10-Q 1 form10-q.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark one)

 

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

 

For the quarterly period ended June 30, 2020

 

OR

 

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

 

For the transition period from ______ to ______.

 

Commission File Number: 001-35141

 

RENNOVA HEALTH, INC.

(Exact name of registrant as specified in its charter)

 

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

(IRS Employer

Identification No.)

     

931 Village Boulevard, Suite 905

West Palm Beach, FL

  33409
(Address of principal executive offices)   (Zip Code)

 

(561) 855-1626

(Registrant’s telephone number, including area code)

 

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

 

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

 

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

 

Common Stock, $0.0001 Par Value

Warrants to Purchase Common Stock, $0.0001 Par Value

 

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

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [X] No [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

 

Large accelerated filer [  ] Accelerated filer [  ]
Non-accelerated filer [X] Smaller reporting company [X]

 

  Emerging growth company [  ]

 

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

 

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

 

As of August 10, 2020, the registrant had 1,178,885 shares of its Common Stock, $0.0001 par value, outstanding.

 

 

 

 

 

 

RENNOVA HEALTH, INC. AND SUBSIDIARIES

FORM 10-Q

 

June 30, 2020

TABLE OF CONTENTS

 

    Page No.
PART I – FINANCIAL INFORMATION    
       
Item 1. Financial Statements    
  Condensed Consolidated Balance Sheets as of June 30, 2020 (unaudited) and December 31, 2019   3
  Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2020 and 2019 (unaudited)   4
  Condensed Consolidated Statements of Changes in Stockholders’ Deficit for the each of the quarters in the periods ended June 30, 2020 and 2019 (unaudited)   5-6
  Condensed Consolidated Statements of Cash Flows for the three and six months ended June 30, 2020 and 2019 (unaudited)   7
  Notes to Condensed Consolidated Financial Statements (unaudited)   8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations   34
Item 3. Quantitative and Qualitative Disclosures About Market Risk   46
Item 4. Controls and Procedures   47
       
PART II – OTHER INFORMATION    
       
Item 1. Legal Proceedings   47
Item 1A. Risk Factors   47
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds   48
Item 3. Defaults Upon Senior Securities   48
Item 4. Mine Safety Disclosures   48
Item 5. Other Information   48
Item 6. Exhibits   48
       
SIGNATURES   49

 

2

 

 

RENNOVA HEALTH, INC.

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   June 30, 2020   December 31, 2019 
   (unaudited)     
ASSETS          
Current assets:          
Cash  $810,848   $16,933 
Accounts receivable, net   2,596,432    3,565,447 
Inventory   690,076    614,344 
Prepaid expenses and other current assets   17,422    487 
Income tax refunds receivable   1,760,988    642,503 
Current assets of AMSG and HTS classified as held for sale   209,878    505,389 
Total current assets   6,085,644    5,345,103 
           
Property and equipment, net   7,896,467    8,231,830 
Intangibles, net   509,443    509,443 
Deposits   327,281    337,153 
Right-of-use assets   394,281    274,747 
Non-current assets of AMSG and HTS classified as held for sale   2,140    9,383 
           
Total assets  $15,215,256   $14,707,659 
           
LIABILITIES AND STOCKHOLDERS’ DEFICIT          
Current liabilities:          
Accounts payable (includes related parties amount of $0.6 million and $0.6 million, respectively)  $11,766,475   $13,691,250 
Checks issued in excess of bank account balance   145,685    275,124 
Accrued expenses (includes related parties amount of $0 million and $2.0 million, respectively)   16,269,839     14,583,954 
Income taxes payable   1,373,669    1,373,669 
Current portion of notes payable   5,290,477    3,977,710 
Current portion of note payable, related party   -    15,159,455 
Current portion of finance lease obligations   349,987    1,119,418 
Current portion of debentures   29,153,740    29,873,740 
Current portion of right-of-use operating lease obligations   165,924    116,037 
Derivative liabilities   455,336    455,336 
Current liabilities of AMSG and HTS classified as held for sale   2,303,103    2,792,502 
Total current liabilities   67,274,235    83,418,195 
           
Other liabilities:          
Note payable, net of current portion   1,402,428    - 
Right-of-use operating lease obligations, net of current portion   228,357    158,710 
Total liabilities   68,905,020    83,576,905 
           
Commitments and contingencies          
           
Redeemable Preferred Stock - Series I-1   5,835,294    5,835,294 
Redeemable Preferred Stock - Series I-2   1,790,181    1,815,181 
           
Stockholders’ deficit:          
Series H preferred stock, $0.01 par value, 14,202 shares authorized, 10 shares issued and outstanding   -    - 
Series F preferred stock, $0.01 par value, 1,750,000 shares authorized, 1,750,000 shares issued and outstanding   17,500    17,500 
Series K preferred stock, $0.01 par value, 250,000 shares authorized, 0 and 250,000 shares issued and outstanding   -    2,500 
Series L preferred stock, $0.01 par value, 250,000 shares authorized, 250,000 and 0 shares issued and outstanding   2,500    - 
Series M preferred stock, $0.01 par value, 30,000 shares authorized, 22,000 and 0 shares issued and outstanding   220    - 
Common stock, $0.0001 par value, 10,000,000,000 shares authorized, 989,894 and 964,894 shares issued and outstanding   99    96 
Additional paid-in-capital   532,426,974    510,402,197 
Accumulated deficit   (593,762,532)   (586,942,014)
Total stockholders’ deficit   (61,315,239)   (76,519,721)
Total liabilities and stockholders’ deficit  $15,215,256   $14,707,659 

 

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

 

3

 

 

RENNOVA HEALTH, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2020   2019   2020   2019 
                 
Net revenues  $2,069,019   $4,061,189   $3,910,550   $9,251,839 
                     
Operating expenses:                    
Direct costs of revenue   2,779,369    4,680,333    5,345,649    8,844,733 
General and administrative   2,421,863    4,290,935    5,384,592    9,567,071 
Depreciation and amortization   181,091    186,236    345,798    409,822 
Total operating expenses   5,382,323    9,157,504    11,076,039    18,821,626 
                     
Loss from continuing operations before other income (expense) and income taxes   (3,313,304)   (5,096,315)   (7,165,489)   (9,569,787)
                     
Other income (expense):                    
Other income (expense), net   6,847,209    (311,463)   6,719,166    (1,195,742)
Gain from legal settlements   1,230,522    -    1,230,522    - 
Gain on bargain purchase   -    -    -    250,000 
Change in fair value of derivative instruments   -    -    -    (105,076)
Interest expense   (2,658,972)   (7,871,798)   (5,549,232)   (15,591,766)
Total other income (expense), net   5,418,759    (8,183,261)   2,400,456    (16,642,584)
                     
Net income (loss) from continuing operations before income taxes   2,105,455    (13,279,576)   (4,765,033)   (26,212,371)
                     
Benefit from income taxes   -    -    1,118,485    - 
                     
Net income (loss) from continuing operations   2,105,455    (13,279,576)   (3,646,548)   (26,212,371)
                     
Net income (loss) from discontinued operations   16,173    (145,251)   (23,602)   (653,860)
Net income (loss)   2,121,628    (13,424,827)   (3,670,150)   (26,866,231)
Deemed dividend   (3,150,368)   -    (3,150,368)   (123,861,587)
Net loss available to common shareholders  $(1,028,740)  $(13,424,827)  $(6,820,518)  $(150,727,818)
                     
Net loss per common share:                    
Basic net loss available to common shareholders  $(1.04)  $(25.38)  $(6.92)  $(448.88)
Diluted net loss available to common shareholders  $(1.04)  $(25.38)  $(6.92)  $(448.88)
Weighted average number of common shares outstanding during the period:                    
Basic   989,894    528,965    985,608    335,786 
Diluted   989,894    528,965    985,608    335,786 

 

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

 

4

 

 

RENNOVA HEALTH, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT

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

(unaudited)

 

   Preferred Stock   Common Stock   Additional   Accumulated   Total
Stockholders’
 
   Shares   Amount   Shares   Amount   paid-in-capital   Deficit   Deficit 
Balance at December 31, 2019   2,000,010   $20,000    964,894   $96   $510,402,197   $(586,942,014)  $(76,519,721)
Conversion of Series I-2 Preferred Stock into common stock   -    -    25,000    3    24,997    -    25,000 
Net loss   -    -    -    -    -    (5,791,778)   (5,791,778)
Balance at March 31, 2020   2,000,010   $20,000    989,894   $99   $510,427,194   $(592,733,792)  $(82,286,499)
Exchange of Series K Preferred Stock for Series L Preferred Stock   (250,000)   (2,500)   -    -    -    -    (2,500)
Issuance of Series L Preferred Stock   250,000    2,500    -    -    -    -    2,500 
Issuance of Series M Preferred Stock in exchange for related party loans and accrued interest   22,000    220    -    -    21,999,780    -    22,000,000 
Deemed dividend from issuance of Series M Preferred Stock   -    -    -    -    -    (3,150,368)   (3,150,368)
Net income   -    -    -    -    -    2,121,628    2,121,628 
Balance at June 30, 2020   2,022,010   $20,220    989,894   $99   $532,426,974   $(593,762,532)  $(61,315,239)

 

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

 

5

 

 

RENNOVA HEALTH, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT

For each of the quarters in the period ended June 30, 2019

(unaudited)

 

                           Total 
   Preferred Stock   Common Stock   Additional   Accumulated   Stockholders’ 
   Shares   Amount   Shares   Amount   paid-in capital   Deficit   Deficit 
Balance at December 31, 2018   2,000,225   $20,002    12,857   $1   $375,858,739   $(415,046,606)  $(39,167,864)
Conversion of Series I-2 Preferred Stock into common stock   -    -    325,570    33    643,847    -    643,880 
Common stock issued in cashless exercise of warrants   -    -    11,962    1    (1)   -    - 
Stock-based compensation   -    -    -    -    8,650    -    8,650 
Deemed dividend from trigger of down round provision feature   -    -    -    -    123,861,587    (123,861,587)   - 
Modification of warrants   -    -    -    -    4,056,425    -    4,056,425 
Net loss   -    -    -    -    -    (13,441,404)   (13,441,404)
Balance at March 31, 2019   2,000,225    20,002    350,389    35    504,429,247    (552,349,597)   (47,900,313)
Conversion of Series I-2 Preferred Stock into common stock   -    -    250,505    25    261,068    -    261,093 
Stock-based compensation   -    -    -    -    8,650    -    8,650 
Modification of warrants   -    -    -    -    5,408,566    -    5,408,566 
Net loss   -    -    -    -    -    (13,424,827)   (13,424,827)
Balance at June 30, 2019   2,000,225   $20,002    600,894   $60   $510,107,531   $(565,774,424)  $(55,646,831)

 

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

 

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RENNOVA HEALTH, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

   Six Months Ended June 30, 
   2020   2019 
         
Cash flows from operating activities:          
Net loss from continuing operations  $(3,646,548)  $(26,212,371)
Adjustments to reconcile net loss to net cash (used in) provided by operations:          
Depreciation and amortization   345,798    409,822 
Stock-based compensation   -    17,300 
Amortization of debt discount   63,695    5,003,653 
Modification of warrants   -    9,464,991 
Gain from legal settlements   (1,230,522)   - 
HHS Provider Relief Funds   (7,483,830)    - 
Penalty for non-payment of debenture   -    595,440 
Change in fair value of derivative instruments   -    105,076 

Loss on sales of accounts receivable

   249,500    656,949 
Bargain purchase gain for hospital and medical center   -    (250,000)
Loss from discontinued operations   (23,602)   (653,860)
Changes in operating assets and liabilities:          
Accounts receivable   1,328,369    (2,114,913)
Inventory   (75,732)   35,292 
Prepaid expenses and other current assets   (16,935)   (33,353)
Security deposits   9,872    39,227 
Accounts payable and checks issued in excess of bank balance   (1,771,184)   4,111,576 
Accrued expenses   4,420,816    3,290,128 
Income tax assets and liabilities   (1,118,485)   (45,000)
Net cash used in operating activities of continuing operations   (8,948,788)   (5,580,043)
Net cash (used in) provided by operating activities of discontinued operations   (122,991)   153,483 
Net cash used in operating activities   (9,071,779)   (5,426,560)
           
Cash flows from investing activities:          
Purchase of hospital and medical center   -    (658,537)
Purchase of property and equipment   (10,435)   (43,715)
Net cash used in investing activities of continuing operations   (10,435)   (702,252)
Net cash from investing activities of discontinued operations   -    - 
Net cash used in investing activities   (10,435)   (702,252)
           
Cash flows from financing activities:          
Proceeds from issuance of related party note payable and advances   4,595,553    9,099,126 
Payments on related party note payable and advances   (3,251,387)   (1,510,000)
Proceeds from issuance of debentures   -    3,845,000 
Proceeds from note payable   1,077,116    - 
Payments on notes payable   (793,715)   (5,005,513)
Payments on debentures   (720,000)   - 

Proceeds from sales of accounts receivable

   465,000    1,179,500 
Payments on right-to-use liabilities   (133,807)   (92,550)
Proceeds from Paycheck Protection Program notes payable   2,368,100    - 
HHS Provider Relief Funds   7,483,830    - 

Payments of accounts receivable sold under sales agreements

   (1,073,854)   (818,381)
Payments on finance lease obligations   (100,707)   (143,926)
Net cash provided by financing activities of continuing operations   9,916,129    6,553,256 
Net cash used in financing activities of discontinued operations   (40,000)   - 
Net cash provided by financing activities   9,876,129    6,553,256 
           
Net increase in cash   793,915    424,444 
           
Cash at beginning of period   16,933    6,870 
           
Cash at end of period  $810,848   $431,314 

 

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

 

7

 

 

RENNOVA HEALTH, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Three and Six Months Ended June 30, 2020 and 2019

(unaudited)

 

Note 1 – Organization and Summary of Significant Accounting Policies

 

Description of Business

 

Rennova Health, Inc. (“Rennova”), together with its subsidiaries (the “Company”, “we”, “us” or “our”), is a vertically integrated provider of healthcare related products and services. The Company’s principal lines of business are (i) Hospital Operations; and (ii) Clinical Laboratory Operations. The Company presents its financial results based upon these two business segments, which are more fully discussed in Note 16.

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements were prepared using generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Regulation S-X. Accordingly, these financial statements do not include all information or notes required by generally accepted accounting principles for annual financial statements and should be read in conjunction with the consolidated financial statements as filed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, filed with the Securities and Exchange Commission on June 29, 2020. In the opinion of management, the unaudited condensed consolidated financial statements included herein contain all adjustments necessary to present fairly the Company’s consolidated financial position as of June 30, 2020, and the results of its operations, changes in stockholders’ deficit and cash flows for the three and six months ended June 30, 2020 and 2019. Such adjustments are of a normal recurring nature. The results of operations for the three and six months ended June 30, 2020 may not be indicative of results for the year ending December 31, 2020.

 

Principles of Consolidation

 

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

 

Reverse Stock Split

 

On July 22, 2020, the Company’s Board of Directors approved an amendment to the Company’s Certificate of Incorporation to effect a 1-for-10,000 reverse stock split effective July 31, 2020 (the “Reverse Stock Split”). On May 7, 2020, the holders of a majority of the total voting power of the Company’s securities approved an amendment to the Company’s Certificate of Incorporation to effect a reverse split of all of the Company’s shares of common stock at a specific ratio within a range from 1-for-100 to 1-for-10,000, and granted authorization to the Board of Directors to determine in its discretion the specific ratio and timing of the reverse split on or prior to December 31, 2020.

 

As a result of the Reverse Stock Split, every 10,000 shares of the Company’s common stock was combined and automatically converted into one share of the Company’s common stock on July 31, 2020. In addition, the conversion and exercise prices of all of the Company’s outstanding preferred stock, common stock purchase warrants, stock options, equity incentive plans and convertible notes payable were proportionately adjusted at the applicable reverse split ratio in accordance with the terms of such instruments. In addition, proportionate voting rights and other rights of common stockholders were not affected by the Reverse Stock Split, other than as a result of the payment of cash in lieu of fractional shares as no fractional shares were issued in connection with the Reverse Stock Split.

 

All share, per share and capital stock amounts and common stock equivalents as of and for the three and six months ended June 30, 2020 and 2019 presented herein have been restated to give effect to the Reverse Stock Split.

 

Reclassification

 

Cash payment amounts related to the right-of-use liabilities for the six months ended June 30, 2019 have been reclassified on the statements of cash flows and in Note 10 for comparative purposes.

 

8

 

 

Comprehensive Loss

 

During the three and six months ended June 30, 2020 and 2019, comprehensive loss was equal to the net loss amounts presented in the accompanying unaudited condensed consolidated statements of operations.

 

Use of Estimates

 

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

 

Cash and Cash Equivalents

 

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

 

Revenue Recognition

 

We review our calculations for the realizability of gross service revenues monthly to make certain that we are properly allowing for the uncollectable portion of our gross billings and that our estimates remain sensitive to variances and changes within our payer groups. The contractual allowance calculation is made based on historical allowance rates for the various specific payer groups monthly with a greater weight being given to the most recent trends; this process is adjusted based on recent changes in underlying contract provisions. This calculation is routinely analyzed by us based on actual allowances issued by payers and the actual payments made to determine what adjustments, if any, are needed.

 

Hospital Operations

 

Our revenues generally relate to contracts with patients in which our performance obligations are to provide health care services to the patients. Revenues are recorded during the period our obligations to provide health care services are satisfied. Our performance obligations for inpatient services are generally satisfied over periods that average approximately five days, and revenues are recognized based on charges incurred in relation to total expected charges. Our performance obligations for outpatient services are generally satisfied over a period of less than one day. The contractual relationships with patients, in most cases, also involve a third-party payer (Medicare, Medicaid, managed care health plans and commercial insurance companies, including plans offered through the health insurance exchanges) and the transaction prices for the services provided are dependent upon the terms provided by (Medicare and Medicaid) or negotiated with (managed care health plans and commercial insurance companies) the third-party payers. The payment arrangements with third-party payers for the services we provide to the related patients typically specify payments at amounts less than our standard charges. Medicare generally pays for inpatient and outpatient services at prospectively determined rates based on clinical, diagnostic and other factors. Services provided to patients having Medicaid coverage are generally paid at prospectively determined rates per discharge, per identified service or per covered member. Agreements with commercial insurance carriers, managed care and preferred provider organizations generally provide for payments based upon predetermined rates per diagnosis, per diem rates or discounted fee-for-service rates. Management continually reviews the contractual estimation process to consider and incorporate updates to laws and regulations and the frequent changes in managed care contractual terms resulting from contract renegotiations and renewals. Our revenues are based upon the estimated amounts we expect to be entitled to receive from patients and third-party payers. Estimates of contractual allowances under managed care and commercial insurance plans are based upon the payment terms specified in the related contractual agreements. Revenues related to uninsured patients and uninsured copayment and deductible amounts for patients who have health care coverage may have discounts applied (uninsured discounts and contractual discounts). We also record estimated implicit price concessions (based primarily on historical collection experience) related to uninsured accounts to record self-pay revenues at the estimated amounts we expect to collect.

 

Laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation. Estimated reimbursement amounts are adjusted in subsequent periods as cost reports are prepared and filed and as final settlements are determined (in relation to certain government programs, primarily Medicare, this is generally referred to as the “cost report” filing and settlement process). There were no adjustments to estimated Medicare and Medicaid reimbursement amounts and disproportionate-share funds related primarily to cost reports filed during the three and six months ended June 30, 2020 and 2019.

 

9

 

 

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

 

The collection of outstanding receivables for Medicare, Medicaid, managed care payers, other third-party payers and patients is our primary source of cash and is critical to our operating performance. The primary collection risks relate to uninsured patient accounts, including patient accounts for which the primary insurance carrier has paid the amounts covered by the applicable agreement, but patient responsibility amounts (deductibles and copayments) remain outstanding. Implicit price concessions relate primarily to amounts due directly from patients. Estimated implicit price concessions are recorded for all uninsured accounts, regardless of the aging of those accounts. Accounts are written off when all reasonable internal and external collection efforts have been performed. The estimates for implicit price concessions are based upon management’s assessment of historical write offs and expected net collections, business and economic conditions, trends in federal, state and private employer health care coverage and other collection indicators. Management relies on the results of detailed reviews of historical write-offs and collections at facilities that represent a majority of our revenues and accounts receivable (the “hindsight analysis”) as a primary source of information in estimating the collectability of our accounts receivable. We perform the hindsight analysis quarterly, utilizing rolling twelve-months accounts receivable collection and write off data. We believe our quarterly updates to the estimated contractual allowance amounts at each of our hospital facilities provide reasonable estimates of our revenues and valuations of our accounts receivable. At June 30, 2020 and December 31, 2019, estimated contractual allowances of $21.5 million and $16.8 million, respectively, had been recorded as reductions to our accounts receivable balances to enable us to record our revenues and accounts receivable at the estimated amounts we expect to collect.

 

To quantify the total impact of the trends related to uninsured accounts, we believe it is beneficial to view total uncompensated care, which is comprised of charity care, uninsured discounts and implicit price concessions. Total uncompensated care as a percentage of gross revenues was 21% and 6% for the three months ended June 30, 2020 and 2019, respectively, and 15% and 5% for the six months ended June 30, 2020 and 2019, respectively.

 

Clinical Laboratory Operations

 

Laboratory testing services for the six months ended June 30, 2019 include chemical diagnostic tests such as blood analysis and urine analysis. We did not perform any testing and analysis services for the three and six months ended June 30, 2020 and the three months ended June 30, 2019. Laboratory service revenues are recognized at the time the testing services are performed and billed and are reported at their estimated net realizable amounts. Net service revenues are determined utilizing gross service revenues net of contractual adjustments and discounts. Even though it is the responsibility of the patient to pay for laboratory service bills, most individuals in the U.S. have an agreement with a third-party payer such as a commercial insurance provider, Medicaid or Medicare to pay all or a portion of their healthcare expenses; most of the services provided by us in the 2019 period were to patients covered under a third-party payer contract. In most cases, the Company is provided the third-party billing information and seeks payment from the third party in accordance with the terms and conditions of the third-party payer for health service providers like us. Each of these third-party payers may differ not only in terms of rates, but also with respect to terms and conditions of payment and providing coverage (reimbursement) for specific tests. Estimated revenues are established based on a series of procedures and judgments that require industry specific healthcare experience and an understanding of payer methods and trends.

 

The Company intends to sell its clinical laboratory and, if successful, the Company would no longer own or operate clinical laboratories outside of its hospital labs, as more fully discussed under Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

10

 

 

Allowances for Doubtful Accounts Policy

 

Accounts receivable are reported at realizable value, net of allowances for credits and doubtful accounts, which are estimated and recorded in the period the related revenue is recorded. The Company has a standardized approach to estimating and reviewing the collectability of its receivables based on a number of factors, including the period they have been outstanding. Historical collection and payer reimbursement experience is an integral part of the estimation process related to allowances for contractual credits and doubtful accounts. In addition, the Company regularly assesses the state of its billing operations in order to identify issues which may impact the collectability of these receivables or reserve estimates. Receivables deemed to be uncollectible are charged against the allowance for doubtful accounts at the time such receivables are written-off. Recoveries of receivables previously written-off are recorded as credits to the allowance for doubtful accounts. Revisions to the allowances for doubtful accounts estimates are recorded as an adjustment to provision for bad debts.

 

Total gross revenues for Hospital and Clinical Laboratory Operations were reduced by approximately $2.7 million and $2.3 million for bad debt for the three months ended June 30, 2020 and 2019, respectively. After bad debt and contractual and related allowance adjustments to revenues of $11.1 million and $31.4 million, for the three months ended June 30, 2020 and 2019, respectively, we reported net revenues of $2.1 million and $4.1 million.

 

Total gross revenue for Hospital and Clinical Laboratory Operations were reduced by approximately $4.0 million and $3.9 million for bad debt for the six months ended June 30, 2020 and 2019, respectively. After bad debt and contractual and related allowance adjustments to revenues of $22.9 million and $64.8 million, for the six months ended June 30, 2020 and 2019, respectively, we reported net revenues of $3.9 million and $9.3 million. We continue to review the provision for bad debt and contractual and related allowances. Accounts receivable are presented in Note 4.

 

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

 

We account for warrants issued in conjunction with the issuance of common stock and certain convertible debt instruments in accordance with the guidance contained in Accounting Standards Codification (“ASC”) Topic 815, Derivatives and Hedging (“ASC 815”) and ASC Topic 480, Distinguishing Liabilities from Equity (“ASC 480”). For warrant instruments and conversion options embedded in promissory notes that are not deemed to be indexed to the Company’s own stock, we classified such instruments as liabilities at their fair values at the time of issuance and adjusted the instruments to fair value at each reporting period. These liabilities were subject to re-measurement at each balance sheet date until extinguished either through repayment, conversion or exercise, and any change in fair value was recognized in our statement of operations. The fair values of these derivative and other financial instruments had been estimated using a Black-Scholes model and other valuation techniques.

 

In July 2017, the FASB issued ASU 2017-11 “Earnings Per Share (Topic 260) Distinguishing Liabilities from Equity (Topic 480) Derivatives and Hedging (Topic 815).” The amendments in Part I of this Update change the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. The amendments also clarify existing disclosure requirements for equity-classified instruments. As a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. For freestanding equity classified financial instruments, the amendments require entities that present earnings per share (EPS) in accordance with Topic 260 to recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common shareholders in basic EPS. Convertible instruments with embedded conversion options that have down round features are now subject to the specialized guidance for contingent beneficial conversion features (in Subtopic 470-20, Debt—Debt with Conversion and Other Options), including related EPS guidance (in Topic 260).

 

When the down round feature is included in an equity-classified freestanding financial instrument, the value of the effect of the down round feature is treated as a dividend when it is triggered and as a numerator adjustment in the basic EPS calculation. This reflects the occurrence of an economic transfer of value to the holder of the instrument, while alleviating the complexity and income statement volatility associated with fair value measurement on an ongoing basis. A deemed dividend of $123.9 million was recorded for the six months ended June 30, 2019 as a result of down round provision features. We did not record a deemed dividend as a result of down round provision features during the three months ended June 30, 2020 and 2019 and during the six months ended June 30, 2020. See Note 11 for an additional discussion of derivative financial instruments.

 

11

 

 

(Loss)Earnings Per Share

 

The Company reports (loss) earnings per share in accordance with ASC Topic 260, “Earnings Per Share,” which establishes standards for computing and presenting earnings per share. Basic earnings (loss) per share of common stock is calculated by dividing net (loss) earnings allocable to common stockholders by the weighted-average shares of common stock outstanding during the period, without consideration of common stock equivalents. Diluted (loss) earnings per share is calculated by adjusting the weighted-average shares of common stock outstanding for the dilutive effect of common stock equivalents, including stock options and warrants outstanding for the period as determined using the treasury stock method. For purposes of the diluted loss per share calculation, common stock equivalents are excluded from the calculation when their effect would be anti-dilutive. Therefore, basic and diluted loss per share applicable to common stockholders is the same for periods with a net loss. See Note 3 for the computation of (loss) earnings per share for the three and six months ended June 30, 2020 and 2019.

 

Note 2 – Liquidity and Financial Condition

 

Impact of the Pandemic

 

A novel strain of coronavirus (“COVID-19”) was declared a global pandemic by the World Health Organization on March 11, 2020. We have been closely monitoring the COVID-19 pandemic and its impact on our operations and we have taken steps intended to minimize the risk to our employees and patients. These steps have increased our costs and our revenues have been significantly adversely affected. Demand for hospital services has substantially decreased. As discussed in Note 7, we have received Paycheck Protection Program (“PPP”) loans. We have also received Provider Relief Funds from the federal government as more fully discussed below. If the COVID-19 pandemic continues for a further extended period, we expect to incur significant losses and additional financial assistance may be required. Going forward, the Company is unable to determine the extent to which the COVID-19 pandemic will continue to affect its business. The nature and effect of the COVID-19 pandemic on our balance sheet and results of operations will depend on the severity and length of the pandemic in our service areas; government activities to mitigate the pandemic’s effect; regulatory changes in response to the pandemic, especially those affecting rural hospitals; and existing and potential government assistance that may be provided.

 

HHS Provider Relief Funds

 

The Company received Provider Relief Funds from the United States Department of Health and Human Services (“HHS”) provided to eligible healthcare providers out of the $100 billion Public Health and Social Services Emergency Fund provided for in the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”). The funds are allocated to eligible healthcare providers for expenses and lost revenue attributable to the COVID-19 pandemic. The funds are being released in tranches, and HHS partnered with UnitedHealth Group to distribute the initial $30 billion in funds by direct deposit to providers. As of August 10, 2020, Company-owned facilities have received approximately $12.5 million in relief funds, $7.5 million of which we received in the three months ended June 30, 2020. The fund payments are grants, not loans, and HHS will not require repayment, but providers are restricted and the funds must be used only for grant approved purposes. Based on an analysis of the compliance and reporting requirements of the Provider Relief Funds and the impact of the pandemic on our operating results through the end of the second quarter, we recognized $7.5 million of these payments as income in the three and six months ended June 30, 2020. The funds have been recorded under the caption “Other income” in our unaudited condensed consolidated statements of operations.

 

Going Concern

 

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

 

As reflected in the unaudited condensed consolidated financial statements, the Company had a working capital deficit and an accumulated deficit of $61.2 million and $593.8 million, respectively, at June 30, 2020. In addition, the Company had a loss from continuing operations of approximately $3.6 million and cash used in operating activities of $9.1 million for the six months ended June 30, 2020. As of the date of this report, payments for our operations in the ordinary course are not being made. The continued losses and other related factors, including the defaults under the terms of outstanding debentures, for which we have received a payment demand notice, raise substantial doubt about the Company’s ability to continue as a going concern for twelve months from the filing date of this report.

 

12

 

 

The Company’s unaudited condensed consolidated financial statements are prepared assuming the Company can continue as a going concern, which contemplates continuity of operations through realization of assets, and the settling of liabilities in the normal course of business. Initial cost savings were realized by reducing the number of laboratory facilities to one for most of its toxicology diagnostics, thereby reducing the number of employees and associated operating expenses. The Company plans to separate out its Advanced Molecular Services Group (“AMSG”) and Health Technology Solutions, Inc. (“HTS”), as independent publicly traded companies in either a spin off or transaction with a publicly quoted company. The separations are subject to numerous conditions, including effectiveness of Registration Statements that may need to be filed with the Securities and Exchange Commission and consents, including under various funding agreements previously entered into by the Company. The intent of the separation of AMSG and HTS is to create separate public companies, each of which can focus on its own strengths and operational plans. In accordance with ASC 205-20 and having met the criteria for “held for sale”, the Company has reflected amounts relating to AMSG and HTS as disposal groups classified as held for sale and included as part of discontinued operations. AMSG and HTS are no longer included in the segment reporting following the reclassification to discontinued operations. The discontinued operations of AMSG and HTS are described further in Note 17. On June 10, 2020 the Company signed an agreement with TPT Global Tech, Inc. (OTC: TPTW), a California-based public company, to merge HTS and AMSG into a public company (target) after TPT completes a merger of its wholly-owned subsidiary, InnovaQor, Inc. with this target. Completion of the agreement is subject to a number of approvals and consents which need to be secured to complete the transaction as more fully discussed in Note 17.

 

The Company’s core business is now rural hospitals, which is a specialized marketplace with a requirement for capable and knowledgeable management. The Company’s current financial condition may make it difficult to attract and maintain adequate expertise in its management team to successfully operate the Company’s hospitals.

 

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

 

Note 3 – Loss Per Share Available to Common Stockholders

 

Basic loss per share is computed by dividing the loss available to common stockholders by the weighted-average number of shares of common stock outstanding during the period. Basic loss per share excludes potential dilution of securities or other contracts to issue shares of common stock. Diluted loss per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the income of the Company. For each of the three and six months ended June 30, 2020 and 2019, basic net loss per share available to common stockholders is the same as diluted loss per share.

 

13

 

 

The following table sets forth the computation of the Company’s basic and diluted net loss per share during the three and six months ended June 30, 2020 and 2019:

 

   Three Months Ended June 30,   Six Months Ended June 30, 
   2020   2019   2020   2019 
Numerator                    
Net income (loss) from continuing operations  $2,105,455   $(13,279,576)  $(3,646,548)  $(26,212,371)
Deemed dividend   (3,150,368)   -    (3,150,368)   (123,861,587)
Net loss available to common stockholders, continuing operations  $(1,044,913)  $(13,279,576)  $(6,796,916)  $(150,073,958)
Net income (loss) from discontinued operations   16,173    (145,251)   (23,602)   (653,860)
Net loss available to common stockholders  $(1,028,740)  $(13,424,827)  $(6,820,518)  $(150,727,818)
                     
Denominator                    
Basic and diluted weighted average common shares outstanding   989,894    528,965    985,608    335,786 
                     
Loss per share, basic and diluted                    
Basic and diluted, continuing operations  $(1.06)  $(25.11)  $(6.90)  $(446.93)
Basic and diluted, discontinued operations  $0.02   $(0.27)  $(0.02)  $(1.95)
Total basic and diluted  $(1.04)  $(25.38)  $(6.92)  $(448.88)

 

Diluted loss per share excludes all dilutive potential shares if their effect is anti-dilutive. As of June 30, 2020 and 2019, the following potential common stock equivalents were excluded from the calculation of diluted loss per share as their effect was anti-dilutive:

 

   June 30, 
   2020   2019 
Warrants   63,458,545    63,452,541 
Convertible preferred stock   16,759,797    8,529,180 
Convertible debentures   1,545,690    3,057,040 
Stock options   30    34 
    81,764,062    75,038,795 

 

The terms of certain of the warrants, convertible preferred stock and convertible debentures issued by the Company provide for reductions in the per share exercise prices of the warrants and the per share conversion prices of the debentures and preferred stock (if applicable and subject to a floor in certain cases), in the event that the Company issues common stock or common stock equivalents (as that term is defined in the agreements) at an effective exercise/conversion price that is less than the then exercise/conversion prices of the outstanding warrants, preferred stock or debentures, as the case may be. In addition, many of these equity-based securities contain exercise or conversion prices that vary based upon the price of the Company’s common stock on the date of exercise/conversion (see Notes 11, 12 and 13). These provisions have resulted in significant dilution of the Company’s common stock and have given rise to reverse splits of the Company’s common stock, including the Reverse Stock Split effected on July 31, 2020, which is more fully discussed in Note 1.

 

14

 

 

Note 4 – Accounts Receivable and Income Tax Refunds Receivable

 

Accounts receivable at June 30, 2020 (unaudited) and December 31, 2019 consisted of the following:

 

   June 30,   December 31, 
   2020   2019 
         
Accounts receivable - Hospital Operations  $27,238,635   $26,687,028 
Less:          
Allowance for discounts - Hospital Operations   (21,529,786)   (16,801,910)
Allowance for bad debts   (2,397,917)   (5,245,817)
Accounts receivable sold under sales agreements   (714,500)   (1,073,854)
Accounts receivable, net  $2,596,432   $3,565,447 

 

The allowance for discounts reflected in the table above increased as a percentage of accounts receivable to 79.0% at June 30, 2020 compared to 63.0% at December 31, 2019. The allowance for discounts varies based on changes in historical contractual allowance rates.

 

For the three months ended June 30, 2020 and 2019, bad debt expense was $2.7 million and $2.3 million, respectively. For the six months ended June 30, 2020 and 2019, bad debt expense was $4.0 million and $3.9 million, respectively. The allowance for bad debts decreased by $2.8 million at June 30, 2020 compared to the balance at December 31, 2019. The Company’s policy is to write off accounts receivable balances against the allowance for bad debts once an accounts receivable ages past a specified number of days.

 

Accounts Receivable Sales Agreements and Installment Promissory Note

 

During the year ended December 31, 2019, the Company entered into five accounts receivable sales agreements, including three that were entered into during the six months ended June 30, 2019. The aggregate amount of accounts receivable sold on a non-recourse basis during the year ended December 31, 2019 was $3.9 million. The aggregate purchase price paid to the Company was $2.7 million, less $0.1 million of origination fees. As of December 31, 2019, $1.1 million was outstanding and owed under these accounts receivable sales agreements. On January 29, 2020, the Company entered into a Secured Installment Promissory Note (the “Installment Note”) in the principal amount of $1.2 million, less $0.1 million in origination fees, the proceeds of which were used to satisfy in full the amounts due under accounts receivable sales agreements. The Installment Note is more fully discussed in Note 7.

 

On June 26, 2020, the Company entered into an accounts receivable sales agreement under which the Company sold $0.7 million of accounts receivable on a non-recourse basis for a purchase price paid to the Company of $0.5 million, less origination fees. Accordingly, the Company recorded a loss on the sale of $0.2 million during the three and six months ended June 30, 2020. As of June 30, 2020, $0.7 million was outstanding and owed under the accounts receivable sales agreement.

 

Income Tax Refunds Receivable

 

As of June 30, 2020, the Company had $1.8 million of income tax refunds receivable of which $0.6 million is more fully discussed in Note 15. During the first quarter of 2020, the U.S. Congress approved the CARES Act, which allows a five-year carryback privilege for federal net operating tax losses that arose in a tax year beginning in 2018 and through the current tax year, that is, 2020. As a result, during the six months ended June 30, 2020, the Company recorded approximately $1.1 million in refunds from the carryback of certain of its federal net operating losses. The Company’s federal net operating losses are more fully discussed in Note 15 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

 

Note 5 – Acquisition

 

Purchase Agreement re Jellico Community Hospital and CarePlus Center

 

Effective March 5, 2019, the Company acquired certain assets related to Jellico Community Hospital and CarePlus Center. Jellico Community Hospital is a fully operational 54-bed acute care facility that offers comprehensive services, including diagnostic imaging, radiology, surgery (general, gynecological and vascular), nuclear medicine, wound care and hyperbaric medicine, intensive care, emergency care and physical therapy. The CarePlus Center offers sophisticated testing capabilities and compassionate care, all in a modern, patient-friendly environment. Services include diagnostic imaging services, x-ray, mammography, bone densitometry, computed tomography (CT), ultrasound, physical therapy and laboratory services on a walk-in basis.

 

15

 

 

The purchase price for Jellico Community Hospital and CarePlus Center was $658,537. This purchase price was made available by Mr. Diamantis, a former member of the Company’s Board of Directors. The total cost of the acquisition was approximately $908,537, including $250,000 of diligence, legal and other costs associated with the acquisition. The acquisition costs were fully expensed in 2019.

 

The fair value of the purchase consideration paid to the sellers was allocated to the net tangible and intangible assets acquired. The Company accounted for the acquisition as a business combination under U.S. GAAP. In accordance with the acquisition method of accounting under ASC 805 the assets acquired, and liabilities assumed were recorded as of the acquisition date, at their respective fair values and consolidated with those of the Company.

 

The fair value of the assets acquired, net of the liabilities assumed, was $0.9 million. The excess of the aggregate fair value of the net tangible assets acquired over the purchase price was $250,000 and has been treated as a gain on bargain purchase in accordance with ASC 805. The gain was primarily due to the value of the intangible assets acquired. In addition, after evaluation, the Company has made no material adjustments to its preliminary allocation as set forth below. The purchase price allocation was based, in part, on management’s knowledge of hospital operations.

 

The following table shows the allocation of the purchase price of Jellico Community Hospital and CarePlus Center to the acquired identifiable assets acquired, and liabilities assumed:

 

 

Total purchase price  $658,537 
Tangible and intangible assets acquired, and liabilities assumed at estimated fair value:     
Inventories  $317,427 
Property and equipment   500,000 
Intangible asset- certificate of need   250,000 
Accrued expenses   (158,890)
Net tangible and intangible assets acquired  $908,537 
Gain on bargain purchase  $250,000 

 

The following presents the unaudited pro-forma combined results of operations of the Company and Jellico Community Hospital and CarePlus Center as if the acquisitions had occurred on January 1, 2019. The unaudited pro-forma results of operations are presented for information purposes only. The unaudited pro-forma results of operations are not intended to present actual results that would have been attained had the acquisitions been completed as of January 1, 2019 or to project potential operating results as of any future date or for any future periods.

 

   Six Months Ended 
   June 30, 2019 
     
Net revenue  $10,969,459 
Net loss from continuing operations   (26,409,730)
Deemed dividends from trigger of down round provision feature   (123,861,587)
Net loss from discontinued operations   (653,860)
Net loss to common stockholders  $(150,925,177)
      
Net loss per common share:     
Basic and diluted net loss from continuing operations available to common stockholders  $(444.52)
Basic and diluted net loss available to common stockholders  $(449.47)

 

Note 6 – Accrued Expenses

 

Accrued expenses at June 30, 2020 (unaudited) and December 31, 2019 consisted of the following:

 

   June 30,   December 31, 
   2020   2019 
Accrued payroll and related liabilities  $7,892,855   $7,859,739 
Accrued interest   6,838,360    4,905,749 
Accrued legal   970,997    1,308,997 
Other accrued expenses   567,627    509,469 
Accrued expenses  $16,269,839   $14,583,954 

 

16

 

 

Accrued payroll and related liabilities at June 30, 2020 included approximately $1.8 million for penalties associated with $5.4 million of accrued past due payroll taxes. Accrued interest at December 31, 2019 included accrued interest of $1.9 million on loans made to the Company by Mr. Diamantis, a former member of our Board of Directors. The increase in accrued interest is primarily due to interest associated with outstanding debentures. Debentures are more fully discussed in Note 8. On June 30, 2020, the Company exchanged the loans and the related accrued interest owed to Mr. Diamantis for shares of the Company’s Series M Preferred Stock as more fully discussed in Notes 7 and 13.

 

Note 7 – Notes Payable

 

The Company and its subsidiaries are party to a number of loans with unrelated parties. At June 30, 2020 (unaudited) and December 31, 2019, notes payable consisted of the following:

 

Notes Payable – Third Parties

 

   June 30, 2020   December 31, 2019 
   (unaudited)     
Loan payable to TCA Global Master Fund, LP (“TCA”) in the original principal amount of $3 million at 16% interest (the “TCA Debenture”). Principal and interest payments due in various installments through December 31, 2017  $1,741,893   $1,741,893 
           
Notes payable to CommerceNet and Jay Tenenbaum in the original principal amount of $500,000, bearing interest at 6% per annum (the “Tegal Notes”). Principal and interest payments due annually from July 12, 2015 through July 12, 2017   314,102    335,817 
           
Note payable to Anthony O’Killough dated September 27, 2019 in the original principal amount of $1.9 million. Interest is due only upon event of default. Issued net of $0.3 million of debt discount and $0.1 million of financing fees. Payment is due in installments through November 2020.   1,750,000    1,900,000 
           
Notes payable under the Paycheck Protection Program (“PPP) issued on April 20, 2020 through May 1, 2020 bearing interest at a rate of 1% per annum. To the extent not forgiven, principal and interest payments are due monthly beginning seven months from the date of issuance and the notes mature two years from the date of issuance.   2,368,100    - 
           
Installment note payable to Ponte Investments, LLC dated January 29, 2020, less original issue discount of $0.1 million, non-interest bearing, payable in weekly installment payments ranging from $22,500 to $34,000 due on or before February 5, 2020 through on or before October 21, 2020, the maturity date.   518,810    - 
           
    6,692,905    3,977,710 
Less current portion   (5,290,477)   (3,977,710)
Notes payable - third parties, net of current portion  $1,402,428   $- 

 

The Company did not make the required monthly principal and interest payments due under the TCA Debenture for the period from October 2016 through March 2017. On February 2, 2017, the Company made a payment to TCA in the amount of $0.4 million, which was applied to accrued and unpaid interest and fees, including default interest, as of the date of payment. On March 21, 2017, the Company made a payment to TCA in the amount of $0.75 million, of which approximately $0.1 million was applied to accrued and unpaid interest and fees under the TCA Debenture. Also on March 21, 2017, the Company entered into a letter agreement with TCA, which (i) waived any payment defaults through March 21, 2017; (ii) provided for the $0.75 million payment discussed above; (iii) set forth a revised repayment schedule whereby the remaining principal plus interest aggregating to approximately $2.6 million was to be repaid in various monthly installments from April of 2017 through September of 2017; and (iv) provided for payment of an additional service fee in the amount of $150,000, which was due on June 27, 2017, the day after the effective date of the registration statement filed by the Company; which amount was reflected in accrued expenses at June 30, 2020. In addition, TCA entered into an inter-creditor agreement with the purchasers of the convertible debentures (see Note 8) which sets forth rights, preferences and priorities with respect to the security interests in the Company’s assets. On September 19, 2017, the Company entered into a new agreement with TCA, which extended the repayment schedule through December 31, 2017. The remaining debt to TCA remains outstanding and TCA has made a demand for payment. In May 2020, the SEC appointed a Receiver to close down the TCA Global Master Fund, L.P. over allegations of accounting fraud. The amount recorded by the Company as being owed to TCA was based on TCA’s application of prior payments made by the Company. The Company believes that prior payments of principal and interest may have been applied to unenforceable investment banking and other fees and charges. It is the Company’s position that the amount owed to TCA is less than the amount set forth above.

 

The Company did not make the second annual principal payment under the Tegal Notes that was due on July 12, 2016. On November 3, 2016, the Company received a default notice from the holders of the Tegal Notes demanding immediate repayment of the outstanding principal of $341,612 and accrued interest of $43,000. On December 7, 2016, the Company received a breach of contract complaint with a request for the entry of a default judgment (see Note 15). On April 23, 2018, the holders of the Tegal Notes received a judgment against the Company. As of June 30, 2020, the Company has paid $27,510 of principal on these notes.

 

17

 

 

On September 27, 2019, the Company issued a promissory note to a lender in the principal amount of $1.9 million and received proceeds of $1.5 million, which was net of a $0.3 million original issue discount and $0.1 million in financing fees. The first principal payment of $1.0 million was due on November 8, 2019 and the remaining $0.9 million was due on December 26, 2019. These payments were not made. In February 2020, the note holder sued the Company and Mr. Diamantis, as guarantor, in New York State Court for the County of New York, for approximately $2.2 million for non-payment of the promissory note. As a result of the payment default, the Company accrued “penalty” interest in the amount of approximately $0.3 million. In May 2020, the Company, Mr. Diamantis, as guarantor, and the note holder entered into a Stipulation providing for a payment of a total of $2.2 million (which includes accrued interest) in installments through November 1, 2020. As of June 30, 2020, $150,000 has been paid. The Stipulation is also discussed in Note 15.

 

On January 29, 2020, the Company entered into the Installment Note in the principal amount of $1.2 million. The Company used the proceeds to satisfy in full the amounts due under accounts receivable sales agreements. These sales agreements are more fully discussed in Note 4. Pursuant to the Installment Note, weekly installment payments ranging from $22,500 to $34,000 are due on or before February 5, 2020 through on or before October 21, 2020, the maturity date. Accordingly, the Company made payments totaling $0.6 million during the six months ended June 30, 2020. The Installment Note, which was issued with an original issue discount in the amount of approximately $0.1 million, is non-interest bearing and subject to late-payment fees of 10%.

 

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

 

Notes Payable – Related Party

 

At December 31, 2019, the Company was party to loans with a related party, which were exchanged for Series M Preferred Stock on June 30, 2020 as more fully discussed below. At December 31, 2019 related party loans consisted of the following:

 

   December 31, 2019 
     
Loan payable to Christopher Diamantis  $15,159,455 
      
Total note payable, related party   15,159,455 
      
Less current portion of notes payable, related party   (15,159,455)
Total note payable, related party, net of current portion  $- 

 

During the six months ended June 30, 2020, Mr. Diamantis loaned the Company $4.6 million, the majority of which was for working capital purposes. During the six months ended June 30, 2019, Mr. Diamantis advanced the Company $9.1 million which was used for the settlement of a prepaid forward purchase contract, the purchase of Jellico Community Hospital and CarePlus Center as more fully discussed in Note 5 and working capital purposes.

 

During the three months ended June 30, 2020 and 2019, we accrued interest of $0.2 million and $0.6 million, respectively, on the loans from Mr. Diamantis and during the six months ended June 30, 2020 and 2019, we accrued interest of $0.5 million and $0.7 million, respectively, on the loans from Mr. Diamantis. Interest accrued on loans from Mr. Diamantis at a rate of 10% on all amounts loaned.

 

18

 

 

On June 30, 2020, we exchanged the total amount owed to Mr. Diamantis for outstanding loans and accrued interest, net of repayments, of approximately $18.8 million for shares of the Company’s Series M Preferred Stock. The Series M Preferred Stock is more fully discussed in Note 13.

 

Note 8 – Debentures

 

The carrying amount of all outstanding debentures as of June 30, 2020 (unaudited), and December 31, 2019 is as follows:

 

   June 30, 2020   December 31, 2019 
   (unaudited)     
Debentures  $29,153,740   $29,873,740 
    29,153,740    29,873,740 
Less current portion   (29,153,740)   (29,873,740)
Debentures, long-term  $-   $- 

 

The outstanding debentures at June 30, 2020 and December 31, 2019, which were issued during the years ending December 31, 2017, 2018 and 2019, are more fully described in Note 9 to the Company’s audited consolidated financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2019. Certain of these debentures were issued with warrants to purchase shares of the Company’s common stock. Outstanding warrants are more fully discussed in Note 13.

 

Payment on all outstanding debentures of $29.2 million at June 30, 2020, which included non-payment penalties of $6.9 million, is past due. Approximately $0.6 million of the non-payment penalties was recorded in the six months ended June 30, 2019 and the remaining $6.0 million was recorded in the second half of 2019. In January 2020, the Company and Mr. Diamantis entered into a Forbearance Agreement with certain debenture holders under which Mr. Diamantis paid the debenture holders $50,000 for legal fees and $220,000 in principal payments on debentures that were issued in February 2019. In addition, Mr. Diamantis, who had guaranteed certain of the debentures, agreed to grant the debenture holders security interests in certain potential legal settlements funds that may become due to Mr. Diamantis. The Forbearance Agreement, which terminated on March 15, 2020, required the Company and Mr. Diamantis to repay the debenture holders a total of $4.9 million on or before the termination date, of which $4.7 million was not repaid. During May 2020, the Company repaid $0.5 million of the debentures. On June 30, 2020, the Company received a formal notice of default and demand for full payment of the $29.2 million of outstanding debentures plus accrued interest. Accrued interest on the debentures totaled $6.0 million at June 30, 2020.

 

During the six months ended June 30, 2019, the Company realized a total of $3.8 million in proceeds from the issuances of debentures. No debentures were issued during the six months ended June 30, 2020. At June 30, 2019, unamortized discounts were $1.4 million. These discounts represented original issue discounts, the relative fair value of the warrants issued with the debentures (and the modifications thereof) and the relative fair value of the beneficial conversion features of the debentures. During the three and six months ended June 30, 2019, the Company recorded approximately $1.5 million and $14.5 million of non-cash interest and amortization of debt discount expense primarily in connection with the debentures and warrants. The interest expense for the three and six months ended June 30, 2019 included $5.4 million and $9.5 million, respectively, of expense due to the modifications of warrants during the periods. The modifications are more fully discussed in Notes 11 and 13. These discounts were fully amortized as of December 31, 2019 and, accordingly, no amortization associated with the debentures was recorded in the three and six months ended June 30, 2020.

 

In addition to the non-cash interest expense and amortization of debt discount recorded during the three and six months ended June 30, 2019 discussed in the paragraph above, during the three months ended June 30, 2020 and 2019, the Company accrued interest expense on outstanding debentures of $1.9 million and $0.1 million, respectively, and during the six months ended June 30, 2020 and 2019, the Company accrued interest expense on outstanding debentures of $3.9 million and $0.1 million, respectively.

 

On June 30, 2020, as adjusted for the Reverse Stock Split, $2.6 million of principal amount of outstanding debentures were convertible into 1,517,788 shares of the Company’s common stock at a price of $1.70 per share. The remaining outstanding debentures were convertible on that date into 27,902 shares of the Company’s common stock.

 

See Notes 3 and 13 for a discussion of the dilutive effect of the outstanding debentures and warrants as of June 30, 2020.

 

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Note 9 – Related Party Transactions

 

Alcimede billed $0.1 million and $0.1 million for consulting fees for the three months ended June 30, 2020 and 2019, respectively, and $0.2 million and $0.2 million for consulting fees for the six months ended June 30, 2020 and 2019, respectively. Seamus Lagan, the Company’s President and Chief Executive Officer, is the sole manager of Alcimede (see Note 13).

 

See Notes 5 and 7 for discussions of transactions between the Company and Mr. Diamantis.

 

The terms of the foregoing transactions, including those discussed in Notes 5, 7 and 13, are not necessarily indicative of those that would have been agreed to with unrelated parties for similar transactions.

 

Note 10 – Finance and Operating Lease Obligations

 

We adopted ASU No. 2016-02, Leases (Topic 842), which requires leases with durations greater than 12 months to be recognized on the balance sheet, effective January 1, 2019, using the modified retrospective approach. We elected the package of transition provisions available, which allowed us to carryforward our historical assessments of (1) whether contracts are or contain leases, (2) lease classification and (3) initial direct costs. We lease property and equipment under finance and operating leases. For leases with terms greater than 12 months, we record the related right-of-use assets and right-of-use obligations at the present value of lease payments over the term. We do not separate lease and non-lease components of contracts.

 

Generally, we use our estimated weighted average cost of capital at lease commencement as our interest rate, as most of our operating leases do not provide a readily determinable implicit interest rate.

 

The following table presents our lease-related assets and liabilities at June 30, 2020 (unaudited) and December 31, 2019:

 

   Balance Sheet Classification  June 30, 2020   December 31, 2019 
Assets:      (unaudited)      
Operating leases  Right-of-use operating lease assets  $394,281   $274,747 
Finance leases  Property and equipment, net   349,987    1,119,418 
              
Total lease assets     $744,268   $1,394,165 
              
Liabilities:             
Current:             
Operating leases  Right-of-use operating lease obligations   165,924    116,037 
Finance leases  Current liabilities   349,987    1,119,418 
Noncurrent:             
Operating leases  Right-of-use operating lease obligations   228,357    158,710 
Finance leases  Long-term debt   -    - 
              
Total lease liabilities     $744,268   $1,394,165 
              
Weighted-average remaining term:             
Operating leases      2.42 years      2.02 years  
Finance leases      0 years     0.08 years  
Weighted-average discount rate:             
Operating leases(1)      13.0%   13.0%
Finance leases      10.3%   5.1%

 

(1) Upon adoption of the new lease standard, discount rates used for existing operating leases were established at January 1, 2019.

 

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The following table presents certain information related to lease expense for finance and operating leases for the three and six months ended June 30, 2020 and 2019:

 

   Three Months Ended
June 30, 2020
   Three Months Ended
June 30, 2019
   Six Months Ended
June 30, 2020
   Six Months Ended
June 30, 2019
 
Finance lease expense:                    
Depreciation/amortization of leased assets (1)  $10,539   $9,290   $26,349   $(45,069)
Interest on lease liabilities   46,503    1,155    93,012    5,100 
Operating leases:                    
Short-term lease expense (2)   78,502    99,927    194,238    187,401 
                     
Total lease expense  $135,544   $110,372   $313,599   $147,432 

 

(1) Adjusts depreciation recorded in the six months ended June 30, 2019.

(2)

Expenses are included in general and administrative expenses in our unaudited condensed consolidated statements of operations.

 

Other Information

 

The following table presents supplemental cash flow information for the six months ended June 30, 2020 and 2019:

 

   Six Months Ended June 30, 2020   Six Months Ended June 30, 2019 
Cash paid for amounts included in the measurement of lease liabilities:          
Operating cash flows for operating leases  $-   $76,559 
Financing cash flows for operating leases  $133,807   $92,550 
Operating cash flows for finance leases  $9,455   $5,100 
Financing cash flows for finance leases payments  $100,707   $143,926 

 

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

 

   Right-of-Use Operating Leases   Finance Leases 
July 1, 2020 to June 30, 2021  $207,525   $353,779 
July 1, 2021 to June 30, 2022   155,687    - 
July 1, 2022 to June 30, 2023   99,107    - 
July 1, 2023 to June 30, 2024   -    - 
July 1, 2024 to June 30, 2025   -    - 
Total   462,319    353,779 
           
Less interest   (68,038)   (3,792)
Present value of minimum lease payments  $394,281   $349,987 

 

As of June 30, 2020, the Company was in default under its finance lease obligations, therefore, the aggregate future minimum lease payments and accrued interest under finance leases in the amount of $0.4 million are deemed to be immediately due. In July 2020, the Company entered into a settlement with the holder of one of the finance leases and paid $0.1 million as full and final settlement of the obligation as more fully discussed in Note 15.

 

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Note 11 – Derivative Financial Instruments and Fair Value

 

The estimated fair value of financial instruments was determined by the Company using available market information and valuation methodologies considered to be appropriate. At June 30, 2020 and December 31, 2019, the carrying value of the Company’s accounts receivable, accounts payable and accrued expenses approximated their fair values due to their short-term nature.

 

The following table sets forth the financial assets and liabilities carried at fair value measured on a recurring basis as of June 30, 2020 and December 31, 2019:

 

   Level 1   Level 2   Level 3   Total 
                 
As of December 31, 2019:                    
Embedded conversion options  $-   $-   $455,336   $455,336 
Total  $-   $-   $455,336   $455,336 
                     
As of June 30, 2020:                    
Embedded conversion options  $-   $-   $455,336   $455,336 
Total  $-   $-   $455,336   $455,336 

 

The Company utilized the following methods to value its derivative liabilities as of June 30, 2020 and December 31, 2019 for embedded conversion options that were valued at $455,336. The Company determined the fair value by comparing the discounted conversion price per share (85% of market price, subject to a floor in certain cases) multiplied by the number of shares issuable at the balance sheet date to the actual price per share of the Company’s common stock multiplied by the number of shares issuable at that date with the difference in value recorded as a liability.

 

During the six months ended June 30, 2019, the conversion of preferred stock triggered a further reduction in the exercise prices of any debentures and warrants containing ratchet features that had not already ratcheted down to their floor. In accordance with U.S. GAAP, the incremental fair value of the debentures and warrants was measured, ignoring the down round provision, using Black Scholes. The following assumptions were utilized in the Black Scholes valuation models: risk free rates ranging from 2.4% to 2.6% and volatility ranging from 189.5% to 273.1% and weighted average life of 0.3 to 3.2 years. The incremental value of $123.9 million was recorded as a deemed dividend for the six months ended June 30, 2019. Deemed dividends are also discussed in Notes 1 and 3.

 

During the three and six months ended June 30, 2019, the Company recorded interest expense of $5.4 million and $9.5 million, respectively, which represented the fair value of the modification of warrants during the periods as more fully discussed in Note 13. The Company used the Black Scholes model to calculate the fair value of the warrants as of the modification dates. Using the pre-modification terms and related assumptions of risk free rates ranging from 2.44% to 2.46%, volatility ranging from 182.9% to 204.4% and weighted average remaining lives of .24 years to .36 years, and the post-modification terms and related assumptions of risk free rates ranging from 2.23% to 2.49%, volatility ranging from 198.3% to 259.4% and weighted average remaining lives of .48 years to 2.89 years, the changes in the fair value of the warrant instruments as a result of the modifications were estimated.

 

Note 12 – Redeemable Preferred Stock

 

The Company has 5,000,000 authorized shares of Preferred Stock at a par value of $0.01. Issuances of the Company’s Preferred Stock included as part of stockholders’ deficit are discussed in Note 13. The following is a summary of the issuances of the Company’s Redeemable Preferred Stock.

 

Series I-1 Convertible Preferred Stock

 

On October 30, 2017, the Company closed an offering of $4,960,000 stated value of 4,960 shares of a newly-authorized Series I-1 Convertible Preferred Stock (the “Series I-1 Preferred Stock”). Each share of Series I-1 Preferred Stock has a stated value of $1,000. The offering was pursuant to the terms of the Securities Purchase Agreement, dated as of October 30, 2017 (the “Purchase Agreement”), between the Company and certain existing institutional investors of the Company. The Company received proceeds of $4.0 million from the offering. The Purchase Agreement gives the investors the right to participate in up to 50% of any offering of common stock or common stock equivalents by the Company. In the event of any such offering, the investors may also exchange all or some of their Series I-1 Preferred Stock for such new securities on an $0.80 stated value of Series I-1 Preferred Stock for $1.00 of new subscription amount basis. Each share of Series I-1 Preferred Stock is convertible into shares of the Company’s common stock at any time at the option of the holder at a conversion price equal to 85% of the lesser of the volume weighted average market price of the common stock on the day prior to conversion or on the day of conversion. The conversion price is subject to “full ratchet” and other customary anti-dilution protections as more fully described in the Certificate of Designation of the Series I-1 Preferred Stock. Upon the occurrence of certain Triggering Events, as defined in the Certificate of Designation of the Series I-1 Preferred Stock, the holder shall, in addition to any other right it may have, have the right, at its option, to require the Company to either redeem the Series I-1 Preferred Stock in cash or in certain circumstance in shares of common stock at the redemption prices set forth in the Certificate of Designation. The definition of Triggering Events includes the Company not having enough shares of common stock available to issue upon conversion, a default on certain obligations over $150,000 resulting in their acceleration and monetary judgments in excess of $200,000 that are not satisfied after 45 days.

 

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Series I-2 Convertible Preferred Stock

 

On October 30, 2017, the Company entered into Exchange Agreements with the holders of debentures that were issued in September 2017 (the “September Debentures”) to provide that the holders may, from time to time, exchange their September Debentures for shares of a newly-authorized Series I-2 Preferred Stock. The Exchange Agreements permitted the holders of the September Debentures to exchange specified principal amounts of the September Debentures on various closing dates starting on December 2, 2017 (debentures are more fully discussed in Note 8). At the holder’s option each holder could reduce the principal amount of September Debentures exchanged on any particular closing date, or elect not to exchange any September Debentures at all on a closing date. If a holder chose to exchange less principal amount of September Debentures, or no September Debentures at all, it could carry forward such lesser amount to a future closing date and then exchange more than the originally specified principal amount for that later closing date. For each $0.80 of principal amount of September Debenture surrendered to the Company at any closing date, the Company will issue the holder a share of Series I-2 Preferred Stock with a stated value of $1.00. From December 2, 2017 through March 1, 2018, any exchange under the Exchange Agreements was at the option of the holder. Subsequent to March 2018, any exchange is at the option of the Company. Each share of Series I-2 Preferred Stock is convertible into shares of the Company’s common stock at any time at the option of the holder at a conversion price equal to 85% of the lesser of the volume weighted average market price of the common stock on the day prior to conversion or on the day of conversion. The conversion price is subject to “full ratchet” and other customary anti-dilution protections as more fully described in the Certificate of Designation of the Series I-2 Preferred Stock.

 

The Company’s Board of Directors has designated up to 21,346 shares of the 5,000,000 authorized shares of preferred stock as the Series I-2 Preferred Stock and the Company has issued 3,907.67 shares of its Series I-2 Preferred Stock. Each share of Series I-2 Preferred Stock has a stated value of $1,000. Upon the occurrence of certain Triggering Events (as defined in the Certificate of Designation of the Series I-2 Preferred Stock, which is the same as the definition in the Series I-1 Preferred Stock), the holder shall, in addition to any other right it may have, have the right, at its option, to require the Company to either redeem the Series I-2 Preferred Stock in cash or in certain circumstance in shares of common stock at the redemption prices set forth in the Certificate of Designation.

 

During the six months ended June 30, 2020 and 2019, the holder converted 21.25 shares and 769.2276 shares of Series I-2 Preferred Stock, respectively, into 25,000 and 576,075 shares, respectively, of the Company’s common stock. As of June 30, 2020, 1,521.65 shares of the Series I-2 Preferred Stock remain outstanding.

 

Note 13 – Stockholders’ Deficit

 

Authorized Capital

 

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

 

Preferred Stock

 

The Company has 5,000,000 shares, par value $0.01, of preferred stock authorized. As of June 30, 2020, the Company had outstanding shares of preferred stock consisting of shares of its Series I-1 Preferred Stock and shares of its Series I-2 Preferred Stock (both of which are more fully discussed in Note 12), 10 shares of its Series H Convertible Preferred Stock (the “Series H Preferred Stock”), 1,750,000 shares of its Series F Convertible Preferred Stock (the “Series F Preferred Stock”), 250,000 shares of its Series L Convertible Preferred Stock and 22,000 shares of its Series M Preferred Stock.

 

The Series H Preferred Stock has a stated value of $1,000 per share and is convertible into shares of the Company’s common stock at a conversion price of 85% of the volume weighted average price of the Company’s common stock at the time of conversion.

 

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In September 2017, the Company issued 1,750,000 shares of its Series F Preferred Stock valued at $174,097 in connection with the acquisition of Genomas Inc. Genomas Inc. is included in the Company’s discontinued operations, which are discussed in Note 17. As a result of the Reverse Stock Split, the maximum number of shares of common stock issuable upon the conversion of the Series F Preferred Stock is one. Any shares of Series F Preferred Stock outstanding on the fifth anniversary of the issuance date will be mandatorily converted into common stock at the applicable conversion price on such date. The Series F Preferred Stock has voting rights. Each share of Series F Preferred Stock has one vote, and the holders of the Series F Preferred Stock shall vote together with the holders of the Company’s common stock as a single class.

 

On December 23, 2019, the Company entered into an Exchange Agreement (the “Agreement”) with Alcimede LLC (“Alcimede”), of which Seamus Lagan, our Chief Executive Officer, is the sole manager as previously stated. Pursuant to the Agreement, the Company issued to Alcimede 250,000 shares of its Series K Convertible Preferred Stock (the “Series K Preferred Stock”) in exchange for the 250,000 shares of the Company’s Series J Convertible Preferred Stock (the “Series J Preferred Stock”) held by Alcimede. The holder of the Series J Preferred Stock was entitled to receive, when and as declared by the Board of Directors of the Company, but only out of funds that were legally available therefor, cumulative cash dividends at the rate of 8% of the stated value per annum on each share of Series J Preferred Stock. The Series J Preferred Stock had been issued to Alcimede on July 23, 2018 and upon the issuance of the Series K Preferred Stock to Alcimede, the shares of Series J Preferred Stock were cancelled. Under the Agreement, Alcimede relinquished all rights to any cumulative dividends on the Series J Preferred Stock. The terms of the Series K Preferred Stock do not provide for cumulative dividends.

 

On May 4, 2020, the Company filed a Certificate of Designation with the Secretary of State of the State of Delaware to authorize the issuance of up to 250,000 shares of its Series L Preferred Stock. On May 5, 2020, the Company entered into an exchange agreement with Alcimede. Pursuant to the exchange agreement, the Company issued to Alcimede 250,000 shares of its Series L Preferred Stock in exchange for the 250,000 shares of the Company’s Series K Preferred Stock held by Alcimede. Upon the issuance of the Series L Preferred Stock to Alcimede, the shares of Series K Preferred Stock were cancelled. The Series L Preferred Stock is not convertible into common stock prior to December 1, 2020 and is not entitled to receive any dividends.

 

Series M Convertible Preferred Stock Exchanged for Loans from Mr. Diamantis

 

On June 9, 2020, the Company filed a certificate of designation to authorize 30,000 shares of its Series M Preferred Stock with a stated value of $1,000 per share. On June 30, 2020, the Company and Mr. Diamantis entered into an exchange agreement wherein Mr. Diamantis agreed to the extinguishment of the Company’s indebtedness to Mr. Diamantis totaling $18.8 million, including accrued interest, on that date in exchange for 22,000 shares of the Company’s Series M Preferred Stock with a par value of $0.01 per share. As a result of the exchange, the Company recorded a deemed dividend of approximately $3.2 million in the three and six months ended June 30, 2020, which represented the difference between the $18.8 million of debt and accrued interest exchanged and the value of the Series M Preferred Stock of $22.0 million. See Note 7 for a discussion of the Company’s indebtedness to Mr. Diamantis.

 

The terms of the Series M Preferred Stock were set forth in the Company’s Current Report on Form 8-K filed with the SEC on June 16, 2020. In particular: (i) each holder of the Series M Preferred Stock shall be entitled to vote on all matters submitted to a vote of the holders of the Company’s common stock. Regardless of the number of shares of Series M Preferred Stock outstanding and so long as at least one share of Series M Preferred Stock is outstanding, the outstanding shares of Series M Preferred Stock shall have the number of votes, in the aggregate, equal to 51% of all votes entitled to be voted at any meeting of stockholders or action by written consent. Each outstanding share of the Series M Preferred Stock shall represent its proportionate share of the 51% allocated to the outstanding shares of Series M Preferred Stock in the aggregate. The Series M Preferred Stock shall vote with the common stock and any other voting securities as if they were a single class of securities; (ii) each share of the Series M Preferred Stock is convertible into shares of the Company’s common stock at a conversion price equal to 90% of the average closing price of the Company’s common stock on the ten trading days immediately prior to the conversion date but in any event no less than either of the par value of the Company’s common stock or the conversion price of the Series I-1 Preferred Stock; and (iii) dividends at the rate per annum of ten percent (10%) of the stated value per share shall accrue on each outstanding share of Series M Preferred Stock from and after the date of the original issuance of such share of Series M Preferred Stock (subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization). The dividends shall accrue from day to day, whether or not declared, and shall be cumulative and non-compounding; provided, however, that such dividend shall be payable only when, as, and if declared by the Board of Directors and the Company shall be under no obligation to pay such dividends. No cash dividends shall be paid on the Company’s common stock unless the dividends are paid on the Series M Preferred Stock.

 

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

 

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Common Stock

 

The Company has authorized 10,000,000,000 shares of Common Stock, par value $.0001 per share.

 

The Company had 989,894 and 964,894 shares of common stock issued and outstanding at June 30, 2020 and December 31, 2019, respectively. During the six months ended June 30, 2020, the Company issued 25,000 shares of its common stock upon the conversion of 21.25 shares of its Series I-2 Preferred Stock.

 

Shareholder Proposal Approval and Reverse Stock Split

 

On May 7, 2020, Mr. Lagan and Alcimede LLC, the holders of 50.25% of the total voting power of the Company’s voting securities, approved by written consent in lieu of a special meeting of stockholders the following proposal, which had previously been approved and recommended to be approved by the stockholders by the Board of Directors of the Company.

 

Proposal 1: To approve an amendment to our Certificate of Incorporation, as amended, to effect a reverse stock split of all of the outstanding shares of our common stock, at a specific ratio from 1-for-100 to 1-for-10,000, and grant authorization to our Board of Directors to determine, in its discretion, the specific ratio and timing of the reverse split at any time on or before December 31, 2020, subject to the Board of Directors’ discretion to abandon such amendment.

 

The stockholder approval of the above proposal became effective on June 9, 2020. As more fully discussed in Note 1, the Company effected the Reverse Stock Split on July 31, 2020. The Reverse Stock Split did not have an effect on the par value or the number of authorized shares of the Company’s common stock.

 

Common Stock Equivalents

 

The Company has outstanding options, warrants, convertible preferred stock and convertible debentures. Exercise of the options and warrants, and conversions of the convertible preferred stock and debentures could result in substantial dilution of our common stock and a decline in its market price. In addition, the terms of certain of the warrants, convertible preferred stock and convertible debentures issued by us provide for reductions in the per share exercise prices of the warrants and the per share conversion prices of the debentures and preferred stock (if applicable and subject to a floor in certain cases), in the event that we issue common stock or common stock equivalents (as that term is defined in the agreements) at an effective exercise/conversion price that is less than the then exercise/conversion prices of the outstanding warrants, preferred stock or debentures, as the case may be. These provisions, as well as the issuances of debentures and preferred stock with conversion prices that vary based upon the price of our common stock on the date of conversion, have resulted in significant dilution of our common stock and have given rise to reverse splits of our common stock.

 

Stock Options

 

The Company maintained and sponsored the Tegal Corporation 2007 Incentive Award Plan (the “2007 Equity Plan”). Tegal Corporation was the prior name of the Company. The 2007 Equity Plan, as amended, provided for the issuance of stock options and other equity awards to the Company’s officers, directors, employees and consultants. The 2007 Equity Plan terminated pursuant to its terms in September 2017. As a result of the Reverse Stock Split, the total number of outstanding stock options at June 30, 2020 was 30 and the exercise price was so high as to not be meaningful. All outstanding stock options as of June 30, 2020 were fully vested as of December 31, 2019 and, accordingly, the Company did not incur stock option compensation expense during the six months ended June 30, 2020. The Company recognized stock option compensation expense of $17,300 for the six months ended June 30, 2019. As of June 30, 2020, the weighted average remaining contractual life was 5.83 years for options outstanding and exercisable. The intrinsic value of options exercisable at June 30, 2020 was $0.

 

Warrants

 

The Company, as part of various debt and equity financing transactions, has issued warrants to purchase shares of the Company’s common stock.

 

At June 30, 2020, there were 63.5 million warrants outstanding primarily as a result of the anti-dilution provisions of outstanding warrants that were issued in connection with the issuances of debentures, which are more fully discussed in Note 8. The number of warrants issued and outstanding as well as the exercise prices of the warrants reflected in the table below have been adjusted to reflect the full ratchet and other dilutive and down round provisions pursuant to the warrant agreements. As a result of the current exercise prices for the majority of the outstanding warrants (subject to a floor in some cases), as well as the full ratchet provisions of the majority of the outstanding warrants (again, subject to a floor in some cases), subsequent decreases in the price of the Company’s common stock and subsequent issuances of the Company’s common stock or common stock equivalents at prices below the current exercise prices of the warrants will result in (1) increases in the number of shares issuable pursuant to the warrants and (2) decreases in the exercise prices of the warrants.

 

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The following summarizes the information related to warrants issued and the activity during the six months ended June 30, 2020:

 

   Number of warrants   Weighted average exercise price 
Balance at December 31, 2019   63,458,546   $1.44 
Warrants expired   (1)  $(3,150.00)
Balance at June 30, 2020   63,458,545   $1.44 

 

On March 27, 2019, the expiration dates of certain warrants issued in March 2017 and September 2017 with convertible debentures, referred to as the March 2017 Series B Warrants and the September 2017 Series B Warrants, were extended from June 2019 to September 2019. On May 12, 2019, the expiration date of these warrants was further extended to March 31, 2022. The Company used the Black Scholes model to calculate the fair value of the warrants as of the modification date. Using the pre-modification terms and related assumptions, and the post-modification terms and related assumptions, the Company determined that the change in fair value of the warrants as a result of the March 27th modification was $4.1 million and the May 12th modification was $5.4 million. Accordingly, the Company recorded the modification value of $5.4 and $9.5 million as interest expense in the three and six months ended June 30, 2019, respectively. See Note 11 for the assumptions used in the Black Scholes valuation models.

 

Note 14 – Supplemental Disclosure of Cash Flow Information

 

   Six Months Ended June 30, 
   2020   2019 
Cash paid for interest  $9,455   $- 
Cash paid for income taxes  $-   $45,000 
           
Acquisition of Jellico Community Hospital and CarePlus Center:          
Inventory  $-   $317,427 
Property and equipment   -    500,000 
Intangible assets   -    250,000 
Accrued expenses   -    158,890 
           
Non-cash investing and financing activities:          
Series I-2 Preferred Stock converted into common stock  $25,000   $904,973 
Issuance of Series M Preferred Stock in exchange for related party loans and accrued interest   22,000,000    - 
Loans and accrued interest exchanged for Series M Preferred Stock   18,849,632    - 
Deemed dividend   3,150,368    123,861,587 
Exchange of Series K Preferred Stock for Series L Preferred Stock   (2,500)   - 
Issuance of Series L Preferred Stock   2,500    - 
Original issue discounts on debt   122,885    100,000 

 

Note 15 – Commitments and Contingencies

 

Concentration of Credit Risk

 

Credit risk with respect to accounts receivable is generally diversified due to the large number of patients comprising the client base. Generally, the Company does not require collateral or other security to support customer receivables. However, the Company continually monitors its accounts receivable and establishes an allowance for uncollectible accounts and as a consequence, believes that its accounts receivable credit risk exposure beyond such allowance is not material to the financial statements.

 

A number of proposals for legislation continue to be under discussion which could substantially reduce Medicare and Medicaid (CMS) reimbursements to hospitals and clinical laboratories. Depending upon the nature of regulatory action, and the content of legislation, the Company could experience a significant decrease in revenues from Medicare and Medicaid (CMS), which could have a material adverse effect on the Company. The Company is unable to predict, however, the extent to which such actions will be taken.

 

The Company maintains its cash balances in high credit quality financial institutions. The Company’s cash balances may, at times, exceed the deposit insurance limits provided by the Federal Deposit Insurance Corp.

 

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Legal Matters

 

From time-to-time, the Company may be involved in a variety of claims, lawsuits, investigations and proceedings related to contractual disputes, employment matters, regulatory and compliance matters, intellectual property rights and other litigation arising in the ordinary course of business. The Company operates in a highly regulated industry which may inherently lend itself to legal matters. Management is aware that litigation has associated costs and that results of adverse litigation verdicts could have a material effect on the Company’s financial position or results of operations. The Company’s policy is to expense legal fees and expenses incurred in connection with the legal proceedings in the period in which the expense is incurred. Management, in consultation with legal counsel, has addressed known assertions and predicted unasserted claims below.

 

Biohealth Medical Laboratory, Inc. and PB Laboratories, LLC (the “Companies”) filed suit against CIGNA Health in 2015 alleging that CIGNA failed to pay claims for laboratory services the Companies provided to patients pursuant to CIGNA - issued and CIGNA - administered plans. In 2016, the U.S. District Court dismissed part of the Companies’ claims for lack of standing. The Companies appealed that decision to the Eleventh Circuit Court of Appeals, which in late 2017 reversed the District Court’s decision and found that the Companies have standing to raise claims arising out of traditional insurance plans as well as self-funded plans. In July 2019, the Companies and EPIC Reference Labs, Inc. filed suit against CIGNA Health for failure to pay claims for laboratory services provided. Cigna Health, in turn, sued for improper billing practices. CIGNA’s case was dismissed on June 22, 2020; the Company’s case remains in the early stages.

 

The Company’s Epinex Diagnostics Laboratories, Inc. subsidiary was sued in a California state court by two former employees who alleged that they were wrongfully terminated, as well as for a variety of unpaid wage claims. The parties entered into a settlement agreement of this matter on July 29, 2016 for approximately $0.2 million, and the settlement was consummated on August 25, 2016. In October of 2016, the plaintiffs in this matter filed a motion with the court seeking payment for attorneys’ fees in the approximate amount of $0.7 million. On March 24, 2017, the court granted plaintiffs’ motion for payment of attorneys’ fees in the amount of $0.3 million, and the Company accrued this amount in its consolidated financial statements.

 

In February 2016, the Company received notice that the Internal Revenue Service (the “IRS”) placed a lien against Medytox Solutions, Inc. and its subsidiaries relating to unpaid 2014 taxes due, plus penalties and interest, in the amount of $5.0 million. The Company paid $0.1 million toward its 2014 tax liability in March 2016. The Company filed its 2015 Federal tax return on March 15, 2016 and the accompanying election to carryback the reported net operating losses was filed in April 2016. On August 24, 2016, the lien was released, and in September of 2016 the Company received a refund from the IRS in the amount of $1.9 million. In November of 2016, the IRS commenced an audit of the Company’s 2015 Federal tax return. Based upon the audit results, the Company has made provisions of approximately $1.0 million as a liability in its financial statements as well as an estimated $0.6 million of receivables for an additional refund that it believes is due. The Company is also due a refund as a result of the five-year carryback privilege for federal net operating tax losses per the CARES Act, which is more fully discussed in Note 4.

 

On September 27, 2016, a tax warrant was issued against the Company by the Florida Department of Revenue (the “DOR”) for unpaid 2014 state income taxes in the approximate amount of $0.9 million, including penalties and interest. The Company entered into a Stipulation Agreement with the DOR allowing the Company to make monthly installments until July 2019. The Company has made payments to reduce the amount owed. The Company intends to renegotiate another Stipulation agreement. However, there can be no assurance the Company will be successful. The balance accrued of approximately $0.4 million remained outstanding to the DOR at June 30, 2020.

 

In December of 2016, TCS-Florida, L.P. (“Tetra”), filed suit against the Company for failure to make the required payment under an equipment leasing contract that the Company had with Tetra and received a judgment against the Company. In May 2018, Tetra and the Company agreed to dispose of certain equipment and the proceeds from the sale were applied to the outstanding balance. In July 2020, the Company entered into a settlement with Tetra and paid $100,000 as full and final settlement of all liability to Tetra. As a result of the settlement, the Company recorded a gain on settlement of approximately $0.9 million in the three and six months ended June 30, 2020.

 

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In December of 2016, DeLage Landen Financial Services, Inc. (“DeLage”), filed suit against the Company for failure to make the required payments under an equipment leasing contract that the Company had with DeLage (see Note 10). On January 24, 2017, DeLage received a default judgment against the Company in the approximate amount of $1.0 million, representing the balance owed on the lease, as well as additional interest, penalties and fees. The Company recognized this amount in its consolidated financial statements as of December 31, 2016. On February 8, 2017, a Stay of Execution was filed and under its terms the balance due was to be paid in variable monthly installments through January of 2019, with an implicit interest rate of 4.97%. The Company and DeLage have now disposed of certain equipment and reduced the balance owed to DeLage. A balance of $0.2 million remained outstanding at June 30, 2020.

 

On December 7, 2016, the holders of the Tegal Notes (see Note 7) filed suit against the Company seeking payment for the amounts due under the notes in the aggregate of the principal of $341,612, and accrued interest of $43,000. A request for entry of default judgment was filed on January 24, 2017. On April 23, 2018, the holders of the Tegal Notes received a judgment against the Company. As of June 30, 2020, the Company has repaid $27,510 of this amount.

 

Two former employees of the Company’s CollabRx, Inc. subsidiary filed suits in a California state court in connection with amounts claimed to be owed under their respective employment agreements with the subsidiary. One former employee received a judgment in October 2018 for approximately $253,000. The other former employee received a judgment in December 2018 for approximately $173,000. While the Company has accrued these amounts claimed, it is considering its options to refute these matters and believes the claims against the Company to be frivolous and outside of entitlement and contractual agreements.

 

The Company, as well as many of our subsidiaries, are defendants in a case filed in Broward County Circuit Court by TCA Global Credit Master Fund, L.P. The plaintiff alleges a breach by Medytox Solutions, Inc. of its obligations under a debenture and claims damages of approximately $2,030,000 plus interest, costs and fees. The Company and the other subsidiaries are sued as alleged guarantors of the debenture. The complaint was filed on August 1, 2018. The Company has recorded the principal balance and interest owed under the debenture agreement for the period ended June 30, 2020 (see Note 7). The Company and all defendants have filed a motion to dismiss the complaint, but have not recorded any potential liability related to any further damages. In May 2020, the SEC appointed a Receiver to close down the TCA Global Master Fund, LP over allegations of accounting fraud. The amount recorded by the Company as being owed to TCA was based on TCA’s application of prior payments made by the Company. The Company believes that prior payments of principal and interest may have been applied to unenforceable investment banking and other fees and charges. It is the Company’s position that the amount owed to TCA is less than what is set forth in Note 7 above.

 

On September 13, 2018, Laboratory Corporation of America sued EPIC Reference Labs, Inc., a subsidiary of the Company, in Palm Beach County Circuit Court for amounts claimed to be owed. The court awarded a judgment against EPIC Reference Labs, Inc. in May 2019 for approximately $155,000. The Company has recorded the amount owed as a liability as of June 30, 2020.

 

In July 2019, Roche Diagnostics Corporation sued EPIC Reference Labs, Inc. in the Circuit Court for Palm Beach County claiming approximately $240,000 under an agreement to lease equipment and purchase supplies. The amount of the settlement in this case of $110,000 was accrued in 2019 and paid in full during the six months ended June 30, 2020.

 

In August 2019, EPIC Reference Labs, Inc. and Medytox Diagnostics, Inc. were sued by Beckman Coulter, Inc. in the same court under an agreement to purchase laboratory supplies. The plaintiff claims damages of approximately $124,000. The Company has disputed the amount owed, and has entered settlement discussions to settle the matter, but has recorded this liability as of June 30, 2020.

 

In July 2019, the landlord of Medytox Solutions, Inc. received a judgment in the amount of approximately $413,000 in connection with failure to pay under an office lease in West Palm Beach, Florida. The Company reached a settlement in May 2020 to resolve the judgment in the amount of $300,000, which is being paid under a payment plan.

 

In February 2020, Anthony O. Killough sued the Company and Mr. Diamantis, as guarantor, in New York State Court for the County of New York, for approximately $2.0 million relating to the promissory note issued by the Company in September 2019. In May 2020, the parties entered into a Stipulation providing for a payment of a total of $2,158,168 (which includes accrued interest) in installments through November 1, 2020. (See Note 7).

 

Following the Company’s decision to suspend operations at Jamestown Regional Medical Center in June 2019 a number of vendors remain unpaid. A number have initiated or threatened legal actions. The Company believes it will come to satisfactory arrangements with these parties as it works toward reopening the hospital. The Company has taken steps to re-enter the Medicare program and is currently planning the reopening of the hospital. Plans and timing have been disrupted by the current pandemic.

 

In June 2019 CHSPSC, the former owners of Jamestown Regional Medical Center, obtained a judgment against the Company in the amount of $592,650. The Company believes that a number of insurance payments were made to CHSPCS after the change of ownership and will likely offset the majority of the claim made by CHSPCS.

 

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In August 2019, Morrison Management Specialists, Inc. obtained a judgment against Jamestown Regional Medical Center and the Company in Fentress County, Tennessee in the amount of $194,455 in connection with the housekeeping and dietary services. The Company has recorded this liability as of June 30, 2020.

 

In November 2019, Newstat, PLLC obtained a judgment against Big South Fork Medical Center in Knox County, Tennessee in the amount of $190,600 in connection with the provision of medical services. The Company has recorded this liability as of June 30, 2020.

 

Note 16– Segment Reporting

 

Operating segments are defined under U.S. GAAP as components of an enterprise for which discrete financial information is available and are evaluated regularly by the enterprise’s chief operating decision maker in determining how to allocate resources and assess performance. The Company operates in two reportable business segments:

 

  Hospital Operations, which reflects the operations of Jamestown Regional Medical Center, Big South Fork Medical Center, Jellico Community Hospital and CarePlus Center.
     
  Clinical Laboratory Operations, which specializes in providing urine and blood toxicology and pain medication testing to physicians, clinics and rehabilitation facilities in the United States.

 

The Company’s Corporate expenses reflect consolidated company-wide support services such as finance, legal counsel, human resources, and payroll.

 

Selected financial information for the Company’s operating segments was as follows:

 

   Three Months Ended June 30,   Six Months Ended June 30, 
   2020   2019   2020   2019 
Net revenues - External                    
Hospital Operations  $2,069,019   $4,055,774   $3,909,110   $9,161,039 
Clinical Laboratory Operations   -    5,415    1,440    90,800 
   $2,069,019   $4,061,189   $3,910,550   $9,251,839 
Net income (loss) from continuing operations before income taxes                    
Hospital Operations  $(2,323,338)  $(4,002,213)  $(5,416,271)  $(7,177,320)
Clinical Laboratory Operations   (293,456)   (180,028)   (406,842)   (405,558)
Corporate   (696,510)   (914,074)   (1,342,376)   (1,986,909)
Other income (expense), net   5,418,759    (8,183,261)   2,400,456    (16,642,584)
Benefit from income taxes   -    -    1,118,485    - 
   $2,105,455   $(13,279,576)  $(3,646,548)  $(26,212,371)
Depreciation and amortization                    
Hospital Operations  $176,998   $176,371   $359,313   $350,147 
Clinical Laboratory Operations   4,041    9,683    (13,702)   59,345 
Corporate   52    182    187    330 
   $181,091   $186,236   $345,798   $409,822 
Capital expenditures                    
Hospital Operations  $10,435   $1,398   $10,435   $43,715 
   $10,435   $1,398   $10,435   $43,715 

 

   As of 
   June 30, 2020   December 31, 2019 
Total assets          
Hospital Operations  $12,813,219   $14,275,256 
Clinical Laboratory Operations   450,212    330,381 
Corporate   4,457,937    2,305,380 
Assets of AMSG and HTS classified as held for sale   212,018    514,772 
Eliminations   (2,718,130)   (2,718,130)
   $15,215,256   $14,707,659 

 

Note 17 – Discontinued Operations

 

On July 12, 2017, the Company announced plans to spin off AMSG and in the third quarter 2017 our Board of Directors voted unanimously to spin off the Company’s wholly-owned subsidiary, HTS, as independent publicly traded companies by way of tax-free distributions to the Company’s stockholders. On June 10, 2020, the Company signed an agreement for the separation of these divisions into a public company. The agreement is with TPT Global Tech, Inc. (OTC: TPTW), a California-based public company, to merge HTS and AMSG into a public company after TPT completes a merger of its wholly-owned subsidiary, InnovaQor, Inc. with this public company. The public company will be known as InnovaQor going forward. Completion of the agreement is subject to a number of approvals and consents which need to be secured to complete the transaction. Subject to closing and the relevant SEC approvals it is intended that Rennova will receive approximately $22 million of preferred shares in the transaction, $5 million of which will be converted to common shares in the public company, and distributed to Rennova shareholders upon completion of the relevant registration/approvals with the SEC. The remaining approximately $17 million of preferred shares held by Rennova as an investment in InnovaQor will be convertible to common shares on achievement of certain milestones going forward. There can be no assurance that the transaction as described will be consummated or that terms including numbers or values for consideration shares will not change significantly before closing.

 

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In accordance with ASC 205-20 and having met the criteria for “held for sale”, as the Company reached this decision prior to January 1, 2019, the Company has reflected amounts relating to AMSG and HTS as disposal groups classified as held for sale and included as part of discontinued operations. Segment operation disclosures in Note 16 no longer include amounts relating to AMSG and HTS following the reclassification to discontinued operations.

 

Carrying amounts of major classes of assets and liabilities classified as held for sale and included as part of discontinued operations in the condensed consolidated balance sheets consisted of the following:

 

AMSG Assets and Liabilities:

 

   June 30, 2020   December 31, 2019 
   (unaudited)     
Cash  $1,093   $452 
Accounts receivable, net   -    - 
Prepaid expenses and other current assets   -    - 
Current assets classified as held for sale  $1,093   $452 
           
Property and equipment, net  $-   $- 
Deposits   -    - 
Non-current assets classified as held for sale  $-   $- 
           
Accounts payable  $491,566   $491,206 
Accrued expenses   544,410    565,943 
Current portion of notes payable   134,118    256,274 
Current liabilities classified as held for sale  $1,170,094   $1,313,423 

 

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HTS Assets and Liabilities:

 

   June 30, 2020   December 31, 2019 
   (unaudited)     
Cash  $28,208   $17,315 
Accounts receivable, net   177,144    482,472 
Prepaid expenses and other current assets   3,433    5,150 
Current assets classified as held for sale  $208,785   $504,937 
           
Property and equipment, net  $2,140   $3,354 
Deposits   -    6,029 
Non-current assets classified as held for sale  $2,140   $9,383 
           
Accounts payable  $355,375   $668,895 
Accrued expenses   777,634    810,184 
Current liabilities classified as held for sale  $1,133,009   $1,479,079 

 

Consolidated Discontinued Operations Assets and Liabilities:

 

   June 30, 2020   December 31, 2019 
   (unaudited)     
Cash