Notes
Payable – Third Parties
|
|
December
31, 2019
|
|
|
December
31, 2018
|
|
Loan
payable under prepaid forward purchase contract (1)
|
|
$
|
-
|
|
|
$
|
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
|
|
|
1,741,893
|
|
|
|
1,741,893
|
|
|
|
|
|
|
|
|
|
|
Notes
payable to CommerceNet and Jay Tenenbaum in the original principal amount of $500,000, bearing interest at 6% per annum (the
“Tegal Notes”). Principal and interest payments due annually from July 12, 2015 through July 12, 2017
|
|
|
335,817
|
|
|
|
341,612
|
|
|
|
|
|
|
|
|
|
|
Note
payable to Anthony O’Killough dated September 27, 2019 in the original principal amount of $1.9 million. Interest is
due only upon event of default. Issued net of $0.3 million of debt discount and $0.1 million of financing fees with $1.0 million
of principal due on November 8, 2019 and $0.9 million of principal due December 26, 2019
|
|
|
1,900,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,977,710
|
|
|
|
7,083,505
|
|
Less
current portion
|
|
|
(3,977,710
|
)
|
|
|
(7,083,505
|
)
|
Notes
payable - third parties, net of current portion
|
|
$
|
-
|
|
|
$
|
-
|
|
(1)
The loan payable under prepaid forward purchase contract has been fully settled during the year ended December 31, 2019
as more fully discussed below under the heading “Notes Payable –Related Parties”.
The
Company did not make the required monthly principal and interest payments due under the TCA Debenture for the period from October
2016 through March 2017. On February 2, 2017, the Company made a payment to TCA in the amount of $0.4 million, which was applied
to accrued and unpaid interest and fees, including default interest, as of the date of payment. On March 21, 2017, the Company
made a payment to TCA in the amount of $0.75 million, of which approximately $0.1 million was applied to accrued and unpaid interest
and fees in accordance with the terms of the TCA Debenture. Also on March 21, 2017, the Company entered into a letter agreement
with TCA, which (i) waived any payment defaults through March 21, 2017; (ii) provided for the $0.75 million payment discussed
above; (iii) set forth a revised repayment schedule whereby the remaining principal plus interest aggregating to approximately
$2.6 million was to be repaid in various monthly installments from April of 2017 through September of 2017; and (iv) provided
for payment of an additional service fee in the amount of $150,000, which was due on June 27, 2017, the day after the effective
date of the registration statement filed by the Company; which amount is reflected in accrued expenses at December 31, 2019. In
addition, TCA entered into an inter-creditor agreement with the purchasers of the convertible debentures (see Note 9) which sets
forth rights, preferences and priorities with respect to the security interests in the Company’s assets. On September 19,
2017, the Company entered into a new agreement with TCA, which extended the repayment schedule through December 31, 2017. The
remaining debt to TCA remains outstanding and TCA has made a demand for payment.
In
May 2020, the SEC appointed a Receiver to close down the TCA Global Master Fund LP over allegations of accounting fraud. The amount
recorded by the Company as being owed to TCA is based on TCA’s application of prior payments made by the Company. The Company
believes that prior payments of principal and interest may have been applied to unenforceable investment banking and other fees
and charges. It is the Company’s position that the amount owed to TCA is less than the amount set forth above.
The
Company did not make the principal payments under the Tegal Notes that were due on July 12, 2016. On November 3, 2016, the Company
received a default notice from the holders of the Tegal Notes demanding immediate repayment of the outstanding principal of $341,612
and accrued interest of $43,000. On December 7, 2016, the Company received a breach of contract complaint with a request for the
entry of a default judgment (see Note 16). On April 23, 2018, the holders of the Tegal Notes received a judgment against the Company.
As of December 31, 2019, the Company has paid $5,795 of these notes.
On
September 27, 2019, the Company issued a promissory note to a lender in the principal amount of $1.9 million and received proceeds
of $1.5 million, which is net of a $0.3 million original issue discount and $0.1 million in financing fees. The first principal
payment of $1.0 million was due on November 8, 2019 and the remaining $0.9 million was due on December 26, 2019. These payments
have not been paid. In February 2020, the note holder sued the Company and Mr. Diamantis, as guarantor, in New York State Court
for the County of New York, for approximately $2 million for non-payment of the promissory note. As a result of the payment default,
the Company has accrued “penalty” interest in the amount of $0.1 million as of December 31, 2019.
Notes
Payable – Related Parties
|
|
December
31, 2019
|
|
|
December
31, 2018
|
|
|
|
|
|
|
|
|
Loan
payable to Christopher Diamantis
|
|
$
|
15,159,455
|
|
|
$
|
800,000
|
|
|
|
|
|
|
|
|
|
|
Total
notes payable, related parties
|
|
$
|
15,159,455
|
|
|
$
|
800,000
|
|
|
|
|
|
|
|
|
|
|
Less
current portion of notes payable, related parties
|
|
$
|
(15,159,455
|
)
|
|
$
|
(800,000
|
)
|
Total
notes payable, related parties long-term, 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 $0 as of December 31, 2017. In exchange for the consideration
received, the counterparty received the right to: (i) a 20% per annum investment return from the Company on the consideration,
with a minimum repayment term of six months and minimum return of $0.5 million, (ii) all payments recovered from the accounts
receivable up to $5.25 million, if paid in full within six months, or $5.5 million, if not paid in full within six months, and
(iii) 20% of all payments of the accounts receivable in excess of amounts received in (i) and (ii). On March 31, 2017, to the
extent that the counterparty had not been paid $6.0 million, the Company was required to pay the difference. Christopher Diamantis,
a director of the Company until his resignation on February 26, 2020, guaranteed the Company’s obligation. On March 24,
2017, the Company, the counterparty and Mr. Diamantis, as guarantor, entered into an amendment to extend the Company’s obligation
to March 31, 2018. Also, what the counterparty was to receive was amended to equal (a) the $5,000,000 purchase price plus a 20%
per annum investment return thereon, plus (b) $500,000, plus (c) the product of (i) the proceeds received from the accounts receivable,
minus the amount set forth in clauses (a) and (b), multiplied by (ii) 40%. In connection with the extension, the counterparty
received a fee of $1,000,000. On April 2, 2018, the Company, the counterparty and Mr. Diamantis, as guarantor, entered into a
second amendment to extend further the Company’s obligation to May 30, 2018. In connection with this further extension,
the counterparty received a fee of $100,000. The counterparty instituted an arbitration proceeding under the agreement with regard
to the outstanding balance. In December 2018, the Company, Mr. Diamantis and the counterparty entered into a preliminary settlement
agreement in connection with the arbitration, with the terms of the settlement agreement revised on March 31, 2019. The Company
and Mr. Diamantis agreed to pay the counterparty $2,000,000 on or before April 5, 2019 and an additional $7,694,685 plus interest
at 10% per annum on or before May 20, 2019, which date was subsequently amended. On April 5, 2019 and May 31, 2019, Mr. Diamantis
made payments totaling $5.0 million on behalf of the Company. The final payment of $4,937,105 was due on or before July 28, 2019.
Mr. Diamantis made that payment on behalf of the Company on July 26, 2019. The Company and Mr. Diamantis have now complied with
all of their obligations under the settlement agreement. As a result, the Company is obligated to repay Mr. Diamantis a total
of $9,937,105.
During
the year ended December 31, 2019, in addition to the $9,937,105 that Mr. Diamantis loaned the Company in connection with the settlement
of the prepaid forward purchase contract discussed above, Mr. Diamantis advanced the Company: (i) $0.7 million for the purchase
of Jellico Community Hospital as more fully discussed in Note 6; $1.3 million for fees and expenses incurred in connection with
the settlement of the prepaid forward purchase contract; and $4.8 million for working capital purposes. During the year ended
December 31, 2019, we accrued interest of $1.6 million on the advances from Mr. Diamantis and we repaid $2.3 million of principal
to Mr. Diamantis. Interest accrues on advances from Mr. Diamantis at a flat rate of 10%. Therefore, the Company had loans and
accrued interest payable to Mr. Diamantis at December 31, 2019 and 2018 of approximately $17.0 million and $1.1 million, respectively.
See Note 21 for the discussion of additional advances made by Mr. Diamantis to the Company subsequent to December 31, 2019.
Note
9 – Debentures
The
carrying amount of all outstanding debentures as of December 31, 2019 and 2018 was as follows:
|
|
December
31,
|
|
|
|
2019
|
|
|
2018
|
|
Debentures
|
|
$
|
29,873,740
|
|
|
$
|
19,034,800
|
|
Discount
on debentures
|
|
|
—
|
|
|
|
(6,247,469
|
)
|
Deferred
financing fees
|
|
|
—
|
|
|
|
(11,015
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
29,873,740
|
|
|
|
12,776,316
|
|
Less
current portion
|
|
|
(29,873,740
|
)
|
|
|
(12,776,316
|
)
|
Debentures,
long term, net of current portion
|
|
$
|
—
|
|
|
$
|
—
|
|
As
of December 31, 2019, $30 million of principal balance of outstanding debentures, which includes $6.9 million of non-payment penalties,
were not paid, on various maturity dates. The $6.9 million of non-payment penalties is included on the statements of operations
in other expense.
As
of December 31, 2019, $2.0 million of principal balance of outstanding debentures issued in March 2017 (the “March 2017
Debentures”) were not paid as of March 21, 2019, the maturity date, $5.9 million of principal balance of outstanding debentures
issued in September 2017 (the “September 2017 Debentures”) were not paid as of September 19, 2019, the maturity date
and $11.2 million of principal balance of debentures issued during 2018 (“the 2018 Debentures”) were not paid as of
September 19, 2019, the maturity date. The Company has accrued penalties in connection with these non-payments in the amount of
$5.7 million as of December 31, 2019. As of the date of this report, these debentures have still not been paid and remain outstanding,
and the Company has been accruing interest on these debentures at the default rate of 18% per annum since the dates of the payment
defaults. A total of $1.4 million of interest expense has been accrued as of December 31, 2019 as a result of these defaults.
March
2017 Debentures
The
March 2017 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 2017 Debentures to $.000085 per share as of December 31, 2019, due to prices at which the Company
has subsequently issued shares of common stock. The March 2017 Debentures contain customary affirmative and negative covenants.
The conversion price is 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 conversion price of the March 2017 Debentures as of December 31, 2019 stated above reflect an amendment
to remove a floor in the conversion price of the debentures as well as other adjustments for dilutive issuances, which triggered
the down round provisions in the March 2017 Debentures. The March 2017 Debentures are secured by all the Company’s assets
and are guaranteed by substantially all of the Company’s subsidiaries. Between March 22, 2017 and December 31, 2019, holders
of the March Debentures converted an aggregate of $14.0 million of these debentures into 4,258,172 shares of common stock.
September
2017 Debentures
The
September 2017 Debentures contain customary affirmative and negative covenants. The September 2017 Debentures may be converted
at any time into shares of the Company’s common stock. The conversion price is 85% of the volume weighted average price
at the time of conversion, but not less than the floor of $390.00 per share. The conversion price of the September 2017 Debentures
is subject to “full ratchet” and other customary anti-dilution protections as more fully described in the debentures.
The Company’s obligations under the September 2017 Debentures are secured by a security interest in all of the Company’s
and its subsidiaries’ assets. On October 30, 2017, the Company entered into exchange agreements (“Exchange Agreements”)
with the holders of the September 2017 Debentures to provide that the holders may, from time to time, exchange, currently at the
Company’s option, their September 2017 Debentures for shares of a newly-authorized Series I-2 Convertible Preferred Stock
of the Company (the “Series I-2 Preferred Stock”) (See Note 13). On February 8, 2018, $1.4 million of the September
2017 Debentures were exchanged for 1,730.1 shares of Series I-2 Preferred Stock and the Company recorded a loss on the exchange
of $0.7 million. On July 16, 2018, $1.7 million of the September 2017 Debentures were exchanged for 2,176.9 shares of Series I-2
Preferred Stock and the Company recorded a loss on the exchange of $0.8 million. The Series I-2 Preferred Stock is more fully
discussed in Note 13.
The
March 2017 Debentures and the September 2017 Debentures were issued with warrants to purchase shares of the Company’s common
stock. Outstanding warrants are more fully discussed in Note 14.
The
2018 Debentures
On
March 5, 2018, May 14, 2018, May 21, 2018 and June 28, 2018, the Company closed offerings of $6,810,000 aggregate principal amount
of Senior Secured Original Issue Discount Convertible Debentures due September 19, 2019. The Company received proceeds of $5.5
million in the offerings net of the original issue discount of $1,310,000. On July 16, 2018, August 2, 2018, September 6, 2018
and November 8, 2018, the Company entered into Additional Issuance Agreements (the “Issuance Agreements”), with two
existing institutional investors of the Company. Under the Issuance Agreements, the Company issued $4.3 million aggregate principal
amount of Senior Secured Original Issue Discount Convertible Debentures due September 19, 2019 and received proceeds of $3.5 million.
The conversion terms of these debentures are the same as those in the September 2017 Debentures, as more fully described above,
with the exception of the floor conversion price, which is $.052 per share. These debentures may also be exchanged for shares
of the Company’s Series I-2 Preferred Stock under the terms of the Exchange Agreements at the Company’s option.
Debentures
Issued in 2019
The
Company issued debentures on February 24, 2019 in the aggregate principal amount of $300,000 and on March 27, 2019 in the aggregate
principal amount of $300,000. Both of these debentures were guaranteed by Mr. Diamantis and were originally due on June 3, 2019.
The maturity dates of these debentures were extended to December 31, 2019 and the terms were changed so that commencing on August
17, 2019 the debentures bear interest on the outstanding principal amount at a rate of 2.5% per month (increasing to 5% per month
on October 12, 2019), payable quarterly beginning on October 1, 2019. All overdue accrued and unpaid interest entail a late fee
equal to the lesser of 24% per annum or the maximum rate permitted by applicable law.
The
Company issued debentures on May 12, 2019 in the aggregate principal amount of $500,000. These debentures were guaranteed by Mr.
Diamantis and were due on June 3, 2019. In addition, the Company issued debentures on June 5, 2019 in the aggregate principal
amount of $125,000 and on June 7, 2019 in the aggregate principal amount of $200,000. These debentures were also guaranteed by
Mr. Diamantis and were due on July 20, 2019. The maturity dates of these debentures were extended to December 31, 2019 and the
terms were changed so that commencing on August 17, 2019 the debentures bear interest on the outstanding principal amount at a
rate of 2.5% per month (increasing to 5% per month on October 12, 2019), payable quarterly beginning on October 1, 2019. All overdue
accrued and unpaid interest entail a late fee equal to the lesser of 24% per annum or the maximum rate permitted by applicable
law.
On
June 13, 2019, the Company closed an offering of $1,250,000 aggregate principal amount of debentures with certain existing institutional
investors pursuant to the terms of a Bridge Debenture Agreement, dated as of June 13, 2019 (the “June 13 Agreement”)
and received proceeds of $1,250,000. The June 13 Agreement provided that on or prior to June 30, 2019, at the mutual election
of the Company and the investors, the investors could purchase an additional $1,250,000 principal amount on the same terms and
conditions as provided in the June 13 Agreement. Under the June 13 Agreement, the maturity date of the debentures issued on February
24, 2019, March 27, 2019, May 12, 2019, June 5, 2019 and June 7, 2019 were extended to December 31, 2019 and the terms were changed
such that they have the same interest terms as contained in the June 13, 2019 debentures, as more fully discussed below.
On
June 21, 2019, the Company and the investors agreed that the Company would issue, and the investors would purchase, $250,000 principal
amount of debentures and on June 24, 2019 the Company and the investors agreed that the Company would issue, and the investors
would purchase, an additional $1,020,000 aggregate principal amount of debentures. In connection with the issuances of the June
21, 2019 and June 24, 2019 debentures, the Company received total proceeds of $1,270,000.
The
June 13, 2019, June 21, 2019 and June 24, 2019 debentures (collectively, the “June 2019 Debentures”) are secured and
guaranteed by the Company’s subsidiaries on the same terms as provided in the Purchase Agreement, dated as of August 31,
2017. At the Company’s option, the June 2019 Debentures may also be exchanged for shares of the Company’s Series I-2
Convertible Preferred Stock under the terms of the previously-announced Exchange Agreement, dated as of October 30, 2017. Commencing
on August 17, 2019, the June 2019 Debentures bear interest on the outstanding principal amount at a rate of 2.5% per month (increasing
to 5% per month on October 12, 2019), payable quarterly beginning on October 1, 2019. All overdue accrued and unpaid interest
entail a late fee equal to the lesser of 24% per annum or the maximum rate permitted by applicable law. Christopher Diamantis
is a guarantor of the June 2019 Debentures.
The
debentures issued in 2019 were not paid on December 31, 2019, the maturity date. As of December 31, 2019, the Company has accrued
$1.2 million of penalties as a result of the non-payments. As of December 31, 2019, the Company has recorded interest expense
associated with these debentures of $0.7 million, including $8,949 of penalty interest.
The
debentures issued during the years ended December 31, 2019 and 2018, were issued at discounts of $0.1 million and $2.2 million,
respectively, and accordingly, the Company realized a total of $3.8 million and $9.0 million, respectively, in proceeds from the
issuances of the debentures during 2019 and 2018. As of December 31, 2019, these discounts have been fully amortized. These discounts
represented original issue discounts, the relative fair value of the warrants issued with the debentures, the value of the modifications
of certain of these warrants, and the relative fair value of the beneficial conversion features of the debentures. During the
years ended December 31, 2019 and 2018, the Company recorded approximately $16.2 million and $17.6 million, respectively, of such
amortization of debt discount expense in connection with the debentures and warrants. These amounts include debt discount amortization,
which resulted from the modification of warrants as more fully discussed in Notes 12 and 14.
See
Notes 3, 14 and 21 for a discussion of the dilutive effect of the outstanding convertible debentures, warrants and convertible
preferred stock as of December 31, 2019 and May 31, 2020.
Note
10 – Related Party Transactions
In
addition to the transactions discussed in Notes 1, 8 and 21, the Company had the following related party activity during the years
ended December 31, 2019 and 2018:
Alcimede
billed $0.4 million and $0.4 million for the years ended December 31, 2019 and 2018, respectively, pursuant to a consulting agreement
originally entered into in 2012. It is subject to annual renewals. Seamus Lagan, the Company’s President and Chief Executive
Officer, is the sole manager of Alcimede (see Note 14).
The
terms of the foregoing activity, including those discussed in Notes 1, 8, and 21, are not necessarily indicative of those that
would have been agreed to with unrelated parties for similar transactions.
Note
11 – Finance and Operating Lease Obligations
As
more fully discussed in Note 2, we adopted ASU No. 2016-02, Leases (Topic 842), which requires leases with durations greater
than 12 months to be recognized on the balance sheet, effective January 1, 2019, using the modified retrospective approach.
Generally,
we use our estimated weighted average cost of capital at lease commencement as our interest rate, as most of our operating leases
do not provide a readily determinable implicit interest rate.
The
following table presents our lease-related assets and liabilities at December 31, 2019:
|
|
Balance
Sheet Classification
|
|
December
31, 2019
|
|
Assets:
|
|
|
|
|
|
|
Operating
leases
|
|
Right-of-use
operating lease assets
|
|
$
|
274,747
|
|
Finance
leases
|
|
Property
and equipment, net
|
|
|
1,119,418
|
|
Total
lease assets
|
|
|
|
$
|
1,394,165
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
Operating
leases
|
|
Right-of-use
operating lease assets
|
|
$
|
116,037
|
|
Finance
leases
|
|
Current
liabilities
|
|
|
1,119,418
|
|
Noncurrent:
|
|
|
|
|
|
|
Operating
leases
|
|
Right-of-use
operating lease obligations
|
|
|
158,710
|
|
Finance
leases
|
|
Long-term
debt
|
|
|
—
|
|
|
|
|
|
|
|
|
Total
lease liabilities
|
|
|
|
$
|
1,394,165
|
|
|
|
|
|
|
|
|
Weighted-average
remaining term:
|
|
|
|
|
|
|
Operating
leases
|
|
|
|
|
2.02
years
|
|
Finance
leases
|
|
|
|
|
0.08
years
|
|
Weighted-average
discount rate:
|
|
|
|
|
|
|
Operating
leases (1)
|
|
|
|
|
13.0
|
%
|
Finance
leases
|
|
|
|
|
5.122
|
%
|
(1)
|
Upon
adoption of the new lease standard, discount rates used for existing operating leases were established at January 1, 2019.
|
Equipment
leased under finance leases consisted of the following:
|
|
December
31,
|
|
|
December
31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Medical
equipment
|
|
$
|
742,745
|
|
|
$
|
742,745
|
|
Less
accumulated depreciation (1)
|
|
|
(711,490
|
)
|
|
|
(723,318
|
)
|
|
|
|
|
|
|
|
|
|
Net
|
|
$
|
31,255
|
|
|
$
|
19,427
|
|
The
following table presents certain information related to lease expense for finance and operating leases for the year ended December
31, 2019:
|
|
Year
Ended
December 31, 2019
|
|
Finance
lease expense:
|
|
|
|
|
Depreciation/amortization
of leased assets (1)
|
|
$
|
(11,827
|
)
|
Interest
on lease liabilities
|
|
|
184,997
|
|
Operating
leases:
|
|
|
|
|
Short-term
lease expense (2)
|
|
|
356,075
|
|
Total
lease expense
|
|
$
|
529,245
|
|
(1)
|
The
depreciation for the year ended December 31, 2019 has been adjusted for depreciation recorded in the prior year.
|
(2)
|
Expenses
are included in general and administrative expenses in our consolidated statements of operations.
|
Other
Information
The
following table presents supplemental cash flow information for year ended December 31, 2019:
|
|
2019
|
|
Cash
paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
Operating
cash flows for operating leases
|
|
$
|
246,033
|
|
Operating
cash flows for finance leases
|
|
$
|
—
|
|
Financing
cash flows for finance lease payments
|
|
$
|
143,931
|
|
Aggregate
future minimum rentals under right-of-use operating and finance leases are as follows:
|
|
Right-of-Use
|
|
|
|
|
|
|
Operating
Leases
|
|
|
Finance
Leases
|
|
January
1, 2020 to December 31, 2020
|
|
$
|
144,422
|
|
|
$
|
1,316,564
|
|
January
1, 2021 to December 31, 2021
|
|
|
136,592
|
|
|
|
—
|
|
January
1, 2022 to December 31, 2022
|
|
|
29,247
|
|
|
|
—
|
|
January
1, 2023 to December 31, 2023
|
|
|
9,749
|
|
|
|
—
|
|
January
1, 2024 to December 31, 2024
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
|
320,010
|
|
|
|
1,316,564
|
|
|
|
|
|
|
|
|
|
|
Less
interest
|
|
|
(45,264
|
)
|
|
|
(197,146
|
)
|
Present
value of minimum lease payments
|
|
|
274,747
|
|
|
|
1,119,418
|
|
|
|
|
|
|
|
|
|
|
Less
current portion of lease obligations
|
|
|
(116,037
|
)
|
|
|
(1,119,418
|
)
|
Lease
obligations, net of current portion
|
|
$
|
158,710
|
|
|
$
|
0
|
|
Rent
expense for the years ended December 31, 2019 and 2018 was $0.4 million and $0.6 million, respectively.
At
December 31, 2019, the Company was in default of substantially all its finance lease obligations, therefore the aggregate future
minimum rentals and accrued interest under finance leases in the amount of $0.8 million are deemed to be immediately due.
Note
12 – Derivative Financial Instruments and Fair Value
In
accordance with ASC 820, “Fair Value Measurements and Disclosures,” the Company applies fair value accounting
for all financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value
in the financial statements on a recurring basis. Fair value is defined as the price that would be received from selling an asset
or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining
the fair value measurements for assets and liabilities, which are required to be recorded at fair value, the Company considers
the principal or most advantageous market in which it would transact and the market-based risk measurements or assumptions that
market participants would use in pricing the asset or liability, such as risks inherent in valuation techniques, transfer restrictions
and credit risk. Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair
value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and
significant to the fair value measurement:
|
●
|
Level
1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities
that we have the ability to access at the measurement date.
|
|
|
|
|
●
|
Level
2 applies to assets or liabilities for which there are inputs other than quoted prices included in Level 1 that are observable
for the asset or liability, either directly or indirectly, such as quoted prices for similar assets or liabilities in active
markets; or quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions
(less active markets).
|
|
|
|
|
●
|
Level
3 applies to assets or liabilities for which fair value is derived from valuation techniques in which one or more significant
inputs are unobservable, including our own assumptions.
|
The
estimated fair value of financial instruments is determined by the Company using available market information and valuation methodologies
considered to be appropriate. At December 31, 2019 and 2018, the carrying value of the Company’s accounts receivable, accounts
payable and accrued expenses approximate their fair values due to their short-term nature.
The
following table sets forth the financial assets and liabilities carried at fair value measured on a recurring basis as of December
31, 2019 and 2018:
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December
31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Embedded
conversion options
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
455,336
|
|
|
$
|
455,336
|
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
455,336
|
|
|
$
|
455,336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December
31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Embedded
conversion options
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
350,260
|
|
|
$
|
350,260
|
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
350,260
|
|
|
$
|
350,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following table reconciles the changes in the liabilities categorized within Level 3 of the fair value hierarchy for the years
ended December 31, 2018 and 2019:
Balance
at December 31, 2017
|
|
$
|
12,435,250
|
|
Gain
on change in fair value of debentures and warrants (1)
|
|
|
(15,167,335
|
)
|
Fair
value of warrants exercised
|
|
|
(4,619,150
|
)
|
Fair
value of debentures converted
|
|
|
(1,408,901
|
)
|
Fair
value of debentures exchanged for Series I-2 Preferred Stock
|
|
|
(1,420
|
)
|
Modification
of warrants
|
|
|
8,603,069
|
|
Convertible
debt
|
|
|
508,747
|
|
Balance
at December 31, 2018
|
|
$
|
350,260
|
|
Change
in fair value of debentures
|
|
|
105,076
|
|
Balance
at December 31, 2019
|
|
$
|
455,336
|
|
|
(1)
|
In
addition to the gain on change in fair value of debentures and warrants of $15.2 million during the year ended December 31,
2018, the Company recorded a loss on the exchange of convertible debentures for shares of its Series I-2 Preferred
Stock of approximately $1.5 million, as more fully discussed in Note 13. Therefore, the total change in the fair value of
derivative instruments for the year ended December 31, 2018 was a net gain of $13.7 million.
|
The
Company utilized the following methods to value its derivative liabilities as of December 31, 2019 and December 31, 2018, for
embedded conversion options valued at $455,336 and $350,260, respectively. The Company determined the fair value by comparing
the discounted conversion price per share (85% of market price, subject to a floor in certain cases) multiplied by the number
of shares issuable at the balance sheet date to the actual price per share of the Company’s common stock multiplied by the
number of shares issuable at that date with the difference in value recorded as a liability
During
the year ended December 31, 2019, the Company extended the exercise period of the outstanding Series B Warrants (Series B Warrants
are more fully discussed in Notes 12 and 14) twice, once to September 2019 and the second time to March 31, 2022 and recorded
interest expense of $9.5 million, which represented the aggregate fair value of the modifications. The Company used the Black
Scholes model to calculate the fair value of the warrants as of the modification dates. Using the pre-modification terms and related
assumptions of risk free rates ranging from 2.44% to 2.46%, volatility ranging from 182.9% to 204.4% and weighted average remaining
lives of .24 years to .36 years, and the post-modification terms and related assumptions of risk free rates ranging from 2.23%
to 2.49%, volatility ranging from 198.3% to 259.4% and weighted average remaining lives of .48 years to 2.89 years, the changes
in the fair value of the warrant instruments as a result of the modifications were estimated.
During
the year ended December 31, 2018, the Company extended the exercise period of the outstanding Series B Warrants twice, once to
March 21, 2019 and the second time to June 21, 2019 and recorded an additional discount on the Series B Warrants of approximately
$8.6 million as a result of the extensions, $6.4 million of which was included in interest expense in 2018 and the remainder was
included in interest expense in 2019. The Company used the Black Scholes model to calculate the fair value of the warrants as
of the modification dates. Using the pre-modification term and related assumptions of risk free rates ranging from 1.91% to 2.32%,
volatility ranging from 184.0% to 296.3% and weighted average remaining life of .33 years, and the post-modification terms and
related assumptions of risk free rates ranging from 2.09% to 2.56%, volatility ranging from 208.2% to 249.1% and weighted average
remaining life of .65 years, the change in the fair value of the warrant instruments as a result of the modifications was estimated
on each date.
During
the years ended December 31, 2019 and 2018, the conversions of preferred stock and debentures triggered a further reduction in
the exercise prices of any debentures and warrants containing ratchet features that had not already ratcheted down to their floor.
In accordance with U.S. GAAP, the incremental fair value of the debentures and warrants was measured, ignoring the down round
provision, using Black Scholes. The following assumptions were utilized in the Black Scholes valuation models in the year ended
December 31, 2019: risk free rates ranging from 2.4% to 2.6% and volatility ranging from 189.5% to 273.1% and weighted average
life of 0.3 to 3.2 years. The following assumptions were utilized in the Black Scholes valuation models in the year ended December
31, 2018: risk free rates ranging from 2.47% to 2.98%, volatility ranging from 167% to 257% and a weighted-average
remaining life of 2.87 years. The incremental value of the debentures and warrants of $123.9 million and $231.8 million, respectively,
was recorded as deemed dividends for the years ended December 31, 2019 and 2018. Deemed dividends are also discussed in Notes
2 and 3.
Effective
June 9, 2020, the Company’s shareholders approved an amendment to the Company’s Certificate of Incorporation, as amended,
to effect a reverse stock split of all of the outstanding shares of the Company’s common stock, at a specific ratio from
1-for-100 to 1-for-10,000, and to grant authorization to its Board of Directors to determine, in its discretion, the specific
ratio and timing of the reverse split at any time on or before December 31, 2020, subject to the Board of Directors’ discretion
to abandon such amendment. As a result of this authorization, as of the date of filing this report, the Company believes that
it has the ability to have sufficient authorized shares of its common stock to cover all potentially dilutive common shares outstanding.
Note
13 – Redeemable Preferred Stock
The
Company has 5,000,000 authorized shares of Preferred Stock at a par value of $0.01. Issuances of the Company’s Preferred
Stock included as part of stockholders’ deficit are discussed in Note 14. The following is a summary of the issuances of
the Company’s Redeemable Preferred Stock.
Series
I-1 Convertible Preferred Stock
On
October 30, 2017, the Company closed an offering of $4,960,000 stated value of 4,960 shares of a newly-authorized Series I-1 Convertible
Preferred Stock (the “Series I-1 Preferred Stock”). Each share of Series I-1 Preferred Stock has a stated value of
$1,000. The offering was pursuant to the terms of the Securities Purchase Agreement, dated as of October 30, 2017 (the “Purchase
Agreement”), between the Company and certain existing institutional investors of the Company. The Company received proceeds
of $4.0 million from the offering. The Purchase Agreement gives the investors the right to participate in up to 50% of any offering
of common stock or common stock equivalents by the Company. In the event of any such offering, the investors may also exchange
all or some of their Series I-1 Preferred Stock for such new securities on an $0.80 stated value of Series I-1 Preferred Stock
for $1.00 of new subscription amount basis. Each share of Series I-1 Preferred Stock is convertible into shares of the Company’s
common stock at any time at the option of the holder at a conversion price equal to the lesser of (i) $1.00, subject to adjustment,
and (ii) 85% of the lesser of the volume weighted average market price of the common stock on the day prior to conversion or on
the day of conversion. The conversion price is subject to “full ratchet” and other customary anti-dilution protections
as more fully described in the Certificate of Designation of the Series I-1 Preferred Stock. Upon the occurrence of certain Triggering
Events, as defined in the Certificate of Designation of the Series I-1 Preferred Stock, the holder shall, in addition to any other
right it may have, have the right, at its option, to require the Company to either redeem the Series I-1 Preferred Stock in cash
or in certain circumstance in shares of common stock at the redemption prices set forth in the Certificate of Designation.
Series
I-2 Convertible Preferred Stock
On
October 30, 2017, the Company entered into Exchange Agreements with the holders of the September 2017 Debentures to provide
that the holders may, from time to time, exchange their September 2017 Debentures for shares of a newly-authorized Series
I-2 Preferred Stock. The exchange agreements permitted the holders of the September Debentures to exchange specified principal
amounts of the September 2017 Debentures on various closing dates starting on December 2, 2017. At the holder’s option each
holder could reduce the principal amount of September 2017 Debentures exchanged on any particular closing date, or elect
not to exchange any September 2017 Debentures at all on a closing date. If a holder did choose to exchange less principal
amount of September 2017 Debentures, or no September 2017 Debentures at all, it could 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 2017 Debenture surrendered to the Company at any closing date, the Company would
issue the holder a share of Series I-2 Preferred Stock with a stated value of $1.00. Each share of Series I-2 Preferred Stock
is convertible into shares of the Company’s common stock at any time at the option of the holder at a conversion price equal
to the lesser of (i) $1.00, subject to adjustment, and (ii) 85% of the lesser of the volume weighted average market price of the
common stock on the day prior to conversion or on the day of conversion. The conversion price is subject to “full ratchet”
and other customary anti-dilution protections as more fully described in the Certificate of Designation of the Series I-2 Preferred
Stock. From December 2, 2017 through March 1, 2018, any exchange under the Exchange Agreements was at the option of the holder.
Subsequent to March 2018, any exchange is at the option of the Company.
The
Company’s board of directors has designated up to 21,346 shares of the 5,000,000 authorized shares of preferred stock as
the Series I-2 Preferred Stock. Each share of Series I-2 Preferred Stock has a stated value of $1,000. Upon the occurrence of
certain Triggering Events (as defined in the Certificate of Designation of the Series I-2 Preferred Stock), the holder shall,
in addition to any other right it may have, have the right, at its option, to require the Company to either redeem the Series
I-2 Preferred Stock in cash or in certain circumstance in shares of common stock at the redemption prices set forth in the Certificate
of Designation.
On
February 9, 2018, the holders exchanged a portion of the September 2017 Debentures for shares of the Series I-2 Preferred Stock
for the first time. On that date, the holders elected to exchange an aggregate of $1,384,556 principal amount of September 2017
Debentures and the Company issued an aggregate of 1,730.7 shares of its Series I-2 Preferred Stock. On July 16, 2018, the
holders exchanged a portion of the September 2017 Debentures for shares of the Company’s Series I-2 Preferred Stock. On
that date, the holders elected to exchange an aggregate of $1,741,580 principal amount of the September 2017 Debentures and the
Company issued an aggregate of 2,176.975 shares of its Series I-2 Preferred Stock. The Company recorded a loss of approximately
$1.5 million as a result of these exchanges. In 2018, the holder converted 1,286.141 shares of Series I-2 Preferred Stock into
106,335,991 shares of the Company’s common stock.
See
Notes 3, 14, and 21 for a discussion of the dilutive effect of the Series I-1 Preferred Stock and the Series I-2 Preferred Stock
as of December 31, 2019 and May 31, 2020.
Note
14 – Stockholders’ Deficit
Authorized
Capital
The
Company has 10,000,000,000 authorized shares of Common Stock at $0.0001 par value and 5,000,000 authorized shares of Preferred
Stock at a par value of $0.01.
Preferred
Stock
The
Company has 5,000,000 shares, par value $0.01, of preferred stock authorized. As of December 31, 2019, the Company had outstanding
shares of preferred stock consisting of shares of its Series I-1 Preferred Stock and shares of its Series I-2 Preferred Stock
(both of which are more fully discussed in Note 13), 10 shares of its Series H Preferred Stock, 1,750,000 shares of its Series
F Convertible Preferred Stock and 250,000 shares of its Series K Convertible Preferred Stock.
In
December 2019, the Series G Preferred Stock, which had a stated value of $1,000 per share and was convertible into shares of the
Company’s common stock at a price equal to 85% of the volume weighted average price of the Company’s common stock
at the time of conversion, was redeemed for $100.
The
Series H Preferred Stock has a stated value of $1,000 per share and is convertible into shares of the Company’s common stock
at a conversion price of 85% of the volume weighted average price of the Company’s common stock at the time of conversion.
On June 28, 2018, 50 shares of the Series H Preferred Stock were converted into 40,000 shares of the Company’s common stock.
In
connection with the acquisition of Genomas, Inc., on September 27, 2017 (the operations of Genomas, Inc. are included in our discontinued
operations, which are more fully discussed in Note 18), the Company issued 1,750,000 shares of its Series F Convertible Preferred
Stock valued at $174,097. 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 $14,625 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 120. 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. At any time, from time to time after the first anniversary of the issuance date, the Company has
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. The Series F Preferred Stock has voting rights. Each share of Series F Preferred Stock has one vote,
and the holders of the Series F Preferred Stock shall vote together with the holders of the Company’s common stock as a
single class.
On
December 23, 2019, the Company entered into an Exchange Agreement (the “Agreement”) with Alcimede LLC (“Alcimede”),
of which Seamus Lagan, our Chief Executive Officer, is the sole manager as previously stated. Pursuant to the Agreement, the Company
issued to Alcimede 250,000 shares of its Series K Convertible Preferred Stock (the “Series K Preferred Stock”) in
exchange for the 250,000 shares of the Company’s Series J Convertible Preferred Stock (the “Series J Preferred Stock”)
held by Alcimede. The holder of the Series J Preferred Stock was entitled to receive, when and as declared by the Board of Directors
of the Company, but only out of funds that were legally available therefor, cumulative cash dividends at the rate of 8% of the
stated value per annum on each share of Series J Preferred Stock. The Series J Preferred Stock had been issued to Alcimede on
July 23, 2018 and upon the issuance of the Series K Preferred Stock to Alcimede, the shares of Series J Preferred Stock were cancelled.
Under the Agreement, Alcimede relinquished all rights to any cumulative dividends on the Series J Preferred Stock. The terms of
the Series K Preferred Stock do not provide for cumulative dividends. Subsequent to December 31, 2019, Alcimede LLC exchanged
the Series K Preferred Stock for Series L Convertible Preferred Stock as more fully discussed in Note 21.
The
following table summarizes the activity in the Company’s various classes of Preferred Stock included in Stockholders’
Deficit for the years ended December 31, 2019 and 2018:
|
|
Series
G
|
|
|
Series
H
|
|
|
Series
F
|
|
|
Series
J
|
|
|
Series
K
|
|
|
Total
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
Balance
December 31, 2017
|
|
|
215
|
|
|
$
|
2
|
|
|
|
60
|
|
|
$
|
-
|
|
|
|
1,750,000-
|
|
|
$
|
17,500
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
1,750,275
|
|
|
$
|
17,502
|
|
Conversion
of Series H Preferred Stock into common stock
|
|
|
-
|
|
|
|
-
|
|
|
|
(50
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(50
|
)
|
|
|
(50
|
)
|
Issuance
of Series J Preferred Stock
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
250,000
|
|
|
|
2,500
|
|
|
|
-
|
|
|
|
-
|
|
|
|
250,000
|
|
|
|
2,500
|
|
Balance
December 31, 2018
|
|
|
215
|
|
|
$
|
2
|
|
|
|
10
|
|
|
$
|
-
|
|
|
|
1,750,000
|
|
|
$
|
17,500
|
|
|
|
250,000
|
|
|
$
|
2,500
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
2,000,225
|
|
|
$
|
20,002
|
|
|
|
Series
G
|
|
|
Series
H
|
|
|
Series
F
|
|
|
Series
J
|
|
|
Series
K
|
|
|
Total
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
Balance
December 31, 2018
|
|
|
215
|
|
|
$
|
2
|
|
|
|
10
|
|
|
$
|
-
|
|
|
|
1,750,000-
|
|
|
$
|
17,500
|
|
|
|
250,000
|
|
|
$
|
2,500
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
2,000,225
|
|
|
$
|
20,002
|
|
Redemption
of Series G Preferred Stock
|
|
|
(215
|
)
|
|
|
(2
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(215
|
)
|
|
|
(2
|
)
|
Exchange
of Series J Preferred Stock for Series K Preferred Stock
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(250,000
|
)
|
|
|
(2,500
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(250,000
|
)
|
|
|
(2,500
|
)
|
Issuance
of Series K Preferred Stock
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
250,000
|
|
|
|
2,500
|
|
|
|
250,000
|
|
|
|
2,500
|
|
Balance
December 31, 2019
|
|
|
0
|
|
|
$
|
0
|
|
|
|
10
|
|
|
$
|
-
|
|
|
|
1,750,000
|
|
|
$
|
17,500
|
|
|
|
0
|
|
|
$
|
0
|
|
|
|
250,000
|
|
|
$
|
2,500
|
|
|
|
2,000,010
|
|
|
$
|
20,000
|
|
Common
Stock
On
May 9, 2018, the Company filed an amendment to its Certificate of Incorporation, as amended, to increase its authorized common
stock to 3,000,000,000 shares, and on September 18, 2018, the Company amended its Certificate of Incorporation, as amended, to
have the authority to issue 10,000,000,000 shares of Common Stock, par value $.0001 per share, and 5,000,000 shares of Preferred
Stock, par value $0.01 per share.
The
Company had 9,648,936,775 and 128,567,273 shares of common stock issued and outstanding at December 31, 2019 and 2018, respectively.
During the year ended December 31, 2019, the Company issued 9,400,754,118 shares of common stock upon the conversion of 1078.63
shares of its Series I-2 Preferred Stock and 119,615,384 shares of common stock upon the cashless exercise of warrants.
Restricted
Stock
During
2018, the Company issued an aggregate of 142,667 shares of restricted stock to employees and directors, based upon the recommendation
of the Compensation Committee of the Board. The grants fully vested immediately. The Company recognized stock-based compensation
in 2018 in the amount of $477,933 for the grant of such restricted stock based on a valuation of $3.35 per share. In addition,
the Company recorded $189,209 of compensation expense in 2018 related to vesting of restricted stock that had been issued in 2017.
Common
Stock and Common Stock Equivalents
The
Company has outstanding options, warrants, convertible preferred stock and convertible debentures. Exercise of the options and
warrants, and conversions of the convertible preferred stock and debentures could result in substantial dilution of our common
stock and a decline in its market price. In addition, the terms of certain of the warrants, convertible preferred stock and convertible
debentures issued by us provide for reductions in the per share exercise prices of the warrants and the per share conversion prices
of the debentures and preferred stock (if applicable and subject to a floor in certain cases), in the event that we issue common
stock or common stock equivalents (as that term is defined in the agreements) at an effective exercise/conversion price that is
less than the then exercise/conversion prices of the outstanding warrants, preferred stock or debentures, as the case may be.
These provisions, as well as the issuances of debentures and preferred stock with conversion prices that vary based upon the price
of our common stock on the date of conversion, have resulted in significant dilution of our common stock and have given rise to
reverse splits of our common stock.
Effective
June 9, 2020, the Company’s shareholders approved an amendment to the Company’s Certificate of Incorporation, as amended,
to effect a reverse stock split of all of the outstanding shares of the Company’s common stock, at a specific ratio from
1-for-100 to 1-for-10,000, and to grant authorization to its Board of Directors to determine, in its discretion, the specific
ratio and timing of the reverse split at any time on or before December 31, 2020, subject to the Board of Directors’ discretion
to abandon such amendment. As a result of this authorization, as of the date of filing this report, the Company believes that
it has the ability to have sufficient authorized shares of its common stock to cover all potentially dilutive common shares outstanding.
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. The following table summarizes the stock option activity for the years ended December
31, 2019 and 2018:
|
|
Number
of
options
|
|
|
Weighted-
average
exercise price
|
|
|
Weighted-
average
contractual
term
|
|
Outstanding
at December 31, 2017
|
|
|
77
|
|
|
$
|
1,036,374
|
|
|
|
8.33
|
|
Granted
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Forfeit
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2018
|
|
|
77
|
|
|
$
|
1,037,374
|
|
|
|
7.33
|
|
Granted
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Forfeit
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2019
|
|
|
68
|
|
|
$
|
1,152,616
|
|
|
|
6.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at December 31, 2019
|
|
|
68
|
|
|
$
|
1,152,616
|
|
|
|
|
|
As
a result of the forfeiture of 9 unvested stock options during 2019, the Company reversed compensation expense previously recorded
in prior years resulting in a net reduction of compensation expense of $51,900 for the year ended December 31, 2019. The
Company recognized stock option expense of approximately $0.1 million for the year ended December 31, 2018. As of December 31,
2019, the weighted average remaining contractual life was 6.33 years for options outstanding and exercisable. The intrinsic value
of options exercisable at December 31, 2019 and 2018 was $0. As of December 31, 2019, there was no remaining compensation expense
as all of the outstanding options had fully vested. The Company estimated forfeiture and volatility using historical information.
The risk-free interest rate is based on the implied yield available on U.S. Treasury zero-coupon issues over the equivalent lives
of the options. The expected life of the options represents the estimated period using the simplified method. The Company has
not paid cash dividends on its common stock and no assumption of dividend payment(s) is made in the model.
The
following table summarizes information with respect to stock options outstanding and exercisable by employees and directors at
December 31, 2019:
Options
outstanding
|
|
|
Options
vested and exercisable
|
|
Exercise
price
|
|
|
Number
outstanding
|
|
|
Weighted
average remaining contractual life (years)
|
|
|
Weighted
average exercise price
|
|
|
Aggregate
intrinsic value
|
|
|
Number
vested
|
|
|
Weighted
average exercise price
|
|
|
Aggregate
intrinsic value
|
|
$
|
2,250,500
|
|
|
|
22
|
|
|
|
6.25
|
|
|
$
|
2,250,500
|
|
|
$
|
-
|
|
|
|
22
|
|
|
$
|
2,250,500
|
|
|
$
|
-
|
|
$
|
1,125,500
|
|
|
|
22
|
|
|
|
6.25
|
|
|
$
|
1,125,500
|
|
|
|
-
|
|
|
|
22
|
|
|
$
|
1,125,500
|
|
|
|
-
|
|
$
|
225,000
|
|
|
|
12
|
|
|
|
6.33
|
|
|
$
|
225,000
|
|
|
|
-
|
|
|
|
12
|
|
|
$
|
225,000
|
|
|
|
-
|
|
$
|
67,500
|
|
|
|
12
|
|
|
|
6.54
|
|
|
$
|
67,500
|
|
|
|
-
|
|
|
|
12
|
|
|
$
|
67,500
|
|
|
|
-
|
|
|
|
|
|
|
68
|
|
|
|
|
|
|
$
|
1,152,616
|
|
|
$
|
–
|
|
|
|
68
|
|
|
$
|
1,152,616
|
|
|
$
|
-
|
|
Warrants
The
Company, as part of various debt and equity financing transactions, has issued warrants to purchase shares of the Company’s
common stock.
During
the years ended December 31, 2019 and 2018, as a result of the anti-dilution provisions of outstanding warrants, the exercise
prices of the warrants decreased and they became exercisable into an additional 582.2 billion shares and 53.2 billion
shares of common stock, respectively. These warrants were issued in connection with the issuances of the March 2017 Debentures
and the September 2017 Debentures, which are more fully discussed in Note 9.
Warrants
Issued with March 2017 Debentures
In
connection with the March 2017 Debentures, the Company issued warrants to purchase shares of the Company’s common stock
to several accredited investors. At December 31, 2019, these warrants were exercisable into an aggregate of approximately 564.8
billion shares of common stock. The warrants were issued to the investors in three tranches, Series A Warrants, Series B Warrants
and Series C Warrants (collectively, the “March Warrants”). At December 31, 2019, the Series A Warrants were exercisable
for 211.3 billion shares of the Company’s common stock. They were exercisable upon issuance and have a term of exercise
equal to five years. At December 31, 2019, the Series B Warrants were exercisable for 135.2 billion shares of the Company’s
common stock and were initially exercisable for a period of 18 months. During 2018, the Company extended the exercise period twice,
once to March 21, 2019 and the second time to June 21, 2019 and during 2019 the Company again extended the exercise period twice,
once to September 21, 2019 and a second time to March, 31, 2022. As a result of these extensions, the Company recorded additional
interest expense as more fully discussed in Note 12. At December 31, 2019, the Series C Warrants were exercisable for 218.3 billion
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 December 31, 2019, the Series A, Series B and Series C Warrants
each have an exercise price of $0.000085 per share, which reflects adjustments pursuant to their terms. The Series A, Series B
and Series C Warrants are subject to “full ratchet” and other customary anti-dilution protections. For the years ended
December 31, 2019 and 2018, reductions in the exercise prices of the March Warrants have given rise to deemed dividends as more
fully discussed in Notes 2, 3 and 12.
In
connection with the September 2017 Debentures, the Company issued warrants to purchase shares of the Company’s common stock.
At December 31, 2019, these warrants were exercisable into approximately 69,355 shares of common stock. The warrants were issued
to the investors in three tranches, Series A Warrants, Series B Warrants and Series C warrants (collectively the “September
Warrants”). At December 31, 2019, the Series A Warrants were exercisable for an aggregate of 23,118 shares of the Company’s
common stock. They were exercisable upon issuance and have a term of exercise equal to five years. At December 31, 2019, the Series
B Warrants were exercisable for an aggregate of 23,119 shares of the Company’s common stock and were initially exercisable
for a period of 18 months. During 2018, the exercise period of the Series B Warrants was extended to June 19, 2019. On March 27,
2019, the expiration date of these Series B Warrants was extended 90 days to September 21, 2019 and again on May 10, 2019 the
expiration date was extended to March, 31, 2022. These extensions resulted in de minimus amounts of interest expense. At December
31, 2019, the Series C Warrants were exercisable for an aggregate of 23,118 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. At December 31, 2019, the September Warrants exercise price was $390.00 per share. The September Warrants contain
down round provisions, subject to a floor of $390.00 per share. The September Warrants are subject to “full ratchet”
and other customary anti-dilution protections.
The
number of warrants issued, converted and outstanding as well as the exercise prices of the warrants reflected in the table below
have been adjusted to reflect the full ratchet and other dilutive and down round provisions pursuant to the warrant agreements.
As a result of the full ratchet provisions of the majority of the outstanding warrants (subject to a floor in some cases), subsequent
decreases in the price of the Company’s common stock and subsequent issuances of the Company’s common stock or common
stock equivalents at prices below the 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.
The
following summarizes the information related to warrant activity during the years ended December 31, 2019 and 2018:
|
|
Number
of
warrants
|
|
|
Weighted
average
exercise price
|
|
Balance
at December 31, 2017
|
|
|
4,352,806
|
|
|
$
|
22.17820
|
|
Increase
in warrants during the period as a result of down round provisions
|
|
|
53,234,923,889
|
|
|
|
|
|
Warrants
exchanged during the period
|
|
|
(2,760,079
|
)
|
|
$
|
(0.17000
|
)
|
March
Warrants exercised during the period
|
|
|
(106,006,177
|
)
|
|
$
|
(0.04189
|
)
|
Balance at December
31, 2018
|
|
|
53,130,510,439
|
|
|
$
|
0.00172
|
|
Increase
in warrants during the period as a result of down round provisions
|
|
|
582,209,844,938
|
|
|
|
|
|
March
Warrants exercised during the period
|
|
|
(755,000,000
|
)
|
|
$
|
0.00034
|
|
Balance
at December 31, 2019
|
|
|
634,585,355,377
|
|
|
$
|
0.00014
|
|
See
above and Notes 3 and 12 for a discussion of the dilutive effect of the outstanding warrants.
Note
15 – Income Taxes
The
provision for income taxes for the years ended December 31, 2019 and 2018 consists of the following:
|
|
2019
|
|
|
2018
|
|
Current
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
766,070
|
|
State
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
766,070
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
Federal
|
|
|
-
|
|
|
|
-
|
|
State
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
$
|
-
|
|
|
$
|
766,070
|
|
The
following reconciles the Federal statutory income tax rate to the Company’s effective tax rate for the years ended December
31, 2019 and 2018:
|
|
2019
|
|
|
2018
|
|
|
|
|
%
|
|
|
|
%
|
|
Federal
statutory rate
|
|
|
21.0
|
|
|
|
21.0
|
|
Permanent
and other items
|
|
|
(10.67
|
)
|
|
|
(5.81
|
)
|
Federal
income taxes audit and other adjustments
|
|
|
|
|
|
|
93.55
|
|
Change
in valuation allowance
|
|
|
(10.3
|
)
|
|
|
(102.77
|
)
|
|
|
|
0.03
|
|
|
|
5.97
|
|
Deferred
income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. In assessing the realizability of deferred tax assets, Management
evaluates whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those
temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future
taxable income and tax planning strategies in making this assessment. Based on Management’s evaluation, it is more likely
than not that the deferred tax asset will not be realized and as such a valuation allowance has been recorded as of December 31,
2019 and 2018.
Deferred
tax assets and liabilities are comprised of the following at December 31, 2019 and 2018:
|
|
2019
|
|
|
2018
|
|
Deferred
income tax assets:
|
|
|
|
|
|
|
|
|
Amortization
|
|
$
|
868,974
|
|
|
$
|
914,520
|
|
Net
operating loss carryforward
|
|
|
16,053,316
|
|
|
|
19,567,649
|
|
Allowance
for doubtful accounts
|
|
|
1,559,750
|
|
|
|
703,873
|
|
Charitable
contributions
|
|
|
623
|
|
|
|
593
|
|
Stock
options
|
|
|
970,496
|
|
|
|
936,641
|
|
Accrued
liabilities
|
|
|
467,086
|
|
|
|
390,041
|
|
Business
interest expense
|
|
|
2,323,330
|
|
|
|
989,408
|
|
Deferred
state tax asset
|
|
|
1,428,268
|
|
|
|
1,139,059
|
|
|
|
|
23,671,843
|
|
|
|
24,641,784
|
|
|
|
|
|
|
|
|
|
|
Deferred
income tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
(1,578,355
|
)
|
|
|
(2,301,605
|
)
|
|
|
|
(1,578,355
|
)
|
|
|
(2,301,605
|
)
|
Deferred
tax asset, net
|
|
|
22,093,488
|
|
|
|
22,340,179
|
|
|
|
|
|
|
|
|
|
|
Less:
valuation allowance
|
|
|
(22,093,488
|
)
|
|
|
(22,340,179
|
)
|
|
|
|
|
|
|
|
|
|
Net
deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
Management
has reviewed the provisions regarding assessment of their valuation allowance on deferred tax assets and based on that criteria
determined that it should record a valuation allowance of $22.1 million and $22.3 million against its deferred tax assets
as of December 31, 2019 and 2018, respectively. The Company has federal net operating loss carryforwards totaling approximately
$76 million generated since 2016. It also has various state net operating loss carryforwards that begin to expire in 2031. In
November of 2016, the IRS commenced an audit of the Company’s 2015 Federal tax return, which was completed in 2018 (see
Note 16).
The
Company recognizes the consolidated financial statement impact of a tax position only after determining that the relevant tax
authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than–not
threshold, the amount recognized in the consolidated financial statements is the largest benefit that has a greater than 50 percent
likelihood of being realized upon ultimate settlement with the relevant tax authority.
The
Company is subject to income taxes in the U.S. federal jurisdiction and the states of Florida, North Carolina, New Mexico, New
Jersey, California, Kentucky and Tennessee. The tax regulations within each jurisdiction are subject to interpretation of related
tax laws and regulations and require significant judgment to apply.
Note
16 – Commitments and Contingencies
Concentration
of Credit Risk
Credit
risk with respect to accounts receivable is generally diversified due to the large number of patients comprising the client base.
The Company does have significant receivable balances with government payers and various insurance carriers. Generally, the Company
does not require collateral or other security to support customer 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.
A
number of proposals for legislation continue to be under discussion which could substantially reduce Medicare and Medicaid (CMS)
reimbursements to hospitals and clinical laboratories. Depending upon the nature of regulatory action, and the content of legislation,
the Company could experience a significant decrease in revenues from Medicare and Medicaid (CMS), which could have a material
adverse effect on the Company. The Company is unable to predict, however, the extent to which such actions will be taken.
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 Reference Labs, Inc. filed suit against CIGNA Health for failure to pay claims for
laboratory services provided. Cigna Health, in turn, sued for improper billing practices. CIGNA’s case was dismissed
on June 22, 2020, the Company’s case remains in the early stages.
The
Company’s Epinex Diagnostics Laboratories, Inc. subsidiary was sued in a California state court by two former employees
who alleged that they were wrongfully terminated, as well as for a variety of unpaid wage claims. The parties entered into a settlement
agreement of this matter on July 29, 2016 for approximately $0.2 million, and the settlement was consummated on August 25, 2016.
In October of 2016, the plaintiffs in this matter filed a motion with the court seeking payment for attorneys’ fees in the
approximate amount of $0.7 million. On March 24, 2017, the court granted plaintiffs’ motion for payment of attorneys’
fees in the amount of $0.3 million, and the Company accrued this amount in its consolidated financial statements. Additionally,
the Company is seeking indemnification for these amounts from Epinex Diagnostics, Inc., the seller of Epinex Diagnostic Laboratories,
Inc., pursuant to a Stock Purchase Agreement entered into by and among the parties.
In
February 2016, the Company received notice that the Internal Revenue Service (the “IRS”) placed a lien against Medytox
Solutions, Inc. and its subsidiaries relating to unpaid 2014 taxes due, plus penalties and interest, in the amount of $5.0 million.
The Company paid $0.1 million toward its 2014 tax liability in March 2016. The Company filed its 2015 Federal tax return on March
15, 2016 and the accompanying election to carryback the reported net operating losses was filed in April 2016. On August 24, 2016,
the lien was released, and in September of 2016 the Company received a refund from the IRS in the amount of $1.9 million. In November
of 2016, the IRS commenced an audit of the Company’s 2015 Federal tax return. Based upon the audit results, the Company
has made provisions of approximately $1.0 million as a liability in its financial statements as well as an estimated $0.6 million
of receivables for an additional refund that it believes is due.
On
September 27, 2016, a tax warrant was issued against the Company by the Florida Department of Revenue (the “DOR”)
for unpaid 2014 state income taxes in the approximate amount of $0.9 million, including penalties and interest. The Company entered
into a Stipulation Agreement with the DOR allowing the Company to make monthly installments until July 2019. The Company has made
payments of approximately $45,000 to reduce the amount owed as of December 31, 2019. The Company intends to renegotiate
another Stipulation agreement. However, there can be no assurance the Company will be successful. The remaining balance accrued
of approximately $0.4 million remained outstanding to the DOR at December 31, 2019.
In
December of 2016, TCS-Florida, L.P. (“Tetra”), filed suit against the Company for failure to make the required payments
under an equipment leasing contract that the Company had with Tetra (see Note 11). On January 3, 2017, Tetra received a Default
Judgment against the Company in the amount of $2.6 million, representing the balance owed on the leases, as well as additional
interest, penalties and fees. In January and February of 2017, the Company made payments to Tetra relating to this judgment aggregating
$0.7 million, and on February 15, 2017, the Company entered into a forbearance agreement with Tetra whereby the remaining $1.9
million due would be paid in 24 equal monthly installments. The Company has not maintained the payment schedule to Tetra. As a
result of this default, in May 2018, Tetra and the Company agreed to dispose of certain equipment and the proceeds from the sale
have been applied to the outstanding balance. The balance owed to Tetra at December 31, 2019 was $0.95 million and the
Company remains in default as of December 21, 2019.
In
December of 2016, DeLage Landen Financial Services, Inc. (“DeLage”), filed suit against the Company for failure to
make the required payments under an equipment leasing contract that the Company had with DeLage (see Note 11). On January 24,
2017, DeLage received a default judgment against the Company in the approximate amount of $1.0 million, representing the balance
owed on the lease, as well as additional interest, penalties and fees. The Company recognized this amount in its consolidated
financial statements as of December 31, 2016. On February 8, 2017, a Stay of Execution was filed and under its terms the balance
due was to be paid in variable monthly installments through January of 2019, with an implicit interest rate of 4.97%. The Company
and DeLage have now disposed of certain equipment and reduced the balance owed to DeLage. A balance of $0.2 million remained outstanding
at December 31, 2019.
On
December 7, 2016, the holders of the Tegal Notes (see Note 8) filed suit against the Company seeking payment for the amounts due
under the notes in the aggregate of the principal of $341,612, and accrued interest of $43,000. A request for entry of default
judgment was filed on January 24, 2017. On April 23, 2018, the holders of the Tegal Notes received a judgment against the Company.
As of December 31, 2019, the Company has repaid $5,795 of this amount.
The
counterparty to the prepaid forward purchase agreement entered into by the Company on March 31, 2016, as amended, filed an arbitration
proceeding under the agreement with regard to the outstanding balance. During the year ended December 31, 2019, Mr. Diamantis
advanced the Company $9.9 million, which was used to repay all obligations under the prepaid forward purchase agreement, as more
fully discussed in Note 8.
Two
former employees of the Company’s CollabRx, Inc. subsidiary have filed suits in a California state court in connection with
amounts claimed to be owed under their respective employment agreements with the subsidiary. One former employee received a judgment
in October 2018 for approximately $253,000. The other former employee received a judgment in December 2018 for approximately $173,000.
The Company is considering its options to refute these matters and believes the claims against the Company to be frivolous and
outside of entitlement and contractual agreements.
The
Company, as well as many of our subsidiaries, are defendants in a case filed in Broward County Circuit Court by TCA Global Credit
Master Fund, L.P. The plaintiff alleges a breach by Medytox Solutions, Inc. of its obligations under a debenture and claims damages
of approximately $2,030,000 plus interest, costs and fees. The Company and the other subsidiaries are sued as alleged guarantors
of the debenture. The complaint was filed on August 1, 2018. The Company has recorded the principal balance and interest owed
under the debenture agreement for the period ended December 31, 2019. The Company and all defendants have filed a motion to dismiss
the complaint, but have not recorded any potential liability related to any further damages. In May 2020, the SEC appointed
a Receiver to close down the TCA Global Master Fund LP over allegations of accounting fraud. The amount recorded by the Company
as being owed to TCA is based on TCA’s application of prior payments made by the Company. The Company believes that prior
payments of principal and interest may have been applied to unenforceable investment banking and other fees and charges. It is
the Company’s position that the amount owed to TCA is less than what is set forth above.
On
September 13, 2018, Laboratory Corporation of America sued EPIC Reference Labs, Inc., a subsidiary of the Company, in Palm Beach
County Circuit Court for amounts claimed to be owed. The court awarded a judgment against EPIC Reference Labs, Inc. in May 2019
for approximately $155,000. The Company has recorded the amount owed as a liability at December 31, 2019.
In
July 2019, Roche Diagnostics Corporation sued EPIC Reference Labs, Inc. in the Circuit Court for Palm Beach County claiming approximately
$240,000 under an agreement to purchase laboratory supplies. The amount of the settlement in this case of $110,000 was
recorded as a liability at December 31, 2019 and paid in full during 2020.
In
August 2019, EPIC Reference Labs, Inc. and Medytox Diagnostics, Inc. were sued by Beckman Coulter, Inc. in the same court under
an agreement to purchase laboratory supplies. The plaintiff claims damages of approximately $124,000.
In
July 2019, the landlord of Medytox Solutions, Inc. received a judgment in the amount of approximately $413,000 in connection with
failure to pay under an office lease in West Palm Beach, Florida. The Company reached a settlement on in May 2020 to resolve
the judgment in the amount of $300,000.
In
February 2020, Anthony O. Killough sued the Company and Mr. Diamantis, as guarantor, in New York State Court for the County of
New York, for approximately $2.0 million relating to the promissory note issued by the Company in September 2019. This case is
in the early stages.
Following
the Company’s decision to suspend operations at Jamestown Regional Medical Center in June 2019 a number of vendors remain
unpaid. A number have initiated or threatened legal actions. The Company believes it will come to satisfactory arrangements with
these parties as it works towards reopening the hospital. On June 10, 2019, the Company hired a new CEO to oversee the reopening
of the hospital and took steps to re-enter the Medicare program. The hospital received initial approval of its application to
reactivate the Medicare agreement in August and is currently planning the reopening of the hospital. Negotiations with vendors
are ongoing.
In
June 2019 CHSPCS obtained Judgement against the Company in the amount of $729,372. The Company believes that a number of insurance
payments were made to CHSPCS after the Change of Ownership and will likely offset the majority of the claim made by CHSPCS.
Note
17– Segment Reporting
Operating
segments are defined under U.S. GAAP as components of an enterprise for which discrete financial information is available and
are evaluated regularly by the enterprise’s chief operating decision maker in determining how to allocate resources and
assess performance. The Company operates in two reportable business segments:
|
●
|
Hospital
Operations, which reflects the operations of Jamestown Regional Medical Center, Big South Fork Medical Center and Jellico
Community Hospital and CarePlus Center.
|
|
|
|
|
●
|
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.
|
The
Company’s Corporate expenses reflect consolidated company wide support services such as finance, legal counsel, human resources,
and payroll.
Selected
financial information for the Company’s operating segments is as follows:
|
|
Year
Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Net
revenues - External
|
|
|
|
|
|
|
|
|
Hospital
Operations
|
|
$
|
15,927,983
|
|
|
$
|
14,417,676
|
|
Clinical
Laboratory Operations
|
|
|
58,941
|
|
|
|
131,014
|
|
|
|
$
|
15,986,924
|
|
|
$
|
14,548,690
|
|
Loss
from operations
|
|
|
|
|
|
|
|
|
Hospital
Operations
|
|
$
|
(11,060,401
|
)
|
|
$
|
(6,434,538
|
)
|
Clinical
Laborabory Operations
|
|
|
(1,061,145
|
)
|
|
|
(2,247,499
|
)
|
Corporate
|
|
|
(4,209,378
|
)
|
|
|
(4,542,583
|
)
|
|
|
$
|
(16,330,924
|
)
|
|
$
|
(13,224,620
|
)
|
Depreciation
and amortization
|
|
|
|
|
|
|
|
|
Hospital
Operations
|
|
$
|
715,286
|
|
|
$
|
498,352
|
|
Clinical
Laboratory Operations
|
|
|
79,232
|
|
|
|
764,445
|
|
Corporate
|
|
|
683
|
|
|
|
1,047
|
|
|
|
$
|
795,201
|
|
|
$
|
1,263,844
|
|
Capital
expenditures
|
|
|
|
|
|
|
|
|
Hospital
Operations
|
|
$
|
127
|
|
|
$
|
213,105
|
|
Clinical
Laboratory Operations
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
127
|
|
|
$
|
213,105
|
|
|
|
Year
Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Total
assets
|
|
|
|
|
|
|
|
|
Hospital
Operations
|
|
$
|
14,275,256
|
|
|
$
|
13,568,933
|
|
Clinical
Laboratory Operations
|
|
|
330,381
|
|
|
|
271,426
|
|
Corporate
|
|
|
2,305,380
|
|
|
|
2,707,416
|
|
Assets
of AMSG and HTS classified as held for sale
|
|
|
514,772
|
|
|
|
152,171
|
|
Eliminations
|
|
|
(2,718,130
|
)
|
|
|
(2,500,646
|
)
|
|
|
$
|
14,707,659
|
|
|
$
|
14,199,300
|
|
Note
18 – Discontinued Operations
On
July 12, 2017, we announced plans to spin off our Advanced Molecular Services Group (“AMSG”) and in the third quarter
2017 our Board of Directors voted unanimously to spin off the Company’s wholly-owned subsidiary, Health Technology Solutions,
Inc. (“HTS”), as independent publicly traded companies by way of tax-free distributions to the Company’s stockholders.
On June 10, 2020, the Company signed an agreement that will lead to the separation of these divisions into a public company.
The agreement is with TPT Global Tech, Inc. (OTC: TPTW), a California based public company, to merge HTS and AMSG into
a public company after TPT completes a merger of its wholly owned subsidiary, InnovaQor, Inc. with this public Company. The public
company will be known as InnovaQor going forward. Completion of the agreement is subject to a number of approvals and consents
which need to be secured to complete the transaction. Subject to closing and the relevant SEC approvals it is intended that Rennova
will receive approximately $22 million of preferred shares in the transaction, $5 million of which will be converted
to common shares in the public company, and distributed to Rennova Shareholders upon completion of the relevant registration/approvals
with the SEC. The remaining approximately $17 million of preferred shares held by Rennova as an investment in InnovaQor
will be convertible to common shares on achievement of certain milestones going forward. There can be no assurance that the transaction
as described will be consumated or that terms including numbers or values for consideration shares will not change significantly
before closing.
In
accordance with ASC 205-20 and having met the criteria for “held for sale”, as the Company reached this decision prior
to December 31, 2018, the Company has reflected amounts relating to AMSG and HTS as disposal groups classified as held for sale
and included as part of discontinued operations. Prior to being classified as “held for sale,” AMSG had been the Company’s
Decision Support and Informatics segment, except for the Company’s subsidiary, Alethea Laboratories, Inc., which had been
included in the Clinical Laboratory Operations segment and now is part of AMSG, and HTS had been the Company’s Supportive
Software Solutions segment. Segment operation disclosures in Note 17 no longer include amounts relating to AMSG and HTS 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 consolidated balance sheets as of December 31, 2019 and 2018 consisted of the following:
AMSG
Assets and Liabilities:
|
|
December
31, 2019
|
|
|
December
31, 2018
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
452
|
|
|
$
|
4,471
|
|
Accounts
receivable, net
|
|
|
-
|
|
|
|
6,838
|
|
Prepaid
expenses and other current assets
|
|
|
-
|
|
|
|
25,477
|
|
Current
assets classified as held for sale
|
|
$
|
452
|
|
|
$
|
36,786
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
$
|
-
|
|
|
$
|
-
|
|
Deposits
|
|
|
-
|
|
|
|
-
|
|
Non-current
assets classified as held for sale
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable (includes related parties)
|
|
$
|
491,206
|
|
|
$
|
532,858
|
|
Accrued
expenses
|
|
|
565,943
|
|
|
|
418,932
|
|
Current
portion of notes payable
|
|
|
256,274
|
|
|
|
278,836
|
|
Current
liabilities classified as held for sale
|
|
$
|
1,313,423
|
|
|
$
|
1,230,626
|
|
|
|
|
|
|
|
|
|
|
Non-current
liabilities classified as held for sale
|
|
$
|
-
|
|
|
$
|
-
|
|
HTS
Assets and Liabilities:
|
|
December
31, 2019
|
|
|
December
31, 2018
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
17,315
|
|
|
$
|
2,523
|
|
Accounts
receivable, net
|
|
|
482,472
|
|
|
|
90,743
|
|
Prepaid
expenses and other current assets
|
|
|
5,150
|
|
|
|
10,300
|
|
Current
assets classified as held for sale
|
|
$
|
504,937
|
|
|
$
|
103,566
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
$
|
3,354
|
|
|
$
|
5,790
|
|
Deposits
|
|
|
6,029
|
|
|
|
6,029
|
|
Non-current
assets classified as held for sale
|
|
$
|
9,383
|
|
|
$
|
11,819
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable (includes related parties)
|
|
$
|
668,895
|
|
|
$
|
546,969
|
|
Accrued
expenses
|
|
|
810,184
|
|
|
|
520,251
|
|
Current
liabilities classified as held for sale
|
|
$
|
1,479,079
|
|
|
$
|
1,067,220
|
|
|
|
|
|
|
|
|
|
|
Non-current
liabilities classified as held for sale
|
|
$
|
-
|
|
|
$
|
-
|
|
Consolidated
Discontinued Operations Assets and Liabilities:
|
|
December
31, 2019
|
|
|
December
31, 2018
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
17,767
|
|
|
$
|
6,994
|
|
Accounts
receivable, net
|
|
|
482,472
|
|
|
|
97,581
|
|
Prepaid
expenses and other current assets
|
|
|
5,150
|
|
|
|
35,777
|
|
Current
assets classified as held for sale
|
|
$
|
505,389
|
|
|
$
|
140,352
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
$
|
3,354
|
|
|
$
|
5,790
|
|
Deposits
|
|
|
6,029
|
|
|
|
6,029
|
|
Non-current
assets classified as held for sale
|
|
$
|
9,383
|
|
|
$
|
11,819
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable (includes related parties)
|
|
$
|
1,160,101
|
|
|
$
|
1,079,827
|
|
Accrued
expenses
|
|
|
1,376,127
|
|
|
|
939,183
|
|
Current
portion of notes payable
|
|
|
256,274
|
|
|
|
278,836
|
|
Current
liabilities classified as held for sale
|
|
$
|
2,792,502
|
|
|
$
|
2,297,846
|
|
|
|
|
|
|
|
|
|
|
Non-current
liabilities classified as held for sale
|
|
$
|
-
|
|
|
$
|
-
|
|
Major
line items constituting loss from discontinued operations in the consolidated statements of operations for the years ended December
31, 2019 and 2018 consisted of the following:
AMSG
(Loss) Income from Discontinued Operations:
|
|
Year
Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Revenue
from services
|
|
$
|
64,868
|
|
|
$
|
102,991
|
|
Cost
of services
|
|
|
36,648
|
|
|
|
38,299
|
|
Gross
profit
|
|
|
28,220
|
|
|
|
64,692
|
|
Operating
expenses
|
|
|
287,659
|
|
|
|
480,436
|
|
Gain
on sale of stock
|
|
|
-
|
|
|
|
(800,000
|
)
|
Other
expense
|
|
|
62,771
|
|
|
|
1,049
|
|
Provision
for income taxes
|
|
|
-
|
|
|
|
-
|
|
(Loss)
income from Discontinued Operations:
|
|
$
|
(322,210
|
)
|
|
$
|
383,207
|
|
HTS
Loss from Discontinued Operations:
|
|
Year
Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Revenue
from services (**)
|
|
$
|
1,046,699
|
|
|
$
|
1,419,494
|
|
Cost
of services
|
|
|
113,557
|
|
|
|
123,721
|
|
Gross
profit
|
|
|
933,142
|
|
|
|
1,295,773
|
|
Operating
expenses
|
|
|
1,388,443
|
|
|
|
2,108,880
|
|
Other
expense
|
|
|
-
|
|
|
|
4,943
|
|
Provision
for income taxes
|
|
|
-
|
|
|
|
-
|
|
Loss
from Discontinued Operations:
|
|
$
|
(455,301
|
)
|
|
$
|
(818,050
|
)
|
**Revenue
from services, includes related party revenue of $0.4 million and $0.7 million, respectively
Consolidated
Loss from Discontinued Operations:
|
|
Year
Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Revenue
from services
|
|
$
|
1,111,567
|
|
|
$
|
1,522,485
|
|
Cost
of services
|
|
|
150,205
|
|
|
|
162,020
|
|
Gross
profit
|
|
|
961,362
|
|
|
|
1,360,465
|
|
Operating
expenses
|
|
|
1,676,102
|
|
|
|
2,589,316
|
|
Gain
on sale of stock
|
|
|
-
|
|
|
|
(800,000
|
)
|
Other
expense
|
|
|
62,771
|
|
|
|
5,992
|
|
Provision
for income taxes
|
|
|
-
|
|
|
|
-
|
|
Loss
from Discontinued Operations:
|
|
$
|
(777,511
|
)
|
|
$
|
(434,843
|
)
|
Note
19 – Supplemental Disclosure of Cash Flow Information
|
|
Year
Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Cash
paid for interest
|
|
$
|
-
|
|
|
$
|
313,918
|
|
Cash
paid for income taxes
|
|
$
|
45,000
|
|
|
$
|
23,362
|
|
|
|
|
|
|
|
|
|
|
Acquisitions
of Hospitals and Medical Centers:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
-
|
|
|
$
|
375
|
|
Inventory
|
|
|
317,427
|
|
|
|
450,682
|
|
Prepaid
and other current assets
|
|
|
-
|
|
|
|
310,385
|
|
Property
and equipments
|
|
|
500,000
|
|
|
|
7,129,484
|
|
Intangible
assets
|
|
|
250,000
|
|
|
|
504,806
|
|
Accrued
expenses
|
|
|
158,890
|
|
|
|
(193,966
|
)
|
|
|
|
|
|
|
|
|
|
Non-cash
investing and financing activities:
|
|
|
|
|
|
|
|
|
Common
stock issued for conversion of Series I-2 Preferred Stock
|
|
|
1,268,972
|
|
|
|
1,513,105
|
|
Exchange
of debentures for Series I-2 Preferred Stock
|
|
|
-
|
|
|
|
1,420
|
|
Series
J Preferred Stock issued in exchange for notes payable and accrued expenses
|
|
|
-
|
|
|
|
250,000
|
|
Issuance
of Series K Preferred Stock
|
|
|
2,500
|
|
|
|
-
|
|
Exchange
of Series J Preferred Stock for Series K Preferred Stock
|
|
|
(2,500
|
)
|
|
|
-
|
|
Common
stock issued in cashless exercise of warrants
|
|
|
11,962
|
|
|
|
4,619,150
|
|
Conversion
of Series H Preferred Stock
|
|
|
-
|
|
|
|
50,000
|
|
Debentures
converted into common stock
|
|
|
-
|
|
|
|
8,128,044
|
|
Original
issue discounts of debentures and notes payable
|
|
|
400,000
|
|
|
|
2,160,000
|
|
Deemed
dividend for trigger of down round provision feature
|
|
|
123,861,587
|
|
|
|
231,843,826
|
|
Note
20 – Recent Accounting Pronouncements
Accounting
Pronouncements Adopted
In
February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) as updated. We adopted this new standard beginning on January
1, 2019 as more fully discussed in Notes 2 and 11.
In
February 2018, the FASB issued ASU 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification
of Certain Tax Effects from Accumulated Other Comprehensive Income. This standard provides companies with an option to reclassify
stranded tax effects resulting from enactment of the Tax Cuts and Jobs Act (“TCJA”) from accumulated other comprehensive
income to retained earnings. Early adoption of this standard is permitted and may be applied either in the period of adoption
or retrospectively to each period in which the effect of the change in the tax rate as a result of TCJA is recognized. This ASU
became effective for us for annual and interim periods beginning after December 15, 2018. The adoption of this ASU did not have
a material impact on our results of operations, financial position and cash flows.
In
February 2018, the FASB issued ASU 2018-03; Technical Corrections and Improvements to Financial Instruments—Overall (Subtopic
825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. These technical corrections and improvements
are intended to clarify certain aspects of the guidance on recognizing and measuring financial assets and liabilities in ASU 2016-01.
This includes equity securities without a readily determinable fair value, forward contracts and purchased options, presentation
requirements for certain fair value option liabilities, fair value option liabilities denominated in foreign currency and transition
guidance for equity securities without a readily determinable fair value. We were required to adopt these standards starting in
the first quarter of fiscal year 2019. The implementation did not have a material impact on our consolidated financial statements.
In
March 2018, the FASB issued ASU 2018-05; Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting
Bulletin No. 118 (SEC Update), which amended ASC 740 to incorporate the requirements of Staff Accounting Bulletin (“SAB”)
118. Issued in December 2017 by the SEC, SAB 118 addresses the application of U.S. GAAP in situations in which a registrant does
not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete
the accounting for certain income tax effects of the TCJA which was signed into law on December 22, 2017. The adoption did not
have a material impact on our consolidated financial statements.
In
June 2018, the FASB issued ASU 2018-07 to expand the scope of ASC Topic 718, Compensation - Stock Compensation, to include
share-based payment transactions for acquiring goods and services from nonemployees. The pronouncement is effective for fiscal
years, and for interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. The
adoption did not have a material impact on our consolidated financial statements.
Accounting
Pronouncements Not Yet Adopted
In
August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure
Requirements for Fair Value Measurement. This standard will require entities to disclose the amount of total gains or losses
for the period recognized in other comprehensive income that is attributable to fair value changes in assets and liabilities held
as of the balance sheet date and categorized within Level 3 of the fair value hierarchy. This ASU will be effective for us for
annual and interim periods beginning on December 31, 2020. Early adoption of this standard is permitted. We do not expect the
adoption of this ASU to have a material impact on our results of operations, financial position and cash flows.
In
August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s
Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. Under this standard
customers will apply the same criteria for capitalizing implementation costs as they would for an arrangement that has a software
license. The adoption of this new guidance prescribes the balance sheet, income statement, and cash flow classification of the
capitalized implementation costs and related amortization expense, and additional quantitative and qualitative disclosures. This
ASU will be effective for us for annual and interim periods beginning on December 31, 2020. Early adoption of this standard is
permitted and may be applied either prospectively to eligible costs incurred on or after the date of the new guidance or retrospectively.
We do not expect the adoption of this ASU to have a material impact on our results of operations, financial position and cash
flows.
In
December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The
new guidance simplifies the accounting for income taxes by removing certain exceptions to the general principles and also simplification
of areas such as franchise taxes, step-up in tax basis goodwill, separate entity financial statements and interim recognition
of enactment of tax laws or rate changes. This standard will be effective for us for annual periods beginning on January 1, 2021,
including interim periods within those fiscal years. Early adoption of this standard is permitted, including adoption of all amendments
in any interim period for which financial statements have not yet been issued. We are evaluating 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
21 – Subsequent Events
IRS
Payments
Subsequent
to December 31, 2019 and through May 31, 2020, the Company paid the IRS $1.1 million toward satisfy payroll taxes
owed which included amounts that were past due.
Secured
Installment Promissory Note
On
January 29, 2020, the Company entered into a Secured Installment Promissory Note (the “Installment Note”) in the principal
amount of $1.2 million. The Company used the proceeds to satisfy in full the amounts due under accounts receivable factoring
agreements. The factoring agreements are more fully discussed in Note 4. Pursuant to the Installment Note, weekly installment
payments ranging from $22,500 to $34,000 are due on or before February 5, 2020 through on or before October 21, 2020, the maturity
date. The Installment Note is non-interest bearing and subject to late-payment fees of 10%.
Loans
From Mr. Diamantis and Resignation from Board of Directors
Subsequent
to December 31, 2019 and through May 31, 2020, Mr. Diamantis advanced the Company $2.0 million for working capital purposes.
The Company incurred interest of $0.5 million on the advances. On February 26, 2020, Mr. Diamantis resigned as a director
of the Company. In submitting his resignation, Mr. Diamantis did not express any disagreement with the Company on any matter relating
to the Company’s operations, policies or practices. Mr. Diamantis had served as a director since November 2, 2015 and previously,
Mr. Diamantis served as a director of Medytox from April 24, 2013 to November 5, 2015.
Series
M Convertible Preferred Stock
On
June 9, 2020, the Company filed a certificate of designation to authorize 30,000 shares of Series M Convertible Preferred Stock
with a stated value of $1,000 per share.
Paycheck
Protection Loan
As
of May 7, 2020, the Company and its subsidiaries have received loan proceeds in the aggregate amount of approximately $2.4 million
under the Paycheck Protection Program (“PPP”). The PPP, established as part of the Coronavirus Aid, Relief and Economic
Security Act (“CARES Act”), provides for loans to qualifying businesses. A portion of the loans and accrued interest
are forgivable as long as the borrower uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities,
and maintains its payroll levels. The amount of loan forgiveness will be reduced if the borrower terminates employees or reduces
salaries. No collateral or guarantees were provided in connection with the PPP loans.
The
unforgiven portion of the PPP loans is payable over two years at an interest rate of 1%, with a deferral of payments for the first
six months. The Company intends to use the proceeds for purposes consistent with the PPP. While the Company currently believes
that its use of the loan proceeds will meet the conditions for forgiveness of the loans, we cannot assure you that we will not
take actions that could cause the Company to be ineligible for forgiveness of the loans, in whole or in part.
HHS
Provider Relief Funds
The
coronavirus pandemic and the steps taken by governments to seek to reduce its spread have severely impacted the economy and the
health care industry in particular. Hospitals have especially been affected. Small rural hospitals, such as ours, may be overwhelmed
by patients if conditions worsen in their local areas. Staffing costs, and concerns due to the potential exposure to infections,
may increase, as may the costs of needed medical supplies necessary to keep the hospitals open. Doctors and patients may defer
elective procedures and other health care services. Travel bans, social distancing and quarantines may limit access to our facilities.
Business closings and layoffs in our local areas may result in the loss of insurance and adversely affect demand for our services,
as well as the ability of patients and other payers to pay for services as rendered.
The
Company received Provider Relief Funds from the United States Department of Health and Human Services (“HHS”) provided
to eligible healthcare providers out of the $100 billion Public Health and Social Services Emergency Fund provided for in the
Coronavirus Aid, Relief, and Economic Security Act. The funds are allocated to eligible healthcare providers for expenses and
lost revenue attributable to the COVID-19 pandemic. The funds are being released in tranches, and HHS partnered with UnitedHealth
Group to distribute the initial $30 billion in funds by direct deposit to providers. Company-owned facilities have received approximately
$7,400,000 in relief funds. The fund payments are grants, not loans, and HHS will not require repayment, but providers are restricted
and the funds must be used only for grant approved purposes.
Issuance
of Series L Convertible Preferred Stock
On
May 4, 2020, the Company filed a Certificate of Designation with the Secretary of State of the State of Delaware to authorize
the issuance of up to 250,000 shares of its Series L Convertible Preferred Stock (the “ Series L Preferred Stock”
). On May 5, 2020, the Company entered into a second exchange agreement with Alcimede LLC. Pursuant to the second exchange agreement,
the Company issued to Alcimede 250,000 shares of its Series L Preferred Stock in exchange for the 250,000 shares of the Company’s
Series K Preferred Stock held by Alcimede. The Series K Preferred Stock had been issued to Alcimede on December 23, 2019 and upon
the issuance of the Series L Preferred Stock to Alcimede, the shares of Series K Preferred Stock were cancelled. Shares of the
Series K Preferred Stock were convertible immediately into common stock and were entitled to receive, when and as declared by
the Board of Directors, dividends equal (on an as if converted to common stock basis) to and in the same form as dividends actually
paid on shares of common stock. The Series L Preferred Stock is not convertible into common stock prior to December 1, 2020 and
is not entitled to receive any dividends.
Shareholder
Proposal Approval
On
May 7, 2020, Mr. Lagan and Alcimede LLC, the holders of an aggregate of 53,368 shares of common stock and 250,000 shares of Series
L Preferred Stock, which votes with the common stock and the Series F Preferred Stock, with each share of Series L Preferred Stock
having 40,000 votes, representing 50.25% of the total voting power of the Company’s voting securities, approved by written
consent in lieu of a special meeting of stockholders the following proposal, which had previously been approved and recommended
to be approved by the stockholders by the Board of Directors of the Company.
Proposal
1: To approve an amendment to our Certificate of Incorporation, as amended, to effect a reverse stock split of all of the
outstanding shares of our common stock, at a specific ratio from 1-for-100 to 1-for-10,000, and grant authorization to our Board
of Directors to determine, in its discretion, the specific ratio and timing of the reverse split at any time on or before December
31, 2020, subject to the Board of Directors’ discretion to abandon such amendment.
The
stockholder approval of the above proposal became effective on June 9, 2020.
Potential
Common Stock as of May 31, 2020
The
following table presents the dilutive effect of our various potential common shares as of May 31, 2020:
|
|
May
31, 2020
|
|
Common
shares outstanding
|
|
|
9,898,936,775
|
|
Dilutive
potential shares:
|
|
|
|
|
Stock
options
|
|
|
68
|
|
Warrants
|
|
|
634,525,355,376
|
|
Convertible
debt
|
|
|
30,634,784,339
|
|
Convertible
preferred stock
|
|
|
78,872,373,825
|
|
Total
dilutive potential common shares, including outstanding common stock
|
|
|
753,931,450,383
|
|
As
a result of the authorization of the discretionary reverse stock split discussed above under the heading “Shareholder Proposal
Approval,” as of the date of filing this report, the Company believes that it has the ability to have sufficient authorized
shares of its common stock to cover all potentially dilutive common shares outstanding.
Agreement
to separate software and genetic diagnostics interpretation divisions
On
June 10, 2020 the Company signed an agreement with TPT Global
Tech, Inc. (OTC: TPTW), a California based public company, to merge its software and genetic testing interpretation divisions,
Health Technology Solutions, Inc. (HTS) and Advanced Molecular Services Group, Inc., (AMSG) into a public company (target) after
TPT completes a merger of its wholly owned subsidiary, InnovaQor, Inc. with this target.
Completion
of the agreement is subject to a number of approvals and consents which need to be secured to complete the transaction. Subject
to the relevant SEC approvals it is intended that TPT shareholders will receive approximately 2,500,000 common shares in InnovaQor,
with TPT receiving and retaining directly an additional 2,500,000 common shares (total 5,000,000 common shares) and Rennova receiving
approximately $22 million of preferred shares, $5 million of which will be converted to common shares and distributed
to Rennova Shareholders upon completion of the relevant registration/approvals with the SEC, and with the remaining approximately
$17 million of preferred shares held by Rennova as an investment in InnovaQor and convertible to common shares on achievement
of certain milestones going forward. Rennova will be responsible to appoint management to the project. It is intended that 1 million
common shares will vest to management. There can be no assurance that the transaction as described will be consumated
or that terms including numbers or values for consideration shares will not change significantly before closing.