UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
| (X) | Annual Report Pursuant under Section 13 or 15(d) of the Securities Act of 1934. |
For the year ended December 31, 2018
| ( ) | Transition report under section 13 or 15(d) of the Securities Act of 1934. |
For the Transition period from _______ to ________.
Commission File Number: 1-9927
ADVANZEON SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
| Delaware | 95-2594724 | |
|
(State or other jurisdiction of incorporation or organization) |
(IRS Employer Identification No.) | |
|
2901 W. Busch Blvd. Suite 701 Tampa, FL |
33618 | |
| (Address of Principal Executive Offices) | (Zip Code) |
813-517-8484
(Registrant’s telephone number including area code)
Securities to be registered pursuant to Section 12(b) of the Exchange Act:
Securities registered or to be registered pursuant to Section 12(g) of the Exchange Act:
(Title of class)
Common Stock, Par Value $0.01 per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
☐ Yes ☒ No
Indicate by check mark if the registrant is not required to file reports pursuant to section 13 or Section 15 (d) of the Act.
☐ Yes ☒ No
Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☐ No ☒
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☐ No ☒
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K ☐
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ | |
| Non-accelerated filer ☐ | Smaller reporting company ☒ | |
| Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(s) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of the voting and non-voting stock held by non-affiliates of the registrant as of May 1, 2019 was $2,037,061. This calculation does not reflect a determination that certain persons are affiliates of the registrant for any other purposes.
The number of shares of the registrant’s common stock outstanding as of May 22, 2019 was 67,361,656.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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TABLE OF CONTENTS
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CAUTIONARY STATEMENT FOR THE PURPOSES OF THE “SAFE HARBOR” PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995: Certain information included in this Annual Report on Form 10-K and in our other reports, Securities and Exchange Commission (“SEC”) filings, statements, and presentations is forward looking within the meaning of the Private Securities Litigation Reform Act of 1995, including, but not limited to, our anticipated operating results, financial resources, increases in revenues, increased profitability, growth and expansion. And our ability to enter into new contracts. Such forward-looking information involves important risks and uncertainties that could significantly affect actual results and cause them to differ materially from expectations expressed herein and in our other reports, SEC filings, statements, and presentations. These risks and uncertainties include, among others, changes in local, regional, and national economic and political conditions, the effect of governmental regulation, competitive market conditions, varying trends in member utilization, our ability to manage our operating expenses, our ability to obtain additional financing, our ability to renegotiate or extend expiring debt instruments, and other risks detailed in Item 1A in this Annual Report.
OVERVIEW
Established in 1969, Advanzeon Solutions, Inc., (formerly Comprehensive Care Corp.) (“Advanzeon”, “we”, “Parent”, or the “Company”), through its wholly-owned subsidiary Pharmacy Value Management Solutions, Inc., (“PVMS”) and its wholly-owned subsidiaries during 2015, and partly in 2016, provided managed care services by acting as the administrator for certain administrative service agreements in the behavioral health and substance abuse fields. We primarily offered these services to commercial, Medicare, Medicaid, Children’s Health Insurance Program (“CHIP”) health plans, as well as self-insured companies. Our managed care operations consisted solely of servicing administrative service agreements. Starting in July of 2015, we implemented our comprehensive sleep apnea program, called “SleepMaster Solutions” ™. SleepMaster Solutions (“SMS”) utilizes an administrative system for the convenient identification/testing and therapy of Obstructive Sleep Apnea (“OSA”). We partnered with a national health care provider by initiating a sleep apnea wellness program whereby we screened, tested and when needed, offered a treatment programs for treating this disorder. We also contracted with a union to treat its driver members. Beginning in 2017, our only business was our SMS sleep apnea program.
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OBSTRUCTIVE SLEEP APENA
In 2014, the Department of Transportation (“DOT”) overhauled its system such that regulations now require commercial drivers, that is drivers with a commercial driver’s license (‘CDL”) must be specifically examined with respect to whether or not they have a respiratory dysfunction which is defined to include Obstructive Sleep Apnea (“OSA”). OSA is a breathing disorder that causes the airway in a person’s throat to close during sleep for ten seconds or more. This loss of breathing function can occur as many as 400 times during the night, and those who have the disorder wake up multiple times, which can lead to exhaustion during the day. Although OSA is diagnosed across a wide demographic, there are certain factors that increase the risk of a person developing this disorder:
| ● | Obesity |
| ● | Smoking and drinking alcohol |
| ● | Family history |
| ● | Small airway |
| ● | Recessed chin, large overbite |
| ● | Ethnicity |
The troubling aspect of OSA as it relates to CDL drivers is that it causes intense fatigue often causing a driver to struggle with focusing and remaining alert while driving. Sleep apnea is one of the major contributing factors in truck accidents.
SOURCES OF REVENUE
For the years ended December 31, 2018 and 2017, all of our revenue was earned from our sleep apnea business.
OUR BUSINESS
The Company through its wholly-owned subsidiary Pharmacy Value Management Solutions, Inc. administers and operates a medically-driven sleep apnea program branded SleepMaster Solutions™ (“SMS”). Management believes that SMS is the largest provider of these combined services in the nation. We are in all 50 states and provide a turnkey solution designed to effectively keep drivers on the road with no down time and compliant with DOT regulations, improve their health, and significantly decrease legal liability risk for the employer. We are vertically integrated, and we provide a “Program” of services that addresses all the needs of a corporate transportation system, union or other driver-related organizations. We believe we are the only company capable of providing the full range of needed services in a timely manner.
Our services start with the identification of the target population and the potential risk the client currently has. We can do this through our SMS Program, which includes the ability to screen every driver to identify if signs and symptoms of sleep apnea are present. We can then take this data and provide the employer with a list of those drivers that should be tested and the statistical likelihood of the percentage of those drivers who will test positive for obstructive sleep apnea (OSA). Together with the employer/union, SMS provides a realistic time frame, actual total cost, and process for testing all drivers who need to be tested. For those drivers testing positive for OSA, we then provide the appropriate treatment such that the driver will meet the DOT requirements and remain on the road. We monitor 365 days per year driver’s usage of the treatment device according to DOT standards and we report that usage to all stakeholders as required/permitted. We utilize mathematical algorithms to determine if the driver is predicatively meeting the annual DOT requirements for usage. Using those predictive algorithms, we reach out to those drivers to provide case management and encouragement designed to solve problems such that the driver increases usage, if necessary, and remains compliant.
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SMS constructed its model based upon the foregoing principles. The SMS Program includes all processes attended in sleep apnea screening, testing, treatment, monitoring and overall management of commercial drivers’ as well as their employers’ needs. We have successfully established relationships with national health care clinic providers, all with certified medical examiner (“CME”) status. These clinics total almost 1,000 throughout the U.S. We also have both formal and informal relationships with employers; municipalities; a significant veteran’s group; union and non-union driving organizations; suppliers of home sleep testing equipment and a variety of OSA treatment devices; and, a national network of telemedicine sleep specialists covering all 50 states. We have an internal medical team for governance and protocol purposes and a customer service department that interfaces directly with our drivers. We also have a marketing team that regularly interfaces with our existing accounts and markets our services to potential new accounts. Our services are performed utilizing a best medical practices model and an efficient, cost-effective delivery system. We obtain the required equipment on a per order basis from a durable medical equipment distributor.
Revenue is recognized when billed, which is approximately when the testing service is performed or CPAP machine is shipped.
In the past, the commercial transportation industry, and industry in general, did not fully appreciate OSA as a health/liability issue. Today, more and more companies have begun to identify OSA as a major health and liability concern. Part of this realization has been occasioned by the number of successful lawsuits initiated on account of drivers accused of having accidents caused, in part, by their having OSA (sleep apnea). Several years ago, the Company identified this health problem and an industry trend toward more attention being devoted to issues involving OSA. We took steps to address what we saw as a national healthcare epidemic, and in the process, we constructed a nationwide virtual system for the screening, testing and treatment of OSA. We believe we are the only nationwide, medically-driven company that actively engages and promotes to industry a national screening, testing and treatment program targeting OSA.
The United States government has provided impetus to certain employers and unions to start paying more attention to OSA by passing legislation requiring that commercial interstate drivers (including truckers, airline pilots and railway conductors) be examined for a respiratory dysfunction (sleep apnea) as a condition of their maintaining their commercial license. That, notwithstanding, however, the challenge we faced, and continue to face, is getting employers, associations, municipalities and unions (collectively, “employers”) to fully realize the health and economic value to them for actively promoting an internal OSA program to their employees and/or members (collectively, “employees”) which consists of providing our services to their employees on an employer-paid basis – no cost to the employee. Therefore, once we have made our initial contact with an employer who is willing to pay for all or a part of our SMS services, our job is to then assist them in implementing a comprehensive OSA program and, either directly or indirectly, promoting same to their employees. We have found that while many companies wholeheartedly embrace the need to address OSA from a management perspective, others, while recognizing the problem, are not yet ready to actually promote such a program, internally, from a cost perspective. They are oftentimes not willing to enter into a formal contract for our services, preferring an informal relationship whereby they agree that while they will pay for the services we rendered to their employees, they will not engage in the active promotion of the program. The result is that unless we convince the employers to make their employees aware of such coverage, the employees often remain unaware of the fact that their employer is providing them with such a benefit. It is, therefore, our responsibility, and our cost, to work with each such employer, generally through their human resources staff to provide the design and necessary materials needed to implement and monitor an effective OSA benefit program. This requires an active marketing effort on our part both before the relationship is solidified, and consistently thereafter. As a result of our limited financial resources, while we have now successfully established a significant number of these relationships, there still remains the task of continuing our marketing efforts to fully realize the economic benefit of those relationships. We are confident that our continued efforts will ultimately provide a meaningful revenue stream in tandem with the growth of our patient population.
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Our Home Sleep Test (HST) Process:
After a driver has been diagnosed as at risk for OSA, the next step is for the driver to be evaluated with a Home Sleep Test (“HST”). The HST is a testing device used overnight by the driver. The device takes readings of the sleep interruptions, oxygen levels and other related data. SMS contacts the driver and coordinates where to send the Home Seep Test. The driver is advised what will come in the box and when the box will arrive. SMS then ships the test along with a return shipping box. When the test is completed, the driver places the device in the return box. The driver then calls USPS for a free pickup or drops off the box at a USPS location. The test is then returned to SMS where the test is downloaded, results evaluated by a certified sleep specialist, and a report generated. We coordinate with our supplier and provide the HST and related services to the driver for a fee.
CPAP Therapy:
Once the HST Is returned and results evaluated, the driver falls into one of two categories. If sleep apnea is ruled out, the driver and all relevant stakeholders are provided with a “Certificate of Compliance” which is used by the certified medical examiner (CME) to certify the driver’s medical card. If sleep apnea is confirmed, the driver and all relevant stakeholders are advised, and a medically correct and regulatory compliant treatment plan is recommended. This plan is most often Continuous Positive Air Pressure (“CPAP”) therapy. SMS will provide the driver with an auto-regulating CPAP machine and deliver same to the driver’s home, office, or wherever he/she prefers to receive it. The driver is instructed on how to use the CPAP machine and preferences for mask type, fitting size, etc. are customized for the driver. SMS employs staff who is skilled at walking a driver through the process. SMS also utilizes a “hotline” that a driver may call with any questions.
Monitoring:
SMS provides monitoring of drivers for compliance as required by the DOT. There are two phases of monitoring. For those drivers determined to require CPAP therapy, an initial thirty day report is required to demonstrate that the driver is using the CPAP machine at least 70% of the time. SMS not only monitors the driver, but actively intervenes with the driver to encourage compliance. SMS utilizes an algorithm based on current usage to predict if the driver will meet compliance guidelines. If our monitoring indicates the driver is not meeting guidelines, we alert them and offer suggestions and encouragement to help them meet compliance. At the conclusion of the thirty day period, SMS provides a DOT appropriate report documenting compliance performance. SMS also provides ongoing monitoring via a WIFI-based model to monitor the driver’s usage 24/365. We provide the same case management function of encouraging compliance and offering solutions to keep the driver healthy, safe, compliant and on the road.
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The following diagram shows how we deliver our services.
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OUR ADVISORY BOARDS
Medical Advisory Board
Our SMS program is a medically-driven program dedicated to the concept that by attacking and containing root causes of various ailments affecting our population, we can dramatically reduce the cost of healthcare; increase workplace productivity; decrease and, in many cases, eliminate unnecessary expenses; and, provide for a healthier population, both in and out of the workplace. The primary focus of our Medical Advisory Board panel in regard to the foregoing is sleep apnea.
The Medical Advisory Board consists of 33 members at present and is composed of members with specialties and sub-specialties specifically selected so that it can address all of the various sleep-disorder breathing co-morbidities. Some of the practices represented on the Board include cardiovascular, pathology and diabetes The Board meets at least twice a year, and more often as needed. Management consults with individual members on an as needed basis. The Medical Advisory Board furthers the SMS program mission to perform its services utilizing a best medical practices model and an efficient, cost-effective delivery system.
Dental Advisory Board
The Dental Advisory Board meets jointly with the Medicinal Advisory Board. With the expansion of dental practice into the areas of detection and treatment of OSA the Board advises management on advances and new solutions for the treatment of OSA. It presently has three members.
MARKETING AND SALES
Our marketing and sales efforts are led by our management. In addition, we utilized independent sales agents for direct sales to commercial, CHIP health plans, health care providers as well as self-insured companies and unions. We enter into written agreements with these sales agents whereby we pay a base amount of compensation plus a commission amount. We currently have three such agents. Our customer service operations and telemarketing efforts are handles by independent contractors. We pay these contractors a set amount of compensation. We currently have four such contractors.
COMPETITION
We operate in a very competitive but highly fractured health care environment. There are traditional sleep test centers that have operated for a long time and are well established. The services provide by such centers are most often covered by insurance. Our services are not generally covered by insurance as we are not presently credentialed to be able to accept insurance. Once a person has been diagnosed with OSA there are a number of ways that equipment may be obtained. Again, insurance may cover the purchase of such equipment. Equipment for the treatment of OSA is readily obtainable from many sources including the internet. In addition, there are a number of devices advertised that claim to treat OSA without the need for CPAP equipment. We believe that our SMS Program is the only medically driven comprehensive program that provides the customer/employer with a turnkey solution from initial screening through testing, when required, treatment and ongoing compliance monitoring.
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GOVERNMENT REGULATION
We are subject to the requirements of the Health Insurance Portability and Accountability Act of 1996, as amended (“HIPAA”). One of the purposes of HIPAA is to improve the efficiency and effectiveness of the healthcare system through standardization of the electronic data interchange of certain administrative and financial transactions and, also, to protect the security and privacy of protected health information. Entities subject to HIPAA include some healthcare providers and all healthcare plans.
MANAGEMENT INFORMATION SYSTEMS
All of our OSA information technology and systems operate on a single platform. This approach avoids the costs associated with maintaining multiple systems and improves productivity. The open architecture of the systems gives us the ability to transfer data from other systems thereby facilitating the integration of new health plan business. We use our information system for customer processing, utilization management, reporting, cost trending, planning, and analysis. The system also supports customer and provider service functions.
We significantly enhanced our network by installing a storage area network and virtualizing our computer servers. This implementation brought in the current best practices approach and permitted a major overhaul of our information technology infrastructure. The technology centralizes storage management, increases the utilization of equipment, improves redundancy of the servers, reduces the overall hardware requirements, and facilitates growth, while driving down the total cost of ownership.
ADMINISTRATION AND EMPLOYEES
Our executive and administrative offices are located in Tampa, Florida, where we maintain operations, business development, accounting, reporting and information systems, and provider and customer service functions. As of December 31, 2018, we employed two people and contracted for seven others.
AVAILABLE INFORMATION
Our investors’ website can be found at www.advanzeonshareholders.com. We make available free of charge, through a link to the SEC internet site, our annual, quarterly, and current reports, and any amendments to these reports, as well as any beneficial ownership reports of officers and directors filed electronically on Forms 3, 4, and 5. Information contained on our website or linked through our website is not part of this Annual Report on Form 10-K. The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Additionally, the SEC maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, which can be found at http://www.sec.gov.
Our Board of Directors has two committees, an audit committee and a compensation and stock option committee. Each of these committees has a formal charter which was filed as an exhibit to our Annual Report on Form 10-K for the year ended December 31, 2009. Any references to our stockholder website and the SEC’s website above are intended to be inactive textual references only, and the contents of those Web sites are not incorporated by reference herein.
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In addition, you may request a copy of the foregoing charters at no cost by writing us at the following address or telephoning us at the following telephone number:
Advanzeon Solutions, Inc.
P.O. Box 271485
Tampa, FL 33688
Attention: Investor Relations
Tel: (813) 517-8484
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You should carefully consider and evaluate all of the information in this Annual Report on Form 10-K, including the risk factors listed below. Risks and uncertainties in addition to those we describe below, that may not be presently known to us, or that we currently believe are immaterial, may also harm our business and operations in the future. If any of these risks occur, our business, and its future financial condition, results of operations and cash flows could be harmed, the price of shares of our common stock could decline, and future events and circumstances could differ significantly from those expected that are set forth in or underlie the forward-looking statements contained in this report.
Dependence on our Chief Executive Officer
We are dependent on the services of Mr. Clark A. Marcus, our Chief Executive Officer. The loss of his services would have a materially adverse effect on the performance and growth of our business for some period of time. We do not have any “Key Man” insurance for Mr. Marcus.
Our inability to renew, extend or replace expiring or terminated contracts in the near term could adversely affect our liquidity, profitability and financial condition.
Many of the contracts we service could be terminated immediately either for cause or without cause by the client upon notice of a specified time (typically between 30 and 60 days). The loss of one of these contracts could materially reduce our net revenue and have a material adverse effect on our liquidity, profitability and financial condition.
A compromise of our information systems or unauthorized access to confidential information or our customers personal information could materially harm our business and/or our reputation.
An effective and secure information system, available at all times, is vital to our individual and corporate customers. We collect and store confidential medical and personal from our customers. Certain of the information we collect is Personnel Health Information as that term is defined under HIPPA. We depend on our computer systems for significant service and management functions, such as providing membership monitoring, utilization, processing customer information, and providing regulatory data and other client and managerial reports. Although our computer and communications hardware is protected by physical and software safeguards and other internal controls, it is still vulnerable to computer hacking which if successful, could cause such information to be misappropriated. We could be subject to liability for failure to comply with HIPPA or other privacy laws. Any compromise of our systems or data could disrupt our operations, damage our reputation, and expose us to claims from customers. This could have an adverse effect on our business, financial condition and results of operations. We do not have 100% redundancy for all of our computer operations.
We are subject to intense competition that may prevent us from gaining new customers or pricing our contracts at levels sufficient to achieve gross margins to ensure profitability.
We are continually pursuing new business. Many of our competitors are significantly larger and better capitalized than we are. Our smaller size and weak financial condition have been a deterrent to some prospective customers. One of the general ways in which testing is presently done for OSA is a “sleep center”. These facilities are able to accept insurance. We are not presently credentialed to accept insurance. As a result, we may not be able to successfully compete in our industry in some respects.
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Failure to adequately comply with HIPAA may result in penalties.
Our industry is subject to the security and privacy requirements of HIPAA relative to patients’ health information. Although we believe we are fully compliant with all HIPAA regulations, any assertions of lack of compliance with HIPAA regulations could result in penalties and have a material adverse effect on our ability to retain our customers or to gain new business.
We may require additional funding, and we cannot guarantee that we will find adequate sources of capital at acceptable terms in the future.
Our available revenue from operations is not currently sufficient to fund our business. If we are unable to increase our revenue from operations, we may need to seek new financing, possibly in the form of additional debt or equity (which could dilute current stockholders’ ownership interests). We cannot provide assurance that such additional funding will be available on acceptable terms.
Risks related to our common and preferred stock.
Our Series C Convertible Preferred stockholders have significant rights and preferences over the holders of our common stock and may be deemed to operate as an anti-takeover device.
Our Series C Convertible Preferred stockholders are entitled to receive dividends when declared by our Board of Directors before dividends are paid on our common stock and also have a claim against our assets senior to the claim of the holders of our common stock in the event of our liquidation, dissolution or winding-up. The aggregate amount of that senior claim is currently $2,608,500. In addition, each Series C Convertible Preferred stockholder is entitled to vote together with the holders of our common stock on an “as converted” basis, and, voting together as a separate class, all holders have the right to elect five of our nine directors to our Board of Directors. The holders by their ability to control a majority of our Directors may be deemed to be an anti-takeover device.
The holders of our Series C Convertible Preferred Stock have other rights and preferences as detailed elsewhere in this report. These rights and preferences could adversely affect our ability to finance future operations, satisfy capital needs or engage in other business activities that may be in our interest.
Our Series D Convertible Preferred stockholders have significant rights and preferences over the holders of our common stock and may be deemed to operate as an anti-takeover device.
We also have a class of convertible preferred stock, Series D, for which 7,000 shares are authorized and 250 shares have been issued. Subject to certain conditions, the shares do not vest until the tenth anniversary of the grant date of January 4, 2012, at which time each share will be convertible into 100,000 shares of common stock. Prior to vesting and thereafter, each Series D convertible preferred share is entitled to all voting, dividend, liquidation and other rights accorded a share of Series D convertible preferred stock. If a dividend is declared on the common stock, each share of Series D stock is entitled to receive a dividend equal to 50% of the dividend declared for the common stock as if the Series D stock had been converted. Despite their nonvested status, voting rights of each share nevertheless consist of the right to cast the number of votes equal to those of 500,000 shares of common stock. Unless otherwise required by applicable law, holders of shares of Series D have the right to vote together with holders of common stock as a single class on all matters submitted to a vote of our stockholders. The holders by virtue of their superior voting rights may be deemed to operate as an anti-takeover device.
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The holders of our Series D Preferred Stock may be deemed to control the Company as they have the ability to elect a majority of the members of the Board of Directors.
We may raise additional funds in the future through issuances of securities and such additional funding may be dilutive to stockholders or impose operational restrictions.
To fund our operations, repay our existing debt and grow our business we may raise additional capital in the future through sales of shares of our common stock or securities convertible into shares of our common stock or through debt. Such additional financing may be dilutive to our stockholders, and debt financing, if available, may involve significant interest costs and/or restrictive covenants which may limit our operating flexibility.
Applicable SEC rules governing the trading of “penny stocks” may limit the trading and liquidity of our common stock which, along with our small public capitalization may affect the trading price of our common stock and may subject us to securities litigation.
Our common stock is a “penny stock” as defined under Rule 3a51-1 of the Exchange Act and is accordingly subject to SEC rules and regulations that impose limitations upon the manner in which our common stock may be publicly traded. These regulations require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule explaining the penny stock market and the associated risks. Under these regulations, certain brokers who recommend such securities to persons other than established customers or certain accredited investors must make a special written suitability determination regarding such a purchaser and receive such purchaser’s written agreement to a transaction prior to sale. These regulations may have the effect of limiting the trading activity of our common stock and reducing the liquidity of an investment in our common stock. In addition, the size of our public market capitalization is relatively small, resulting in highly limited trading volume in, and high volatility in the price of, our common stock.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
We leased our Tampa corporate office and paid annual rent of $99,485 in 2018. The term of the lease is for 5 years beginning in May 2014 and ending on June 30, 2019. We currently lease approximately 3,133 square feet and pay approximately $8,229 per month. We consider the condition of our leased property to be average and adequate for our current needs. In our Tampa office, we maintain clinical operations, business development, accounting, financial and regulatory reporting and other management information symptoms information systems, and provider and member service functions. During 2019, the Company renegotiated the Tampa office lease and verbally agreed to a three-year extension of the lease with no increase in payments.
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We leased our Huntington Beach office and paid annual rent of $25,900 in 2018. The term of the lease is for 1 year beginning April 18, 2018 and ending April 30, 2019. We currently pay $3,700 per month. The lease has been extended on a month to month basis at a monthly rent of $4,000. We consider the condition of our leased property to be average and adequate for our current needs.
We lease a vehicle for our CEO to be used for business. The term of the lease is 3 years beginning July 9, 2018 and ending July 9, 2021. We currently pay a monthly rate of $893.
With the exception of the matter set forth below, all of the legal proceedings for the year ended December 31, 2018 is disclosed in our annual report on Form 10-K filed on January 29, 2019.
On May 15, 2018, the Company was awarded $269,750 during the final settlement in connection with overpaid fees owed to the Company.
In a related matter to the Katzman litigation, on January 10, 2017, the Company brought an action against Melanie Damian et al. Case number 17-CA-00252, Thirteenth Judicial Circuit Court, Hillsborough County, FL. The Company alleges abuse of process based upon wrongful collection practices including wrongful garnishment of bank accounts. The matter has been dismissed by mutual consent.
In an action entitled Pharmacy Value Management Services Inc. v. Hartman et al, Case No. 8:17-cv-132-T-35TBM (M.D. Fla.) – a settlement pursuant to the mediation in the matter was reached and executed on March 18, 2018. Pursuant to the settlement Defendants paid the sum of $70,000.
During January 2019, the Company settled a legal dispute with Rotech Healthcare, Inc. The total settlement was for $146,671 to be paid to Rotech during 2019, which is included in accounts payable as of December 31, 2018. The Company intends to either negotiate and/or move to the court to reopen the settlement based upon, among other things, mutual mistakes. The Company has, to date, abided by the settlement.
As referred to in Note 3 to the Consolidated Financial Statements $309,892 of these awarded settlements are still outstanding as of December 31, 2018.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASE OF EQUITY SECURITIES
| (a) | Market Information - Our common stock is traded on the OTCBB under the symbol CHCR. The following table sets forth the range of high and low bid quotations for the common stock, as reported by the OTCBB, for the fiscal quarters indicated. The market quotations reflect inter-dealer prices without retail mark-up, mark-down or commissions and may not necessarily represent actual transactions. |
The below quotations, as determined through a query of Bloomberg LLP, reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions:
| High | Low | ||||||||
| Year ended December 31, 2018 | |||||||||
| 4th quarter, ended December 31, 2018 | $ | 0.10 | $ | 0.08 | |||||
| 3rd quarter, ended September 30, 2018 | $ | 0.10 | $ | 0.10 | |||||
| 2nd quarter, ended June 30, 2018 | $ | 0.12 | $ | 0.11 | |||||
| 1st quarter, ended March 31, 2018 | $ | 0.10 | $ | 0.09 | |||||
| (b) | Holders – As of April 26, 2019, we had 416 holders of record of our common stock. |
| (c) | Dividends - We did not pay any cash dividends on our common stock during the year ended December 31, 2018 and do not contemplate the initiation of payment of any cash dividends in the foreseeable future. In the event that we do pay dividends, the holders of record of our Series C Convertible Preferred Stock and Series D Convertible Preferred Stock are entitled to receive such dividends in preference to the holders of our common stock, when and if declared by our Board of Directors. If declared, holders of our Series C Convertible Preferred Stock will receive dividends in an amount equal to the amount that would have been payable had the Series C Convertible Preferred Stock been converted into shares of our common stock immediately prior to the declaration of such dividend. Holders of our Series D Convertible Preferred Stock will receive dividends in an amount equal to 50% of the amount that would have been payable had the Series D Convertible Preferred Stock been converted into shares of our common stock. No dividends shall be authorized, declared, paid or set apart for payment on any class or series of our stock ranking, as to dividends, on a parity with or junior to the Series C Convertible Preferred Stock for any period unless full cumulative dividends have been, or contemporaneously are authorized, declared, paid or set apart in trust for such payment on the Series C Convertible Preferred Stock. In addition, as long as a majority of the 10,434 shares of our Series C Convertible Preferred Stock are outstanding, we cannot declare or pay any dividend or other distribution with respect to any equity securities without the affirmative vote of holders of at least 50% of the outstanding shares of Series C Convertible Preferred Stock. |
15
RECENT SALES OF UNREGISTERED SECURITIES
With the exception of the transactions set forth below, the sale of unregistered securities for the year ended December 31, 2018 were disclosed in our Annual Report on Form 10-K filed on January 29, 2019.
On September 30, 2018, the Company issued 2,000,000 shares of common stock for a legal settlement. The shares were issued at a value of $0.12 per share or for a total value of $240,000. In addition, the Company issued 1,597,971 shares for the conversion of a promissory note of $50,000 and accrued interest of $1,231. The stock was issued at a value of $0.03 per share. We relied on Section 4(a)(1) of the Securities Act of 1933, as amended, as the exception from registration under the Act.
On November 30, 2018, we issued a convertible promissory note in the principle amount of $25,000 to an accredited investor. The interest rate was 12%. The Holder of the note has the right to convert all or a portion of the principle and any accrued interest into shares of our common stock at a per share price equal to the lesser of (i) 15% below the average daily closing price of our common stock for the immediately preceding twenty (20) business days or (ii) $0.11. The principal amount and any accrued but unpaid interest under the note shall be due and payable on the earliest to occur (i) the date which is twelve months from the effective date of the note or (ii) the receipt by the Company of payment on its accounts receivable owed to it by Universal Health Care, Inc. and Universal Health Care Insurance Company, which accounts receivable is currently being processed in the matter of The Receivership of Universal Health Care, Inc., a Florida corporation and The Receivership of Universal Health Care Insurance Company, Inc., a Florida corporation under case numbers 2013-CA and 2013-CA, respectively. The Company also granted to the purchaser a five year warrant to purchase 50,000 shares of the Company’s common stock at an exercise price of $0.15 per share.
On December 10, 2018, we issued a convertible promissory note in the principle amount of $50,000 to an accredited investor. The interest rate was 12%. The Holder of the note has the right to convert all or a portion of the principle and any accrued interest into shares of our common stock at a per share price equal to the lesser of (i) 15% below the average daily closing price of our common stock for the immediately preceding twenty (20) business days or (ii) $0.11. The principal amount and any accrued but unpaid interest under the note shall be due and payable on the earliest to occur (i) the date which is twelve months from the effective date of the note or (ii) the receipt by the Company of payment on its account receivable owed to it by Universal Health Care, Inc. and Universal Health Care Insurance Company, which accounts receivable is currently being processed in the matter of The Receivership of Universal Health Care, Inc., a Florida corporation and The Receivership of Universal Health Care Insurance Company, Inc., a Florida corporation under case numbers 2013-CA and 2013-CA, respectively. The Company also granted to the purchaser a five year warrant to purchase 100,000 shares of the Company’s common stock at an exercise price of $0.15 per share.
On December 11, 2018, we issued a convertible promissory note in the principle amount of $25,000 to an accredited investor. The interest rate was 12%. The Holder of the note has the right to convert all or a portion of the principle and any accrued interest into shares of our common stock at a per share price equal to the lesser of (i) 15% below the average daily closing price of our common stock for the immediately preceding twenty (20) business days or (ii) $0.11. The principal amount and any accrued but unpaid interest under the note shall be due and payable on the earliest to occur (i) the date which is twelve months from the effective date of the note or (ii) the receipt by the Company of payment on its account receivable owed to it by Universal Health Care, Inc. and Universal Health Care Insurance Company, which accounts receivable is currently being processed in the matter of The Receivership of Universal Health Care, Inc., a Florida corporation and The Receivership of Universal Health Care Insurance Company, Inc., a Florida corporation under case numbers 2013-CA and 2013-CA, respectively. The Company also granted to the purchaser a five year warrant to purchase 50,000 shares of the Company’s common stock at an exercise price of $0.15 per share.
16
On December 20, 2018, we issued a convertible promissory note in the principle amount of $100,000 to an accredited investor. The interest rate was 12%. The Holder of the note has the right to convert all or a portion of the principle and any accrued interest into shares of our common stock at a per share price equal to the lesser of (i) 15% below the average daily closing price of our common stock for the immediately preceding twenty (20) business days or (ii) $0.11. The principal amount and any accrued but unpaid interest under the note shall be due and payable on the earliest to occur (i) the date which is twelve months from the effective date of the note or (ii) the receipt by the Company of payment on its account receivable owed to it by Universal Health Care, Inc. and Universal Health Care Insurance Company, which accounts receivable is currently being processed in the matter of The Receivership of Universal Health Care, Inc., a Florida corporation and The Receivership of Universal Health Care Insurance Company, Inc., a Florida corporation under case numbers 2013-CA and 2013-CA, respectively. The Company also granted to the purchaser a five year warrant to purchase 200,000 shares of the Company’s common stock at an exercise price of $0.15 per share.
On December 21, 2018, we issued a convertible promissory note in the principle amount of $100,000 to an accredited investor. The interest rate was 12%. The Holder of the note has the right to convert all or a portion of the principle and any accrued interest into shares of our common stock at a per share price equal to the lesser of (i) 15% below the average daily closing price of our common stock for the immediately preceding twenty (20) business days or (ii) $0.11. The principal amount and any accrued but unpaid interest under the note shall be due and payable on the earliest to occur (i) the date which is twelve months from the effective date of the note or (ii) the receipt by the Company of payment on its account receivable owed to it by Universal Health Care, Inc. and Universal Health Care Insurance Company, which accounts receivable is currently being processed in the matter of The Receivership of Universal Health Care, Inc., a Florida corporation and The Receivership of Universal Health Care Insurance Company, Inc., a Florida corporation under case numbers 2013-CA and 2013-CA, respectively. The Company also granted to the purchaser a five year warrant to purchase 200,000 shares of the Company’s common stock at an exercise price of $0.15 per share.
On December 21, 2018, we issued a convertible promissory note in the principle amount of $25,000 to an accredited investor. The interest rate was 12%. The Holder of the note has the right to convert all or a portion of the principle and any accrued interest into shares of our common stock at a per share price equal to the lesser of (i) 15% below the average daily closing price of our common stock for the immediately preceding twenty (20) business days or (ii) $0.11. The principal amount and any accrued but unpaid interest under the note shall be due and payable on the earliest to occur (i) the date which is twelve months from the effective date of the note or (ii) the receipt by the Company of payment on its account receivable owed to it by Universal Health Care, Inc. and Universal Health Care Insurance Company, which accounts receivable is currently being processed in the matter of The Receivership of Universal Health Care, Inc., a Florida corporation and The Receivership of Universal Health Care Insurance Company, Inc., a Florida corporation under case numbers 2013-CA and 2013-CA, respectively. The Company also granted to the purchaser a five year warrant to purchase 50,000 shares of the Company’s common stock at an exercise price of $0.15 per share.
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All of the convertible promissory notes listed above were issued to accredited investors, as that term is defined under the Section 501 of Regulation D, promulgated under the Securities Act of 1933, as amended. The warrants issued in connection with the promissory notes all have a cashless exercise feature.
We issued common stock purchase warrants separate from the warrants issued in connection with the issuance of the above-mentioned convertible promissory notes during the year ended December 31, 2018. With the exceptions of the transactions set forth below all of issuances of our warrants were disclosed in our Annual Report on Form 10-K filed on January 29, 2019.
On December 22, 2018, we issued 50,000 warrants to a member of our Dental Advisory Board, an accredited investor. The warrants have a term of three years and an exercise price of $0.25 per warrant.
On December 28, 2018, we issued 50,000 warrants to a member of our Medical Advisory Board, an accredited investor. The warrants have a term of three years and an exercise price of $0.25 per warrant.
On December 30, 2018, we issued 50,000 warrants to a member of our Medical Advisory Board, an accredited investor. The warrants have a term of three years and an exercise price of $0.25 per warrant.
We relied on Section 4 (2) of the Securities Act of 1933, as amended and or Section 501 of Regulation D promulgated under said Act as the exemption from registration under the Act.
We recognized no compensation costs during 2018 due to the issuance of the warrants.
We issued 700,000 shares of our common stock subsequent to December 31, 2018 as follows:
On March 21, 2019, the Company issued 200,000 shares of its common stock to its Securities Exchange Commission counsel, who elected to take common stock in the Company as partial payment of his legal fees. We relied on Section 4 (2) of the Securities Act of 1933, as amended as the exemption from registration under the Act.
On March 29, 2019, the Company issued 500,000 shares of its common stock to an existing shareholder and warrant holder, who elected to exercise his warrants to purchase 500,000 shares of the Company's common stock for $15,000. The warrants were issued during May of 2017. We relied on Section 4(a)1 of the Act as the exemption from registration under the Act.
Subsequent to December 31, 2018, we issued the following convertible promissory notes and warrants:
On January 11, 2019, we issued a convertible promissory note in the principle amount of $25,000 to an accredited investor. The interest rate was 12%. The Holder of the note has the right to convert all or a portion of the principle and any accrued interest into shares of our common stock at a per share price equal to the lesser of (i) 15% below the average daily closing price of our common stock for the immediately preceding twenty (20) business days or (ii) $0.11. The principal amount and any accrued but unpaid interest under the note shall be due and payable on the earliest to occur (i) the date which is twelve months from the effective date of the note or (ii) the receipt by the Company of payment on its account receivable owed to it by Universal Health Care, Inc. and Universal Health Care Insurance Company, which accounts receivable is currently being processed in the matter of The Receivership of Universal Health Care, Inc., a Florida corporation and The Receivership of Universal Health Care Insurance Company, Inc., a Florida corporation under case numbers 2013-CA and 2013-CA, respectively. The Company also granted to the purchaser a five year warrant to purchase 50,000 shares of the Company’s common stock at an exercise price of $0.15 per share.
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On January 14, 2019, we issued a convertible promissory note in the principle amount of $25,000 to an accredited investor. The interest rate was 12%. The Holder of the note has the right to convert all or a portion of the principle and any accrued interest into shares of our common stock at a per share price equal to the lesser of (i) 15% below the average daily closing price of our common stock for the immediately preceding twenty (20) business days or (ii) $0.11. The principal amount and any accrued but unpaid interest under the note shall be due and payable on the earliest to occur (i) the date which is twelve months from the effective date of the note or (ii) the receipt by the Company of payment on its account receivable owed to it by Universal Health Care, Inc. and Universal Health Care Insurance Company, which accounts receivable is currently being processed in the matter of The Receivership of Universal Health Care, Inc., a Florida corporation and The Receivership of Universal Health Care Insurance Company, Inc., a Florida corporation under case numbers 2013-CA and 2013-CA, respectively. The Company also granted to the purchaser a five year warrant to purchase 50,000 shares of the Company’s common stock at an exercise price of $0.15 per share.
On January 18, 2019, we issued a convertible promissory note in the principle amount of $50,000 to an accredited investor. The interest rate was 12%. The Holder of the note has the right to convert all or a portion of the principle and any accrued interest into shares of our common stock at a per share price equal to the lesser of (i) 15% below the average daily closing price of our common stock for the immediately preceding twenty (20) business days or (ii) $0.11. The principal amount and any accrued but unpaid interest under the note shall be due and payable on the earliest to occur (i) the date which is twelve months from the effective date of the note or (ii) the receipt by the Company of payment on its account receivable owed to it by Universal Health Care, Inc. and Universal Health Care Insurance Company, which accounts receivable is currently being processed in the matter of The Receivership of Universal Health Care, Inc., a Florida corporation and The Receivership of Universal Health Care Insurance Company, Inc., a Florida corporation under case numbers 2013-CA and 2013-CA, respectively. The Company also granted to the purchaser a five year warrant to purchase 100,000 shares of the Company’s common stock at an exercise price of $0.15 per share.
On February 18, 2019, we issued a convertible promissory note in the principle amount of $20,000 to an accredited investor. The interest rate was 12%. The Holder of the note has the right to convert all or a portion of the principle and any accrued interest into shares of our common stock at a per share price equal to the lesser of (i) 15% below the average daily closing price of our common stock for the immediately preceding twenty (20) business days or (ii) $0.11. The principal amount and any accrued but unpaid interest under the note shall be due and payable on the earliest to occur (i) the date which is twelve months from the effective date of the note or (ii) the receipt by the Company of payment on its account receivable owed to it by Universal Health Care, Inc. and Universal Health Care Insurance Company, which accounts receivable is currently being processed in the matter of The Receivership of Universal Health Care, Inc., a Florida corporation and The Receivership of Universal Health Care Insurance Company, Inc., a Florida corporation under case numbers 2013-CA and 2013-CA, respectively. The Company also granted to the purchaser a five year warrant to purchase 40,000 shares of the Company’s common stock at an exercise price of $0.15 per share.
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On February 21, 2019, we issued a convertible promissory note in the principle amount of $20,000 to an accredited investor. The interest rate was 12%. The Holder of the note has the right to convert all or a portion of the principle and any accrued interest into shares of our common stock at a per share price equal to the lesser of (i) 15% below the average daily closing price of our common stock for the immediately preceding twenty (20) business days or (ii) $0.11. The principal amount and any accrued but unpaid interest under the note shall be due and payable on the earliest to occur (i) the date which is twelve months from the effective date of the note or (ii) the receipt by the Company of payment on its account receivable owed to it by Universal Health Care, Inc. and Universal Health Care Insurance Company, which accounts receivable is currently being processed in the matter of The Receivership of Universal Health Care, Inc., a Florida corporation and The Receivership of Universal Health Care Insurance Company, Inc., a Florida corporation under case numbers 2013-CA and 2013-CA, respectively. The Company also granted to the purchaser a five year warrant to purchase 40,000 shares of the Company’s common stock at an exercise price of $0.15 per share.
On February 21, 2019, we issued a convertible promissory note in the principle amount of $25,000 to an accredited investor. The interest rate was 12%. The Holder of the note has the right to convert all or a portion of the principle and any accrued interest into shares of our common stock at a per share price equal to the lesser of (i) 15% below the average daily closing price of our common stock for the immediately preceding twenty (20) business days or (ii) $0.11. The principal amount and any accrued but unpaid interest under the note shall be due and payable on the earliest to occur (i) the date which is twelve months from the effective date of the note or (ii) the receipt by the Company of payment on its account receivable owed to it by Universal Health Care, Inc. and Universal Health Care Insurance Company, which accounts receivable is currently being processed in the matter of The Receivership of Universal Health Care, Inc., a Florida corporation and The Receivership of Universal Health Care Insurance Company, Inc., a Florida corporation under case numbers 2013-CA and 2013-CA, respectively. The Company also granted to the purchaser a five year warrant to purchase 50,000 shares of the Company’s common stock at an exercise price of $0.15 per share.
On February 28, 2019, we issued a convertible promissory note in the principle amount of $100,000 to an accredited investor. The interest rate was 12%. The Holder of the note has the right to convert all or a portion of the principle and any accrued interest into shares of our common stock at a per share price equal to the lesser of (i) 15% below the average daily closing price of our common stock for the immediately preceding twenty (20) business days or (ii) $0.11. The principal amount and any accrued but unpaid interest under the note shall be due and payable on the earliest to occur (i) the date which is twelve months from the effective date of the note or (ii) the receipt by the Company of payment on its account receivable owed to it by Universal Health Care, Inc. and Universal Health Care Insurance Company, which accounts receivable is currently being processed in the matter of The Receivership of Universal Health Care, Inc., a Florida corporation and The Receivership of Universal Health Care Insurance Company, Inc., a Florida corporation under case numbers 2013-CA and 2013-CA, respectively. The Company also granted to the purchaser a five year warrant to purchase 2000,000 shares of the Company’s common stock at an exercise price of $0.15 per share.
On March 5, 2019, we issued a convertible promissory note in the principle amount of $15,000 to an accredited investor. The interest rate was 12%. The Holder of the note has the right to convert all or a portion of the principle and any accrued interest into shares of our common stock at a per share price equal to the lesser of (i) 15% below the average daily closing price of our common stock for the immediately preceding twenty (20) business days or (ii) $0.11. The principal amount and any accrued but unpaid interest under the note shall be due and payable on the earliest to occur (i) the date which is twelve months from the effective date of the note or (ii) the receipt by the Company of payment on its account receivable owed to it by Universal Health Care, Inc. and Universal Health Care Insurance Company, which accounts receivable is currently being processed in the matter of The Receivership of Universal Health Care, Inc., a Florida corporation and The Receivership of Universal Health Care Insurance Company, Inc., a Florida corporation under case numbers 2013-CA and 2013-CA, respectively. The Company also granted to the purchaser a five year warrant to purchase 30,000 shares of the Company’s common stock at an exercise price of $0.15 per share.
20
On March 20, 2019, we issued a convertible promissory note in the principle amount of $25,000 to an accredited investor. The interest rate was 12%. The Holder of the note has the right to convert all or a portion of the principle and any accrued interest into shares of our common stock at a per share price equal to the lesser of (i) 15% below the average daily closing price of our common stock for the immediately preceding twenty (20) business days or (ii) $0.11. The principal amount and any accrued but unpaid interest under the note shall be due and payable on the earliest to occur (i) the date which is twelve months from the effective date of the note or (ii) the receipt by the Company of payment on its account receivable owed to it by Universal Health Care, Inc. and Universal Health Care Insurance Company, which accounts receivable is currently being processed in the matter of The Receivership of Universal Health Care, Inc., a Florida corporation and The Receivership of Universal Health Care Insurance Company, Inc., a Florida corporation under case numbers 2013-CA and 2013-CA, respectively. The Company also granted to the purchaser a five year warrant to purchase 50,000 shares of the Company’s common stock at an exercise price of $0.15 per share.
On March 21, 2019, we issued a convertible promissory note in the principle amount of $25,000 to an accredited investor. The interest rate was 12%. The Holder of the note has the right to convert all or a portion of the principle and any accrued interest into shares of our common stock at a per share price equal to the lesser of (i) 15% below the average daily closing price of our common stock for the immediately preceding twenty (20) business days or (ii) $0.11. The principal amount and any accrued but unpaid interest under the note shall be due and payable on the earliest to occur (i) the date which is twelve months from the effective date of the note or (ii) the receipt by the Company of payment on its account receivable owed to it by Universal Health Care, Inc. and Universal Health Care Insurance Company, which accounts receivable is currently being processed in the matter of The Receivership of Universal Health Care, Inc., a Florida corporation and The Receivership of Universal Health Care Insurance Company, Inc., a Florida corporation under case numbers 2013-CA and 2013-CA, respectively. The Company also granted to the purchaser a five year warrant to purchase 50,000 shares of the Company’s common stock at an exercise price of $0.15 per share.
On March 22, 2019, we issued a convertible promissory note in the principle amount of $25,000 to an accredited investor. The interest rate was 12%. The Holder of the note has the right to convert all or a portion of the principle and any accrued interest into shares of our common stock at a per share price equal to the lesser of (i) 15% below the average daily closing price of our common stock for the immediately preceding twenty (20) business days or (ii) $0.11. The principal amount and any accrued but unpaid interest under the note shall be due and payable on the earliest to occur (i) the date which is twelve months from the effective date of the note or (ii) the receipt by the Company of payment on its account receivable owed to it by Universal Health Care, Inc. and Universal Health Care Insurance Company, which accounts receivable is currently being processed in the matter of The Receivership of Universal Health Care, Inc., a Florida corporation and The Receivership of Universal Health Care Insurance Company, Inc., a Florida corporation under case numbers 2013-CA and 2013-CA, respectively. The Company also granted to the purchaser a five year warrant to purchase 50,000 shares of the Company’s common stock at an exercise price of $0.15 per share.
21
On April 3, 2019, we issued a convertible promissory note in the principle amount of $25,000 to an accredited investor. The interest rate was 12%. The Holder of the note has the right to convert all or a portion of the principle and any accrued interest into shares of our common stock at a per share price equal to the lesser of (i) 15% below the average daily closing price of our common stock for the immediately preceding twenty (20) business days or (ii) $0.11. The principal amount and any accrued but unpaid interest under the note shall be due and payable on the earliest to occur (i) the date which is twelve months from the effective date of the note or (ii) the receipt by the Company of payment on its account receivable owed to it by Universal Health Care, Inc. and Universal Health Care Insurance Company, which accounts receivable is currently being processed in the matter of The Receivership of Universal Health Care, Inc., a Florida corporation and The Receivership of Universal Health Care Insurance Company, Inc., a Florida corporation under case numbers 2013-CA and 2013-CA, respectively. The Company also granted to the purchaser a five year warrant to purchase 50,000 shares of the Company’s common stock at an exercise price of $0.15 per share.
On April 25, 2019, we issued a convertible promissory note in the principle amount of $50,000 to an accredited investor. The interest rate was 12%. The Holder of the note has the right to convert all or a portion of the principle and any accrued interest into shares of our common stock at a per share price equal to the lesser of (i) 15% below the average daily closing price of our common stock for the immediately preceding twenty (20) business days or (ii) $0.11. The principal amount and any accrued but unpaid interest under the note shall be due and payable on the earliest to occur (i) the date which is twelve months from the effective date of the note or (ii) the receipt by the Company of payment on its account receivable owed to it by Universal Health Care, Inc. and Universal Health Care Insurance Company, which accounts receivable is currently being processed in the matter of The Receivership of Universal Health Care, Inc., a Florida corporation and The Receivership of Universal Health Care Insurance Company, Inc., a Florida corporation under case numbers 2013-CA and 2013-CA, respectively. The Company also granted to the purchaser a five year warrant to purchase 1000,000 shares of the Company’s common stock at an exercise price of $0.15 per share.
On April 25, 2019, we issued a convertible promissory note in the principle amount of $50,000 to an accredited investor. The interest rate was 12%. The Holder of the note has the right to convert all or a portion of the principle and any accrued interest into shares of our common stock at a per share price equal to the lesser of (i) 15% below the average daily closing price of our common stock for the immediately preceding twenty (20) business days or (ii) $0.11. The principal amount and any accrued but unpaid interest under the note shall be due and payable on the earliest to occur (i) the date which is twelve months from the effective date of the note or (ii) the receipt by the Company of payment on its account receivable owed to it by Universal Health Care, Inc. and Universal Health Care Insurance Company, which accounts receivable is currently being processed in the matter of The Receivership of Universal Health Care, Inc., a Florida corporation and The Receivership of Universal Health Care Insurance Company, Inc., a Florida corporation under case numbers 2013-CA and 2013-CA, respectively. The Company also granted to the purchaser a five year warrant to purchase 100,000 shares of the Company’s common stock at an exercise price of $0.15 per share.
All of the convertible promissory notes listed above were issued to accredited investors, as that term is defined under the Section 501 of Regulation D, promulgated under the Securities Act of 1933, as amended. The warrants issued in connection with the promissory notes all have a cashless exercise feature.
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On January 11, 2019, we issued 50,000 warrants to a member of our Dental Advisory Board, an accredited investor. The warrants have a term of three years and an exercise price of $0.25 per warrant.
On February 12, 2019, we issued 50,000 warrants to a member of our Medical Advisory Board, an accredited investor. The warrants have a term of three years and an exercise price of $0.25 per warrant.
On February 16, 2019, we issued 50,000 warrants to a member of our Dental Advisory Board, an accredited investor. The warrants have a term of three years and an exercise price of $0.25 per warrant.
On March 22, 2019, we issued 50,000 warrants to a member of our Medical Advisory Board, an accredited investor. The warrants have a term of three years and an exercise price of $0.25 per warrant.
On April 14, 2019, we issued 307,823 warrants to a promissory note holder, an accredited investor, in lieu of interest. The warrants have a term of five years and an exercise price of $0.06 per warrant. The warrant has a cashless feature.
On April 19, 2019, we issued 50,000 warrants to a member of our Medical Advisory Board, an accredited investor. The warrants have a term of three years and an exercise price of $0.25 per warrant.
On April 25, 2019, we issued 50,000 warrants to a member of our Medical Advisory Board, an accredited investor. The warrants have a term of three years and an exercise price of $0.25 per warrant.
We relied on Section 4 (2) of the Securities Act of 1933, as amended and or Section 501 of Regulation D promulgated under said Act as the exemption from registration under the Act.
We recognized no compensation costs in connection with the issuance of the warrants.
ITEM 6. SELECTED FINANCIAL DATA – SMALLER REPORTING ENTITY
As a smaller reporting entity under SEC Regulations, we are not required to furnish selected financial data.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Information
The Company may from time to time make written or oral “forward-looking statements” including statements contained in this report and in other communications by the Company, which are made in good faith pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. Such statements are based on our beliefs as well as assumptions made by and information currently available to us. When used in this document, words like “may,” “might,” “will,” “except,” “anticipate,” “believe,” “potential,” and similar expressions are intended to identify forward-looking statements. Actual results could differ materially from our current expectations.
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Forward-looking statements in this report, including without limitation, statements related to the Company’s plans, strategies, objectives, expectations, intentions and adequacy of resources, are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that such forward-looking statements involve risks and uncertainties including, without limitation, the following: (i) changes in the Company’s plans, strategies, objectives, expectations and intentions, which may be made at any time at the discretion of the Company; (ii) the impact of uncertainties in global economic conditions, including the impact on the Company’s suppliers and customers; (iii) changes in client needs and consumer spending habits; (iv) the impact of competition and technological changes on the Company; (v) the Company’s ability to manage its growth effectively, including its ability to successfully integrate any business it might acquire; (vi) currency fluctuations; (vii) increases in the cost of borrowings resulting from rising interest rates; (viii) international trade policies and their impact on demand for our products and our competitive position, including the imposition of new tariffs or changes in existing tariff rates; and (ix) other risks and uncertainties indicated from time to time in the Company’s filings with the Securities and Exchange Commission. For a more detailed discussion of these and other factors affecting the Company, see the Risk Factors set forth above in Item 1A of this Annual Report on Form 10-K.
OVERVIEW
Throughout the year ended December 31, 2018, the Company continued its marketing and sales efforts with respect to agreements and relationships established during the first three quarters of 2018. It focused on establishing additional relationships within its existing market (referrals from occupational healthcare clinics) and establishing a foothold in other markets, such as pain clinics, behavioral healthcare and sports medicine.
The Company’s sales in 2018, while not increasing, stayed consistent with sales in 2017. However, as a result of its marketing efforts, a substantial number of new relationships were established in 2018 which management believes will, in combination with its existing accounts, produce substantial revenues in 2019. The overwhelming majority of its revenues in 2018 were generated principally through its relationship with one of the nation’s largest occupational healthcare providers, who referred a significant number of their patients to the Company for sleep apnea screening, testing and treatment. During 2018, that account was acquired by an even larger national healthcare provider, and throughout 2018, these providers actively engaged in the integration of their two systems.
Not seeking to cause any disruption in their integration process and in consultation with the provider, the Company all but totally suspended its marketing activities with respect to visiting the provider’s various clinics throughout the U.S. Those visits were, in management’s view, the main impetus for the Company achieving referrals from these clinics as it had done in 2017. Instead, the Company devoted a large amount of time to expanding its business to additional clinics and, as aforesaid, other markets with a view towards 2019. The Company anticipated that while its sales would decrease in 2018 as a result of the suspension of such marketing activities, once the integration of the two clinic chains was completed, those sales would not only return to their prior levels but will materially increase. In furtherance of that plan, the Company also pursued an opportunity with its existing clinic account designed to have the Company designated as the collective chains’ sleep apnea provider, nationwide.
Remarkably, the Company’s revenue from its existing clinic account did not materially decrease but continued, as before. Management believes this was a result of the Company’s prior successful efforts with this account, and the reputation it had established over the preceding three plus years. We believe the aforesaid integration process will soon be completed allowing the Company to resume its now well-established marketing efforts of, among other things, having its field representatives periodically visit the combined chain of clinics. We are also confident that the Company will be designated as the national sleep apnea provider for the combined clinic chain in 2019. The chain reportedly is in excess of 700 clinics, nationwide.
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The pause in our sales efforts with the clinics allowed the Company, throughout 2018 (with an emphasis on the third and fourth quarters of 2018), to materially penetrate the third party payor market such that going into 2019, the Company now has, in addition to its clinic accounts, a significant number of third party payor accounts. These include unions, municipalities, school districts and small to mid-size corporations – all authorizing us to bill them directly for providing our sleep apnea services to their members/employees.
We expect our relationship with the combined clinic chain, coupled with the new business relationships established primarily during the third and fourth quarters of 2018, will result in a material increase in revenue to the Company without a concomitant increase in expenses. The Company has prepared, internally, for the anticipated increase in its business and the manpower burden this might place on the Company.
SOURCES OF REVENUE
A quantitative summary of our revenues by source category for 2018 and 2017 as follows:
| 2018 | 2017 | Change | |||||||||||
| OSA-related | $ | 524,172 | $ | 564,117 | $ | (39,945 | ) | ||||||
Results of Operations
2018 vs. 2017
Revenues and Costs of Goods sold
Revenues for the year ended December 31, 2018, were $524,172 compared to revenues of $564,117 for the comparable period ending December 31, 2017.
OSA-related
OSA services decreased to $524,172 in 2018 from $564,117 in 2017. The Company's sales in 2018 stayed consistent with the sales from 2017 while the Company worked on new contracts that will take effect in 2019.
Cost of revenues decreased to $261,170 from $286,332. The difference in amounts is a result of the timing of services performed to generate revenue during the periods.
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Selling, general and administrative expense
Selling, general and administrative expense in total was as follows:
| 2018 | $ | 1,745,094 | |||
| 2017 | 4,708,930 | ||||
| Change | $ | (2,963,836 | ) | ||
| Percentage Change | (62.94 | )% |
We evaluate selling, general and administrative expenses at the Parent company level as well as at our PVMS subsidiary. Selling, general, and administrative expenses at the Parent company level include overhead and the cost of being a public entity. Selling, general, and administrative expenses at PVMS are solely related to the OSA services segment. A breakdown of these expenses is as follows:
| 2018 | 2017 | Change | ||||||||||
| Parent | 533,933 | 3,233,457 | $ | (2,699,524 | ) | |||||||
| PVMS | 1,211,161 | 1,475,473 | (264,312 | ) | ||||||||
| Total selling, general and administrative | $ | 1,745,094 | $ | 4,708,930 | $ | (2,963,836 | ) | |||||
Parent Company level
| 2018 | 2017 | Change | ||||||||||
| Executive compensation and payroll related | $ | — | $ | 2,441,316 | $ | (2,441,316 | ) | |||||
| Travel expense | (413 | ) | 22,917 | (23,330 | ) | |||||||
| Professional fees | 223,314 | 461,880 | (238,566 | ) | ||||||||
| Board of Directors fees | 150,000 | 150,000 | — | |||||||||
| Rent expense | 99,485 | 95,086 | 4,399 | |||||||||
| Other | 61,547 | 62,258 | (711 | ) | ||||||||
| Total selling, general and administrative | $ | 533,933 | $ | 3,233,457 | $ | (2,699,524 | ) | |||||
Explanations of variations by line item follow:
Executive compensation and payroll related expenses decreased $2,441,316. Mr. Marcus agreed to reduce his annual base compensation from approximately $2,100,000 in 2017 to $200,000 and to accept common stock purchase warrants totaling 833,333 in lieu of his 2018 compensation. In July 2018, Mr. Heidt agreed to reduce the annual compensation from $300,000 in 2017 to $125,000. He also agreed to accept 520,833 common stock purchase warrant in lieu of his 2018 compensation.
Travel expense decreased $23,330 due to the phasing out of the ASO product line. Most travel was done at the subsidiary level.
Professional Fees decreased by $238,566. Legal fees decreased due to decreased litigation expenses. Accounting expenses were phased out completely at the parent level and solely done at the subsidiary level beginning 2018.
Board of Directors Fees accrue at the rate of $150,000 each year.
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PVMS Subsidiary
| 2018 | 2017 | Change | ||||||||||
| Executive compensation and payroll related | $ | 542,578 | $ | 504,698 | $ | 37,880 | ||||||
| Travel expense | 258,469 | 632,428 | (373,959 | ) | ||||||||
| Professional fees | 123,606 | 51,662 | 71,944 | |||||||||
| Advertising | 50,811 | 82,919 | (32,108 | ) | ||||||||
| Other, mostly home office | 235,697 | 203,766 | 31,931 | |||||||||
| Total selling, general and administrative | $ | 1,211,161 | $ | 1,475,473 | $ | (264,312 | ) |
Payroll related expenses increased $37,880. As the Company began to expand operations it hired additional personnel and began paying commission.
Travel expense was $373,959 lower due to the sales force having cutback on traveling to trade shows and visiting existing and potential clinics. The sales force and supporting forces were most active in 2017 in building up new clientele while in 2018 expanding the services offered to current clientele from local to national.
Professional Fees increased $71,944. In 2018, PVMS hired an outside accountant and for the Company as a whole, whom we pay $7,000 per month. There was a consultant who we paid $15,000 to improve social media activities and transition us to an app-based platform. Legal fees decreased by approximately $26,000 due to decreased litigation expenses.
Advertising decreased $32,108 due to minimized attendance at trade shows and magazine product placements in trade journals.
Interest Expense
Interest expense between 2018 and 2017 was as follows
| 2018 | $ | 1,436,974 | ||
| 2017 | 1,441,583 | |||
| Change | $ | (4,609 | ) | |
| Percentage change | (0.32) | % |
A breakdown of the interest expense for the years ended December 31, 2018 and 2017 is as follows:
| 2018 | 2017 | Change | |||||||||||
| Parent | $ | 935,849 | $ | 825,645 | $ | 110,204 | |||||||
| PVMS | 501,125 | 615,938 | (114,813 | ) | |||||||||
| Total | $ | 1,436,974 | $ | 1,441,583 | $ | (4,609 | ) | ||||||
Interest expense stayed consistent with the interest expense in 2017.
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Liquidity and Capital Resources
During the year ended December 31, 2018, we funded our operations from revenues and private borrowings. We will continue to fund our operations from these sources until we are able to produce operating revenue sufficient to cover our cost structure. In the event we are not able to secure such funding, our operations will be adversely affected.
Short Term: We funded our operations with revenues from sales and private borrowings.
Subsequent to 2018, we issued $480,000 of promissory notes through April 26, 2019.
ACCOUNTING POLICIES AND ESTIMATES
Preparation of our consolidated financial statements requires us to make significant estimates and judgments to develop the amounts reflected and disclosed in the consolidated financial statements. On an on-going basis, we evaluate the appropriateness of our estimates and we maintain a thorough process to review the application of our accounting policies. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
Revenue recognition. The Company is on an accrual basis and revenue is recognized when billed, which is approximately when the testing service is performed or CPAP machine is shipped.
Income taxes. Computing our provision for income taxes involves significant judgment and estimates particularly in relation to the determination of a valuation allowance for deferred tax assets (primarily from net operating loss carryforwards). See Note 15 to the consolidated financial statements.
Stock-based compensation. We issue various stock-based compensation awards to our employees and members of our Board of Directors. We account for the awards in accordance with ASC 718 “Compensation – Stock Compensation” and measure compensation cost for stock options at fair value on the grant date and recognize compensation cost on a straight-line basis over the service period for those options expected to vest. We use the Black-Scholes option pricing model, which requires us to use certain variable assumptions for input, to calculate the fair value of a stock award on the grant date. These assumptions, which are set forth in Note 2 to our consolidated financial statements variables include the expected volatility of our stock price, award exercise behaviors, the risk-free interest rate, and expected dividends. We use significant judgment in estimating expected volatility of the stock, exercise behavior and forfeiture rates developing our assumptions as follows:
Expected Volatility
We estimate the volatility of the share price by using historical data of our traded stock in combination with our expectation of the extent of fluctuation in future stock prices. We believe our historical volatility is more representative of future stock price volatility and as such it has been given greater weight in estimating future volatility.
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Expected Term
A variety of factors are considered in determining the expected term of options granted. Options granted are grouped by their homogeneity based on the optionees’ position, whether managerial or clerical, and length of service and turnover rate. Where possible, we analyze exercise and post-vesting termination behavior. For any group without sufficient information, we estimate the expected term of the options granted by averaging the vesting term and the contractual term of the options.
Expected Forfeiture Rate
We generally separate our option awards into two groups: employee and non-employee awards. The historical data of each group are analyzed independently to estimate the forfeiture rate of options at the time of grant. These estimates are revised in subsequent periods if actual forfeitures differ from estimated forfeitures.
Risk-free Interest Rate
We estimate the risk-free interest rate by reference to the interest rate for a U.S. Treasury constant maturity security with the same estimated term as the stock based award being issued.
Expected Dividends
No dividends are expected to be paid for the expected life of the instruments; therefore, we assume a dividend rate of zero.
RECENT ACCOUNTING PRONOUNCEMENTS
Recent Accounting Standards Update - Recently various new ASUs were issued by the Financial Accounting Standards Board (FASB). Management has determined based on their review that the following ASUs issued will be applicable to the Company. As new ASUs are released, Management will assess if they are applicable and, if they are applicable, the effect will be included in the notes to the consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, “Leases,” which significantly changes the accounting for a lessee. Under previous guidance, lessees did not have to record a lease it designated as operating on its balance sheet. Under the new guidance, a lessee must record a liability for lease payments (referred to as the lease liability) and an asset for the right to use the leased asset during the lease term (referred to as the right of use asset) for all leases, regardless of whether they are designated as finance or operating leases. If a lessee has a lease with a term of 12 months of less, it may make an accounting policy election (by leased asset class) not to recognize lease assets or lease liabilities. This election generally requires the lessee to recognize lease expense on a straight-line basis over the lease term. ASU 2016-02 is effective for interim and annual periods beginning after December 15, 2018 for public entities, not-for-profit entities that have issued (including conduit bond obligors) securities that are traded, listed, or quoted on an exchange or an over-the-counter market, and employee benefit plans that file financial statements with the United States Securities and Exchange Commission (SEC). All other entities must apply the ASU to annual periods beginning after December 15, 2019, and interim periods beginning after December 15, 2020. Any entity may early adopt the ASU. Management has determined that when this guidance is adopted the impact will be properly reflected in the financial statements and notes thereto. Management has determined that the adoption of this guidance will not have any impact on the financial statements and notes thereto.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have no material exposure to changing interest rates as the interest rates on our short term and long-term debt are fixed. Additionally, we do not use derivative financial instruments for investment or trading purposes and our investments are generally limited to cash deposits.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS
Our audited financial statements may be found beginning on Page 55, appearing elsewhere in this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Management of Advanzeon Solutions, Inc. is responsible for maintaining disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. In addition, the disclosure controls and procedures must ensure that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required financial and other required disclosures.
At the end of the period covered by this report, an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13(a)-15(e) and 15(d)-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)) was carried out under the supervision of our Chief Financial Officer (“CFO”). Based upon this evaluation of our disclosure controls and procedures, it was concluded that during the period covered by this report, such disclosure controls and procedures were not optimally effective. This was due to our limited resources, including the absence of a financial staff with accounting and financial expertise and deficiencies in the design or operation of our internal control over financial reporting that adversely affected our disclosure controls and that may be considered to be “material weaknesses.”
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To address these weaknesses, management plans to hire and designate an individual responsible for identifying reportable developments and to implement procedures designed to remedy material weaknesses by focusing additional attention and resources in our internal accounting functions. However, the material weaknesses will not be considered remedied until applicable controls have operated for a sufficient period of time and management has concluded that these controls are operating effectively.
Our CFO, who is also a member of our Board of Directors, was appointed CFO in April 2018. He will directly oversee our efforts to remedy material weaknesses. Additionally, in January 2018, we retained the services of an outside accounting firm (“Outside Accountant”) to work with our CFO in the implementation of the remedial process. Our CFO does not maintain an office in the Company, and we do not compensate him for his services.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over our financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance to our management and Board of Directors regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.
Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions; (ii) provide reasonable assurance that transactions are recorded as necessary for preparation of our financial statements; (iii) provide reasonable assurance that receipts and expenditures of company assets are made in accordance with management authorization; and (iv) provide reasonable assurance that unauthorized acquisition, use or disposition of company assets that could have a material effect on our financial statements would be prevented or detected on a timely basis.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because changes in conditions may occur or the degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2018. This evaluation was based on criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO, Internal Control-Integrated Framework. Based upon such assessment, our CFO concluded that, as of December 31, 2018, our internal controls over financial reporting were not optimally effective in the specific areas described in the paragraphs below.
As of December 31, 2018, our current CFO identified the following specific material weaknesses in the Company’s internal controls over its financial reporting processes:
| ● | Policies and Procedures for the Financial Close and Reporting Process – During the period of this report, the Company’s policies or procedures did not clearly define the roles in the financial reporting process. The various roles and responsibilities related to this process should be defined, documented, updated and communicated. Not having clear policies and procedures in place amounts to a material weakness in the Company’s internal controls over its financial reporting processes. |
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| ● | Representative with Financial Expertise – For the years prior to the year ended December 31, 2018, the Company did not continuously have an employee with the requisite knowledge and expertise to review the financial statements and disclosures at a sufficient level to monitor the financial statements and disclosures to the Company. Failure to have, continuously, an employee with such knowledge and expertise amounts to a material weakness to the Company’s internal controls over its financial reporting processes. |
As a result of our retaining the services of an Outside Accountant in January 2018 and appointing an internal Company employee to interface with the Outside Accountant, we have instituted the following policies and procedures designed to address the material weaknesses cited above.
| ● | All billing invoices prepared by the billing department are sent to the Outside Accountant for review and approval before sending out to the customer. |
| ● | Copies of all incoming payable invoices are sent to the Outside Accountant for review, approval and data entry into the accounting system. That way Corporate Office has the originals and the outside accountants have duplicate copies. Accounts Payable Aging Report is sent once a week from the Outside Accountants to the Corporate office. The Corporate office, along with Outside Accountants, decide on which bills to pay weekly. Electronic payments have a duel control approval system (one person is initiating the payment and another person is approving the payment). |
| ● | Paperwork on all customer invoices, credit card payments and check payments received at Corporate are copied and forwarded to Outside Accountants. Customer invoices are recorded daily. Customer payments received are recorded daily. Customer payments are reconciled with the bank on a daily basis. Aged Accounts Receivable Reports are sent to Corporate by the Outside Accountants with suggestions on a regular basis. |
| ● | All bank accounts are reconciled monthly. |
| ● | Financial Statements are prepared and reviewed monthly. |
The Company plans to further augment its addressing of material weaknesses, on an as-needed basis, by hiring additional accounting personnel once its initial corrective steps have been fully implemented, tested and found to be effective.
ITEM 9B. OTHER INFORMATION
Not applicable.
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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The following table lists our executive officers and directors as of December 31, 2018. Each director is serving a term that will expire at our next shareholder meeting. There are no family relationships among any of our directors or executive officers.
| Name | Age | Position | ||
| Clark A. Marcus | 77 | Chairman of the Board, Chief Executive Officer and Director | ||
| Mark T. Heidt | 66 | President, Director | ||
| James L. Koenig | 72 | Director | ||
| Arnold B. Finestone, Ph.D. | 89 | Chief Financial Officer, Director, Audit Committee Chairman and Compensation and Stock Option Committee Member | ||
| Sharon Kay Ray | 61 | Director, Audit Committee Member, and Compensation and Stock Option Committee Member | ||
| Arthur K. Yeap | 63 | Director, Audit Committee Member, and Compensation and Stock Option Committee Chairman | ||
| Stephen M. Kreitzer | 73 | Director, Medical Director | ||
CLARK A. MARCUS
Clark A. Marcus was appointed as our Co-Chief Executive Officer, a director and Chairman of the Board on May 11, 2009. In September 2010, he assumed the position of sole Chief Executive Officer. Mr. Marcus was formerly Chairman and Chief Executive Officer of Core from September 2008 to January 2009. Prior to that, he was a founder, Chairman and Chief Executive Officer at The Amacore Group, Inc., a public company and marketer of healthcare related memberships, from September 1993 to August 2008. Mr. Marcus has been a practicing attorney since 1968 and was a senior partner in the New York law firms of Victor & Marcus and Marcus & Marcus. He is a Board member of America’s Agenda Health Care for All. He previously served as a member of the American Academy of Opthalmology’s Corporate Advisory Council. He has participated as a guest lecturer at various national healthcare conferences and has authored numerous healthcare related articles published in various national healthcare publications such as “Managed Care Weekly” and “Managing Employee Health Benefits”. He is a director of Document Security Systems, Inc., a New York Stock Exchange listed company. Mr. Marcus contributes to the Board of Directors through his unique expertise in the healthcare industry, legal expertise, decades of experience in building and operating companies as well as proven leadership skills in guiding public companies.
ARNOLD B FINESTONE, Ph.D.
Arnold B. Finestone was appointed to our Board of Directors on January 21, 2009. He is a business management consultant and formerly served on the Board of Directors of The Amacore Group, Inc., a public company and marketer of healthcare related memberships. He has served on the Boards of public companies and start-up business ventures since 1985. From 1982 to 1985, he was President of Dartco, Inc., a subsidiary of Dart & Kraft Inc., which was engaged in marketing and manufacturing of high-performance engineering plastics for consumer, industrial, and military uses. From 1970 to 1982, he served as Executive Vice President of the Chemical–Plastics Group of Dart Industries and Dart & Kraft, Inc. From 1957 to 1970, he was Vice President and Director of Planning, Development and Marketing for Foster Grant, Inc. Dr. Finestone’s qualifications to sit on our Board of Directors include his financial expertise, which qualify him as our “Audit Committee Chairman and “financial expert,” and his extensive governance and executive experience, including executive level roles in complex organizations. In April 2018, Dr. Finestone was appointed as our Chief Financial Officer. We do not compensate Dr. Finestone for his services as our CFO. He does not maintain an office at the Company.
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SHARON KAY RAY
Sharon Kay Ray was appointed to our Board of Directors on January 21, 2009. Since March 1989, she has served as a regional marketing representative for Novo Nordisk, a multi-national pharmaceutical company, and as a special marketing consultant for a number of public and non-public corporations. Within the last five years, Ms. Ray served on the Board of Directors of The Amacore Group, Inc. a public company and marketer of healthcare related memberships. Ms. Ray brings to the Board of Directors a unique marketing perspective that provides strategic insight into the promotion of our healthcare related consumer products.
ARTHUR K. YEAP
Arthur K. Yeap joined our Board of Directors on January 21, 2009. Since 1983, Mr. Yeap has served as Chief Executive Officer of Novo Group, consultants and manufacturers in the USA and Asia of audio, green lighting and LED Display products for professional use. He also has been a principal investigator on the staff of the University of California at Berkeley, engaged in research in perception and hearing for advanced military and consumer uses of the Internet. From 1996 to 1999, he was Director of Marketing, Consumer Products, for ITV Corporation. From 1995 to 1996 Mr. Yeap was Chief Engineer for WYSIWYG Networks. Mr. Yeap was a member of the Board of Directors of the Golden Gate Regional Center, which provides services and state funding for the mentally handicapped from 1992-1996 and served as its Chairperson from 1996-1997. He served on the Board of Trustees of Grace Cathedral in San Francisco and is currently on the Board of Clausen House in Oakland, a nonprofit agency serving individuals with special needs. Mr. Yeap provides valuable managerial knowledge to the Board of Directors as well as experience in strategic product development and operations, with a focus on information technology and systems.
STEPHEN M. KREITZER, M.D.
Dr. Stephen M. Kreitzer joined our Board in March 2018. He is a graduate of the Albert Einstein College of Medicine of the Yeshiva University and completed his fellowship training at the Harvard Medical School. He is Board Certified in Internal Medicine, Pulmonary Medicine and Sleep Medicine and has been in practice for over 30 years in Tampa, Florida. Dr. Kreitzer currently serves as the Medical Director of the Sleep Laboratory at Memorial Hospital of Tampa, as well as the Chief of Pulmonary Medicine. He has previously been Chief of Pulmonary Medicine at St. Joseph’s Hospital in Tampa. He chairs the Medical Ethics Committee at Memorial Hospital and previously served on the Board of Censors of the Hillsborough County Medical Association. He also served as a Major in the United States Air Force and has conducted over 100 clinical FDA approved trials besides authoring numerous articles in his field. Dr. Kreitzer has been voted “Top Doctor” by his peers in both sleep medicine and pulmonary medicine in the Tampa-St. Petersburg-Clearwater Florida area for 2016 and 2017. Dr. Kreitzer brings to the Board of Directors his considerable knowledge and experience in the treatment of sleep apnea. Dr. Kreitzer also services as our Medical Director.
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MARK T. HEIDT
Mr. Heidt joined our Board of Directors in September 2014. Prior to his appointment, he served as a consultant to the Company since January 2014. Prior to that time, he was the owner and manager of BEC Worldwide, LLC, a national advertising, marketing and management company. Mr. Heidt contributes to the Board with over thirty years of experience in mass marketing, media placement and advertising placement with a specialty in infomercial design.
Section 16(a) Beneficial Ownership Reporting Compliance
Under Section 16(a) of the Securities Exchange Act of 1934, as amended, an officer, director or greater than 10% stockholder of our outstanding common stock must file with the SEC initial reports of ownership and reports of changes in ownership of our equity securities. Such persons are required by SEC regulations to furnish us with copies of all such reports they file. Based solely upon a review of Section 16(a) reports furnished to us, we believe all such entities or persons subject to the Section 16(a) reporting requirements have complied with applicable filing requirements during 2014, with the exception of the following:
Board Leadership Structure
Our Board is led by its Chairman, Mr. Clark A. Marcus, who is also CEO of the Company. We believe that having our CEO serve as Chairman of the Board provides us with unified leadership and direction and strengthens the ability of the CEO to develop and implement strategic initiatives and respond efficiently to various situations. The Board is aware of the potential conflicts that may arise when an insider chairs the Board but believes any such conflicts are offset by the fact that independent directors comprise a majority of the Board and each of its committees. The committees facilitate deeper analysis of various matters and promote regular monitoring of our activities in their advisory role to the Board. At present, the Board believes that its current structure effectively maintains independent oversight of management and that having an independent director as Chair is unnecessary. The Board has the ability to quickly adjust its leadership structure should business or managerial conditions change.
Governance and Nominating Committee
Our Board does not utilize a separate Governance and Nominating Committee. Instead, our full Board performs the functions that are normally the responsibility of a Governance and Nominating Committee. In considering candidates for open Board positions, diversity of background and personal experience is considered by the Board in assembling a group of individuals that will work well together in overseeing our affairs. Although we do not have a formal diversity policy, the Board considers, among other things, diverse business experiences, the candidate’s range of experiences with public companies, and racial and gender diversity in evaluating Board candidates. While diversity in background in directors is important, it does not necessarily outweigh other attributes or factors the Board may consider in evaluating any particular candidate.
Code of Ethics
We have adopted a code of ethics applicable to all of our employees, including our principal executive officer, principal financial and accounting officer and persons performing similar functions. The text of this code of ethics can be found on our website at www.Advanzeon.com. We intend to post notice on our website of any waiver from, or amendment to, any provision of our code of ethics.
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Audit Committee
Although we are not required to have an Audit Committee, we maintain one whose primary function is to assist the Board of Directors (“the Board”) in the oversight of the integrity of our financial statements, the effectiveness of our internal control over financial reporting, the identification and management of risk, and in evaluation of the performance of our independent auditor. As of December 31, 2018, the Audit Committee of our Board consisted of Arnold B. Finestone (Chairman) and Arthur K. Yeap. The Board of Directors has determined that, although not applicable in our case, all members of the Committee nevertheless were independent as defined in Section 303A of the New York Stock Exchange’s listing standards and SEC Rule 10A-3, and that Dr. Finestone qualifies as a “financial expert,” as defined by Item407(d)(5) of Regulation S-K.
Compensation and Stock Option Committee
The purpose of the Compensation and Stock Option Committee is to determine, or recommend to the Board for determination, the direct and indirect compensation of the CEO and all other officers and to administer any incentive compensation plans from which stock options and other stock based awards may be granted. The Compensation and Stock Option Committee of our Board consisted of Arthur K. Yeap (Chairman), Sharon Kay Ray, and Arnold B. Finestone.
Compensation Consultants
We did not use any compensation consultants during 2018.
Indemnification Matters
In connection with our indemnification program for executive officers and directors, Mr. Marcus as well as eleven former key management employees, directors, or subsidiary directors, 26 former directors, and 19 former officers are entitled to indemnification pursuant to Indemnification Agreements.
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ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth the cash and non-cash compensation for our named executive officers for 2018:
| Principal Position | Year | Salary ($) (1) | ||||||
| Clark A. Marcus | 2018 | $ | — | |||||
| Chairman of the Board and Chief Executive Officer | ||||||||
| Mark T. Heidt | 2018 | $ | — | |||||
| President | ||||||||
(1) In July 2018, Mr. Marcus and Mr. Heidt both agreed to reduce their annual base compensation and to accept common stock purchase warrants in lieu of their respective cash compensation for 2018. Mr. Marcus agreed to an annual base compensation of $200,000. Mr. Heidt agreed to an annual base compensation of $125,000. The warrants have a term of five years and an exercise price that is fifty percent above the closing bid price as of the Company’s Common Stock as of July 11, 2018. We do not recognize any compensation costs related to the issuance of warrants to Messrs. Marcus and Heidt.
Executive Employment Agreements
Chairman and Chief Executive Officer
On May 11, 2009, we executed an employment agreement with our Chairman of the Board and CEO, Clark A. Marcus. Mr. Marcus’ employment contract has a term of three years and includes an initial base salary of $700,000 per annum. As of December 31, 2017, the base salary for Mr. Marcus was $2,141,316. This compensation may, at our election, be accrued, in whole or in part, until such time as we receive financing and/or generate sufficient cash flows with which to pay Mr. Marcus his stated compensation, after the payment of our operating expenses.
Upon execution of the agreement in 2009, Mr. Marcus was paid an $80,000 signing bonus. In addition, Mr. Marcus is entitled to receive a special annual bonus in an amount equal to one percent of our pre-tax profits from the preceding year (as determined by the application of generally accepted accounting principles), up to the first $1,000,000 of such profits; plus, an additional sum equal to two percent of our pre-tax profits for all sums over $1,000,000. Mr. Marcus may also receive a bonus determined at the discretion of the Board of Directors.
In November 2011, the Compensation and Stock Option Committee modified Mr. Marcus’ employment agreement to state that it will not be deemed to have begun until all outstanding, deferred salary and bonus amounts have been paid, at which time the employment agreement will then proceed for a term of five years. In addition, Mr. Marcus will receive an annual increase on January 1st of each year the contract is effective, with such increase equal to the greater of 15% or the percentage change in the Consumer Price Index for the Tampa Bay metropolitan area for the preceding year. Furthermore, the Company will continue to pay the premiums on Mr. Marcus’ life insurance policies existing and following the termination of his employment through his 81st birthday.
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In the event Mr. Marcus’ employment is terminated without cause, or Mr. Marcus terminates his employment within 12 months from a change in control, we will pay to Mr. Marcus a lump sum amount equal to the aggregate of (i) accrued unpaid salary, if any; (ii) accrued but unpaid expenses, if any; (iii) accrued but unpaid bonuses, if any; (iv) unissued warrants, if any; and (v) the total compensation which would have been paid to Mr. Marcus through five full years of compensation from the date of termination. In July 2018, Mr. Marcus agreed to reduce his annual base compensation to $200,000. He also agreed to accept 833,333 common stock purchase warrants in lieu of his 2018 compensation. At December 31, 2018, we had accrued approximately $7,883,802 of compensation and bonuses to Mr. Marcus.
President
Mr. Mark Heidt was appointed President in September 2014 and entered into an employment agreement at that time. The term is one year with automatic one year renewals unless sooner terminated by either party upon 120 days’ notice. The annual compensation is $300,000. In July 2018, Mr. Heidt agrees to reduce the annual compensation to $125,000. He also agreed to accept 520,833 common stock purchase warrant in lieu of his 2018 compensation. At December 31, 2018, we had accrued approximately $990,000 in compensation to Mr. Heidt.
Outstanding Equity Awards at Year-End
The following table sets forth all outstanding equity awards held by our named executive officers as of December 31, 2018:
| Number of shares underlying unexercised options, warrants | ||||||||||||||
| Name | Excercisable (#) | Unexercisable (#) | Option of Warrant Exercise Price ($) | Option or Warrant Expiration Date | ||||||||||
| Clarck A. Marcus (1) | 6,500,000 | — | $ | 0.25 | 11/21/2021 | |||||||||
| 2,950,000 | — | $ | 0.06 | 12/31/2020 | ||||||||||
| 1,000,000 | — | $ | 0.25 | 11/21/2021 | ||||||||||
| 5,000,000 | — | $ | 0.06 | 4/30/2020 | ||||||||||
| Mark T. Heidt (2) | 1,000,000 | — | $ | 0.06 | 4/28/2020 | |||||||||
| James L. Koenig | 1,500,000 | — | $ | 0.06 | 12/31/2018 | |||||||||
| Total | 17,950,000 | |||||||||||||
(1) In July 2018, Mr. Marcus was granted 833,333 common stock purchase warrants. The warrants have a term of five years and the excerize price of $0.24.
(2) In July 2018, Mr. Heidt was granted 520,833 common stock purchase warrants. The warrants have a term of five years and the exercise price is $0.24.
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Director of Compensation
The following table provides information regarding compensation earned by certain of our non-employee directors during the year ended December 31, 2018.
| Year | Fees Earned (1) | |||||||
| Arnold B. Finestone, Ph.D. | 2018 | $ | 90,000.00 | |||||
| Sharon Kay Ray | 2018 | $ | 30,000.00 | |||||
| Arthur K. Yeap | 2018 | $ | 30,000.00 | |||||
| (1) | Amounts represent fees earned for service as a director on our Board of Directors and as a member of one or more Board committees. Three of our directors are paid a monthly fee. Dr. Finestone is paid $7,500 per month; Ms. Ray is paid $2,500 per month and Mr. Yeap is paid $2,500 per month. Each of the above-named persons agreed in October 2013 to waive off on payments by the Company of any existing accrued fees and/or future fees until further notice. As of December 31, 2018, the total amount of accrued compensation for all of the named individuals was $900,000. |
Members of the Board of Directors who are also executive officers or employees of the Company receive no compensation for serving as directors. Outstanding stock option and warrant awards for each non-employee director as of December 31, 2018 are as follows:
| Number of shares underlying unexercised options, warrants | ||||||||
| Name | Options (#) | Warrants (#) | ||||||
| Arnold B. Finestone, Ph.D. | 1,025,000 | 2,000,000 | ||||||
| Sharon Kay Ray | 775,000 | — | ||||||
| Arthur Yeap | 775,000 | — | ||||||
(1) Dr. Finestone was appointed as our Chief Financial Officer in April 2018. The securities listed above were awarded prior to his appointment as CFO.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Security Ownership of Certain Beneficial Owners
The following table sets forth, as of December 31, 2018, the name, address, stock ownership and voting power of each person or group of persons known by us who is not a director or a named executive officer of the Company to own beneficially more than five percent of the outstanding shares of our common stock. Unless otherwise indicated, each of the stockholders has sole voting and investment power with respect to shares beneficially owned.
| Name and Address of Beneficial Owner | Common stock owned directly | Common stock acquirable (1) | Total common stock beneficially owned | Percent of Voting Common Stock Outstanding | ||||||||||||
| Howard Jenkins | 26,885,714 | 9,000,000 | 35,885,714 | (2) | 46.99 | % | ||||||||||
| c/o Advanzeon Solutions, Inc. | ||||||||||||||||
| 2901 W. Busch Blvd., Suite 701 | ||||||||||||||||
| Tampa, Florida 33618 | ||||||||||||||||
| Bernard C. Sherman | 0 | 14,712,500 | 14,712,500 | (3) | 17.93 | % | ||||||||||
| 150 Signet Dr. | ||||||||||||||||
| Weston, Ontario Canada M9L 1T9 | ||||||||||||||||
| Lloyd I. Miller | 602,100 | 5,121,100 | 5,723,100 | 7.90 | % | |||||||||||
| 222 Lakeview Ave., Suite 100-365 | ||||||||||||||||
| West Palm Beach, Florida 33401 | ||||||||||||||||
| Benjamin B. West | 4,000,000 | 50,000 | 4,050,000 | 6.01 | % | |||||||||||
| c/o Advanzeon Solutions, Inc. | ||||||||||||||||
| 2901 W. Busch Blvd, Suite 701 | ||||||||||||||||
| Tampa, Florida 33618 | ||||||||||||||||
| Joshua I. Smith | 1,922,829 | 2,525,000 | 4,447,829 | 6.36 | % | |||||||||||
| c/o Advanzeon Solutions, Inc. | ||||||||||||||||
| 2901 W. Busch Blvd, Suite 701 | ||||||||||||||||
| Tampa, Florida 33618 | ||||||||||||||||
| (1) | Includes common stock acquirable through the conversion of equity instruments convertible into common stock and the exercise of options and warrants to acquire common stock. |
| (2) | Information obtained from Form 13D/A dated June 4, 2010, filed on July 29, 2010 and Company records. |
| (3) | Information obtained from Form 13G/A dated November 14, 2011, filed on December 9, 2011 and Company records. |
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| (4) | Information obtained from Form 13G/A dated February 5, 2015, filed on February 5, 2015. Of the 5,162,600 shares beneficially owned, Mr. miller has sole voting and investment power over 4,790,808 shares and shared voting and investment power over 371,792 shares. |
| (5) | Information obtained from Form 13G/A dated December 31, 2011, filed on February 14, 2012. |
| (6) | Information obtained from Company records. Does not include 5,000,000 shares obtainable from the conversion of the 50 shares of the Series D Convertible Preferred Stock. The Series D Convertible Preferred Stock vests in 10 years from the date of grant. Early vesting can occur if (a) the Grantee’s service as a member of the Board of Directors is terminated by the Company, or (b) by mutual agreement between the Company and the Grantee, or (c) by the Grantee for Good Reason, which is defined to mean without the Grantee’s express written consent, a material breach of any material provision of any agreement between the Company or a successor and the Grantee which breach is not cured within 30 days after notice, or (d) due to the Grantee’s death or disability before the vesting date. |
Security Ownership of Management
The following table sets forth, as of December 31, 2018, information concerning the beneficial ownership of our common stock by each director of the Company and the named executive officers and all directors and executive officers as a group. According to rules adopted by the SEC, a person is the “beneficial owner” of securities if he or she has, or shares, the power to vote such securities or to direct their investment. Unless otherwise indicated, each of the stockholders has sole voting and investment power with respect to shares beneficially owned.
| Name of Beneficial Owner | Shares Benefically Owned | Percent of Common Stock Outstanding | ||||||
| Clark A. Marcus (1)(6) | 18,036,000 | 21.12 | % | |||||
| Arnold B. Finestone, Ph.D. (2)(6) | 3,102,171 | 4.40 | % | |||||
| Sharon Kay Ray (3)(6) | 1,175,000 | 1.71 | % | |||||
| Arthur K. Yeap (3)(6) | 1,175,000 | 1.71 | % | |||||
| Mark T. Heidt (4) | 1,781,250 | 2.58 | % | |||||
| James L. Koenig (5) | 1,600,000 | 2.32 | % | |||||
| Stephen M. Kreitzer, M.D. (7) | 1,200,000 | 1.75 | % | |||||
| All directors and named executive officers as a group (7 persons) | 28,069,421 | 35.59 | % | |||||
| (1) | Includes 70,000 shares of common stock held directly, 1,000,000 shares subject to options that are presently exercisable, and 15,700,000 million shares acquirable with warrants that are presently exercisable. Of this amount, 4,000,000 warrants that were to expire June 30, 2015, were extended in April 2015, until December 31, 2018. Does not include 10,000,000 shares obtainable from the conversion of 100 shares of the Series D Convertible Preferred Stock. |
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| (2) | Includes 1,025,000 shares subject to options that are presently exercisable, 2.0 million shares acquirable with a warrant that is presently exercisable, and 77,171 shares obtainable from the conversion of 244 Series C Convertible Preferred Stock shares that are presently convertible. Does not include 5,000,000 shares obtainable from the conversion of 50 shares of the Series D Convertible Preferred Stock. |
| (3) | Includes 322,829 shares of common stock held directly, 775,000 shares subject to options that are presently exercisable, and 77,171 shares obtainable from the conversion of 244 Series C Convertible Preferred Stock shares that are presently convertible. Does not include 2,500,000 shares obtainable from the conversion of 25 shares of the Series D Convertible Preferred Stock. |
| (4) | Represents warrants to purchase common stock. |
| (5) | The Series D Convertible Preferred Stock vests in 10 years from the date of grant. Early vesting can occur if (a) the Grantee’s service as a member of the Board of Directors is terminated by the Company, or (b) by mutual agreement between the Company and the Grantee, or (c) by the Grantee for Good Reason, which is defined to mean without the Grantee’s express written consent, a material breach of any material provision of any agreement between the Company or a successor and the Grantee which breach is not cured within 30 days after notice, or (d) due to the Grantee’s death or disability before the vesting date. |
| (6) | Represents warrants to purchase common stock. Does not include a convertible promissory note in the principle amount of $100,000. At the option of the holder all or any part of the principle and any unpaid interest may be converted into shares of our common stock. The conversion rate shall be the lessor of (i) 15% below the average daily closing bid price of our common stock for the immediately preceding twenty business days or (ii) $0.11. |
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Transactions with Related Persons
In connection with an employment agreement with our Chairman and CEO, Clark A. Marcus, we have accrued compensation and bonuses payable to Mr. Marcus of approximately $7,883,802 as of December 31, 2018.
One of our independent sales agents is the son of our Chief Executive Officer. He is paid a monthly amount and is entitled to earn a commission on certain sales. In 2018, his total compensation was $60,913. He currently is paid $6,000 per month. We use the services of the daughter of our Chief Executive Officer for marketing purposes. In 2018, her total compensation was $25,000. She is currently paid $2,500 per month. In January 2018, we began using the services of an accounting firm owned by the brother of our Chief Executive Officer. In 2018, the firm was paid $66,288. We presently pay the firm $7,000 per month.
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Director Independence
Although we are not listed on the New York Stock Exchange, and therefore not subject to its requirements, we nevertheless have used the definition of “independent” set forth in Section 303A of the New York Stock Exchange listing standards for the purpose of determining the independence of our directors and members of a committee of our Board of Directors. Such standards define an independent director, generally, as one who has no material relationship with us, has not been employed by us within the last three years, has not received compensation from us in excess of $120,000 other than director and committee fees, is not related to a person who is a partner or employee of our external auditor, is not related to any of our officers, and is not an officer or owner of a business having transactions with us that exceed the greater of $1 million or 2% of our consolidated gross revenues.
The following is a list of individuals that served as a director at any point during the period covered by this Annual Report on Form 10-K and that were considered independent:
| Arnold B. Finestone (1) | |
| Sharon Kay Ray | |
| Arthur K. Yeap |
(1) Mr. Finestone was appointed our Chief Financial Officer in April 2018.
There were no transactions, relationships, or arrangements considered by the Board of Directors in determining that a director is independent other than those described immediately above under the caption “Transactions with Related Persons”.
ITEM 14. PRINCIPAL ACCOUNTANTS’ FEES AND SERVICES
Audit and Related Fees
The firm of Louis Plung & Company, LLP (“Louis Plung”) currently serves as our independent registered public accounting firm to perform audits and to prepare our income tax returns. The Audit Committee approved 100% of the services described below for audit fees.
Audit Fees. The aggregate fees billed by Louis Plung for services relative to audits of our annual consolidated financial statements conducted for 2018 were $25,000.
Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditors
The Audit Committee’s policy is to pre-approve all audit and permissible non-audit services provided by our independent registered public accounting firm and assure that the provision of such services does not impair the firm’s independence. These services may include audit services, audit-related services, tax services and other services. Management is required to periodically report to the Audit Committee regarding the extent of services provided by the independent registered public accounting firm in accordance with this pre-approval, and the fees for the services performed to date.
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ITEM 15. EXHIBITS and FINANCIAL STATEMENT SCHEDULES
| (a) | 1. | Consolidated Financial Statements - Included in Part II of this report: | |
| Report of Independent Registered Public Accounting Firm | 53 | ||
| Consolidated Balance Sheets as of December 31, 2018 and 2017 | 54-55 | ||
| Consolidated Statements of Operations for the years ended December 31, 2018 and 2017 | 56 | ||
| Consolidated Statements of Stockholders’ Equity Deficiency for the years ended December 31, 2018 and 2017 | 57 | ||
| Consolidated Statements of Cash Flows for the years ended December 31, 2018 and 2017 | 58 | ||
| Notes to Consolidated Financial Statements | 59 | ||
| 2. | Consolidated Financial Statement Schedules: None. | ||
| 3. | Exhibits: |
The exhibits listed below are filed as part of this Annual Report on Form 10-K. Certain of the exhibits, as indicated, have been previously filed and are incorporated by reference.
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- 45 -
- 46 -
- 47 -
| 101 | The following materials from Advanzeon Solutions, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2018 formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Stockholder’s Equity Deficiency, (iv) Consolidated Statements of Cash Flows, and (v) Notes to Consolidated Financial Statements, tagged as blocks of text. Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections. |
| * | Management contract or compensatory plan or arrangement with one or more directors or executive officers. |
| (1) | Filed as an exhibit to the Company’s Form 10-K for the years ended December 31, 2015, 2016 and 2017. |
| (2) | Filed as an exhibit to the Company’s Form 8-K dated November 9, 1995. |
| (3) | Filed as an exhibit to the Company’s Form 8-K dated June 14, 2005. |
| (4) | Filed as an exhibit to the Company’s Form 10-K for the year ended May 31, 2000. |
| (5) | Filed as an exhibit to the Company’s Form 8-K dated November 25, 1998. |
| (6) | Filed as Appendix A to the Company’s definitive proxy statement on Schedule 14A filed on January 28, 2005. |
| (7) | Filed as an exhibit to Form S-8 (File No. 333-108561) filed on September 5, 2003. |
| (8) | Filed as an exhibit to the Company’s Form 8-K, dated November 3, 2005. |
| (9) | Filed as an exhibit to the Company’s Form 10-K for the fiscal year ended May 31, 2006. |
| (10) | Filed as an exhibit to the Company’s Form 10-K for the year ended December 31, 2007. |
| (11) | Filed as an exhibit to the Company’s Form 8-K, dated November 12, 2008. |
| (12) | Filed as an exhibit to the Company’s Form 8-K, dated January 16, 2009. |
| (13) | Filed as an exhibit to the Company’s Form 10-K for the year ended December 31, 2008. |
| (14) | Filed as an exhibit to the Company’s Form 8-K, dated March 31, 2009. |
| (15) | Filed as an exhibit to the Company’s Form 10-Q for the quarterly period ended March 31, 2009. |
| (16) | Filed as an exhibit to the Company’s Form 8-K, dated June 17, 2009. |
| (17) | Filed as an exhibit to the Company’s Form 10-Q for the quarterly period ended September 30, 2009. |
| (18) | Filed as an exhibit to the Company’s Form 8-K, dated February 25, 2009. |
| (19) | Filed as an exhibit to the Company’s Form 8-K, dated June 24, 2009. |
- 48 -
| (20) | Filed as an exhibit to the Company’s Form 8-K/A, dated January 16, 2009 and filed April 6, 2009. |
| (21) | Filed as an exhibit to the Company’s Form 10-K for the year ended December 31, 2009. |
| (22) | Filed as an exhibit to the Company’s Form 8-K, dated May 6, 2010. |
| (23) | Filed as an exhibit to the Company’s Form 8-K, dated June 10, 2010. |
| (24) | Filed as an exhibit to the Company’s Form 8-K, dated June 15, 2010. |
| (25) | Filed as an exhibit to the Company’s Form 8-K, dated June 22, 2010. |
| (26) | Filed as an exhibit to the Company’s Form 8-K, dated July 28, 2010. |
| (27) | Filed as an exhibit to the Company’s Form 10-Q for the quarterly period ended June 30, 2010. |
| (28) | Filed as an exhibit to the Company’s Form 8-K, dated November 19, 2010. |
| (29) | Filed as an exhibit to the Company’s Form 10-Q/A for the quarterly period ended September 30, 2010. |
| (30) | Filed as an exhibit to the Company’s Form 8-K, dated August 30, 2011. |
| (31) | Filed as an exhibit to the Company’s Form 8-K, dated March 5, 2012. |
| (32) | Filed as an exhibit to the Company’s Form 8-K, dated June 25, 2012. |
| (33) | Filed as an exhibit to the Company’s Form 10-K for the year ended December 31, 2012. |
| (34) | Filed as an exhibit to the Company’s Form 10-K for the years ended December 31, 2013 and 2014. |
| (35) | Filed as an exhibit to the Company Annual Report on Form 10-K for the years ended December 31, 2015, 2016 and 2017. |
Not applicable.
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Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, May 24, 2019.
| ADVANZEON SOLUTIONS, INC. | |||||
| By: | /s/ CLARK A. MARCUS | ||||
|
Chief Executive Officer and Chairman (Principal Executive Officer) |
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Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities indicated as of May 24, 2019.
| SIGNATURE | TITLE | |||
| /s/ CLARK A. MARCUS |
Chief Executive Officer and Chairman (Principal Executive Officer) |
|||
| Clark A. Marcus | ||||
| Director, Chief Financial Officer and Chief Accounting Officer | ||||
| /s/ ARNOLD B. FINESTONE, Ph.D. | (Principal Financial and Accounting Officer) | |||
| Arnold B. Finestone, Ph.D. | ||||
|
/s/ ARTHUR K. YEAP |
Director |
|||
| Arthur K. Yeap | ||||
|
/s/ SHARON KAY RAY |
Director |
|||
| Sharon Kay Ray | ||||
|
/s/ JAMES L. KOENIG |
Director |
|||
| James L. Koenig | ||||
|
/s/ MARK T. HEIDT |
Director |
|||
| Mark T. Heidt | ||||
|
/s/ STEPHEN M. KREITZER, MD. |
Director |
|||
| Stephen M. Kreitzer, M.D. | ||||
- 51 -
ADVANZEON SOLUTIONS, INC.
FINANCIAL STATEMENTS AND
INDEPENDENT AUDITORS’ REPORT
December 31, 2018 and 2017
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Advanzeon Solutions, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Advanzeon Solutions, Inc. (the Company) as of December 31, 2018 and 2017, and the related consolidated statements of operations, stockholders’ deficiency, and cash flows for each of the years in the two year period ended December 31, 2018, and the related notes (collectively referred to as the financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the two year period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Louis Plung & Company
We have served as the Company’s auditor since 2018.
Pittsburgh, Pennsylvania
May 24, 2019
ADVANZEON SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2018 and 2017
ASSETS
| 2018 | 2017 | |||||||
| CURRENT ASSETS | ||||||||
| Cash | $ | 25,036 | $ | 18,200 | ||||
| Accounts receivable | 24,890 | 961 | ||||||
| Other | 828,996 | 62,833 | ||||||
| Total current assets | 878,922 | 81,994 | ||||||
| NON-CURRENT ASSETS | ||||||||
| Leasehold improvements, net | 299 | 898 | ||||||
| Total non-current assets | 299 | 898 | ||||||
| TOTAL ASSETS | $ | 879,221 | $ | 82,892 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
54
ADVANZEON SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2018 and 2017
LIABILITIES AND STOCKHOLDERS’ DEFICIENCY
| 2018 | 2017 | |||||||
| CURRENT LIABILITIES | ||||||||
| Loans payable: | ||||||||
| Related parties | $ | 737,023 | $ | 19,923 | ||||
Due to shareholder | — | 3,000,000 | ||||||
| Account payable | 700,067 | 946,841 | ||||||
| Current portion of long-term debt | 10,087,939 | 8,461,795 | ||||||
| Contingent liability | 642,659 | 489,995 | ||||||
| Accrued interest-related party | — | 5,017,708 | ||||||
| Other accrued expenses | 14,614,772 | 13,170,753 | ||||||
| Total current liabilities | 26,782,460 | 31,107,015 | ||||||
| TOTAL LIABILITIES | 26,782,460 | 31,107,015 | ||||||
| STOCKHOLDERS’ DEFICIENCY | ||||||||
| Preferred stock, $0.001 and $50 par value; 1,000,000 shares authorized, as of December 31, 2018 and 2017 | — | — | ||||||
| Series C Convertible Preferred, $0.001 and $50 par value; 14,400 shares authorized; 10,434 shares issued and outstanding as of December 31, 2018 and 2017 | 10 | 521,700 | ||||||
| Series D Convertible Preferred, $0.001 and $50 par value; 7,000 shares authorized; 250 shares issued and outstanding as of December 31, 2018 and 2017 | — | — | ||||||
| Remaining Preferred stock, $0.001 and $50 par value; 978,600 shares as of December 31, 2018 and 2017 | — | — | ||||||
Common stock, $0.01 par value; 1,000,000,000 shares authorized; 66,661,656 and 63,063,685 shares issued and outstanding | 666,617 | 630,637 | ||||||
| Additional paid in capital | 28,012,007 | 27,235,066 | ||||||
| Accumulated deficit | (54,581,873 | ) | (59,411,526 | ) | ||||
| Total stockholders’ deficiency | (25,903,239 | ) | (31,024,123 | ) | ||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIENCY | $ | 879,221 | $ | 82,892 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
55
ADVANZEON SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2018 and 2017
| 2018 | 2017 | |||||||
| Revenues: | ||||||||
| Obstructive sleep apnea (OSA) - related | 524,172 | 564,117 | ||||||
| Total revenues | 524,172 | 564,117 | ||||||
| Costs and expenses: | ||||||||
| Costs of revenues | 261,170 | 286,332 | ||||||
| Selling, general and administrative | 1,745,094 | 4,708,930 | ||||||
| Depreciation and amortization | 599 | 598 | ||||||
| Total costs and expenses | 2,006,863 | 4,995,860 | ||||||
| Operating loss | (1,482,691 | ) | (4,431,743 | ) | ||||
| Other income (expense): | ||||||||
| Interest expense | (1,436,974 | ) | (1,441,583 | ) | ||||
| Legal settlement (See Note 15) | 215,848 | (17,031 | ) | |||||
| Setttlement of prior accounting services | (240,000 | ) | — | |||||
| Extinguishment of loan due to shareholder | 7,771,140 | — | ||||||
| Tax penalty | (50 | ) | — | |||||
| Other income | 2,380 | — | ||||||
| Total other income (expense) | 6,312,344 | (1,458,614 | ) | |||||
| Net income (loss) | $ | 4,829,653 | $ | (5,890,357 | ) | |||
| PER SHARE INFORMATION | ||||||||
| Basic | $ | 0.07 | $ | (0.09 | ) | |||
| Weighted average number of | ||||||||
| common shares outstanding | 65,362,240 | 63,063,685 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
56
ADVANZEON SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIENCY
For the Years Ended December 31, 2018 and 2017
| Series C Convertible Preferred Stock Number of Shares | Series C Convertible Preferred Stock Amount | Common
| Common Stock Amount | Additional Paid- in Capital | Accumulated Deficit | Total | ||||||||||||||||||||||
| Balance at December 31, 2017 | 10,434 | $ | 521,700 | 63,063,685 | $ | 630,637 | $ | 27,235,066 | $ | (59,411,526 | ) | $ | (31,024,123 | ) | ||||||||||||||
| Stock issued for settlement of accounting services | — | — | 2,000,000 | 20,000 | 220,000 | — | 240,000 | |||||||||||||||||||||
| Issuance of stock options | — | — | 1,597,971 | 15,980 | 35,251 | — | 51,231 | |||||||||||||||||||||
| Par value adjustment to Series C Convertible Perferred Stock* | — | (521,690 | ) | — | — | 521,690 | — | — | ||||||||||||||||||||
| Net income | — | — | — | — | — | 4,829,653 | 4,829,653 | |||||||||||||||||||||
| Balance at December 31, 2018 | 10,434 | $ | 10 | 66,661,656 | $ | 666,617 | $ | 28,012,007 | $ | (54,581,873 | ) | $ | (25,903,239 | ) | ||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
57
ADVANZEON SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2018 and 2017
| 2018 | 2017 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net income (loss) | $ | 4,829,653 | $ | (5,890,357 | ) | |||
| Adjustments to reconcile net income (loss) to net cash | ||||||||
| used in operating activities | ||||||||
| Depreciation and amortization expense | 599 | 598 | ||||||
| Stock issued for settlement of accounting services | 240,000 | — | ||||||
| Extinguishment of loan due to shareholder and interest | (7,771,140 | ) | — | |||||
| Changes in assets and liabilities: | ||||||||
| Accounts receivable | (23,929 | ) | (961 | ) | ||||
| Other current assets | (1,035,163 | ) | 34,749 | |||||
| Accounts payable | 528,226 | 70,684 | ||||||
| Contingent liability | 152,664 | 489,995 | ||||||
| Accrued interest-related party | (246,568 | ) | 1,132,002 | |||||
| Other accrued expense | 1,641,510 | 2,902,440 | ||||||
| Net cash used in operating activities | (1,684,148 | ) | (1,260,850 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Proceeds from promissory notes | 1,772,763 | 1,570,000 | ||||||
| Repayment of notes | (81,779 | ) | (480,000 | ) | ||||
| Notes payable, related party-net | — | (5,000 | ) | |||||
| Net cash provided by financing activities | 1,690,984 | 1,085,000 | ||||||
| Net increase/(decrease) in cash | 6,836 | (175,850 | ) | |||||
| Cash - Beginning of Year | 18,200 | 194,050 | ||||||
| CASH - END OF YEAR | $ | 25,036 | $ | 18,200 | ||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash paid during the year for: | ||||||||
| Interest | $ | — | $ | — | ||||
| Income taxes | $ | — | $ | — | ||||
| Schedule of non-cash inversting transactions | ||||||||
| Convertible promissory note converted to common stock | $ | 51,231 | $ | — | ||||
The accompanying notes are an integral part of these consolidated financial statements.
58
ADVANZEON SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| NOTE 1 | DESCRIPTION OF THE COMPANY’S BUSINESS AND BASIS OF PRESENTATION |
The consolidated financial statements include the accounts of Advanzeon Solutions, Inc. and its wholly-owned subsidiaries, each with their respective subsidiaries (collectively referred to herein as, the “Company”, “Advanzeon”, “we”, “us”, or “our”).
| NOTE 2 | SUMMARY OF SIGNFICANT ACCOUNTING POLICIES |
Established in 1969, Advanzeon Solutions, Inc., (formerly Comprehensive Care Corp.) (“Advanzeon”, “we”, “Parent”, or the “Company”), through its wholly-owned subsidiary Pharmacy Value Management Solutions, Inc., and its wholly-owned subsidiaries during 2015, and partly in 2016, provided managed care services by acting as the administrator for certain administrative service agreements in the behavioral health and substance abuse fields. We primarily offered these services to commercial, Medicare, Medicaid, Children’s Health Insurance Program (“CHIP”) health plans, as well as self-insured companies. Our managed care operations consisted solely of servicing administrative service agreements. Starting in July of 2015, we implemented our comprehensive sleep apnea program, called “SleepMaster Solutions” ™. SleepMaster Solutions (“SMS”) utilizes an administrative system for the convenient identification/testing and therapy of Obstructive Sleep Apnea (“OSA”). We partnered with a national health care provider by initiating a sleep apnea wellness program whereby we screened, tested and when needed, offered a treatment programs for treating this disorder. We also contracted with a union to treat its driver members. Beginning in 2017, our only business was our SMS sleep apnea program.
The Company has elected to not adopt the option available under United States generally accepted accounting principles (“GAAP”) to measure any eligible financial instruments or other items at fair market value at this time. Accordingly, the Company measures all of its assets and liabilities on the historical cost basis of accounting, except as otherwise required by GAAP.
Inter-company accounts and transactions have been eliminated in consolidation. Certain minor reclassifications of prior period amounts have been made to conform to the current year presentation.
Use of Estimates - The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates that affect the reported amounts. Actual results could differ from these estimates. Estimates involved in the determination of an allowance for doubtful accounts receivable and accrued claims payable, including incurred but not reported, are considered by management as particularly susceptible to material change in the next year. Other significant estimates relate to stock-based compensation, valuation of goodwill, warrants and beneficial conversion features.
Accounts Receivable - Accounts and notes receivable are carried at estimated collectible value. Since customer credit is generally extended on a short-term basis, accounts receivable does not bear interest and are uncollateralized. We manage credit risk and determine necessary allowances by evaluating customers’ credit worthiness before extending credit and periodically for collectability, based primarily on customers’ past credit history and current financial conditions and general economic conditions, results of prior collection efforts, the relative strength of our relationship therewith and, in the event of a dispute, its legal position and the estimated cost of proposed collection proceedings. Management has not established a policy for when to charge off uncollectible accounts receivable or to use external collection agencies and makes such decisions on a case-by-case basis. The maximum losses that the Company would incur if a customer failed to pay would be limited to the carrying value of the receivable after any related allowances provided.
59
ADVANZEON SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Leasehold Improvements - Leasehold improvement (Note 4) is stated at cost less accumulated amortization. Depreciation and amortization are computed using the straight-line method over the estimated useful lives ranging from 2 to 12 years. Leasehold improvements are amortized over the shorter of the lease term or the asset’s useful life.
Fair Value Measurements - The carrying amounts of cash, accounts receivable and accounts payable approximate their estimated fair value due to the short-term nature of these instruments. Since our other financial liabilities are not traded in an open market, we generally use a present value technique, which is a level 3 input, as defined in GAAP, to measure the estimated fair value of these financial instruments, except for valuing stock options and warrants (see below). The rate used for discounting expected cash flows is a risk-free rate adjusted for systematic and unsystematic risk.
The carrying amounts and estimated fair values of long-term debt at December 31, 2018 and 2017 are as follows:
| 2018 | 2017 | |||||||||||||||
| Carrying Amount | Estimated Fair Value | Carrying Amount | Estimated Fair Value | |||||||||||||
| Convertible promissory notes | $ | 10,087,939 | $ | — | $ | 8,461,795 | $ | — | ||||||||
| Loans payable related party | 737,023 | — | 3,019,923 | — | ||||||||||||
| $ | 10,824,962 | $ | — | $ | 11,481,718 | $ | — | |||||||||
Revenue recognition - The Company is on an accrual basis and revenue is recognized when billed, which is approximately when the testing service is performed or CPAP machine is shipped.
Cost of Revenues - Costs of revenues consist of supplies and operating expense. Supplies are recognized in the period in which a patient actually receives the supplies.
Legal Defense Costs - We accrue an estimate of incurred legal defense costs to be incurred in connection with pending disputes and litigation matters as part of our estimated minimum probable losses (see Note 13).
Income Taxes - We are subject to the income tax jurisdictions of the U.S. and multiple state tax jurisdictions. However, our provisions for income taxes for 2018 include only state income taxes (see Note 16).
Management has evaluated our tax positions taken or to be taken on income tax returns that remain subject to examination (i.e., tax years 2008 and thereafter federally), and has concluded that there have been no uncertain tax positions (as defined in GAAP) taken that require recognition or disclosure in the consolidated financial statements. In the event of any income tax-related interest or penalties are incurred, they would be included in general and administrative expense.
60
ADVANZEON SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock Options and Warrants - We grant stock options and warrants (see Note 14) to our non-employee directors, note holders and certain consultants and clients allowing them to purchase our common stock pursuant to approved terms. The estimated value of the warrants issued with debt instruments is recorded as a discount on notes payable and amortized as interest expense over the term of the notes using the effective interest method.
We use a Black-Scholes valuation model to estimate the fair value of options and warrants on the measurement date and for determining the allocation of the relative values of debt and warrants. In applying the model, we use level 3 inputs, as defined by GAAP, consisting of historical data and management judgment to estimate the expected terms of the instruments. Expected volatility is based on the historical volatility of our traded stock. We do not expect to pay dividends for the period of the expected life of the instruments, and therefore we assume no expected dividend. The assumed risk-free rates used are based on the U.S. Treasury yield curve with the same expected terms as those of the equity instruments at the time of grant.
The following table lists the assumptions utilized in applying the Black-Scholes valuation model for options and warrants.
| Year ended December 31, | ||||||||
| 2018 | 2017 | |||||||
| Expected volatitily | 160 | % | 160 | % | ||||
| Expected life (in years) of options | 2 | 3 | ||||||
| Expected life (in years) of warrants | 1/2 | 1/2 | ||||||
| Risk-free interest rate range, options | 1.5 | % | 1.5 | % | ||||
| Risk-free interest rate range, warrants | 1.5 | % | 1.5 | % | ||||
| Expected divident yield | 0 | % | 0 | % | ||||
PER SHARE DATA
For the periods presented, since losses would produce anti-dilution, no diluted loss per common share is presented. The following table sets forth the computation of basic loss per common share:
| Year ended December 31, | ||||||||
| 2018 | 2017 | |||||||
| Numerator: | ||||||||
| Net income (loss) attributable to common stockholders | $ | 4,829,653 | $ | (5,890,357 | ) | |||
| Denominator: | ||||||||
| Weighted average common shares | 65,362,240 | 63,063,685 | ||||||
| Basic income (loss) per share attributable to common stockholders | $ | 0.07 | $ | (0.09 | ) | |||
61
ADVANZEON SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Recent Accounting Standards Update - Recently various new ASUs were issued by the Financial Accounting Standards Board (FASB). Management has determined based on their review that the following ASUs issued will be applicable to the Company. As new ASUs are released, Management will assess if they are applicable and, if they are applicable, the effect will be included in the notes to the consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, “Leases,” which significantly changes the accounting for a lessee. Under previous guidance, lessees did not have to record a lease it designated as operating on its balance sheet. Under the new guidance, a lessee must record a liability for lease payments (referred to as the lease liability) and an asset for the right to use the leased asset during the lease term (referred to as the right of use asset) for all leases, regardless of whether they are designated as finance or operating leases. If a lessee has a lease with a term of 12 months of less, it may make an accounting policy election (by leased asset class) not to recognize lease assets or lease liabilities. This election generally requires the lessee to recognize lease expense on a straight-line basis over the lease term. ASU 2016-02 is effective for interim and annual periods beginning after December 15, 2018 for public entities, not-for-profit entities that have issued (including conduit bond obligors) securities that are traded, listed, or quoted on an exchange or an over-the-counter market, and employee benefit plans that file financial statements with the United States Securities and Exchange Commission (SEC). All other entities must apply the ASU to annual periods beginning after December 15, 2019, and interim periods beginning after December 15, 2020. Any entity may early adopt the ASU. Management has determined that when this guidance is adopted the impact will be properly reflected in the financial statements and notes thereto.
Reclassification – Certain 2017 amounts have been reclassified to conform with the 2018 consolidated financial statement presentation.
| NOTE 3 | OTHER CURRENT ASSETS |
Other current assets as of December 31, 2018 and 2017 consist of the following:
| 2018 | 2017 | |||||||
| Due from escrow account | $ | 472,788 | $ | 29,068 | ||||
| Loans to others | — | 400 | ||||||
| Security and lease deposits | 13,500 | 3,500 | ||||||
| Prepaid expenses | 5,248 | 29,865 | ||||||
| Miscellaneous receivable | 334,509 | — | ||||||
| Capitalized portion of lease | 2,951 | — | ||||||
| Other current asset | $ | 828,996 | $ | 62,833 | ||||
Miscellaneous receivable consists of $24,617 owed to the Company for prepaid accounting fees paid to a previous accounting firm the Company used and no longer uses. The remaining $309,892 is Legal Settlement (see Note 15).
62
ADVANZEON SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| NOTE 4 | LEASEHOLD IMPROVEMENTS |
Leasehold improvement, net, consists of the following at December 31, 2018 and 2017:
| 2018 | 2017 | |||||||
| Leasehold improvement | $ | 2,992 | $ | 2,992 | ||||
| Less accumulated amortization | (2,693 | ) | (2,094 | ) | ||||
| Leasehold improvement - net | $ | 299 | $ | 898 | ||||
Amortization expense for the years ended December 31, 2018 and 2017 is $599 and $598, respectively.
| NOTE 5 | RELATED PARTY AND SHAREHOLDER LOANS PAYABLE |
The Company has received financing from Management to the Company as well as from members of our Board of Directors. These individuals are deemed to be related parties to the Company and their indebtedness must be disclosed separately.
As of December 31, 2018 and 2017, balances were as follows:
| 2018 | 2017 | |||||||
| Loans payable related party | $ | 737,023 | $ | 19,923 | ||||
| Due to shareholder | — | 3,000,000 | ||||||
| $ | 737,023 | $ | 3,019,923 | |||||
During the first quarter of 2018, $910,010 was reclassified from accounts payable to loans payable related party. During the third quarter of 2018, the Company wrote off the due to shareholder balance and accrued interest totaling $7,771,140 as disclosed in Note 12.
| NOTE 6 | NOTES PAYABLE |
As of December 31, 2018 and 2017, the balance was as follows:
| 2018 | 2017 | |||||||
| Notes payable | $ | 10,087,939 | $ | 8,461,795 | ||||
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ADVANZEON SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Break-out of debt between the parent company and our subsidiary PVMS is as follows:
| 2018 | 2017 | |||||||
| Advanzeon parent | $ | 5,010,016 | $ | 5,035,795 | ||||
| PVMS subsidiary | 5,077,923 | 3,426,000 | ||||||
| $ | 10,087,939 | $ | 8,461,795 | |||||
At PVMS, the sum total of notes issued, and their dollar values were as follows:
| 2018 | 2017 | |||||||
| Number of notes issued | 31 | 39 | ||||||
| Dollar value | $ | 1,751,923 | $ | 1,570,000 | ||||
All notes are short-term in nature, one year maturity date. All debt issued has a stated interest rate of 12% per year.
At PVMS, the sum total of notes converted to stock year-to-date and their dollar values were as follows:
| 2018 | 2017 | |||||||
| Number of notes converted | 1 | — | ||||||
| Dollar value | $ | 50,000 | $ | — | ||||
| NOTE 7 | COMMON STOCK |
During the year ended December 31, 2018, the Company issued 2,000,000 shares of common stock for a legal settlement. The shares were issued at a value of $0.12 per share or for a total value of $240,000. In addition, the Company issued 1,597,971 shares for the conversion of a promissory note of $50,000 and accrued interest of $1,231. The stock was issued at a value of $0.03 per share. We relied on Section 4(a)(1) of the Securities Act of 1933, as amended, as the exception from registration under the Act.
During the year ended December 31, 2017, no stock was sold or issued.
| NOTE 8 | PAR VALUE ADJUSTMENT TO PREFERRED STOCK |
On September 28, 2018 the Company filed a Certificate of Correction, which can be found as Exhibit 3 within the Form 10-K report for the year ended December 31, 2017 filed January 29, 2019. Within this exhibit the Company decreased the par value of the Preferred Stock from $50 per share to $.001 per share.
- 64 -
ADVANZEON SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| NOTE 9 | CONTINGENT LIABILITY |
Contingent liability consisted of the following items as of December 31, 2018:
(1) a lawsuit against the Company for $450,000 from the son of a deceased promissory note holder. This matter has been dismissed twice by the judge but is ongoing due to appeals.
(2) interest payable to the same person listed in (1) in the amount of $171,247.
(3) Advanzeon won a decision on a court case against Universal Healthcare. The attorney's fees relating to this matter total $21,412. This fee will be paid out of the proceeds of the case when collected.
As of December 31, 2018 and 2017, the balance of this indebtedness is as follows:
| 2018 | 2017 | |||||||
| Legal settlement payable | $ | — | $ | 39,995 | ||||
| Disputed note payable | 450,000 | 450,000 | ||||||
| Disputed interest payable | 171,247 | — | ||||||
| Pending attorney fees | 21,412 | — | ||||||
| Contingent liability | $ | 642,659 | $ | 489,995 | ||||
In 2018, we have reclassified the Legal Settlement Payable of $39,995 to Accounts Payable.
| NOTE 10 | ACCRUED INTEREST-RELATED PARTY |
As of December 31, 2018 and 2017, balances of accrued interest on this indebtedness were as follows:
| 2018 | 2017 | |||||||
| Accrued interest-related party | $ | — | $ | 5,017,708 | ||||
During the second quarter of 2018, a total of $4,771,140 was written off to extinguishment of loan due to shareholder. The remaining balance of $246,568 was reclassified as accrued interest payable (non-related party).
- 65 -
ADVANZEON SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| NOTE 11 | OTHER ACCRUED LIABILITIES |
As of December 31, 2018 and 2017, balances of other accrued liabilities were as follows:
| 2018 | 2017 | |||||||
| Management compensation | $ | 8,873,802 | $ | 8,873,802 | ||||
| Accrued interest-non-related party | 4,809,644 | 2,632,159 | ||||||
| Board of Director fees | 900,000 | 600,000 | ||||||
| State fees | 21,000 | — | ||||||
| Payroll tax liabilities | 2,927 | 11,522 | ||||||
| Other | 7,399 | 1,053,270 | ||||||
| Total other accrued liabilities | $ | 14,614,772 | $ | 13,170,753 | ||||
In 2018, other accrued liabilities of $1,053,270 has been reclassified to its proper categories; $696,989 has been reclassified to accrued interest-non-related party, $196,260 to loan payable related party, $150,000 to accrued board of directors fees, $10,021 was a reversal of the December 31, 2017 year-end accrual of wages, subcontractor fees, and commissions.
| NOTE 12 | EXTINGUISHMENT OF LOAN DUE TO SHAREHOLDER |
An expired promissory note and the accrued interest were written off to extinguishment of loan due to shareholder due in accordance with Florida Law 95.11 (2)(b) on the expiration of debt. The principal amount of $3,000,000 and accrued interest of $4,771,140 was written off.
| NOTE 13 | LEGAL PROCEEDINGS |
With the exception of the matters set forth below, all of the legal proceedings for the year ended December 31, 2018 are disclosed in our annual report on Form 10-K filed on January 29, 2019.
On May 15, 2018, the Company was awarded $269,750 during the final settlement of litigation in connection with overpaid fees owed to the Company.
In a related matter to the Katzman litigation, on January 10, 2017, the Company brought an action against Melanie Damian et al. Case number 17-CA-00252, Thirteenth Judicial Circuit Court, Hillsborough County, FL. The Company alleges abuse of process based upon wrongful collection practices including wrongful garnishment of bank accounts. The matter has been dismissed by mutual consent.
In an action entitled Pharmacy Value Management Services Inc. v. Hartman et al, Case No. 8:17-cv-132-T-35TBM (M.D. Fla.) – a settlement pursuant to the mediation in the matter was reached and executed on March 18, 2018. Pursuant to the settlement Defendants paid the sum of $70,000.
During January 2019, the Company settled a legal dispute with Rotech Healthcare, Inc. The total settlement was for $146,671 to be paid to Rotech during 2019, which is included in accounts payable as of December 31, 2018. The Company intends to either negotiate and/or move to the court to reopen the settlement based upon, among other things, mutual mistakes. The Company has, to date, abided by the settlement.
As referred to in Note 3, $309,892 of these awarded settlements are still outstanding as of December 31, 2018.
- 66 -
ADVANZEON SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| NOTE 14 | EQUITY INSTRUMENTS |
Our Series C preferred stock is currently convertible into common stock at the rate of 316.28 common shares for each share of Series C preferred, adjustable for any dilutive issuances of common occurring in the future. Series C preferred shares vote with the common stockholders on an as-converted basis. The shares are nonparticipating except that dividends, when declared by our Board of Directors on the common stock, must be paid on the Series C stock on an as-converted basis before any dividends are paid on our common stock. The Series C is also cumulative with respect to dividends on common stock and junior series of preferred stock. Other significant rights and preferences of the Series C preferred include:
| ● | the right to vote as a separate class to appoint five directors of the Company, and |
| ● | liquidation preferences, whereby the Series C holders have a claim against our assets senior to the claim of the holders of our common stock in the event of our liquidation, dissolution or winding-up (the value of the liquidation preference is $250 per share, or approximately $2,608,500 at December 31, 2018 and 2017). |
We also have a class of convertible preferred stock, Series D, for which 7,000 shares are authorized and 250 shares were outstanding at December 31, 2018. The shares, which were granted in January 2012, do not vest until the tenth anniversary of the grant date. Such shares were issued in exchange for the cancellation of 120 previously granted warrants to purchase Series D shares. Once vested, a Series D preferred share will be convertible at any time into 100,000 shares of common stock, subject to adjustment in the event of any common stock dividend, split, combination thereof or other similar recapitalization, without additional consideration. Prior to vesting and thereafter, each Series D convertible preferred share is entitled to all voting, dividend, liquidation and other rights accorded a share of Series D convertible preferred stock. As to dividends, the Series D stock is noncumulative. If a dividend is declared on the common stock, each share of Series D stock is entitled to receive a dividend equal to 50% of the dividend declared for the common stock as if the Series D stock had been converted. Despite their nonvested status, voting rights of each share nevertheless consist of the right to cast the number of votes equal to those of 500,000 shares of common stock. Unless otherwise required by applicable law, holders of shares of Series D have the right to vote together with holders of common stock as a single class on all matters submitted to a vote of our stockholders.
STOCK INCENTIVE COMPENSATION PLANS
WARRANTS:
To Purchase Common Stock
During the year ended December 31, 2018, warrants were issued as parts of financing transactions to consultants and to members of our Board of Directors.
- 67 -
ADVANZEON SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The status of outstanding warrants for the year ended December 31, 2018 is as follows:
| Warrants | Shares | Weighted-Average Exercise Price | Weighted-Average Remaining Contractual Term | Aggregate Intrinsic Value | ||||||||||
| Outstanding at January 1, 2018 | 41,873,984 | 0.18 | 2.96 years | — | ||||||||||
| Granted | 9,073,613 | |||||||||||||
| Forfeited, expired or cancelled | (2,675,000 | ) | ||||||||||||
| Exerciseable at December 31, 2018 | 48,272,597 | 0.20 | 1.77 years | — | ||||||||||
We recognized no compensation costs during the year ended December 31, 2018 due to the issuance of these securities.
OPTIONS:
From time-to-time, we grant stock options as compensation for services to our employees, non-employee directors and certain consultants (“grantees”) allowing grantees to purchase our common stock pursuant to stockholder-approved stock option plans. We currently have one active incentive qualified option plan, 2009 Equity Compensation Plan, that provides for the granting of stock options, stock appreciation rights, limited stock appreciation rights, restricted preferred stock, and common stock grants to grantees. Grants issued under the Plans may qualify as incentive stock options (“ISOs”) under Section 422A of the Internal Revenue Code of 1986, as amended. Options for ISOs may be granted for terms of up to ten years. For the 2009 Equity Compensation Plan, the vesting period is determined by our Compensation and Stock Option Committee. The exercise price for ISOs must equal or exceed the fair market value of the underlying shares on the date of grant. The Plan also provide for the full vesting of all outstanding options under certain change of control events. The maximum number of common shares authorized for issuance under the plan is 50,000,000. We did not issue any options during the year ended December 31, 2018. The information regarding the options is set forth below.
| 2018 | 2017 | |||||||
| Shares available | 50,000,000 | 50,000,000 | ||||||
| Options outstanding (Directors and employees) | 3,695,000 | 3,695,000 | ||||||
| Options exerciseable (Directors and employees) | 3,680,000 | 3,680,000 | ||||||
In addition, under our Non-employee Directors’ Stock Option Plan, we are authorized to issue non-qualified stock options to our non-employee directors for up to 1,000,000 common shares. Each non-qualified stock option is exercisable at a price equal to the average of the closing bid and asked prices of the common stock in the over-the-counter market for the most recent preceding day there was a sale of the stock prior to the grant date. Grants of options vest in accordance with vesting schedules established by our Board of Directors’ Compensation and Stock Option Committee. Upon joining our Board of Directors, directors receive an initial grant of 25,000 options for common shares. As of December 31, 2018, there were 10,000,000 shares available for option grants and 2,678,000 options for common shares outstanding under the non-qualified directors’ plan.
- 68 -
ADVANZEON SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of activity for the year ended December 31, 2018 is as follows:
| Warrants | Shares | Weighted-Average Exercise Price | Weighted-Average Remaining Contractual Term | Aggregate Intrinsic Value | ||||||||||
| Outstanding at January 1, 2018 | 6,407,500 | 0.28 | 3.25 years | — | ||||||||||
| Granted | — | |||||||||||||
| Forfeited, expired or cancelled | — | |||||||||||||
| Exerciseable at December 31, 2018 | 6,407,500 | 0.28 | 3.25 years | — | ||||||||||
The following table summarizes information about options granted and vested during the year ended December 31, 2018.
| 2018 | 2017 | |||||||
| Options granted | 0 | 0 | ||||||
| Weighted-average grant-date fair value ($) | N/A | N/A | ||||||
| Options vested | 0 | 0 | ||||||
| Fair value of vested options | N/A | N/A | ||||||
During 2018, we granted no options for common shares to employees, non-employee directors and consultants.
A summary of common stock options outstanding and exercisable as of December 31, 2018 follows:
| Options Outstanding | Exercise Price Range | Weighted-Average Exercise Price | Weighted-Average Remaining Contractual Term | Options Exercisable | Weight-Average Exercise Price of Exercisable Options | |||||||||||||||||
| 6,407,500 | 0.28 | 0.25-0.65 | 9.85 | — | N/A | |||||||||||||||||
- 69 -
ADVANZEON SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| NOTE 15 | LEGAL SETTLEMENTS |
Legal settlements were as follows:
| 2018 | 2017 | |||||||
| Universal Healthcare settlement (1) | $ | 269,750 | $ | — | ||||
| John Hartman settlement (1)(2) | 70,000 | — | ||||||
| Rotech litigation (1) | (112,421 | ) | — | |||||
| Katzman litigation | (11,481 | ) | (17,031 | ) | ||||
| Total legal settlement | $ | 215,848 | $ | (17,031 | ) | |||
(1) See Note 13 Legal Proceedings
(2) Of the $70,000 settlement, $29,858 was paid to the Company in April of 2018.
The Company is currently pursuing repayment of prior accounting fees paid to a previous accounting firm. The Company has filed a complaint and recorded a receivable of $24,617 for the fees paid.
| NOTE 16 | INCOME TAXES |
The Company did not provide for income taxes with respect to differences between financial loss and taxable loss arising from the timing of when certain transactions are recorded for book purposes versus tax purpose. The Company has not filed federal or state income tax returns since 2012. The financial statements do not reflect any fines or penalties that may or may result from not filing the various income returns.
In prior years the Company incurred net operating losses and, accordingly, no provision for income taxes has been recorded. In addition, no benefit for income taxes has been recorded due to the uncertainty of the realization of any tax assets. For the 2018 tax year the Company had net operating loss carryforwards of approximately $40,900,000 for tax purposes. The carryforwards are available to offset taxable income of future periods and begin to expire after the Company’s 2024 tax year. Realization of the deferred tax benefit related to the carryforward is dependent upon the Company generating sufficient taxable income in the future, against which the loss can be offset, which is not guaranteed.
Deferred income taxes reflect the net tax effect of temporary differences between carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, as well as tax benefits of net operating loss carryforwards. The significant components of the Company’s deferred tax assets and liabilities relate to the following:
| 2018 | 2017 | |||||||
| Net operating loss carryfoward | $ | 40,910,571 | $ | 45,740,224 | ||||
| Depreciation | — | — | ||||||
| Net deferred tax assts and before valuation allowance | 40,910,571 | 45,740,224 | ||||||
| Less: Valuation allowance | (40,910,571 | ) | (45,740,224 | ) | ||||
| Net deferred tax assets | $ | — | $ | — | ||||
- 70 -
ADVANZEON SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For financial reporting purposes, the Company has incurred losses in previous years. Based on the available objective evidence, including the Company’s previous losses, management believes it is more likely than not that the net deferred tax assets will not be fully realizable. Accordingly, the Company provided for a full valuation allowance against its net deferred tax assets as of December 31, 2018.
The effective income tax rate varied from the statutory Federal tax rate as follows:
| 2018 | 2017 | |||||||
| Federal statutory rate | 21 | % | 34 | % | ||||
| Effect of net operating losses | (21 | )% | (34 | )% | ||||
| Effective income tax rate | — | % | — | % | ||||
The company’s effective tax rate is lower than what would be expected if the federal statutory rate were applied to income (loss) before taxes, primarily due to net operating loss carryforwards.
On December 22, 2017, the President signed into law the Tax Cuts and Jobs Act (H.R.1) (the “Act”). The Act includes a number of changes to existing tax law impacting businesses including, among other things, a permanent reduction in the corporate income tax rate from 34% to 21%. The rate reduction applies to tax years beginning on or after January 1, 2018.
As a result of the reduction in the corporate income tax rate under the Act, the Company had to revalue its net deferred tax liability, for the year ended December 31, 2017. The did not change the Company’s net income for the year ended December 31, 2018.
| NOTE 17 | OPERATING LEASES |
We leased our Tampa corporate office and paid annual rent of $99,485 and $95,086 for the years ended December 31, 2018 and 2017, respectively. The term of the lease is for 5 years beginning in May 2014 and ending on June 30, 2019. We currently lease approximately 3,133 square feet and pay approximately $8,229 per month. The lease was renegotiated in 2019 and verbally agreed to have a three-year extension with no rent increase. We consider the condition of the leased property to be average and adequate for our current needs. In our Tampa office, we maintain clinical operations, business development, accounting, financial and regulatory reporting and other management information symptoms information systems, and provider and member service functions. Total lease expenses of the current lease during the year ended December 31, 2019 is $49,374.
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ADVANZEON SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We leased our Huntington Beach office and paid annual rent of $25,900 in 2018. The term of the lease is for 1 year beginning April 18, 2018 and ending April 30, 2019. We currently pay $3,700 per month. The lease has been extended on a month to month basis at a monthly rent of $4,000. We consider the condition of our leased property to be average and adequate for our current needs. Total expenses through the conclusion of the current lease during the year ended December 31, 2019 is $14,800.
The Company leases a vehicle for the CEO to be used for business. The term of the lease is 3 years beginning July 9, 2018 and ending July 9, 2021. The Company pays a monthly rate of $893.
| NOTE 18 | OTHER MATTERS |
During the year ended December 31, 2018, we funded our operations from revenues and new debt issuances. We will continue to fund our operations from these sources until we are able to produce operating revenue sufficient to cover our cost structure. In the event we are not able to secure such funding, our operations will be adversely affected.
| NOTE 19 | SUBSEQUENT EVENTS |
In accordance with ASC Topic 855, “Subsequent Events”, the Company evaluated subsequent events through May 24, 2019, the date these financial statements were available to be issued. During their evaluation, the following subsequent events were identified.
During 2019, the Company renegotiated the Tampa office lease and verbally agreed to a three-year extension of the lease with no increase in payments.
The Huntington Beach lease has been extended during 2019 on a month to month basis at a monthly rate of $4,000.
Issuance of debt and warrants
Subsequent to the balance sheet date, the Company has issued $480,000 of promissory notes. All of the debt matures in 2020 and has a stated interest rate of 12% and is unsecured. Concurrent with the issuance of debt, the Company has issued 1,517,823 warrants at an average exercise price of $0.17. At the time of issuance, all warrants had a three or five year term.
Issuance of common stock
The Company has issued 700,000 shares subsequent to December 31, 2018 as follows:
On March 21, 2019, the Company issued 200,000 shares of its common stock to its Securities Exchange Commission counsel, who elected to take common stock in the Company as partial payment of its legal fees.
Additionally, on March 29, 2019, the Company issued 500,000 shares of its common stock to an existing shareholder and warrant holder, who elected to exercise his warrants to purchase 500,000 shares of the Company's common stock for $15,000. The warrants were issued during May of 2017.
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