
2021. While the majority of the named defendants were dismissed from the lawsuit on June 28, 2023, the allegations against
Rennova Health, Inc., Jellico Medical Center, Inc., and Jamestown TN Medical Center still remain. This lawsuit was unsealed in
November 2022 and Clifford Barron disclosed as the Plaintiff-Relator (whistleblower) who asserted violations of the False Claims
Act. Clifford Barron was an employee of CollabRx, Inc. (a San Francisco based, wholly owned subsidiary of the Company) until early
2018. Following his resignation on January 17, 2018, Clifford Barron sought and received a judgment against the Company for
approximately $
Note 13 – Discontinued Operations
EPIC Reference Labs, Inc. and Other Non-Operating Subsidiaries
During the third quarter of 2020, the Company made a decision to sell EPIC and it made a decision to discontinue other non-operating subsidiaries, and as a result, EPIC’s operations and the other non-operating subsidiaries’ liabilities have been included in discontinued operations for all periods presented. The Company was unable to find a buyer for EPIC and, therefore, it has ceased all efforts to sell EPIC and closed down its operations.
Carrying amounts of major classes of liabilities of EPIC and the other non-operating subsidiaries included as part of discontinued operations in the condensed consolidated balance sheets as of September 30, 2023 (unaudited) and December 31, 2022 consisted of the following:
September 30, 2023 | December 31, 2022 | |||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Current liabilities of discontinued operations | $ | $ | ||||||
Consolidated Loss from Discontinued Operations:
Three Months Ended September 30, 2023 (unaudited) | Three Months Ended September 30, 2022 (unaudited) | Nine Months Ended September 30, 2023 (unaudited) | Nine Months Ended September 30, 2022 (unaudited) | |||||||||||||
| Operating expenses | $ | $ | $ | $ | ||||||||||||
| Other expense | ( | ) | ( | ) | ( | ) | ||||||||||
| Provision for income taxes | ||||||||||||||||
| Loss from discontinued operations | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
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Note 14 – Recent Accounting Pronouncements
In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40). The new guidance provides accounting for convertible instruments and contracts in an entity’s own equity. The FASB issued this Update to address issues identified as a result of the complexity associated with applying U.S. GAAP for certain financial instruments with characteristics of liabilities and equity. The Board focused on amending the guidance on convertible instruments and the guidance on the derivatives scope exception for contracts in an entity’s own equity. This standard will be effective for us for annual periods beginning on January 1, 2024, including interim periods within those fiscal years. Early adoption of this standard is not permitted for us because we have already adopted ASU 2017-11 “Earnings Per Share (Topic 260) Distinguishing Liabilities from Equity (Topic 480) Derivatives and Hedging (Topic 815).” We have not yet determined the impact of adopting this new accounting guidance on our consolidated financial statements.
In June 2022, the FASB issued ASU 2022-03, Fair Value Measurement (Topic 820), Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions. The FASB issued this ASU to: (1) clarify the guidance in Topic 820, Fair Value Measurement, when measuring the fair value of an equity security subject to contractual restrictions that prohibit the sale of an equity security, (2) amend a related illustrative example, and (3) introduce new disclosure requirements for equity securities subject to contractual sale restrictions that are measured at fair value in accordance with Topic 820. The amendments in this ASU do not change the principles of fair value measurement. For public business entities, the amendments are effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. Early adoption is permitted for both interim and annual financial statements that have not yet been issued or made available for issuance. The Company will apply the amendments prospectively with any adjustments from the adoption of the amendments recognized in earnings and disclosed on the date of adoption. We have not yet determined the impact of adopting this new accounting guidance on our consolidated financial statements.
Other recent accounting standards issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the SEC did not or are not believed by management to have a material impact on the Company’s present or future consolidated financial statements.
Note 15 – Subsequent Events
Debentures Amendment and Waiver Agreement
On
October 25, 2023, the Company entered into an Amendment and Waiver Agreement (the “Amendment Agreement”) with the
holders of its March Debenture and 2018 Debentures, which are more fully described in Note 6. As of September 30, 2023, there was
$
Opening of Myrtle Nonresidential Office-Based Opiate Treatment Facility
On November 1, 2023, Myrtle began accepting patients at its recently opened Nonresidential Office-Based Opiate Treatment Facility (“OBOT”). The OBOT is located adjacent to Myrtle’s alcohol and drug treatment facility in Oneida, Tennessee and supplements the existing residential rehabilitation and detoxification services offered at Myrtle, which is more fully discussed in Note 1.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
SPECIAL NOTE CONCERNING FORWARD-LOOKING STATEMENTS
Certain statements made in this Form 10-Q are “forward-looking statements” (within the meaning of the Private Securities Litigation Reform Act of 1995) regarding the plans and objectives of management for future operations. Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. The forward-looking statements included herein are based on current expectations that involve numerous risks and uncertainties. The Company’s plans and objectives are based, in part, on assumptions involving its continued business operations. Assumptions related to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond the control of the Company. Although the Company believes its assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove to be inaccurate and, therefore, there can be no assurance the forward-looking statements included in this report will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by the Company or any other person that the objectives and plans of the Company will be achieved.
The forward-looking statements included in this Form 10-Q and referred to elsewhere are related to future events or our strategies or future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may,” “should,” “believe,” “anticipate,” “future,” “potential,” “estimate,” “expect,” “intend,” “plan,” or the negative of such terms or comparable terminology. All forward-looking statements included in this Form 10-Q are based on information available to us as of the filing date of this report, and the Company assumes no obligation to update any such forward-looking statements, except as required by law. Our actual results could differ materially from the forward-looking statements.
Important factors that might cause our actual results to differ materially from the results contemplated by the forward-looking statements are contained in the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (the “2022 Form 10-K”) and in our subsequent filings with the Securities and Exchange Commission. The following discussion of our results of operations should be read in conjunction with the audited financial statements contained within the 2022 Form 10-K and with our unaudited condensed consolidated financial statements and related notes thereto included elsewhere in this report.
COMPANY OVERVIEW
Our Services
We are a provider of health care services for our patients. We own one operating hospital in Oneida, Tennessee, a hospital located in Jamestown, Tennessee that we plan to reopen, and operate and an operating rural clinic in Kentucky. In addition, the Company owns a subsidiary providing services in the behavioral health sector on the campus of its hospital in Oneida, Tennessee. The Company’s operations consist of only one segment.
Scott County Community Hospital (d/b/a Big South Fork Medical Center)
On January 13, 2017, we acquired certain assets related to Scott County Community Hospital, based in Oneida, Tennessee (the “Oneida Assets”). The Oneida Assets include a 52,000-square foot hospital building and 6,300-square foot professional building on approximately 4.3 acres. Scott County Community Hospital has 25 beds, a 24/7 emergency department and a laboratory that provides a range of diagnostic services. Scott County Community Hospital closed in July 2016 in connection with the bankruptcy filing of its parent company, Pioneer Health Services, Inc. We acquired the Oneida Assets out of bankruptcy for a purchase price of $1.0 million. The hospital, which has since been renamed Big South Fork Medical Center, became operational on August 8, 2017. The hospital became certified as a Critical Access Hospital (rural) hospital in December 2021, retroactive to June 30, 2021.
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CarePlus Rural Health Clinic
On March 5, 2019, we acquired certain assets related to an outpatient clinic located in Williamsburg, Kentucky known as CarePlus Clinic. The clinic, which was acquired from CarePlus Rural Health Clinic, LLC, offers compassionate care in a modern, patient-friendly facility. The CarePlus Clinic is located 32 miles northeast of our Big South Fork Medical Center.
Myrtle Recovery Centers, Inc.
In the second quarter of 2022, we formed a subsidiary, Myrtle Recovery Centers, Inc. (“Myrtle”), to pursue opportunities in the behavioral health sector, initially in our core, rural markets. We are leveraging our existing physical locations and corporate and regional infrastructure to offer behavioral health services, including substance abuse treatment. Services are provided on either an inpatient, residential basis or an outpatient basis.
On August 10, 2023, Myrtle was granted a license by the Department of Mental Health and Substance Abuse Services of Tennessee to operate an alcohol and drug treatment facility in Oneida Tennessee. The facility, which is located at Rennova’s Big South Fork Medical Center campus, commenced operations and began accepting patients on August 14, 2023. The facility offers alcohol and drug residential detoxification and residential rehabilitation treatment services for up to 30 patients. On November 1, 2023, Myrtle began offering outpatient opiate treatment services at its Oneida facility as more fully discussed below under “Recent Events”.
On April 11, 2023, Myrtle sold shares of its common stock equivalent to a 1.961% ownership stake in the subsidiary for de minimis value to an unaffiliated individual licensed as a physician in Tennessee. The shares have certain transfer restrictions, including the right of the subsidiary to transfer the shares to another physician licensed in Tennessee for de minimis value. The shares were sold to the individual for Tennessee healthcare regulatory reasons.
Jamestown Regional Medical Center
On June 1, 2018, we acquired from Community Health Systems, Inc. certain assets related to an acute care hospital located in Jamestown, Tennessee, referred to as Jamestown Regional Medical Center, for a purchase price of $0.7 million. The hospital is an 85-bed facility of approximately 90,000-square feet on over eight acres of land, which offered a 24-hour emergency department with two trauma bays and seven private exam rooms, inpatient and outpatient medical services and a progressive care unit which provided telemetry services. The acquisition also included a separate physician practice known as Mountain View Physician Practice, Inc.
The Company suspended operations at the hospital and physician practice in June 2019, as a result of the termination of the hospital’s Medicare agreement and other factors. The Company is evaluating whether to reopen the facility as an acute care hospital or as another type of healthcare facility. Jamestown is located 38 miles west of Big South Fork Medical Center.
Recent Events
Debentures Amendment and Waiver Agreement
On October 25, 2023, the Company entered into an Amendment and Waiver Agreement (the “Amendment Agreement”) with the holders of its debentures, which are more fully described in Note 6 to the accompanying unaudited condensed consolidated financial statements. As of September 30, 2023, there was $8.2 million principal amount of these debentures outstanding, including mandatory default amounts, and $6.2 million in accrued interest. Under the Amendment Agreement, all defaults under these debentures were waived and the maturity dates of these debentures were extended to December 31, 2025. Certain other amendments were also made in the terms of these debentures. As a result of the Amendment Agreement, the Company does not expect to recognize default interest in future periods, subject to remaining in compliance with covenants and other obligations.
Opening of Myrtle Nonresidential Office-Based Opiate Treatment Facility
On November 1, 2023, Myrtle began accepting patients at its recently opened Nonresidential Office-Based Opiate Treatment Facility (“OBOT”). The OBOT is located adjacent to Myrtle’s alcohol and drug treatment facility in Oneida, Tennessee and supplements the existing residential rehabilitation and detoxification services offered at Myrtle, which is more fully discussed above.
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Outlook
We currently operate one hospital, a rural health clinic and an alcohol and drug treatment and OBOT facility. We also own another hospital at which operations are currently suspended. Owning a number of facilities in the same geographic location will create numerous efficiencies in management, purchasing and staffing and will enable the provision of additional, specialized and more valuable services that are needed by rural communities but cannot be sustained by a standalone facility. We remain confident that this is a sustainable model we can continue to grow through acquisition and development.
Three Months Ended September 30, 2023 Compared to the Three Months Ended September 30, 2022
The following table summarizes the results of our consolidated continuing operations for the three months ended September 30, 2023 and 2022:
| Three Months Ended September 30, | ||||||||||||||||
| 2023 | 2022 | |||||||||||||||
| % | % | |||||||||||||||
| Net revenues | $ | 3,538,095 | 100.0 | % | $ | 2,825,937 | 100.0 | % | ||||||||
| Operating expenses: | ||||||||||||||||
| Direct costs of revenues | 1,806,517 | 51.1 | % | 1,823,473 | 64.5 | % | ||||||||||
| General and administrative expenses | 2,275,755 | 64.3 | % | 1,809,835 | 64.0 | % | ||||||||||
| Depreciation and amortization | 56,796 | 1.6 | % | 117,441 | 4.2 | % | ||||||||||
| Income (loss) from continuing operations before other income (expense), income taxes and net loss attributable to noncontrolling interest | (600,973 | ) | -17.0 | % | (924,812 | ) | -32.7 | % | ||||||||
| Other income, net | 281,963 | 8.0 | % | 129,451 | 4.6 | % | ||||||||||
| Gain from legal settlement | - | 0.0 | % | 60,808 | 2.2 | % | ||||||||||
| Interest expense | (420,551 | ) | -11.9 | % | (605,312 | ) | -21.4 | % | ||||||||
| Benefit for income taxes | 184,524 | 5.2 | % | - | 0.0 | % | ||||||||||
| Net loss from continuing operations, including noncontrolling interest | (555,037 | ) | -15.7 | % | (1,339,865 | ) | -47.4 | % | ||||||||
| Net loss attributable to noncontrolling interest | 7,924 | 0.2 | % | - | 0.0 | % | ||||||||||
| Net loss from continuing operations | $ | (547,113 | ) | -15.5 | % | $ | (1,339,865 | ) | -47.4 | % | ||||||
Net Revenues
Net revenues were $3.5 million for the three months ended September 30, 2023, as compared to net revenues of $2.8 million for the three months ended September 30, 2022, an increase of $0.7 million. We attribute the increase in net revenues to greater inpatient admissions, increased outpatient and emergency room services and higher reimbursement rates.
Direct Cost of Revenues
Direct costs of revenues remained constant at $1.8 million for each of the three months ended September 30, 2023 and 2022. As a result of the increase in net revenues, direct costs decreased to 51.1% of net revenues for the three months ended September 30, 2023 compared to 64.5% for the three months ended September 30, 2022.
General and Administrative Expenses
General and administrative expenses increased by $0.5 million in the three months ended September 30, 2023 compared to the three months ended September 30, 2022. Myrtle and our hospital operations contributed approximately $0.4 million and $0.2 million of the increase, respectively, partially offset by a reduction of approximately $0.1 million of corporate related expenses. Myrtle began accepting patients on August 14, 2023. The increase in our hospital operations expenses was primarily due to an increase in employee related expenses and other professional fees.
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Depreciation and Amortization
Depreciation and amortization expense was $56,796 and $0.1 million in the three months ended September 30, 2023 and 2022, respectively. The decrease was due to fully depreciating certain fixed assets.
Loss from Continuing Operations Before Other Income (Expense), Income Taxes and Net Loss Attributable to Noncontrolling Interest
Loss from continuing operations before other income (expense), income taxes and net loss attributable to noncontrolling interest for the three months ended September 30, 2023 was $0.6 million compared to a loss of $0.9 million for the three months ended September 30, 2022. We attribute the decrease in the loss in the 2023 period primarily to the $0.7 million increase in net revenues in the three months ended September 30, 2023 compared to the comparable 2022 period, partially offset by the increase in general and administrative expenses of $0.5 million in the three months ended September 30, 2023 versus the 2022 period.
Other Income, Net
Other income, net of $0.3 million for the three months ended September 30, 2023 consisted primarily of approximately $0.3 million from HHS Provider Relief Funds and $0.1 million of non-cash interest income and other miscellaneous income, partially offset by $0.1 million of accrued penalties and interest on past due payroll taxes. Other income, net of $0.1 million for the three months ended September 30, 2022 consisted primarily of adjustments totaling approximately $0.2 million for certain previously accrued payroll related expenses, $0.1 million of non-cash interest income and $0.1 million of other income, net from various items, partially offset by $0.3 million of HHS Provider Relief Funds liabilities.
Interest Expense
Interest expense was $0.4 million and $0.6 million for the three months ended September 30, 2023 and 2022, respectively. Interest expense for the three months ended September 30, 2023 and 2022 consisted of interest expense on debentures and notes payable.
Benefit for Income Taxes
The benefit for income taxes of $0.2 million for the three months ended September 30, 2023 was due to a revision to the estimated taxable income for the year ended December 31, 2023, partly offset by an increase in the amount due for state income taxes.
Net Loss from Continuing Operations
Net loss from continuing operations for the three months ended September 30, 2023 was $0.5 million, as compared to a net loss from continuing operations of $1.3 million for the three months ended September 30, 2022. The improvement in the 2023 period as compared to the 2022 period was primarily due to a $0.3 million reduction in the loss from continuing operations before other income (expense), income taxes and net loss attributable to noncontrolling interest in the three months ended September 30, 2023 compared to the 2022 period, $0.3 million of other income, net in the 2023 period compared to other income, net of $0.1 million in the 2022 period and a decrease in interest expense of $0.2 million in the three months ended September 30, 2023 versus the comparable 2022 period, partially offset by a gain from legal settlement, net of $0.1 million in the 2022 period.
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Nine months ended September 30, 2023 compared to the nine months ended September 30, 2022
The following table summarizes the results of our consolidated continuing operations for the nine months ended September 30, 2023 and 2022:
| Nine Months Ended September 30, | ||||||||||||||||
| 2023 | 2022 | |||||||||||||||
| % | % | |||||||||||||||
| Net revenues | $ | 14,843,210 | 100.0 | % | $ | 7,576,693 | 100.0 | % | ||||||||
| Operating expenses: | ||||||||||||||||
| Direct costs of revenues | 5,493,670 | 37.0 | % | 4,769,789 | 63.0 | % | ||||||||||
| General and administrative expenses | 6,851,183 | 46.2 | % | 5,262,338 | 69.5 | % | ||||||||||
| Depreciation and amortization | 250,288 | 1.7 | % | 351,481 | 4.6 | % | ||||||||||
| Income (loss) from continuing operations before other income (expense), income taxes and net loss attributable to noncontrolling interest | 2,248,069 | 15.1 | % | (2,806,915 | ) | -37.0 | % | |||||||||
| Other income, net | 537,077 | 3.6 | % | 87,170 | 1.2 | % | ||||||||||
| Gain from forgiveness of debt | 200,000 | 1.3 | % | 334,819 | 4.4 | % | ||||||||||
| Gain (loss) from legal settlements, net | 286,719 | 1.9 | % | (15,410 | ) | -0.2 | % | |||||||||
| Interest expense | (1,404,298 | ) | -9.5 | % | (1,705,502 | ) | -22.5 | % | ||||||||
| Provision for income taxes | (322,476 | ) | -2.2 | % | - | 0.0 | % | |||||||||
| Net income (loss) from continuing operations, including noncontrolling interest | 1,545,091 | 10.4 | % | (4,105,838 | ) | -54.2 | % | |||||||||
| Net loss attributable to noncontrolling interest | 9,286 | 0.1 | % | - | 0.0 | % | ||||||||||
| Net income (loss) from continuing operations | $ | 1,554,377 | 10.5 | % | $ | (4,105,838 | ) | -54.2 | % | |||||||
Net Revenues
Net revenues were $14.8 million for the nine months ended September 30, 2023, as compared to $7.6 million for the nine months ended September 30, 2022, an increase of $7.3 million. We attribute the increase in net revenues to greater inpatient admissions, increased outpatient and emergency room services, higher reimbursement rates and certain collections from prior periods related to Critical Access Hospital designation at our Big South Fork Medical Center. We began billing as a Critical Access Hospital in the three months ended June 30, 2022 retroactive to June 30, 2021.
Direct Costs of Revenues
Direct costs of revenue increased by $0.7 million for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. We attribute the increase primarily to higher salaries and wages and supply costs. Salaries and wages increased primarily due to greater inpatient admissions and increased non-clinical staffing, partially offset by reduced contract labor. Central supplies increased as a result of the increase in patient admissions.
General and Administrative Expenses
General and administrative expenses increased by $1.6 million in the nine months ended September 30, 2023 compared to the 2022 period. Myrtle and our hospital operations contributed approximately $0.6 million and $1.2 million of the increase, respectively, partially offset by a reduction of approximately $0.2 million of corporate related expenses. Myrtle began accepting patients on August 14, 2023. Our hospital operations general and administrative expenses increased primarily due to increased employee related expenses, professional and purchased services and property taxes.
Depreciation and Amortization Expense
Depreciation and amortization expense decreased by approximately $0.1 million in the nine months ended September 30, 2023 compared to the 2022 period as a result of fully depreciating certain fixed assets.
Income (Loss) from Continuing Operations Before Other Income (Expense), Income Taxes and Net Loss Attributable to Noncontrolling Interest
Our income from continuing operations before other income (expense), income taxes and net loss attributable to noncontrolling interest for the nine months ended September 30, 2023 was $2.2 million compared to a loss of $2.8 million for the nine months ended September 30, 2022. We attribute the $5.0 million improvement in the nine months ended September 30, 2023 to the $7.3 million increase in net revenues in the nine months ended September 30, 2023 compared to the comparable 2022 period, partially offset by higher direct costs of revenues and general and administrative expenses in the nine months ended September 30, 2023 versus the 2022 period.
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Other Income, net
Other income, net for the nine months ended September 30, 2023 of $0.5 million consisted primarily of $0.3 million from HHS Provider Relief Funds as well as approximately $0.5 million from various other miscellaneous income items, including $36,455 of non-cash interest income, partially offset by $0.3 million of penalties and interest associated with past due payroll taxes. Other income, net of $0.1 million for the nine months ended September 30, 2022 consisted primarily of adjustments totaling approximately $0.3 million for certain previously accrued payroll related expenses and $0.1 million of non-cash interest income, as well as approximately $0.3 million of other income, net from various other items, partially offset by $0.3 million of HHS Provider Relief Funds liabilities and $0.3 million of penalties and interest associated with past due payroll taxes.
Gain from Forgiveness of Debt
Gain from forgiveness of debt of $0.2 million for the nine months ended September 30, 2023 resulted from the forgiveness of a portion of outstanding notes payable. Gain from forgiveness of debt for the nine months ended September 30, 2022 resulted from the forgiveness of PPP Notes.
Gain (Loss) from Legal Settlements, net
The gain (loss) from legal settlements, net was $0.3 million and ($15,410) for the nine months ended September 30, 2023 and 2022, respectively. The gain from legal settlements, net in the 2023 period resulted primarily from a gain of $0.6 million from the settlement of an obligation under a note payable, partially offset by $0.3 million associated with the adjustment of reserves related to judgments with the former owners of Jamestown Regional Medical Center.
Interest Expense
Interest expense for the nine months ended September 30, 2023 was $1.4 million compared to $1.7 million for the nine months ended September 30, 2022. Interest expense for the nine months ended September 30, 2023 included approximately $1.3 million for interest on debentures and notes payable and $58,000 for interest on loans from Mr. Diamantis, a former member of our Board of Directors. Interest expense for the nine months ended September 30, 2022 included $1.6 million for interest on debentures and notes payable and $0.1 million for interest on loans from Mr. Diamantis.
Provision for Income Taxes
The provision for income taxes of $0.3 million for the nine months ended September 30, 2023 compared to no provision for the nine months ended September 30, 2022 was due to the taxable income in the 2023 period versus a loss for the 2022 period.
Net Income (Loss] from Continuing Operations
Net income from continuing operations for the nine months ended September 30, 2023 was $1.5 million compared to a net loss from continuing operations of $4.1 million for the nine months ended September 30, 2022. The improvement in the results from continuing operations in the 2023 period as compared to the 2022 period of approximately $5.6 million was primarily due to the income from continuing operations before other income (expense), income taxes and net loss attributable to noncontrolling interest of $2.2 million in the 2023 period versus a loss of $2.8 in the comparable 2022 period, an increase of other income, net of $0.4 million in the 2023 period compared to the 2022 period, a gain from legal settlements, net of $0.3 million in the 2023 period compared to a loss from legal settlements, net of ($15,410) in the 2022 period and a reduction in interest expense of $0.3 million in the 2023 period compared to the 2022 period. Partially offsetting the improvement was a decrease of $0.1 million in the gain from forgiveness of debt in the 2023 period compared to the 2022 period and $0.3 million of income tax expense in the 2023 period versus no income tax expense in the 2022 period.
Liquidity and Capital Resources
Overview
For the nine months ended September 30, 2023, we financed our operations with the $3.1 million of cash that we generated from operations and $0.6 million of loans from Mr. Diamantis, a former member of our Board of Directors. During the nine months ended September 30, 2022, we financed our operations with $1.5 million from issuances of our Series P Convertible Redeemable Preferred Stock and $0.9 million of loans from Mr. Diamantis. Also, during the nine months ended September 30, 2022, we received $0.3 million from HHS Provider Relief Funds. During the nine months ended September 30, 2023, the Company repaid $1.4 million of loans from Mr. Diamantis and $0.4 million of debentures. During the nine months ended September 30, 2023 and 2022, we repaid $0.9 million and $1.2 million of notes payable, respectively. Each of these financing transactions is more fully discussed in Notes 6 and 10 to our accompanying unaudited condensed consolidated financial statements.
Future cash needs for working capital, capital expenditures, pursuit of opportunities in the behavioral health sector, debt service obligations and potential acquisitions will require management to seek additional capital. The sale/issuance of additional equity will result in additional dilution to our stockholders.
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Going Concern and Liquidity
Under Accounting Standards Codification (“ASC”), Presentation of Financial Statements—Going Concern (Subtopic 205-40) (“ASC 205-40”), the Company has the responsibility to evaluate whether conditions and/or events raise substantial doubt about its ability to meet its future financial obligations as they become due within one year after the date that the financial statements are issued. As required by ASC 205-40, this evaluation shall initially not take into consideration the potential mitigating effects of plans that have not been fully implemented as of the date the financial statements are issued. Management has assessed the Company’s ability to continue as a going concern in accordance with the requirement of ASC 205-40.
At September 30, 2023, the Company had a working capital deficit and a stockholders’ deficit of $41.5 million and $27.6 million, respectively. While the Company had net income of $1.5 million during the nine months ended September 30, 2023, it incurred a net loss of $0.5 million and $3.3 million for the three months ended September 30, 2023 and the year ended December 31, 2022, respectively. As of the date of this report, the Company’s cash is deficient and payments for its operations in the ordinary course are not being made. The losses and other related factors, including past due accounts payable and payroll taxes, as well as payment defaults under the terms of certain outstanding notes payable and debentures, as more fully discussed in Notes 5 and 6 to the accompanying unaudited condensed consolidated financial statements, raise substantial doubt about the Company’s ability to continue as a going concern for 12 months from the filing date of this report.
The Company’s accompanying 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. In 2021, the Company sold subsidiaries to InnovaQor, Inc. and the Company received 14,950 shares of InnovaQor, Inc.’s Series B-1 Non-Voting Convertible Preferred Stock (the “InnovaQor Series B-I Preferred Stock”) valued at $9.1 million as consideration for the sale. As of September 30, 2023, the Company held 14,850 shares of InnovaQor’s Series B-1 Preferred Stock valued at $9.0 million as an investment.
The accompanying unaudited condensed consolidated financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.
As of September 30, 2023, we were party to legal proceedings, which are presented in Note 12 to the accompanying unaudited condensed consolidated financial statements.
The following table presents our capital resources as of September 30, 2023 and December 31, 2022:
| September 30, | December 31, | |||||||||||
| 2023 | 2022 | Change | ||||||||||
| Cash | $ | 123,898 | $ | 499,470 | $ | (375,572 | ) | |||||
| Working capital deficit | 41,512,097 | 42,944,995 | (1,432,898 | ) | ||||||||
| Total debt | 11,614,691 | 14,534,630 | (2,919,939 | ) | ||||||||
| Finance lease obligations | 220,461 | 220,461 | - | |||||||||
| Total stockholders’ deficit | 27,568,708 | 29,094,588 | (1,525,880 | ) | ||||||||
The following table presents the major sources and uses of cash for the nine months ended September 30, 2023 and 2022:
| Nine Months Ended September 30, | ||||||||||||
| 2023 | 2022 | Change | ||||||||||
| Cash provided by (used in) operations | $ | 3,102,439 | $ | (1,166,596 | ) | $ | 4,269,035 | |||||
| Cash used in investing activities | (1,332,278 | ) | (541,334 | ) | (790,944 | ) | ||||||
| Cash provided by (used in) financing activities | (2,145,733 | ) | 994,364 | (3,140,097 | ) | |||||||
| Net change in cash | (375,572 | ) | (713,566 | ) | 337,994 | |||||||
| Cash and cash equivalents, beginning of the year | 499,470 | 724,524 | (225,054 | ) | ||||||||
| Cash and cash equivalents, end of the period | $ | 123,898 | $ | 10,958 | $ | 112,940 | ||||||
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The components of cash provided by (used in) operations for the nine months ended September 30, 2023 and 2022 are presented in the following table:
| Nine Months Ended September 30, | ||||||||||||
| 2023 | 2022 | Change | ||||||||||
| Net income (loss) from continuing operations, including noncontrolling interest | $ | 1,535,091 | $ | (4,105,838 | ) | $ | 5,640,929 | |||||
| Non-cash adjustments to net income (loss): (1) | (558,458 | ) | 220,889 | (779,347 | ) | |||||||
| Changes in operating assets and liabilities: | ||||||||||||
| Accounts receivable | 1,320,017 | (774,975 | ) | 2,094,992 | ||||||||
| Inventory | (23,312 | ) | 6,869 | (30,181 | ) | |||||||
| Accounts payable and accrued expenses | 502,364 | 3,530,217 | (3,027,853 | ) | ||||||||
| Loss from discontinued operations | (9,213 | ) | (7,075 | ) | (2,138 | ) | ||||||
| Income taxes | 326,561 | - | 326,561 | |||||||||
| Other | 176 | (34,969 | ) | 35,145 | ||||||||
| Net cash provided by (used in) operating activities of continuing operations | 3,093,226 | (1,164,882 | ) | 4,258,108 | ||||||||
| Cash provided by (used in) discontinued operations | 9,213 | (1,714 | ) | 10,927 | ||||||||
| Cash provided by (used in) operations | $ | 3,102,439 | $ | (1,166,596 | ) | $ | 4,269,035 | |||||
| (1) | Non-cash adjustments to net income for the nine months ended September 30, 2023 of $0.6 million included primarily $0.2 million of gain from forgiveness of debt and $0.3 million of gain from legal settlements, net, and $0.3 million of income from HHS Provider Relief Funds, partially offset by $0.3 million of depreciation and amortization. Non-cash adjustments to net loss for the nine months ended September 30, 2022 of $0.2 million include primarily $0.3 million of other income from forgiveness of PPP Notes and $0.1 million of non-cash interest income, offset by $0.4 million of depreciation and amortization and $0.3 million of loss from HHS Provider Relief Funds. |
Common Stock and Common Stock Equivalents
The Company had 37,051,322,257 and 29,084,322,257 shares of its common stock issued and outstanding at September 30, 2023 and December 31, 2022, respectively. During the nine months ended September 30, 2023, the Company issued an aggregate of 8.0 billion shares of its common stock upon conversions of 496.53 shares of its Series N Convertible Redeemable Preferred Stock (the “Series N Preferred Stock”) and 220.50 shares of its Series O Convertible Redeemable Preferred Stock (the “Series O Preferred Stock”). During the nine months ended September 30, 2022, the Company issued 8.4 billion shares of its common stock upon conversions of 2,352 shares of its Series N Preferred Stock and it issued 6.7 billion shares of its common stock upon conversions of 638 shares of its Series O Preferred Stock.
The terms of certain of the outstanding 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 price of the outstanding warrants, preferred stock or debentures, as the case may be. In addition, the majority of these equity-based securities contain exercise/conversion prices that vary based upon the price of the Company’s common stock on the date of exercise/conversion (see Notes 6, 9 and 10 to the accompanying unaudited condensed consolidated financial statements). These provisions have resulted in significant dilution of the Company’s common stock and have given rise to reverse splits of the Company’s common stock, including a 1-for-10,000 reverse stock split effected on March 15, 2022. As a result of these down round provisions, the potential common stock equivalents, including outstanding common stock, are 1.0 trillion at September 30, 2023 and November 6, 2023.
On August 13, 2020, Mr. Diamantis entered into the Voting Agreement and Irrevocable Proxy (the “Voting Agreement”) with the Company, Mr. Seamus Lagan and Alcimede LLC (of which Mr. Lagan, the Company’s Chief Executive Officer, 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.
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Also, on November 5, 2021, the Company amended its Certificate of Incorporation, as amended, to provide that the number of authorized shares of its common stock or preferred stock may be increased or decreased (but not below the number of shares then outstanding) by the affirmative vote of the holders of a majority in voting power of the stock of the Company entitled to vote generally in the election of directors, irrespective of the provisions of Section 242(b)(2) of the General Corporation Law of the State of Delaware (or any successor provision thereto), voting together as a single class, without a separate vote of the holders of the class or classes the number of authorized shares of which are being increased or decreased unless a vote by any holders of one or more series of preferred stock is required by the express terms of any series of preferred stock pursuant to the terms thereof.
As a result of the Voting Agreement and the November 5, 2021 amendment to the Company’s Certificate of Incorporation discussed above, as of the date of filing of 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 shares of common stock outstanding.
OTHER MATTERS
Inflation and Supply Chain Issues
The healthcare industry is very labor intensive, and salaries and benefits are subject to inflationary pressures, as are supply and other costs. The nationwide shortage of nurses and other clinical staff and support personnel has been a significant operating issue facing us and other healthcare providers. Like others in the healthcare industry, we continue to experience a shortage of nurses and other clinical staff and support personnel. This staffing shortage may require us to further enhance wages and benefits to recruit and retain nurses and other clinical staff and support personnel or require us to hire expensive temporary personnel. Our ability to pass on increased costs associated with providing healthcare to Medicare and Medicaid patients is limited due to various federal, state and local laws which have been enacted that, in certain cases, limit our ability to increase prices.
COVID-19 Matters
Demand for services at our hospitals was substantially impacted by the COVID-19 pandemic. Moreover, the pandemic affected the hospitals’ ability to maintain adequate staffing levels which put pressure on salaries and wages and the need for higher cost, contract labor. The availability of supplies was limited, and supplies costs increased as well. Reduced demand and higher costs negatively affected our overall profitability and liquidity. Although the effects of COVID-19 have not been as significant in 2022 and 2023 as compared to prior years, a resurgence of COVID-19 in our markets could affect demand for services and increase our costs. In addition, government assistance programs may not be available as have been in the past to address such near-term profitability and liquidity pressures.
Off Balance Sheet Arrangements
Under SEC regulations, we are required to disclose the Company’s off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company’s financial condition, results of operations, liquidity, capital expenditures or capital resources that are material to investors. Off-balance sheet arrangements consist of transactions, agreements or contractual arrangements to which any entity that is not consolidated with us is a party, under which we have:
| ● | Any obligation under certain guarantee contracts. | |
| ● | Any retained or contingent interest in assets transferred to an unconsolidated entity or similar arrangement that serves as credit, liquidity or market risk support to that entity for such assets. | |
| ● | Any obligation under a contract that would be accounted for as a derivative instrument, except that it is both indexed to the Company’s stock and classified in stockholder’s equity in the Company’s statement of financial position. | |
| ● | Any obligation arising out of a material variable interest held by us in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to us, or engages in leasing, hedging or research and development services with us. |
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As of September 30, 2023, the Company had no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on the Company’s financial condition, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable
Item 4. Controls and Procedures.
| (a) | Evaluation of Disclosure Controls and Procedures |
We maintain disclosure controls and procedures that are designed to ensure that material information required to be disclosed in our periodic reports filed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and to ensure that such information is accumulated and communicated to our management, including our Chief Executive Officer and Interim Chief Financial Officer as appropriate, to allow timely decisions regarding required disclosure. Under the supervision and with the participation of our management, including our Chief Executive Officer, who also serves as our Interim Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures. Based on the foregoing evaluation, our management concluded that, as of September 30, 2023, our disclosure controls and procedures were not effective to provide reasonable assurance that the information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and is accumulated and communicated to our management, including our Chief Executive Officer and Interim Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Our management, including our Chief Executive Officer (Principal Executive Officer), who also serves as our Interim Chief Financial Officer (Principal Financial Officer), does not expect that our disclosure controls and procedures will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our Company have been detected. These inherent limitations include, but are not limited to, the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
In our Annual Report on Form 10-K for the year ended December 31, 2022, we identified material weaknesses in our internal control over financial reporting. Insufficient staffing, accounting processes and procedures led to a lack of contemporaneous documentation supporting the accounting for certain transactions and the approval of certain cash disbursements. There are risks related to the timing and accuracy of the integration of information from various accounting systems whereby the Company has experienced delays in receiving information in a timely manner from its subsidiaries. Based on these material weaknesses in internal control over financial reporting, management concluded the Company did not maintain effective internal control over financial reporting as of December 31, 2022. As of September 30, 2023, we concluded that these material weaknesses continued to exist.
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The Company expects improvements to be made on the integration of information issues during the remainder of 2023 and 2024 as we plan to move towards securing a more timely and accurate reporting system. The Company is continuing to further remediate the material weaknesses identified above. The Company has taken or is in the process of taking the following steps to remediate these material weaknesses: (i) increasing the staffing of its internal accounting department; and (ii) implementing enhanced documentation procedures to be followed by the internal accounting department.
Notwithstanding such material weaknesses, management believes that the unaudited condensed consolidated financial statements included in this Form 10-Q fairly present in all material respects the Company’s financial condition, results of operations and cash flows for the periods and dates presented.
| (b) | Changes in Internal Control over Financial Reporting |
During the three months ended September 30, 2023, there have been no changes in our internal control over financial reporting that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings.
From time-to-time, the Company may be involved in a variety of claims, lawsuits, investigations and proceedings related to contractual disputes, employment matters, regulatory and compliance matters, intellectual property rights and other litigation arising in the ordinary course of business. The Company operates in a highly regulated industry which may inherently lend itself to legal matters. Management is aware that litigation has associated costs and that results of adverse litigation verdicts could have a material effect on the Company’s financial position or results of operations. Management, in consultation with legal counsel, has addressed known assertions and predicted unasserted claims, which are presented in Note 12 to the accompanying unaudited condensed consolidated financial statements.
Item 1A. Risk Factors.
In addition to the other information set forth in this report, you should carefully consider the risk factors discussed in Part I, Item 1A of our 2022 Form 10-K, which could materially affect our business, financial condition, or future results. There have been no material changes to the risk factors previously disclosed in our 2022 Form 10-K.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
Item 6. Exhibits
| 31.1 | Rule 13a-14(a) Certification by the Principal Executive Officer.* |
| 31.2 | Rule 13a-14(a) Certification by the Principal Financial Officer.* |
| 32.1 | Certification by the Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.** |
| 32.2 | Certification by the Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.** |
| 101.INS | Inline XBRL Instance Document |
| 101.SCH | Inline XBRL Schema Document |
| 101.CAL | Inline XBRL Calculation Link base Document |
| 101.DEF | Inline XBRL Definition Link base Document |
| 101.LAB | Inline XBRL Label Link base Document |
| 101.PRE | Inline XBRL Presentation Link base Document |
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
| * | Filed herewith |
| ** | Furnished herewith |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| RENNOVA HEALTH, INC. | ||
| Date: November 14, 2023 | By: | /s/ Seamus Lagan |
| Seamus Lagan | ||
Chief Executive Officer, President and Interim Chief Financial Officer (Principal Executive Officer and Principal Financial Officer) | ||
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