Notes
Payable – Third Parties
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
Loan payable under prepaid forward purchase contract
|
|
$
|
5,000,000
|
|
|
$
|
5,000,000
|
|
|
|
|
|
|
|
|
|
|
Loan payable to TCA Global Master Fund, LP ("TCA") in the original principal amount of $3 million
at 16% interest (the "TCA Debenture"). Principal and interest payments due in various installments through December
31, 2017.
|
|
|
1,957,476
|
|
|
|
3,000,000
|
|
|
|
|
|
|
|
|
|
|
Notes payable to CommerceNet and Jay Tenenbaum in the original principal amount of $500,000,
bearing interest at 6% per annum (the "Tegal Notes"). Prinicpal and interest payments are due annually from July 12, 2015
through July 12, 2017
|
|
|
341,612
|
|
|
|
341,612
|
|
|
|
|
|
|
|
|
|
|
Other convertible notes payable
|
|
|
-
|
|
|
|
440,000
|
|
|
|
|
|
|
|
|
|
|
Unamortized discount on other convertible notes
|
|
|
-
|
|
|
|
(179,889
|
)
|
Derivative liability associated with the TCA Debenture, at fair value
|
|
|
-
|
|
|
|
409,524
|
|
|
|
|
7,299,088
|
|
|
|
9,011,247
|
|
Less current portion
|
|
|
(7,299,088
|
)
|
|
|
(9,011,247
|
)
|
Notes payable - third parties, net of current portion
|
|
$
|
-
|
|
|
$
|
-
|
|
On
March 31, 2016, the Company entered into an agreement to pledge certain of its accounts receivable as collateral against a prepaid
forward purchase contract whereby the Company received consideration in the amount of $5.0 million. The receivables had an estimated
collectable value of $8.7 million which had been adjusted down to approximately $1.5 million on the Company’s balance sheet
as of December 31, 2016 and $0 as of September 30, 2017. In exchange for the consideration received, the counterparty received
the right to: (i) a 20% per annum investment return from the Company on the consideration, with a minimum repayment term of six
months and minimum return of $0.5 million, (ii) all payments recovered from the accounts receivable up to $5.25 million, if paid
in full within six months, or $5.5 million, if not paid in full within six months, and (iii) 20% of all payments of the accounts
receivable in excess of amounts received in (i) and (ii). On March 31, 2017, to the extent that the counterparty has not been
paid $6.0 million, the Company was required to pay the difference, plus 30% interest per annum on the total balance. To date,
the Company has not recovered any payments against the accounts receivable. As of September 30, 2017, the Company has accrued
$1.9 million for the counterparty’s required investment return, which is reflected in accrued expenses in the accompanying
condensed consolidated balance sheet, and $6.9 million was due to the counterparty on September 30, 2017. The Company does not
have the financial resources to repay this obligation.
The
Company did not make the required monthly principal and interest payments due under the TCA Debenture for the period from October
2016 through March 2017. On February 2, 2017, the Company made a payment to TCA in the amount of $0.4 million which was applied
to accrued and unpaid interest and fees, including default interest, as of the date of payment. On March 21, 2017, the Company
made a payment to TCA in the amount of $0.75 million, of which approximately $0.1 million was applied to accrued and unpaid interest
and fees in accordance with the terms of the TCA Debenture. Also on March 21, 2017, the Company entered into a letter agreement
with TCA, which (i) waived any payment defaults through March 21, 2017; (ii) provided for the $0.75 million payment discussed
above; (iii) set forth a revised repayment schedule whereby the remaining principal plus interest aggregating to approximately
$2.6 million was to be repaid in various monthly installments from April of 2017 through September of 2017; and (iv) provided
for payment of an additional service fee in the amount of $150,000, which was due on June 27, 2017, the day after effective date
of the registration statement filed by the Company; which amount is reflected in accrued expenses in the accompanying condensed
consolidated balance sheet at September 30, 2017. In addition, TCA entered into an intercreditor agreement with the purchasers
of the convertible debentures (see Note 6) which sets forth rights, preferences and priorities with respect to the security interests
in the Company’s assets. On September 19, 2017, the Company entered into a new agreement with TCA, which extended the
repayment schedule through to December 31, 2017. The Company is current with its payments.
RENNOVA
HEALTH, INC.
Notes
to Condensed Consolidated Financial Statements
(unaudited)
On
September 15, 2016, the Company entered into an agreement with two investors whereby the Company sold to the investors convertible
notes in the aggregate principal amount of $0.4 million (the “September 2016 Notes”). The September 2016 Notes were
convertible into shares of the Company’s common stock at a conversion price of $112.50 per share. In conjunction with the
sale of the September 2016 Notes, the Company issued warrants to purchase an aggregate of 4,444 shares of the Company’s
common stock at an exercise price of $180.00 per share. Based on the allocation of the net proceeds from the September 2016 Notes
to the fair value of the warrants, and the resulting beneficial conversion features, the Company recognized a discount for the
entire face value of the September 2016 Notes, which was accreted through the notes’ maturity date of March 15, 2017. On
March 13, 2017, the September 2016 Notes, along with the accompanying warrants, were exchanged for 26,667 shares of the Company’s
common stock.
The
Company did not make the principal payments under the Tegal Notes that were due on July 12, 2016. On November 3, 2016, the Company
received a default notice from the holders of the Tegal Notes demanding immediate repayment of the outstanding principal and accrued
interest aggregating to $0.4 million. On December 7, 2016 the Company received a breach of contract complaint with a request for
entry of a default judgment (see Note 11). To date, the Company has yet to repay this amount.
Notes
Payable – Related Parties
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
Loan payable to Alcimede LLC, bearing interest at 6% per annum, with all principal
and interest due on February 2, 2018
|
|
$
|
168,500
|
|
|
$
|
218,500
|
|
|
|
|
|
|
|
|
|
|
Other advances from related parties
|
|
|
55,000
|
|
|
|
110,000
|
|
|
|
|
223,500
|
|
|
|
328,500
|
|
Less current portion
|
|
|
(223,500
|
)
|
|
|
(328,500
|
)
|
Total notes payable - related parties, net of current
portion
|
|
$
|
-
|
|
|
$
|
-
|
|
On
February 3, 2015, the Company borrowed $3.0 million from Alcimede LLC (“Alcimede”). Seamus Lagan, the Company’s
President and Chief Executive Officer, is the sole manager of Alcimede. The note has an interest rate of 6% and was originally
due on February 2, 2016. Alcimede later agreed to extend the maturity date of the loan to August 2, 2017. On June 29, 2015, Alcimede
exercised options granted in October 2012 to purchase 66,667 shares of the Company’s common stock at an exercise price of
$37.50 per share, and the loan outstanding was reduced in satisfaction of the aggregate exercise price of $2.5 million. In August
of 2016, $0.3 million was repaid by the Company through the issuance of shares of common stock. In March of 2017, the Company
and Mr. Lagan agreed that a payment made to Alcimede in the amount of $50,000 would be deducted from the outstanding balance
of the note. On August 2, 2017, the Company and Alcimede agreed to further extend the maturity date of the loan to February 2,
2018.
The
remaining balance due on this loan as of September 30, 2017 was $0.2 million, including accrued interest.
During
the nine months ended September 30, 2017, the Company repaid $0.1 million that was outstanding to a former principal stockholder,
and borrowed an additional $75,000 from this same stockholder of which $50,000 has been repaid and $3.6 million from Mr. Diamantis,
a director of the Company, which has been fully repaid (see Note 7).
RENNOVA
HEALTH, INC.
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note
6 – Debentures
The
carrying amount of all outstanding debentures as of September 30, 2017 (unaudited) is as follows:
|
|
September 30, 2017
|
|
Debentures
|
|
$
|
20,962,234
|
|
Discount on Debentures
|
|
|
(16,398,666
|
)
|
Deferred financing fees
|
|
|
(324,563
|
)
|
|
|
|
4,239,005
|
|
Less current portion
|
|
|
-
|
|
Debentures
|
|
$
|
4,239,005
|
|
There
were no debentures outstanding as of December 31, 2016.
February
Offering
On
February 2, 2017, the Company issued $1.6 million aggregate principal amount of Original Issue Discount Convertible Debentures
due three months from the date of issuance (the “February Debentures”) and warrants to purchase an aggregate of 6,667
shares of common stock, which can be exercised at any time after August 17, 2017 at an exercise price of $38.70 per share (the
“February Warrants”), to an accredited investor for a purchase price of $1.5 million. On March 21, 2017, the February
Debentures were exchanged for $2.5 million of exchange debentures as more fully discussed below.
March
Offerings
On
March 21, 2017, the Company issued $10.85 million aggregate principal amount of Senior Secured Original Issue Discount Convertible
Debentures due March 21, 2019 (the “Convertible Debentures”). The Company received net proceeds from this transaction
in the approximate amount of $8.4 million. The Company used $3.8 million of the net proceeds to repay the 2017 Diamantis Note
(see Note 7) and $0.75 million of the net proceeds to make the partial repayment on the TCA Debenture (see Note 5). The remainder
of the net proceeds were used for general corporate purposes. In conjunction with the issuance of the Convertible Debentures,
the holder of the February Debentures exchanged these debentures for $2.5 million of new debentures (the “Exchange Debentures”
and, collectively with the Convertible Debentures, the “March Debentures”) on the same terms as, and pari passu with,
the Convertible Debentures and warrants. The Company recorded non-cash interest expense in the amount of $0.4 million as a result
of this exchange. Additionally, the holders of an aggregate of $2.2 million stated value of the Company’s Series H Convertible
Preferred Stock (the “Series H Preferred Stock”) exchanged such preferred stock into $2.7 million principal amount
of Exchange Debentures and warrants. The March Debentures contain a 24% original issue discount, have
no regularly scheduled interest payments except in the event of a default and have a maturity date of March 21, 2019.
In
connection with the March Debentures the Company issued warrants to purchase an aggregate of 9,166,616 shares of the Company’s
common stock to several accredited investors. The warrants were issued to the investors in three tranches, Series A Warrants,
Series B Warrants and Series C Warrants (collectively, the “March Warrants”). The Series A Warrants are exercisable
for 3,214,911 shares of the Company’s common stock. They are immediately exercisable and have a term of exercise equal to
five years. The Series B Warrants are exercisable for 2,736,794 shares of the Company’s common stock and are exercisable
for a period of 18 months commencing immediately. The Series C Warrants are exercisable for 3,214,911 shares of the Company’s
common stock and have a term of five years provided such warrants shall only vest if, when and to the extent that the holders
exercise the Series B Warrants. At September 30, 2017, the Series A, Series B and Series C Warrants each have an exercise price
of $5.85 per share, which reflects an adjustment pursuant to their terms. The Series A, Series B and Series C Warrants are subject
to “full ratchet” and other customary anti-dilution protections.
The
March Debentures are convertible into shares of the Company’s common stock, at a conversion price which has been adjusted
pursuant to the terms of the March Debentures to $5.85 per share as of September 30, 2017, due to prices at which the Company
has subsequently issued shares of common stock. The Convertible Debentures began to amortize monthly commencing on the 90th day
following the closing date. The Exchange Debentures began to amortize monthly on the closing date. On each monthly amortization
date, the Company may elect to repay 5% of the original principal amount of the March Debentures in cash or, in lieu thereof,
the conversion price of such debentures will thereafter be 85% of the volume weighted average price at the time of conversion.
In the event the Company does not elect to pay such amortization amounts in cash, each investor, in their sole discretion, may
increase the conversion amount subject to the alternative conversion price by up to four times the amortization amount. The March
Debentures contain customary affirmative and negative covenants. The conversion prices are subject to reset in the event of offerings
or other issuances of common stock, or rights to purchase common stock, at a price below the then conversion price, as well as
other customary anti-dilution protections as more fully described in the debentures.
The
March Debentures are secured by all of the Company’s assets and are guaranteed by substantially
all of the Company’s subsidiaries. Between March 22, 2017 and September 30, 2017, holders of the March Debentures converted an aggregate of $4.1 million of these debentures into 548,932 shares of common stock.
RENNOVA
HEALTH, INC.
Notes
to Condensed Consolidated Financial Statements
(unaudited)
The
exercise prices of the March Warrants issued in connection with the March Debentures are subject to reset in the event of offerings
or other issuances of common stock, or rights to purchase common stock, at a price below the then exercise price, as well as other
customary anti-dilution protections. As a result of these provisions, both the March Debentures and the March Warrants were deemed
to be not indexed to the Company’s common stock, and the Company recognized derivative liabilities for the embedded conversion
feature of the March Debentures and the March Warrants in the original amount of $15.3 million and $41.3 million, respectively.
The Company recognized a discount for 100% of the principal value of the March Debentures and non-cash interest
expense in the amount of $43.7 million in connection with the recognition of these derivative liabilities. As a result of the
adoption of ASU 2017-11 in the second quarter of 2017, the interest expense and derivative liability originally recognized were
adjusted and extinguished during the three months ended June 30, 2017. See Note 1 for the adoption of ASU 2017-11 for the retrospective
adjustments made to the Company’s condensed consolidated financial statements with respect to the derivative liabilities
associated with these debentures and warrants.
June
Offerings
In
June 2017, the Company issued debentures due three months from the date of issuance in two issuances (collectively, the “June
Debentures”) and warrants to purchase an aggregate of 100,000 shares of common stock (33,333 warrants in the June 2, 2017
transaction and 66,667 in the June 22, 2017 transaction), which can be exercised at any time after nine months at an exercise
price of $5.85 per share for the June 2, 2017 warrants and $5.70 per share for the June 22, 2017 warrants (collectively the “June Warrants”), to accredited investors for a purchase price of $1,902,700 and proceeds to the Company of $1.5 million.
The Company recorded a discount on the debentures of $107,700 which has been fully amortized
.
As
more fully discussed below, on July 17, 2017, the June Debentures were exchanged
.
July
Offerings
On
July 17, 2017, the Company closed an offering of $4,136,862 aggregate principal amount of Original Issue Discount Debentures due
October 17, 2017 (the “July Debentures”) and warrants to purchase an aggregate of 141,333 shares of common stock (the
“July Warrants”) for consideration of $2,000,000 in cash and the exchange of the full $1,902,700 aggregate principal
amount of the June Debentures. Under the Purchase Agreement, the Company was required to hold a stockholders’ meeting to
obtain stockholder approval for at least a 1-for-8 reverse split of the Company’s common stock on or before September 20,
2017. Accordingly, the Company’s stockholders approved a reverse stock split on September 20, 2017 and the Company effected
a 1-for-15 reverse stock split of its common stock on October 5, 2017, as further discussed in Note 1. The July Debentures were
guaranteed by substantially all of the subsidiaries of the Company pursuant to a Subsidiary Guarantee in favor of the holders
of the July Debentures. As more fully discussed below, on September 19, 2017, the July Debentures were exchanged for $6.4 million
of exchange debentures.
The
July Warrants are exercisable into shares of the Company’s common stock at any time from and after six months from the closing
date at an exercise price of $5.63 per common share (subject to adjustment). The July Warrants will terminate five years after
they become exercisable.
September
Offerings
On
September 19, 2017, the Company closed an offering of $2,604,000 principal amount of Senior Secured Original Issue Discount
Convertible Debentures due September 19, 2019 (the “New Debentures”) and three series of warrants to purchase an
aggregate of 6,935,517 shares of the Company’s common stock (the “Series A Warrants,” the “Series B
Warrants,” and the “Series C Warrants,” and collectively, the “September Warrants”). The
offering was pursuant to the terms of a Securities Purchase Agreement, dated as of August 31, 2017 (the “Purchase
Agreement”), between the Company and certain existing institutional investors of the Company. The Company received
proceeds of $2,100,000 from the offering.
Also
on September 19, 2017, the Company closed exchanges by which the holders of the Company’s July Debentures exchanged $4,136,862
principal amount of such debentures for $6,412,136 principal amount of new debentures on the same items as, and pari passu with,
the New Debentures (the “September Exchange Debentures” and, together with the New Debentures, the “September
Debentures”). The Company recorded non-cash interest expense in the amount of $1.0 million as a result of this exchange.
All issuance amounts of the September Debentures reflect a 24% original issue discount.
The
September Debentures contain customary affirmative and negative covenants. The conversion price is subject to “full
ratchet” and other customary anti-dilution protections as more fully described in the debentures. The September
Debentures may be converted at any time into shares of the Company’s common stock. The September Debentures begin to
amortize monthly commencing on October 1, 2017. For the first three amortization dates, the amortization amount is
$100,000. Thereafter, on each monthly amortization date, the Company may elect to repay 5% of the original principal
amount of September Debentures in cash or, in lieu thereof, the conversion price of such September Debentures shall
thereafter be 85% of the volume weighted average price at the time of conversion. In the event the Company does not elect to
pay such amortization amounts in cash, each investor, in their sole discretion, may increase the conversion amount subject to
the alternative conversion price by up to four times the amortization amount.
RENNOVA
HEALTH, INC.
Notes
to Condensed Consolidated Financial Statements
(unaudited)
The
Series A Warrants are exercisable for an aggregate of 2,311,829 shares of the Company’s common stock. They are immediately
exercisable and have a term of exercise equal to five years. The Series B Warrants are exercisable for an aggregate of 2,311,859
shares of the Company’s common stock and are exercisable for a period of 18 months commencing immediately. The Series C
Warrants are exercisable for an aggregate of 2,311,829 shares of the Company’s common stock, and have a term of five years
provided such Series C Warrants shall only vest if, when and to the extent that the holders exercise the Series B Warrants. The
September Warrants each have an exercise price of $3.90. All of the September Warrants are subject to “full ratchet”
and other customary anti-dilution protections.
The
Company’s obligations under the September Debentures are secured by a security interest in all of the Company’s and
its subsidiaries’ assets, pursuant to the terms of the Security Agreement, dated as of March 20, 2017.
During
the nine months ended September 30, 2017, the Company realized approximately $15.7 million in proceeds from the issuances of these
debentures and warrants. At September 30, 2017, the unamortized discounts were $16.4 million. These discounts represent original
issue discounts, the relative fair value of the warrants issued with the debentures and the relative fair value of the beneficial
conversion features of the debentures. During the three and nine months ended September 30, 2017, the Company recorded approximately
$4.8 million and approximately $14.7 million of non-cash interest and amortization of debt discount expense primarily
in connection with the debentures and warrants.
See
Note 9 for summarized information related to warrants issued and the activity during the nine months ended September 30, 2017.
Note
7 – Related Party Transactions
In
addition to the transactions discussed in Note 5, the Company had the following related party transactions during the nine months
ended September 30, 2017 and 2016:
In
January and February of 2017, the Company received advances aggregating $3.6 million from Christopher Diamantis, a director of
the Company. The advances, along with $0.5 million of previously accrued but unpaid interest, were due on demand, bearing interest
at 10% per annum. The Company used the advances to pay the purchase price for the Hospital Assets and for general corporate purposes.
On March 7, 2017, the Company issued a promissory note to Mr. Diamantis in the amount of $3.8 million (the “2017 Diamantis
Note”) in connection with these advances received in 2017, plus accrued and unpaid interest of $0.5 million. In conjunction
with the issuance of the 2017 Diamantis Note, the Company also issued to Mr. Diamantis warrants to purchase 27,667 shares
of the Company’s common stock, exercisable at $15.00. The 2017 Diamantis Note was repaid on March 21, 2017
with the proceeds received from the issuance of the Convertible Debentures (see Note 6). In May and June of 2017, the Company
received advances from Mr. Diamantis, net of repayments totaling $0.2 million, at a 10% annum interest rate, which amount was
paid in full on July 18, 2017.
Alcimede
billed the Company $0.4 million and $0.3 million for consulting fees pursuant to a consulting agreement for each of the nine months
ended September 30, 2017 and 2016, respectively.
Monarch
Capital, LLC (“Monarch”) billed the Company for consulting fees pursuant to a consulting agreement in the amount of
$0.1 million for the nine months ended September 30, 2017 and 2016, respectively. The agreement expired on August 31, 2017. Michael
Goldberg, a director of the Company up until his resignation effective April 24, 2017, is the Managing Director of Monarch.
Note
8 – Capital Lease Obligations
The
Company leases various assets under capital leases expiring through 2020 as follows. At September 30, 2017 (unaudited) and December
31, 2016, capital lease obligations consisted of the following:
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
Medical equipment
|
|
$
|
4,497,025
|
|
|
$
|
4,497,025
|
|
Less accumulated depreciation
|
|
|
(3,582,631
|
)
|
|
|
(2,809,511
|
)
|
|
|
|
|
|
|
|
|
|
Net
|
|
$
|
914,394
|
|
|
$
|
1,687,514
|
|
RENNOVA
HEALTH, INC.
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Aggregate
future minimum rentals under capital leases are as follows:
Year ended December 31,
|
|
|
|
2017 (October through December)
|
|
$
|
493,282
|
|
2018
|
|
|
1,427,375
|
|
2019
|
|
|
377,919
|
|
2020
|
|
|
32,611
|
|
Total
|
|
|
2,331,187
|
|
|
|
|
|
|
Less interest
|
|
|
103,983
|
|
Present value of minimum lease payments
|
|
|
2,227,204
|
|
|
|
|
|
|
Less current portion of capital lease obligations
|
|
|
1,491,666
|
|
Capital lease obligations, net of current portion
|
|
$
|
735,538
|
|
Note
9 – Stockholders’ Equity
Preferred
Stock
The
Company has 5,000,000 shares, par value $0.01, of preferred stock authorized. As of September 30, 2017, the Company had
outstanding 1,750,275 shares of preferred stock consisting of 215 shares of its Series G Preferred Stock, 60 shares of its
Series H Preferred Stock and 1,750,000 shares of its Series F Convertible Preferred Stock (the “Series F Preferred
Stock”).
During
the nine months ended September 30, 2017, 7,785 shares of Series H Preferred Stock were converted into 370,446 shares of common
stock in accordance with the terms of the Series H Preferred Stock. Also during the nine months ended September 30, 2017, 2,174
shares of Series H Preferred Stock with a stated value of $2.2 million were exchanged for Exchange Debentures with an aggregate
principal amount of $2.7 million and warrants (see Note 6).
In
connection with the acquisition of Genomas, Inc., on September 27, 2017, which is more fully discussed in Note 14, the Company
issued 1,750,000 shares of its Series F Preferred Stock valued at $174,097. The following is a summary of certain terms and provisions
of the Company’s Series F Preferred Stock:
Rank
.
The Series F Preferred Stock ranks on parity to our common stock.
Conversion
.
Each share of the Series F Preferred Stock is convertible into shares of our common stock (subject to adjustment as provided in
the related certificate of designation of preferences, rights and limitations) at any time after the first anniversary of the
issuance date at the option of the holder at a conversion price equal to the greater of $29.25 or the average closing price of
the Company’s common stock for the 10 trading days immediately preceding the conversion. The maximum number of shares of
common stock issuable upon the conversion of the Series F Preferred Stock is 59,829. Any shares of Series F Preferred Stock outstanding
on the fifth anniversary of the issuance date will be mandatorily converted into common stock at the applicable conversion price
on such date.
Liquidation
Preference
. In the event of our liquidation, dissolution or winding-up, holders of Series F Preferred Stock will be entitled
to receive the same amount that a holder of common stock would receive if the Series F Preferred Stock were fully converted into
shares of our common stock at the conversion price (assuming for such purposes that the Series F Preferred Stock is then convertible)
which amounts shall be paid pari passu with all holders of common stock.
Voting
Rights
. Each share of Series F Preferred Stock shall have one vote, and the holders of the Series F Preferred Stock shall
vote together with the holders of our common stock as a single class.
Dividends
.
The holders of the Series F Preferred Stock will participate, on an as-if-converted-to-common stock basis, in any cash dividends
to the holders of common stock.
Redemption
.
At any time, from time to time after the first anniversary of the issuance date, we have the right to redeem all or any portion
of the outstanding Series F Preferred Stock at a price per share equal to $1.95 plus any accrued but unpaid dividends.
Negative
Covenants
. As long as any shares of Series F Preferred Stock are outstanding, the Company may not amend, alter or repeal any
provision of our certificate of incorporation, the certificate of designation or our bylaws in a manner that materially adversely
affects the powers, preferences or rights of the Series F Preferred Stock.
RENNOVA
HEALTH, INC.
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Preferred
Stock Issued Subsequent to September 30, 2017
In
October 2017, the Company issued its Series I-1 Convertible Preferred Stock in connection with a financing as more fully discussed
in Note 15.
Common
Stock
The
Company had 1,354,171 and 186,692 shares of common stock outstanding at September 30, 2017 and December 31, 2016, respectively.
The Company issued 1,167,479 shares of its common stock during the nine months ended September 30, 2017 as follows:
The
February 22, 2017 reverse stock split, which is more fully described in Note 1, resulted in the issuance of 526 shares of common
stock due to the rounding up of fractional shares.
On
March 13, 2017, the Company issued 26,667 shares of common stock in settlement of $0.4 million of outstanding notes and warrants
(see Note 5).
On
March 15, 2017, the Company agreed to issue 2,056 shares of common stock to the holders of a like number of warrants to purchase
the Company’s common stock in exchange for the warrants valued at $57,868.
During
the nine months ended September 30, 2017, the Company issued 548,932 shares of its common stock upon conversion of $4.1 million
of the principal amount of the March Debentures (See Note 6).
On
July 25, 2017, the Company issued 8,333 shares of its common stock valued at $42,510 for severance owed to a former employee under
the terms of the Company’s equity plan. The equity plan is more fully described below.
On
August 14, 2017, the Company issued 181,933 shares of restricted stock to employees and directors, and later returned 4,933
shares of this stock to treasury, as more fully discussed under the heading
Restricted Stock
below.
On
August 23, 2017, the Company issued 33,334 shares of its common stock in payment of professional service fees valued at $118,493.
Restricted
Stock
On
August 14, 2017, the Board of Directors, based on the recommendation of the Compensation Committee of the Board and in accordance
with the provisions of the 2007 Equity Plan, approved grants to employees and directors of the Company of an aggregate of 181,933
shares of restricted common stock of the Company. The grants fully vest on the first anniversary of the date of grant, subject
to the grantee’s continued status as an employee or director, as the case may be, on the vesting date. During the nine months
ended September 30, 2017, 4,933 shares of the restricted stock were forfeited by their terms and returned to treasury and cancelled.
During
the nine months ended September 30, 2017, the Company recognized stock-based compensation in the amount of $82,974 for the grant
of the restricted stock based on a valuation of $3.75 per share. At September 30, 2017, the Company had approximately $580,750
of unrecognized compensation cost related to the restricted stock.
Stock
Options
The
Company maintained and sponsored the Tegal Corporation 2007 Incentive Award Equity Plan (the “2007 Equity
Plan”). Tegal Corporation is the predecessor entity to 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. During
the nine months ended September 30, 2017 and 2016, the Company recognized stock-based compensation in the amount of $34,081 and
$0.7 million, respectively, for the vesting of outstanding stock options. The 2007 Equity Plan terminated pursuant to its terms
in September 2017. The following table summarizes the Company’s stock option activity for the nine months ended September
30, 2017:
RENNOVA
HEALTH, INC.
Notes
to Condensed Consolidated Financial Statements
(unaudited)
|
|
Number of
options
|
|
|
Weighted-
average
exercise
price
|
|
|
Weighted-
average
contractual
term (Yrs.)
|
|
Outstanding at December 31, 2016
|
|
|
47,268
|
|
|
$
|
1,941.45
|
|
|
|
8.93
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Forfeit
|
|
|
(8,790
|
)
|
|
|
-
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Outstanding at September 30, 2017
|
|
|
38,478
|
|
|
$
|
2,072.75
|
|
|
|
8.68
|
|
Exercisable at September 30, 2017
|
|
|
31,811
|
|
|
$
|
2,445.84
|
|
|
|
|
|
As
of September 30, 2017, the Company had approximately $155,582 of unrecognized compensation cost related to stock options granted
under the Company’s 2007 Equity Plan, which is expected to be recognized over a weighted-average period of 1.03 years.
Warrants
The
Company, as part of various debt and equity financing transactions, has issued warrants to purchase shares of the Company’s
common stock. The following summarizes the information related to warrants issued and the activity during the nine months ended
September 30, 2017:
|
|
Number of
warrants
|
|
|
Weighted
average
exercise price
|
|
Balance at December 31, 2016
|
|
|
93,843
|
|
|
$
|
175.50
|
|
Warrants issued during the period
|
|
|
17,900,999
|
|
|
$
|
4.58
|
|
Warrants exchanged/exercised during period
|
|
|
(6,500
|
)
|
|
|
|
|
Warrants expired during the period
|
|
|
-
|
|
|
|
|
|
Balance at September 30, 2017
|
|
|
17,988,342
|
|
|
$
|
5.40
|
|
During
the nine-months ended September 31, 2017, the Company issued 16,350,132 warrants with a weighted average exercise price of $5.03
per share in connection with the issuances of debentures as more fully discussed in Note 6.
Basic
and Diluted Loss per Share
Basic
loss per share excludes dilution and is computed by dividing loss attributable to common stockholders by the weighted-average
number of common shares outstanding during the period. Diluted loss per share reflects the potential dilution that could occur
if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance
of common stock that then shared in the income of the Company. For the three and nine months ended September 30, 2017 and 2016,
basic loss per share is the same as diluted loss per share.
Diluted
loss per share excludes all dilutive potential shares if their effect is anti-dilutive. As of September 30, 2017 and 2016, the
following potential common stock equivalents were excluded from the calculation of diluted loss per share as their effect was
anti-dilutive:
|
|
As of September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Warrants
|
|
|
17,988,342
|
|
|
|
78,102
|
|
Convertible preferred stock
|
|
|
71,147
|
|
|
|
47,463
|
|
Convertible debt
|
|
|
4,353,898
|
|
|
|
3,911
|
|
Stock options
|
|
|
38,478
|
|
|
|
49,331
|
|
|
|
|
22,451,865
|
|
|
|
178,807
|
|
RENNOVA
HEALTH, INC.
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note
10 – Supplemental Disclosure of Cash Flow Information
The
supplemental cash flow information for the nine months ended September 30, 2017 and 2016 (unaudited) is as follows:
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
2017
|
|
|
|
2016
|
|
Cash paid for interest
|
|
$
|
1,106,835
|
|
|
$
|
1,237,622
|
|
Cash paid for income taxes
|
|
$
|
506,313
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Services and severance settled through issuance of
common stock
|
|
$
|
161,003
|
|
|
$
|
2,131,829
|
|
Exchange of convertible debentures for convertible
debentures and warrants
|
|
$
|
10,734,336
|
|
|
$
|
-
|
|
Series F Preferred Stock issued for business acquisition
|
|
$
|
174,097
|
|
|
$
|
-
|
|
Note payable and warrants settled through issuance
of common stock
|
|
$
|
440,000
|
|
|
$
|
-
|
|
Convertible debenture issued in exchange of Series
H Preferred Stock
|
|
$
|
2,695,760
|
|
|
$
|
-
|
|
Debentures converted into common stock
|
|
$
|
4,064,162
|
|
|
$
|
-
|
|
Deemed dividend for trigger of down round provision
feature
|
|
$
|
53,341,619
|
|
|
$
|
-
|
|
Note
11 – Commitments and Contingencies
Legal
Matters
From
time to time, the Company may be involved in a variety of claims, lawsuits, investigations and proceedings related to contractual
disputes, employment matters, regulatory and compliance matters, intellectual property rights and other litigation arising in
the ordinary course of business. The Company operates in a highly regulated industry which may inherently lend itself to legal
matters. Management is aware that litigation has associated costs and that results of adverse litigation verdicts could have a
material effect on the Company’s financial position or results of operations. Management, in consultation with legal counsel,
has addressed known assertions and predicted unasserted claims below.
Biohealth
Medical Laboratory, Inc, and PB Laboratories, LLC (the “Companies”) filed suit against CIGNA Health in 2015
alleging that CIGNA failed to pay claims for laboratory services the Companies provided to patients pursuant to CIGNA -
issued and CIGNA - administered plans. In 2016, the U.S. District Court dismissed part of the Companies’ claims for
lack of standing. The Companies appealed that decision to the Eleventh Circuit Court of Appeals, which recently reversed the
District Court’s decision and found that the Companies have standing to raise claims arising out of traditional
insurance plans as well as self-funded plans.
The
Company’s Epinex Diagnostics Laboratories, Inc. subsidiary was sued in a California state court by two former employees
who alleged that they were wrongfully terminated, as well as for a variety of unpaid wage claims. The parties entered into a settlement
agreement of this matter on July 29, 2016 for approximately $0.2 million, and the settlement was consummated on August 25, 2016.
In October of 2016, the plaintiffs in this matter filed a motion with the court seeking payment for attorneys’ fees
in the approximate amount of $0.7 million. On March 24, 2017, the court granted plaintiffs’ motion for payment of attorneys’
fees in the amount of $0.3 million, and the Company has accrued this amount in its condensed consolidated financial statements.
Additionally, the Company is seeking indemnification for these amounts from Epinex Diagnostics, Inc. (“EDI”), the
seller of Epinex Diagnostic Laboratories, Inc. (“EDL”), pursuant to a Stock Purchase Agreement entered into by and
among the parties.
In
February 2016, the Company received notice that the Internal Revenue Service (the “IRS”) placed a lien against Medytox
Solutions, Inc. and its subsidiaries relating to unpaid 2014 taxes due, plus penalties and interest, in the amount of $5.0 million.
The Company paid $0.1 million toward its 2014 tax liability on March 2016. The Company filed its 2015 Federal tax return on March
15, 2016 and the accompanying election to carryback the reported net operating losses was filed in April 2016. On August 24, 2016,
the lien was released, and on September of 2016 the Company received a refund from the IRS in the amount of $1.9 million. In
November of 2016, the IRS commenced an audit of the Company’s 2015 Federal tax return. The Company is currently unable
to predict the outcome of the audit or any liability to the Company that may result from the audit.
On
September 27, 2016, a tax warrant was issued against the Company by the Florida Department of Revenue (the
“DOR”) for unpaid 2014 state income taxes in the approximate amount of $0.9 million, including penalties and
interest. On January 25, 2017, the Company paid the DOR $250,000 as partial payment on this liability, and in February 2017
the Company entered into a Stipulation Agreement with the DOR which will allow the Company to make monthly installment
payments of $35,000 until February 2018 and negotiate a new payment agreement then, if the balance of $0.3 million cannot be
satisfied in a lump sum. If at any time during the Stipulation period the Company fails to timely file any required tax
returns with the DOR or does not meet the payment obligations under the Stipulation Agreement, the entire amount due will be
accelerated. The Company is current with the agreed payment plan.
RENNOVA
HEALTH, INC.
Notes
to Condensed Consolidated Financial Statements
(unaudited)
In
December of 2016, TCS-Florida, L.P. (“Tetra”), filed suit against the Company for failure to make the required
payments under an equipment leasing contract that the Company had with Tetra (see Note 8). On January 3, 2017, Tetra received
a Default Judgment against the Company in the amount of $2.6 million, representing the balance owed on the leases, as well as
additional interest, penalties and fees. The Company has recognized this amount in its consolidated financial statements as
of December 31, 2016. In January and February of 2017, the Company made payments to Tetra in connection with this
judgment aggregating to $0.7 million, and on February 15, 2017 the Company entered into a forbearance agreement with Tetra
whereby the remaining $1.9 million due will be paid in 24 equal monthly installments. Payments commenced on May 1, 2017. The
Company is current with its payments.
In
December of 2016, DeLage Landen Financial Services, Inc. (“DeLage”), filed suit against the Company for failure to
make the required payments under an equipment leasing contract that the Company had with DeLage (see Note 8). On January 24, 2017,
DeLage received a default judgment against the Company in the approximate amount of $1.0 million, representing the balance owed
on the lease, as well as additional interest, penalties and fees. The Company has recognized this amount in its consolidated financial
statements as of December 31, 2016. On February 8, 2017, a Stay of Execution was filed and under its terms the balance due will
be paid in variable monthly installments through January of 2019, with an implicit interest rate of 4.97%. The Company is current
in its payments.
On
December 7, 2016, the holders of the Tegal Notes (see Note 5) filed suit against the Company seeking payment for the amounts
due under the notes in the aggregate of $0.4 million, including accrued interest. A request for entry of default judgment was
filed on January 24, 2017. A Case Management Conference is scheduled for December 5, 2017. The Company has submitted a
settlement agreement proposal to the holders of the Tegal Notes and is awaiting a response.
Note
12 – Segment Information
Operating
segments are defined under U.S. GAAP as components of an enterprise for which discrete financial information is available and
are evaluated regularly by the enterprise’s chief operating decision maker in determining how to allocate resources and
assess performance. The Company operates in four reportable business segments:
|
●
|
Clinical
Laboratory Operations
, which specializes in providing urine and blood toxicology and pain medication testing to physicians,
clinics and rehabilitation facilities in the United States.
|
|
|
|
|
●
|
Supportive
Software Solutions
, including EHR and medical billing and laboratory information management systems.
|
|
|
|
|
●
|
Hospital
Operations
, which reflects the purchase of the Hospital Assets (see Note 3) and the operations of Scott County Community
Hospital, which has since been renamed as Big South Fork Medical Center.
|
|
|
|
|
●
|
Corporate,
which reflects consolidated company wide support services such as finance, legal counsel, human resources, and
payroll.
|
The
Company’s Decision Support and Informatics segment is now included in discontinued operations as it has been classified
as held for sale as of September 30, 2017. The accounting policies of the reportable segments are the same as those described
in Note 2, Summary of Significant Accounting Policies, of the Company’s audited consolidated financial statements included
in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 and in Note 1 for the adoption to ASU 2017-11.
Selected financial information for the Company’s operating segments is as follows:
RENNOVA
HEALTH, INC.
Notes
to Condensed Consolidated Financial Statements
(unaudited)
|
|
Three Months Ended September
30,
|
|
|
Nine Months Ended September
30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Net revenues - External
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Clinical Laboratory Operations
|
|
$
|
586,663
|
|
|
$
|
(9,085
|
)
|
|
$
|
1,994,639
|
|
|
$
|
3,461,987
|
|
Supportive Software Solutions
|
|
|
208,070
|
|
|
|
50,447
|
|
|
|
698,359
|
|
|
|
605,575
|
|
Hospital Operations
|
|
|
619,478
|
|
|
|
-
|
|
|
|
619,478
|
|
|
|
-
|
|
|
|
$
|
1,414,211
|
|
|
$
|
41,362
|
|
|
$
|
3,312,476
|
|
|
$
|
4,067,562
|
|
Net revenues - Intersegment
(***
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supportive Software Solutions
|
|
|
217,431
|
|
|
|
502,055
|
|
|
|
501,924
|
|
|
|
1,036,396
|
|
|
|
$
|
217,431
|
|
|
$
|
502,055
|
|
|
$
|
501,924
|
|
|
$
|
1,036,396
|
|
(Loss) income from operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Clinical Laboratory Operations
|
|
$
|
(1,039,118
|
)
|
|
$
|
(7,364,096
|
)
|
|
$
|
(3,809,146
|
)
|
|
$
|
(10,590,435
|
)
|
Supportive Software Solutions
|
|
|
(660,800
|
)
|
|
|
(1,253,386
|
)
|
|
|
(1,721,694
|
)
|
|
|
(3,800,893
|
)
|
Hospital Operations
|
|
|
(2,093,805
|
)
|
|
|
-
|
|
|
|
(3,114,473
|
)
|
|
|
-
|
|
Corporate
|
|
|
(1,369,765
|
)
|
|
|
(2,940,956
|
)
|
|
|
(5,058,565
|
)
|
|
|
(7,059,644
|
)
|
Eliminations
|
|
|
-
|
|
|
|
33,663
|
|
|
|
8,181
|
|
|
|
100,987
|
|
|
|
$
|
(5,163,488
|
)
|
|
$
|
(11,524,775
|
)
|
|
$
|
(13,695,697
|
)
|
|
$
|
(21,349,985
|
)
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Clinical Laboratory Operations
|
|
$
|
410,801
|
|
|
$
|
549,748
|
|
|
$
|
1,265,174
|
|
|
$
|
1,646,167
|
|
Supportive Software Solutions
|
|
|
25,015
|
|
|
|
163,749
|
|
|
|
227,999
|
|
|
|
490,236
|
|
Hospital Operations
|
|
|
15,436
|
|
|
|
-
|
|
|
|
22,045
|
|
|
|
-
|
|
Corporate
|
|
|
345
|
|
|
|
745
|
|
|
|
1,005
|
|
|
|
2,494
|
|
Eliminations
|
|
|
-
|
|
|
|
(33,663
|
)
|
|
|
(8,181
|
)
|
|
|
(100,987
|
)
|
|
|
$
|
451,597
|
|
|
$
|
680,579
|
|
|
$
|
1,508,042
|
|
|
$
|
2,037,910
|
|
Capital expenditures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Clinical Laboratory Operations
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
6,000
|
|
Supportive Software Solutions
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9,998
|
|
Hospital Operations
|
|
|
160,413
|
|
|
|
-
|
|
|
|
1,554,499
|
|
|
|
-
|
|
|
|
$
|
160,413
|
|
|
$
|
-
|
|
|
$
|
1,554,499
|
|
|
$
|
15,998
|
|
***`
Intersegment revenues are eliminated in consolidation.
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
Total assets
|
|
|
|
|
|
|
|
|
Clinical Laboratory Operations
|
|
$
|
1,686,167
|
|
|
$
|
3,986,126
|
|
Supportive Software Solutions
|
|
|
1,767,251
|
|
|
|
2,602,428
|
|
Decision Support and Informatics
|
|
|
-
|
|
|
|
60,000
|
|
Hospital Operations
|
|
|
1,748,986
|
|
|
|
-
|
|
Corporate
|
|
|
3,037,112
|
|
|
|
2,130,191
|
|
Assets of AMSG classified as held for sale
|
|
|
997,497
|
|
|
|
414,662
|
|
Eliminations
|
|
|
(2,871,080
|
)
|
|
|
(2,711,014
|
)
|
|
|
$
|
6,365,933
|
|
|
$
|
6,482,393
|
|
RENNOVA
HEALTH, INC.
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note
13 – Recently Issued Accounting Standards
The
following table provides a brief description of recently issued accounting standards:
Title
and reference
|
|
Prescribed
|
|
Commentary
|
Effective
Date
|
ASU
No. 2015-11, “Inventory” (Topic 330): Simplifying the Measurement of Inventory.
|
|
Fiscal
years beginning after December 15, 2016 and for interim periods therein.
|
|
In
July 2015, the FASB issued ASU No. 2015-11, “Inventory” (Topic 330): Simplifying the Measurement of Inventory
(“ASU 2015-11”). ASU 2015-11 simplifies the measurement of inventory by requiring certain inventory to be subsequently
measured at the lower of cost and net realizable value. The amendments in this guidance are effective for fiscal years beginning
after December 15, 2016 and for interim periods therein and did not have a significant impact on the Company’s consolidated
financial statements upon adoption.
|
ASU
No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”
|
|
Fiscal
years beginning after December 15, 2017 and for interim periods therein.
|
|
In
May 2014, the FASB issued guidance that outlines a single comprehensive model for entities to use in accounting for revenue
arising from contracts with customers and supersedes most recent current revenue recognition guidance, including industry-specific
guidance. The core principle of the revenue model is that an entity recognizes revenue to depict the transfer of promised
goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in
exchange for those goods or services. The guidance also specifies the accounting for certain incremental costs of obtaining
a contract and costs to fulfill a contract with a customer. Entities have the option of applying either a full retrospective
approach to all periods presented or a modified approach that reflects differences prior to the date of adoption as an adjustment
to equity. In April 2015, FASB deferred the effective date of this guidance until January 1, 2018 and the Company is currently
assessing the impact of this guidance on its consolidated financial statements.
|
ASU
No. 2014-15, “Presentation of Financial Statements - Going Concern” (Subtopic 205-40): Disclosure of Uncertainty
about an Entity’s Ability to Continue as a Going Concern.
|
|
Fiscal
years, and interim periods within those years, beginning on or after December 15, 2016, with early adoption permitted.
|
|
In
August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements - Going Concern” (Subtopic
205-40): Disclosure of Uncertainty about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”).
ASU 2014-15 provides guidance that establishes management’s responsibility to evaluate whether there is substantial
doubt about an entity’s ability to continue as a going concern and setting rules for how this information should be
disclosed in the financial statements. Adoption of this new standard did not have a significant impact on the Company’s
consolidated financial statements. See Note 1 regarding management’s current disclosures regarding the Company’s
ability to continue as a going concern.
|
ASU
No. 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes”
|
|
Fiscal
years beginning on or after December 15, 2016, with early adoption permitted.
|
|
In
November 2015, the FASB issued ASU No. 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred
Taxes” (“ASU 2015-17”). Topic 740, Income Taxes, requires an entity to separate deferred income tax liabilities
and assets into current and noncurrent amounts in a classified statement of financial position. Deferred tax liabilities and
assets are classified as current or noncurrent based on the classification of the related asset or liability for financial
reporting. Deferred tax liabilities and assets that are not related to an asset or liability for financial reporting are classified
according to the expected reversal date of the temporary difference. To simplify the presentation of deferred income taxes,
the amendments in ASU 2015-17 require that deferred income tax liabilities and assets be classified as noncurrent in a classified
statement of financial position. For public business entities, the amendments in this update are effective for financial statements
issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Adoption of
ASU 2015-17 did not have a material impact on the Company’s consolidated financial statements.
|
Accounting
Standards Update (“ASU”) No. 2016-02, “Leases (Topic 842)”
|
|
Annual
and interim periods within the annual period beginning after December 15, 2018.
|
|
In
February 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-02, “Leases (Topic 842)”
(“ASU 2016-02”). The amendments in this update create Topic 842, Leases, and supersede the leases requirements
in Topic 840, Leases. Topic 842 specifies the accounting for leases. The objective of Topic 842 is to establish the principles
that lessees and lessors shall apply to report useful information to users of financial statements about the amount, timing,
and uncertainty of cash flows arising from a lease. The main difference between Topic 842 and Topic 840 is the recognition
of lease assets and lease liabilities for those leases classified as operating leases under Topic 840. Topic 842 retains a
distinction between finance leases and operating leases. The classification criteria for distinguishing between finance leases
and operating leases are substantially similar to the classification criteria for distinguishing between capital leases and
operating leases in the previous leases guidance. The result of retaining a distinction between finance leases and operating
leases is that under the lessee accounting model in Topic 842, the effect of leases in the statement of comprehensive income
and the statement of cash flows is largely unchanged from previous GAAP. The amendments in ASU 2016-02 are effective for fiscal
years beginning after December 15, 2018, including interim periods within those fiscal years for public business entities.
Early application of the amendments in ASU 2016-02 is permitted. The Company has not yet determined the impact that adoption
of ASU 2016-02 will have on its consolidated financial statements.
|
ASU
No. 2017-11, “Earnings Per Share (Topic 260) Distinguishing Liabilities from Equity (Topic 480) Derivatives and Hedging
(Topic 815)” (“ASU 2017-11”)
|
|
Fiscal
years beginning on or after December 15, 2018, with early adoption permitted.
|
|
The
Company adopted this amendment as of its period ended June 30, 2017 (see Note 1)
.
|
ASU
No. 2017-12, “Derivatives and Hedging (Topic 815)”(“ASU 2017-12”)
|
|
For
public business entities, the amendments in this ASU 2017-12 are effective for fiscal years beginning after December 15, 2018,
and interim periods within those fiscal years. Early adoption permitted in any interim period after issuance of this ASU.
|
|
The
amendments in ASU 2017-12 (“Update”) provide recognition and presentation guidance for qualifying hedges. The
amendments in this Update more closely align the results of cash flow and fair value hedge accounting with risk management
activities through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation
of hedge results in the financial statements. The amendments address specific limitations in current U.S. GAAP by expanding
hedge accounting for both nonfinancial and financial risk components and by refining the measurement of hedge results to better
reflect an entity’s hedging strategies. Thus, the amendments will enable an entity to report more faithfully the economic
results of hedging activities for certain fair value and cash flow hedges and will avoid mismatches in earnings by allowing
for greater precision when measuring change in fair value of the hedged item for certain fair value hedges. Additionally,
by aligning the timing of recognition of hedge results with the earnings effect of the hedged item for cash flow and net investment
hedges, and by including the earnings effect of the hedging instrument in the same income statement line item in which the
earnings effect of the hedged item is presented, the results of an entity’s hedging program and the cost of executing
that program will be more visible to users of financial statements. Additionally, the amendments in this Update should ease
the operational burden of applying hedge accounting by allowing more time to prepare hedge documentation and allowing effectiveness
assessments to be performed on a qualitative basis after hedge inception. The Company has not yet determined the impact that
adoption of ASU 2017-12 will have on its consolidated financial statements.
|
Note
14 – Discontinued Operations
On
July 12, 2017, the Company announced plans to spin off AMSG as an independent publicly traded company by way of a tax-free distribution
to the Company’s stockholders. Completion of the spinoff is expected to occur in the first quarter of 2018 and is
subject to numerous conditions, including effectiveness of a Registration Statement on Form 10 to be filed with the Securities
and Exchange Commission, and consents, including under various funding agreements previously entered into by the Company.
A record date to determine those stockholders entitled to receive shares in the spin off should be approximately 30 to 60 days
prior to the date of the spinoff. The strategic goal of the spinoff is to create two public companies, each of which can focus
on its own strengths and operational plans. In addition, after the spinoff, each company will provide a distinct and targeted
investment opportunity.
In
accordance with ASC 205-20 and having met the criteria for “held for sale”, as the Company reached this decision prior
to September 30, 2017, the Company has reflected amounts relating to AMSG as a disposal group classified as held for sale and
included as part of discontinued operations. AMSG had been included in the Decision Support and Informatics segment, except for
the Company’s subsidiary, Alethea Laboratories, Inc., which had been included in the Clinical Laboratory Operations segment.
Segment disclosures in Note 12 no longer include amounts relating to AMSG following the reclassification to discontinued operations.
Carrying
amounts of major classes of assets and liabilities classified as held for sale and included as part of discontinued operations
in the condensed consolidated balance sheets consisted of the following:
RENNOVA
HEALTH, INC.
Notes
to Condensed Consolidated Financial Statements
(unaudited)
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Cash
|
|
$
|
8,690
|
|
|
$
|
2,962
|
|
Accounts receivable, net
|
|
|
6,503
|
|
|
|
267,681
|
|
Prepaid expenses and other current assets
|
|
|
53,582
|
|
|
|
67,257
|
|
Current assets classified as held for sale
|
|
$
|
68,775
|
|
|
$
|
337,900
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
-
|
|
|
$
|
53,012
|
|
Goodwill
|
|
|
914,972
|
|
|
|
-
|
|
Deposits
|
|
|
13,750
|
|
|
|
23,750
|
|
Non-current assets classified as held for sale
|
|
$
|
928,722
|
|
|
$
|
76,762
|
|
|
|
|
|
|
|
|
|
|
Accounts payable (includes related parties)
|
|
$
|
837,989
|
|
|
$
|
422,864
|
|
Accrued expenses
|
|
|
253,991
|
|
|
|
1,253,117
|
|
Current portion of notes payable
|
|
|
276,632
|
|
|
|
-
|
|
Current liabilities classified as held for sale
|
|
$
|
1,368,612
|
|
|
$
|
1,675,981
|
|
|
|
|
|
|
|
|
|
|
Non-current liabilities classified as held for sale
|
|
$
|
-
|
|
|
$
|
26,598
|
|
Major
line items constituting loss from discontinued operations in the consolidated statements of operations for the nine months ended
September 30, 2017 and 2016 consisted of the following:
|
|
September 30, 2017
|
|
|
September 30, 2016
|
|
|
|
|
(unaudited)
|
|
|
|
(unaudited)
|
|
Revenue from services
|
|
$
|
224,224
|
|
|
$
|
1,154,967
|
|
Cost of services
|
|
|
9,282
|
|
|
|
162,266
|
|
Gross profit
|
|
|
214,942
|
|
|
|
992,701
|
|
Operating expenses
|
|
|
1,225,638
|
|
|
|
4,073,873
|
|
Other income (expenses)
|
|
|
42,775
|
|
|
|
(253,142
|
)
|
Loss from discontinued operations
|
|
$
|
(1,053,471
|
)
|
|
$
|
(2,828,030
|
)
|
Acquisition
of Genomas, Inc. on September 27, 2017
On
September 29, 2016, the Company announced that it had entered into a Stock Purchase Agreement (the “Purchase Agreement”)
to acquire the remaining outstanding equity securities of Genomas, Inc. (“Genomas”) that the Company did not already
own, representing approximately 85% of the outstanding equity interests in Genomas, for 1,750,000 shares of the Company’s
newly - designated Series F Preferred Stock. (The Series F Preferred Stock is more fully described in Note 9 and below.) Genomas
is a biomedical company that develops PhyzioType Systems for DNA-guided management and prescription of drugs used to treat mental
illness, pain, heart disease, and diabetes. The Company had previously announced that on July 19, 2016 it acquired approximately
15% of the outstanding equity of Genomas from Hartford Healthcare Corporation (“Hartford”), along with approximately
$1.5 million of notes payable to Hartford and certain rights to and license participation in technology that is used by Genomas,
for $250,000 in cash. Under the terms of the Purchase Agreement, the Company also agreed to assume approximately $0.8 million
of indebtedness and other obligations of Genomas. The closing of this acquisition, which was subject to, among other things, receipt
of regulatory and licensure approvals as well as other customary closing conditions, did not occur until September 27, 2017. As
a result of delays in the closing of the transaction, the Company expensed all amounts previously paid for the company during
the fourth quarter of 2016, including outstanding advances to Genomas in the amount of $0.4 million. Genomas will be spun-off
as part of AMSG, so it is presented here in discontinued operations.
RENNOVA
HEALTH, INC.
Notes
to Condensed Consolidated Financial Statements
(unaudited)
The
Series F Preferred Stock issued effective September 27, 2017 has an aggregate stated value of $1,750,000, and is convertible into
shares of the Company’s common stock at any time after the one-year anniversary of the closing date at a conversion price
per common share equal to the greater of $29.25 or the average closing sales price of the Company’s common stock for the
10 trading days immediately preceding the conversion. The maximum number of common shares issuable upon the conversion of the
Series F Preferred Stock is 59,829. The Company valued the Series F Preferred Stock based on the value of the common stock issuable
upon conversion on the date of the acquisition, which was $174,097.
The
following table summarizes the (preliminary) fair values of assets acquired and liabilities assumed at the acquisition
date of Genomas. The Fair Market Value appears to equal cost. The Company has one year to revalue goodwill and other intangible
assets in accordance with GAAP per ASC 850-10-25-14.
Cash
|
|
$
|
7,990
|
|
Accounts receivable, net
|
|
|
6,503
|
|
Accounts payable and accrued expenses
|
|
|
(458,736
|
)
|
Deferred revenue
|
|
|
(20,000
|
)
|
Loans payable short-term
|
|
|
(142,514
|
)
|
Note payable long-term
|
|
|
(134,118
|
)
|
Total identifiable net liabilities
|
|
|
(740,875
|
)
|
Goodwill
|
|
|
914,972
|
|
Total consideration
|
|
$
|
174,097
|
|
The
acquisition of Genomas was accounted for under the purchase method of accounting and, accordingly, the unaudited condensed consolidated
financial statements reflect the results of operations of Genomas from the date of acquisition. Unaudited pro forma results of
operations for the three-months ended September 30, 2017 and 2016 and the nine-months ended September 30, 2017 and 2016 are included
below. Such pro forma information assumes that the Genomas acquisition had occurred as of January 1, 2017 and 2016, respectively,
and revenue is presented in accordance with our accounting policies. These unaudited pro forma statements have been prepared for
comparative purposes only and are not intended to be indicative of what our results would have been had the acquisition occurred
at the beginning of the periods presented or the results which may occur in the future.
|
|
Three Months Ended September
30,
|
|
|
Nine Months Ended September
30,
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Net Revenue
|
|
$
|
1,439,151
|
|
|
$
|
122,432
|
|
|
$
|
3,460,125
|
|
|
$
|
4,251,890
|
|
Loss from discontinued operations
|
|
|
(475,065
|
)
|
|
|
452,083
|
|
|
|
(1,070,620
|
)
|
|
|
(1,871,057
|
)
|
Net loss
|
|
|
(10,930,151
|
)
|
|
|
(10,770,201
|
)
|
|
|
(31,189,252
|
)
|
|
|
(21,158,568
|
)
|
Deemed dividend from triggher of down
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
round provision feature
|
|
|
(2,280,280
|
)
|
|
|
-
|
|
|
|
(53,341,619
|
)
|
|
|
-
|
|
Net loss to common shareholders
|
|
$
|
(13,210,431
|
)
|
|
$
|
(10,770,201
|
)
|
|
$
|
(84,530,871
|
)
|
|
$
|
(21,158,568
|
)
|
Loss per share basic and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share – discontinued operations
|
|
$
|
(0.40
|
)
|
|
$
|
(4.92
|
)
|
|
$
|
(1.57
|
)
|
|
$
|
(35.71
|
)
|
Net loss per common share
|
|
$
|
(10.99
|
)
|
|
$
|
(117.32
|
)
|
|
$
|
(123.69
|
)
|
|
$
|
(403.88
|
)
|
Note
15 – Subsequent Events
Common
Stock Listing
As
previously announced, on April 18, 2017, the Company was notified by Nasdaq that the stockholders’ equity balance reported
on the Company’s Form 10-K for the year ended December 31, 2016 fell below the $2.5 million minimum requirement for continued
listing under the Nasdaq Capital Market’s Listing Rule 5550(b)(1) (the “Rule”). As of September 30, 2017, the
Company reported a stockholders’ deficit of $18.8 million.
In
accordance with the Rule, the Company submitted a plan to Nasdaq outlining how it intended to regain compliance. On August 17,
2017, Nasdaq notified the Company that its plan to correct the stockholders’ equity deficiency did not contain sufficient
evidence to support a correction being achieved in the required time frame. The Company appealed this decision to a Hearing Panel
which, on October 23, 2017, maintained this position and denied the Company a continued listing. Effective October 25, 2017, the
Company’s common stock (RNVA) and warrants to purchase common stock (RNVAW) were no longer listed on the
Nasdaq Stock Market but began trading on the OTCQB instead.
Subsequent
to September 30, 2017, the Company has issued an aggregate of 4.3 million shares of common stock upon the conversion of debentures
and exercise of warrants.
RENNOVA
HEALTH, INC.
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Series
I-1 Convertible Preferred Stock
On
October 30, 2017, the Company closed an offering of $4,960,000 stated value of its newly-authorized Series I-1 Convertible Preferred
Stock (the “Series I-1 Preferred Stock”). The offering was pursuant to the terms of the Securities Purchase Agreement,
dated as of October 30, 2017 (the “Purchase Agreement”), between the Company and certain existing institutional investors
of the Company. The Company received proceeds of $4,000,000 from the offering.
The
Purchase Agreement gives the investors the right to participate in up to 50% of any offering of common stock or common stock equivalents
by the Company. In the event of any such offering, the investors may also exchange all or some of their Series I-1 Preferred Stock
for such new securities on an $0.80 stated value of Series I-1 Preferred Stock for $1.00 of new subscription amount basis.
The
following is a summary of certain terms and provisions of the Series I-1 Preferred Stock:
General.
The Company’s board of directors has designated up to 4,960 shares of the 5,000,000 authorized shares of preferred stock
as the Series I-1 Preferred Stock. Each share of Series I-1 Preferred Stock has a stated value of $1,000.
Rank.
The Series I-1 Preferred Stock is senior in right of payment, including dividend rights and liquidation preference, to the
Company’s Series G Preferred Stock and Series H Preferred Stock.
Conversion.
Each share of Series I-1 Preferred Stock is convertible into shares of the Company’s common stock at any time at the
option of the holder at a conversion price equal to the lesser of (i) $1.00, subject to adjustment, and (ii) 85% of the lesser
of the volume weighted average market price of the common stock on the day prior to conversion or on the day of conversion. The
conversion price is subject to “full ratchet” and other customary anti-dilution protections as more fully described
in the Certificate of Designation of the Series I-1 Preferred Stock.
Liquidation
Preference.
Upon any liquidation, dissolution or winding-up of the Company, the holders of Series I-1 Preferred Stock shall
be entitled to receive an amount equal to the stated value of the Series I-1 Preferred Stock, plus any accrued and unpaid dividends
thereon and any other fees or liquidated damages then due and owing for each share of Series I-1 Preferred Stock, before any distribution
or payment shall be made on any junior securities.
Voting
Rights.
Shares of Series I-1 Preferred Stock generally have no voting rights, except as required by law and except that the
affirmative vote of the holders of a majority of the then outstanding shares of Series I-1 Preferred Stock is required to (a)
alter or change adversely the powers, preferences or rights given to the Series I-1 Preferred Stock or alter or amend the Certificate
of Designation of the Series I-1 Preferred Stock, (b) authorize or create any class of stock ranking as to dividends, redemption
or distribution of assets upon liquidation senior to, or otherwise pari passu with, the Series I-1 Preferred Stock, (c) amend
the Company’s certificate of incorporation or other charter documents in any manner that adversely affects any rights of
the holders, (d) increase the number of authorized shares of Series I-1 Preferred Stock, or (e) enter into any agreement with
respect to any of the foregoing.
Dividends.
Holders of Series I-1 Preferred Stock shall be entitled to receive dividends on shares of Series I-1 Preferred Stock
equal (on an as-converted to common stock basis) to and in the same form as dividends actually paid on shares of common stock
when, as and if dividends are paid on shares of common stock. No other dividends shall be paid on shares of Series I-1 Preferred
Stock.
Redemption.
Upon the occurrence of certain Triggering Events (as defined in the Certificate of Designation of the Series I-1 Preferred
Stock), the holder shall, in addition to any other right it may have, have the right, at its option, to require the Company to
either redeem the Series I-1 Preferred Stock in cash or in certain circumstance in shares of common stock at the redemption prices
set forth in the Certificate of Designation.
Negative
Covenants.
As long as at least a specified number of shares of Series I-1 Preferred Stock are outstanding, unless the holders
of 67% of the then outstanding shares of Series I-1 Preferred Stock shall have given prior written consent, the Company and its
subsidiaries are, with certain exceptions, limited from (a) incurring indebtedness, (b) creating liens, (c) amending its charter
documents, (d) repurchasing or acquiring shares of common stock or common stock equivalents, (e) paying cash dividends on junior
securities, (f) entering into transactions with affiliates, or (g) entering into any agreement with respect to the foregoing.
RENNOVA
HEALTH, INC.
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Series
I-2 Convertible Preferred Stock
On
October 30, 2017, the Company entered into exchange agreements with the holders of the September Debentures to provide that the
holders may, from time to time, exchange their September Debentures for shares of a newly-authorized Series I-2 Convertible Preferred
Stock of the Company (the “Series I-2 Preferred Stock”). The exchange agreements permit the holders of the September
Debentures to exchange specified principal amounts of the September Debentures on various closing dates from December 2, 2017
through March 1, 2018. Any exchange is at the option of the holders. Each holder may reduce the principal amount of September
Debentures exchanged on any particular closing date, or elect not to exchange any September Debentures at all on a closing date.
If a holder does choose to exchange less principal amount of September Debentures, or no September Debentures at all, it can carry
forward such lesser amount to a future closing date and then exchange more than the originally specified principal amount for
that later closing date. For each $0.80 of principal amount of September Debenture surrendered to the Company at any closing date,
the Company will issue the holder a share of Series I-2 Preferred Stock with a stated value of $1.00. Each share of Series I-2
Preferred Stock is convertible into shares of the Company’s common stock at any time at the option of the holder at a conversion
price equal to the lesser of (i) $1.00, subject to adjustment, and (ii) 85% of the lesser of the volume weighted average market
price of the common stock on the day prior to conversion or on the day of conversion. The conversion price is subject to “full
ratchet” and other customary anti-dilution protections as more fully described in the Certificate of Designation of the
Series I-2 Preferred Stock.
The
following is a summary of certain terms and provisions of the Series I-2 Preferred Stock.
General.
The Company’s board of directors has designated up to 12,000 shares of the 5,000,000 authorized shares of preferred
stock as the Series I-2 Preferred Stock. Each share of Series I-2 Preferred Stock has a stated value of $1,000.
Rank.
The Series I-2 Preferred Stock is senior in right of payment, including dividend rights and liquidation preference, to the
Company’s Series G Preferred Stock and Series H Preferred Stock.
Liquidation
Preference.
Upon any liquidation, dissolution or winding-up of the Company, the holders of Series I-2 Preferred Stock
shall be entitled to receive an amount equal to the stated value of the Series I-2 Preferred Stock, plus any accrued and
unpaid dividends thereon and any other fees or liquidated damages then due and owing for each share of Series I-2 Preferred
Stock, before any distribution or payment shall be made on any junior securities.
Voting
Rights.
Shares of Series I-2 Preferred Stock generally have no voting rights, except as required by law and except that the
affirmative vote of the holders of a majority of the then outstanding shares of Series I-2 Preferred Stock is required to (a)
alter or change adversely the powers, preferences or rights given to the Series I-2 Preferred Stock or alter or amend the Certificate
of Designation of the Series I-2 Preferred Stock, (b) authorize or create any class of stock ranking as to dividends, redemption
or distribution of assets upon liquidation senior to, or otherwise pari passu with, the Series I-2 Preferred Stock, (c) amend
the Company’s certificate of incorporation or other charter documents in any manner that adversely affects any rights of
the holders, (d) increase the number of authorized shares of Series I-2 Preferred Stock, or (e) enter into any agreement with
respect to any of the foregoing.
Dividends
.
Holders of Series I-2 Preferred Stock shall be entitled to receive dividends on shares of Series I-2 Preferred Stock equal (on
an as-converted to common stock basis) to and in the same form as dividends actually paid on shares of common stock when, as and
if dividends are paid on shares of common stock. No other dividends shall be paid on shares of Series I-2 Preferred Stock.
Redemption.
Upon the occurrence of certain Triggering Events (as defined in the Certificate of Designation of the Series I-2 Preferred
Stock), the holder shall, in addition to any other right it may have, have the right, at its option, to require the Company to
either redeem the Series I-2 Preferred Stock in cash or in certain circumstance in shares of common stock at the redemption prices
set forth in the Certificate of Designation.
Negative
Covenants.
As long as at least a specified number of shares of Series I-2 Preferred Stock are outstanding, unless the holders
of 67% of the then outstanding shares of Series I-2 Preferred Stock shall have given prior written consent, the Company and its
subsidiaries are, with certain exceptions, limited from (a) incurring indebtedness, (b) creating liens, (c) amending its charter
documents, (d) repurchasing or acquiring shares of common stock or common stock equivalents, (e) paying cash dividends on junior
securities, (f) entering into transactions with affiliates, or (g) entering into any agreement with respect to the foregoing.
Modification
of Anti-Dilution Provisions of the March Debentures and March Warrants
On
October 30, 2017, the Company agreed to amend the March Debentures and March Warrants, which are more fully discussed in Note
6, to remove the floor in the anti-dilution provisions therein.
Conversions
of March Debentures and Exercises of Warrants
During
the month of October 2017, $2,185,464.02 aggregate principal amount of March Debentures were exercised for 1,924,037 shares
of common stock and the Company received $633,000 upon the exercise of Class B Warrants issued in March 2017 for the
issuance of 600,000 shares of common stock.
RENNOVA
HEALTH, INC.