UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark one)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the quarterly period ended
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ______ to ______.
Commission
File Number:
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
(IRS Employer Identification No.) | |
| (Address of principal executive offices) | (Zip Code) |
(Registrant’s telephone number, including area code)
Securities registered under Section 12(b) of the Act:
| Title of Each Class | Trading Symbol(s) | Name of each exchange on which registered | ||
| None | None | None |
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.0001 Par Value
Indicate
by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
| Large accelerated filer ☐ | Accelerated filer ☐ |
| Smaller
reporting company | |
| Emerging
growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
As of November 6, 2023, the registrant had shares of its Common Stock, $0.0001 par value, outstanding.
RENNOVA HEALTH, INC. AND SUBSIDIARIES
FORM 10-Q
September 30, 2023
TABLE OF CONTENTS
| 2 |
RENNOVA HEALTH, INC.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
CONDENSED CONSOLIDATED BALANCE SHEETS
| September 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| (unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Note receivable / receivable from related party | ||||||||
| Inventory | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Income tax refunds receivable | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Intangible asset | ||||||||
| Investment | ||||||||
| Deposits | ||||||||
| Right-of-use assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| Current liabilities: | ||||||||
| Accounts
payable (includes related party amounts of $ | $ | $ | ||||||
| Accrued expenses | ||||||||
| Income taxes payable | ||||||||
| Current portion of notes payable | ||||||||
| Current portion of loan payable, related party | ||||||||
| Current portion of debentures | ||||||||
| Current portion of right-of-use operating lease obligations | ||||||||
| Current portion of finance lease obligation | ||||||||
| Derivative liability | ||||||||
| Current liabilities of discontinued operations | ||||||||
| Total current liabilities | ||||||||
| Right-of-use operating lease obligations, net of current portion | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies | ||||||||
| Stockholders’ deficit: | ||||||||
| Series H preferred stock, $ par value, $ stated value per share, shares authorized, shares issued and outstanding | ||||||||
| Series L preferred stock, $ par value, $ stated value per share, shares authorized, shares issued and outstanding | ||||||||
| Series M preferred stock, $ par value, $ stated value per share, shares authorized, shares issued and outstanding | ||||||||
| Series N preferred stock, $ par value, $ stated value per share, shares authorized, and shares issued and outstanding, respectively | ||||||||
| Series O preferred stock, $ par value, $ stated value per share, shares authorized, and shares issued and outstanding, respectively | ||||||||
| Series P preferred stock, $ par value, $ stated value per share, shares authorized, shares issued and outstanding | ||||||||
| Common stock, $ par value, shares authorized, and shares issued and outstanding, respectively | ||||||||
| Additional paid-in-capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total Rennova’s stockholders’ deficit | ( | ) | ( | ) | ||||
| Noncontrolling interest | ( | ) | ||||||
| Total stockholders’ deficit | ( | ) | ( | ) | ||||
| Total liabilities and stockholders’ deficit | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 3 |
RENNOVA HEALTH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Net revenues | $ | $ | $ | $ | ||||||||||||
| Operating expenses: | ||||||||||||||||
| Direct costs of revenues | ||||||||||||||||
| General and administrative expenses | ||||||||||||||||
| Depreciation and amortization | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Income (loss) from continuing operations before other income (expense), income taxes and net loss attributable to noncontrolling interest | ( | ) | ( | ) | ( | ) | ||||||||||
| Other income (expense): | ||||||||||||||||
| Other income, net | ||||||||||||||||
| Gain from forgiveness of debt | ||||||||||||||||
| Gain (loss) from legal settlements, net | ( | ) | ||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total other income (expense), net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income (loss) from continuing operations before income taxes, including noncontrolling interest | ( | ) | ( | ) | ( | ) | ||||||||||
| Benefit (provision) for income taxes | ( | ) | ||||||||||||||
| Net income (loss) from continuing operations, including noncontrolling interest | ( | ) | ( | ) | ( | ) | ||||||||||
| Net loss from discontinued operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net income (loss), including noncontrolling interest | ( | ) | ( | ) | ( | ) | ||||||||||
| Net loss attributable to noncontrolling interest | ||||||||||||||||
| Net income (loss) attributable to Rennova | ( | ) | ( | ) | ( | ) | ||||||||||
| Deemed dividends | ( | ) | ||||||||||||||
| Net income (loss) available to common stockholders | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||
| Net income (loss) per share of common stock available to common stockholders - basic: | ||||||||||||||||
| Continuing operations | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||
| Discontinued operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total basic | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||
| Net income (loss) per share of common stock available to common stockholders - diluted: | ||||||||||||||||
| Continuing operations | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||
| Discontinued operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total diluted | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||
| Weighted average number of shares of common stock outstanding during the period | ||||||||||||||||
| Basic: | ||||||||||||||||
| Diluted: | ||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 4 |
RENNOVA HEALTH, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIT
For Each of the Quarters in the Nine-Month Period Ended September 30, 2023
(unaudited)
| Preferred Stock | Common Stock | Additional paid-in | Accumulated | Rennova Stockholders’ | Non-controlling | Total Stockholders’ | ||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | capital | Deficit | Deficit | Interest | Deficit | ||||||||||||||||||||||||||||
| Balance at December 31, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | |||||||||||||||||||||||
| Conversion of Series N Preferred Stock into common stock | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Conversion of Series O Preferred Stock into common stock | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Net income | - | - | ||||||||||||||||||||||||||||||||||
| Balance at March 31, 2023 | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Sale of noncontrolling interest | - | - | ||||||||||||||||||||||||||||||||||
| Net income | - | - | ( | ) | ||||||||||||||||||||||||||||||||
| Balance at June 30, 2023 | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Conversions of Series N Preferred Stock into common stock | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Conversion of Series O Preferred Stock into common stock | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Balance at September 30, 2023 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 5 |
RENNOVA HEALTH, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIT
For Each of the Quarters in the Nine-Month Period Ended September 30, 2022
(unaudited)
| Preferred Stock | Common Stock | Additional paid-in- | Accumulated | Total Stockholders’ | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | capital | Deficit | Deficit | ||||||||||||||||||||||
| Balance at December 31, 2021 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||
| Conversion of Series N Preferred Stock into common stock | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
| Issuance of Series P Preferred Stock | - | |||||||||||||||||||||||||||
| Deemed dividends from issuance of Series P Preferred Stock | - | - | ( | ) | ||||||||||||||||||||||||
| Payment of cash in lieu of fractional shares | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||
| Deemed dividends from triggers of down round provisions | - | - | ( | ) | ||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance at March 31, 2022 | ( | ) | ( | ) | ||||||||||||||||||||||||
| Conversion of Series N Preferred Stock into common stock | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
| Conversion of Series O Preferred Stock into common stock | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
| Issuance of Series P Preferred Stock | - | |||||||||||||||||||||||||||
| Deemed dividends from issuance of Series P Preferred Stock | - | - | ( | ) | ||||||||||||||||||||||||
| Deemed dividends from triggers of down round provisions | - | - | ( | ) | ||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance at June 30, 2022 | ( | ) | ( | ) | ||||||||||||||||||||||||
| Conversion of Series F Preferred Stock into common stock | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
| Conversion of Series N Preferred Stock into common stock | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
| Conversion of Series O Preferred Stock into common stock | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance at September 30, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 6 |
RENNOVA HEALTH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(unaudited)
| Nine Months Ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income (loss) from continuing operations, including noncontrolling interest | $ | $ | ( | ) | ||||
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operations: | ||||||||
| Depreciation and amortization | ||||||||
| Non-cash interest income | ( | ) | ( | ) | ||||
| Loss from disposition of property and equipment | ||||||||
| Net (gain) loss from legal settlements | ( | ) | ||||||
| Gain from forgiveness of debt | ( | ) | ( | ) | ||||
| (Income) loss from federal government provider relief funds | ( | ) | ||||||
| Loss from discontinued operations | ( | ) | ( | ) | ||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Inventory | ( | ) | ||||||
| Prepaid expenses and other current assets | ||||||||
| Security deposits | ( | ) | ( | ) | ||||
| Change in right-of-use assets | ||||||||
| Accounts payable | ||||||||
| Accrued expenses | ( | ) | ||||||
| Income taxes payable | ||||||||
| Change in right-of-use operating lease obligations | ( | ) | ( | ) | ||||
| Net cash provided by (used in) operating activities of continuing operations | ( | ) | ||||||
| Net cash provided by (used in) operating activities of discontinued operations | ( | ) | ||||||
| Net cash provided by (used in) operating activities | ( | ) | ||||||
| Cash flows from investing activities: | ||||||||
| Note receivable / receivable from related party | ( | ) | ( | ) | ||||
| Capital expenditures | ( | ) | ( | ) | ||||
| Net cash used in investing activities of continuing operations | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from issuance of related party loan payable | ||||||||
| Payments of related party loan payable | ( | ) | ||||||
| Payments of debentures | ( | ) | ||||||
| Payments of notes payable | ( | ) | ( | ) | ||||
| Receivables paid under accounts receivable sales agreements | ( | ) | ||||||
| Proceeds from issuances of preferred stock | ||||||||
| Proceeds from federal government provider relief funds | ||||||||
| Cash paid for fractional shares in connection with reverse stock split | ( | ) | ||||||
| Net cash (used in) provided by financing activities of continuing operations | ( | ) | ||||||
| Net change in cash | ( | ) | ( | ) | ||||
| Cash at beginning of period | ||||||||
| Cash at end of period | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 7 |
RENNOVA HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Nine Months Ended September 30, 2023 and 2022
(unaudited)
Note 1 – Organization and Summary of Significant Accounting Policies
Description of Business
Rennova Health, Inc. (“Rennova”, together with its subsidiaries, the “Company”, “we”, “us”, “its” or “our”) is a provider of health care services. The Company owns one operating hospital in Oneida, Tennessee, a hospital located in Jamestown, Tennessee that it plans to reopen and operate and an operating rural health clinic in Kentucky. In addition, the Company owns a subsidiary providing services in the behavioral health sector on the campus of its hospital in Oneida, Tennessee. The Company’s operations consist of only one segment.
Scott County Community Hospital (d/b/a Big South Fork Medical Center)
On
January 13, 2017, we acquired certain assets related to Scott County Community Hospital, based in Oneida, Tennessee (the “Oneida
Assets”). The Oneida Assets include a
CarePlus Clinic
On March 5, 2019, we acquired certain assets related to an outpatient clinic located in Williamsburg, Kentucky, known as CarePlus Clinic. The clinic and its associated assets, which were acquired from CarePlus Rural Health Clinic, LLC, offers compassionate care in a modern, patient-friendly facility. The CarePlus Clinic is located 32 miles northwest of our Big South Fork Medical Center.
Myrtle Recovery Centers, Inc.
In the second quarter of 2022, the Company formed a subsidiary, Myrtle Recovery Centers, Inc. (“Myrtle”), to pursue opportunities in the behavioral health sector, initially in our core, rural markets. We are leveraging our existing physical locations and corporate and regional infrastructure to offer behavioral health services, including substance abuse treatment. Services are provided on either an inpatient, residential basis or an outpatient basis.
On August 10, 2023, Myrtle was granted a license by the Department of Mental Health and Substance Abuse Services of Tennessee to operate an alcohol and drug treatment facility in Oneida Tennessee. The facility, which is located at Rennova’s Big South Fork Medical Center campus, commenced operations and began accepting patients on August 14, 2023. The facility offers alcohol and drug residential detoxification and residential rehabilitation treatment services for up to 30 patients. Myrtle began offering outpatient opiate treatment services at its Oneida facility on November 1, 2023 as more fully discussed in Note 15.
On
April 11, 2023, Myrtle sold shares of its common stock equivalent to a
Jamestown Regional Medical Center
On
June 1, 2018, we acquired from Community Health Systems, Inc. certain assets related to an acute care hospital located in Jamestown,
Tennessee, referred to as Jamestown Regional Medical Center, for a purchase price of $
The Company suspended operations at the hospital and physician practice in June 2019, as a result of the termination of the hospital’s Medicare agreement and other factors. The Company is evaluating whether to reopen the facility as an acute care hospital or as another type of healthcare facility. Jamestown is located 38 miles west of Big South Fork Medical Center.
| 8 |
Basis of Presentation
The unaudited condensed consolidated financial statements were prepared using generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Regulation S-X. Accordingly, these financial statements do not include all information or notes required by generally accepted accounting principles for annual financial statements and should be read in conjunction with the consolidated financial statements as filed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. In the opinion of management, the unaudited condensed consolidated financial statements included herein contain all adjustments necessary to present fairly the Company’s consolidated financial position as of September 30, 2023, and the results of its operations and changes in stockholders’ deficit for the three and nine months ended September 30, 2023 and 2022 and its cash flows for the nine months ended September 30, 2023 and 2022. Such adjustments are of a normal recurring nature. The results of operations for the three and nine months ended September 30, 2023 may not be indicative of results for the year ending December 31, 2023.
Principles of Consolidation
The unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), include the accounts of Rennova and its wholly-owned and majority-owned subsidiaries. All intercompany transactions and balances have been eliminated in the consolidation.
Comprehensive Income (Loss)
During the three and nine months ended September 30, 2023 and 2022, comprehensive income (loss) was equal to the net income (loss) amounts presented in the unaudited condensed consolidated statements of operations.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent liabilities at the date of the consolidated financial statements, and the reported amounts of net revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates and assumptions include the estimates of fair values of assets acquired and liabilities assumed in business combinations, contractual allowances and bad debt reserves, the recoverability of long-lived assets, the valuation allowance relating to the Company’s deferred tax assets, the valuations of investments, equity and derivative instruments, deemed dividends, litigation and related reserves, among others. Actual results could differ from those estimates and would impact future results of operations and cash flows.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation.
Cash and Cash Equivalents
The Company considers all highly liquid temporary cash investments with an original maturity of three months or less to be cash equivalents.
Revenue Recognition
We recognize revenue in accordance with Accounting Standard Codification (“ASC”), “Revenue from Contracts with Customers (Topic 606),” including subsequently issued updates. Under the accounting guidance, our revenues are presented net of estimated contractual allowances and estimated implicit price concessions. We also do not present “allowances for doubtful accounts” on our balance sheets.
| 9 |
Our revenues relate to contracts with patients in which our performance obligations are to provide health care services to the patients. Revenues are recorded during the period our obligations to provide health care services are satisfied. Our performance obligations for inpatient services are generally satisfied over periods averaging approximately three days, and revenues are recognized based on charges incurred. Our performance obligations for outpatient services, including emergency room-related services, are generally satisfied over a period of less than one day. The contractual relationships with patients, in most cases, also involve a third-party payer (Medicare, Medicaid, managed care health plans and commercial insurance companies, including plans offered through the health insurance exchanges) and the transaction prices for the services provided are dependent upon the terms provided by (Medicare and Medicaid) or negotiated with (managed care health plans and commercial insurance companies) the third-party payers. The payment arrangements with third-party payers for the services we provide to the related patients typically specify payments at amounts less than our standard charges. Medicare, because of the Big South Fork Medical Center’s designation as a Critical Access Hospital, generally pays for inpatient and outpatient services at rates related to the hospital’s costs. Services provided to patients having Medicaid coverage are generally paid at prospectively determined rates per discharge, per identified service or per covered member. Agreements with commercial insurance carriers, managed care and preferred provider organizations generally provide for payments based upon predetermined rates per diagnosis, per diem rates or discounted fee-for-service rates. Management continually reviews the contractual estimation process to consider and incorporate updates to laws and regulations and the frequent changes in managed care contractual terms resulting from contract renegotiations and renewals. Our net revenues are based upon the estimated amounts we expect to be entitled to receive from patients and third-party payers. Estimates of contractual allowances under managed care and commercial insurance plans are based upon the payment terms specified in the related contractual agreements. Revenues related to uninsured patients and uninsured copayment and deductible amounts for patients who have health care coverage may have discounts applied (uninsured discounts and contractual discounts). We also record estimated implicit price concessions (based primarily on historical collection experience) related to uninsured accounts to record self-pay revenues at the estimated amounts we expect to collect.
Laws
and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation. Estimated reimbursement amounts
are adjusted in subsequent periods as cost reports are prepared and filed and as final settlements are determined (in relation to certain
government programs, primarily Medicare, this is generally referred to as the “cost report” filing and settlement process).
As of September 30, 2023, $
The collection of outstanding receivables for Medicare, Medicaid, managed care payers, other third-party payers and patients is our primary source of operating cash and is critical to our operating performance. The primary collection risks relate to uninsured patient accounts, including patient accounts for which the primary insurance carrier has paid the amounts covered by the applicable agreement, but patient responsibility amounts (deductibles and copayments) remain outstanding. Implicit price concessions relate primarily to amounts due directly from patients. Estimated implicit price concessions are recorded for all uninsured accounts, regardless of the aging of those accounts. Accounts are written off when all reasonable internal and external collection efforts have been performed. The estimates for implicit price concessions are based upon management’s assessment of historical write offs and expected net collections, business and economic conditions, trends in federal, state and private employer health care coverage and other collection indicators. Management relies on the results of detailed reviews of historical write-offs and collections at facilities that represent a majority of our revenues and accounts receivable (the “hindsight analysis”) as a primary source of information in estimating the collectability of our accounts receivable.
Contractual Allowances and Doubtful Accounts Policy
Accounts receivable are reported at realizable value, net of estimated contractual allowances and estimated implicit price concessions (also referred to as doubtful accounts), which are estimated and recorded in the period the related revenue is recorded. The Company has a standardized approach to estimating and reviewing the collectability of its receivables based on a number of factors, including the period they have been outstanding. Historical collection and payer reimbursement experience is an integral part of the estimation process related to contractual allowances and doubtful accounts. In addition, the Company regularly assesses the state of its billing operations in order to identify issues which may impact the receivables or reserve estimates. Receivables deemed to be uncollectible are charged against the allowance for doubtful accounts at the time such receivables are written-off. Recoveries of receivables previously written-off are recorded as credits to the allowance for doubtful accounts. Revisions to the allowances for doubtful accounts are recorded as an adjustment to revenues.
During
the three months ended September 30, 2023 and 2022, estimated contractual allowances of $
During
the nine months ended September 30, 2023 and 2022, estimated contractual allowances of $
We continue to review the provisions for implicit price concessions and contractual allowances. See Note 4 – Accounts Receivable.
| 10 |
Impairment or Disposal of Long-Lived Assets
We account for the impairment or disposal of long-lived assets according to the Financial Accounting Standards Board (the “FASB”) ASC Topic 360, Property, Plant and Equipment (“ASC 360”). ASC 360 clarifies the accounting for the impairment of long-lived assets and for long-lived assets to be disposed of, including the disposal of business segments and major lines of business. Long-lived assets are reviewed when facts and circumstances indicate that the carrying value of the asset may not be recoverable. When necessary, impaired assets are written down to estimated fair value based on the best information available. Estimated fair value is generally either based on appraised value or measured by discounting estimated future cash flows. Considerable management judgment is necessary to estimate discounted future cash flows. Accordingly, actual results could vary significantly from such estimates. The Company did not record an asset impairment charge during the three and nine months ended September 30, 2023 and 2022.
Leases in Accordance with ASU No. 2016-02
We account for leases in accordance with Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842), which requires leases with durations greater than 12 months to be recognized on the balance sheet. Upon adoption in 2019, we elected the package of transition provisions available which allowed us to carry forward our historical assessments of (1) whether contracts are or contain leases, (2) lease classification and (3) initial direct costs. We lease property and equipment under finance and operating leases. For operating leases with terms greater than 12 months, we record the related right-of-use assets and right-of-use obligations at the present value of lease payments over the term. For finance leases, we record the present value of the lease payments as finance lease obligations. We do not separate lease and non-lease components of contracts. Our finance and operating leases are more fully discussed in Note 8.
Fair Value Measurements
In accordance with ASC 820, “Fair Value Measurements and Disclosures,” the Company applies fair value accounting for all financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis. Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities which are required to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability, such as risks inherent in valuation techniques, transfer restrictions and credit risk. Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:
| ● | Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities that we have the ability to access at the measurement date. | |
| ● | Level 2 applies to assets or liabilities for which there are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly, such as quoted prices for similar assets or liabilities in active markets; or quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets). | |
| ● | Level 3 applies to assets or liabilities for which fair value is derived from valuation techniques in which one or more significant inputs are unobservable, including our own assumptions. |
On September 30, 2023 and December 31, 2022, we applied the Level 3 fair value hierarchy in determining the fair value of InnovaQor, Inc.’s Series B-1 Non-Voting Convertible Preferred Stock (the “InnovaQor Series B-1 Preferred Stock”), which is reflected on our condensed consolidated balance sheets as an investment. Also, on September 30, 2023 and December 31, 2022, we applied the Level 3 fair value hierarchy in determining the fair value of a derivative liability for an embedded conversion option of an outstanding convertible debenture. Our determination of fair value is more fully discussed in Note 9.
Derivative Financial Instruments and Fair Value, Including ASU 2017-11 and ASU 2021-04
In July 2017, the FASB issued ASU 2017-11, “Earnings Per Share (Topic 260) Distinguishing Liabilities from Equity (Topic 480) Derivatives and Hedging (Topic 815).” The amendments in Part I of this Update change the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. The amendments also clarify existing disclosure requirements for equity-classified instruments. As a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. For freestanding equity classified financial instruments, the amendments require entities that present earnings (loss) per share (EPS) in accordance with Topic 260 to recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common stockholders in basic and diluted EPS. Convertible instruments with embedded conversion options that have down round features are now subject to the specialized guidance for contingent beneficial conversion features (in Subtopic 470-20, Debt—Debt with Conversion and Other Options), including related EPS guidance (in Topic 260).
| 11 |
In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40), Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options. The FASB issued this update to clarify and reduce diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified after modification or exchange. The guidance clarifies whether an issuer should account for a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange as (1) an adjustment to equity (that is, deemed dividends) and, if so, the related earnings per share (EPS) effects, if any, or (2) an expense and, if so, the manner and pattern of recognition. We adopted this new accounting guidance on January 1, 2022. Under the new guidance, the FASB decided not to include convertible debt instruments in the guidance because ASU No 2016-01, Financial Instruments – Overall (Subtopic 825-10) requires that an entity capture the impact of changes in down round provision features of convertible debt within the fair value of the instruments. During the three and nine months ended September 30, 2023 and 2022, there were no changes in the fair values of the Company’s convertible debentures with down round provision features as these debentures issued in 2018 have floors of $ per share and were not in-the-money during these periods. Debentures are more fully discussed in Note 6.
There
were
In
addition, we recorded deemed dividends of approximately $
Income Taxes
Income taxes are accounted for under the liability method of accounting for income taxes. Under the liability method, future tax liabilities and assets are recognized for the estimated future tax consequences attributable to differences between the amounts reported in the financial statement carrying amounts of assets and liabilities and their respective tax bases. Future tax assets and liabilities are measured using enacted or substantially enacted income tax rates expected to apply when the asset is realized or the liability settled. The effect of a change in income tax rates on future income tax liabilities and assets is recognized in income in the period that the change occurs. Future income tax assets are recognized to the extent that they are considered more likely than not to be realized. When projected future taxable income is insufficient to provide for the realization of deferred tax assets, the Company recognizes a valuation allowance.
In accordance with U.S. GAAP, the Company is required to determine whether a tax position of the Company is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax benefit to be recognized is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Derecognition of a tax benefit previously recognized could result in the Company recording a tax liability (or reducing a tax asset) that would reduce net assets. The Company did not have an unrecognized tax benefit at September 30, 2023 and December 31, 2022.
The Company reports earnings (loss) per share in accordance with ASC Topic 260, “Earnings Per Share,” which establishes standards for computing and presenting earnings (loss) per share. Basic earnings (loss) per share of common stock is calculated by dividing net earnings (loss) available to common stockholders by the weighted average shares of common stock outstanding during the period, without consideration of common stock equivalents. Diluted earnings (loss) per share is calculated by adjusting the weighted average shares of common stock outstanding for the dilutive effect of common stock equivalents, including preferred stock, convertible debt, stock options and warrants outstanding for the period, with options and warrants determined using the treasury stock method. For purposes of the diluted earnings (loss) per share calculation, common stock equivalents are excluded from the calculation when their effect would be anti-dilutive. See Note 3 for the computation of earnings (loss) per share for the three and nine months ended September 30, 2023 and 2022.
| 12 |
Reverse Stock Split
On
March 15, 2022, the Company effected a
Amendment to Certificate of Incorporation
Effective November 5, 2021, the Company filed an Amendment to its Certificate of Incorporation, as amended, with the Secretary of State of the State of Delaware to provide that the number of authorized shares of the Company’s common stock or preferred stock may be increased or decreased (but not below the number of shares then outstanding) by the affirmative vote of the holders of a majority in voting power of the stock of the Company entitled to vote generally in the election of directors, irrespective of the provisions of Section 242(b)(2) of the General Corporation Law of the State of Delaware (or any successor provision thereto), voting together as a single class, without a separate vote of the holders of the class or classes the number of authorized shares of which are being increased or decreased unless a vote by any holders of one or more series of preferred stock is required by the express terms of any series of preferred stock pursuant to the terms thereof.
Note 2 – Liquidity and Financial Condition
Going Concern
The Company has the responsibility to evaluate whether conditions and/or events raise substantial doubt about its ability to meet its future financial obligations as they become due within one year after the date that the financial statements are issued. As required by ASC, Presentation of Financial Statements-Going Concern (Subtopic 205-40) (“ASC 205-40”), this evaluation shall initially not take into consideration the potential mitigating effects of plans that have not been fully implemented as of the date the financial statements are issued. Management has assessed the Company’s ability to continue as a going concern in accordance with the requirements of ASC 205-40.
At
September 30, 2023, the Company had a working capital deficit and a stockholders’ deficit of $
The Company’s unaudited condensed consolidated financial statements are prepared assuming the Company can continue as a going concern, which contemplates continuity of operations through realization of assets, and the settling of liabilities in the normal course of business. The Company’s current financial condition may make it difficult to attract and maintain adequate expertise in its management team to successfully operate its healthcare facilities.
There can be no assurance that the Company will be able to achieve its business plan, raise any additional capital or secure the additional financing necessary to implement its current operating plan. The ability of the Company to continue as a going concern is dependent upon its ability to raise adequate capital to fund its operations and repay its outstanding debt and other past due obligations, fully align its operating costs, increase its net revenues, and maintain profitable operations. The unaudited condensed consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
HHS Provider Relief Funds
The
Company received HHS Provider Relief Funds, which were provided to eligible healthcare providers out of the $
| 13 |
As
of September 30, 2023, the Company’s estimate of the amount for which it is reasonably assured of meeting the underlying terms
and conditions of the grants was based on, among other things, the various notices issued by HHS on September 19, 2020, October 22, 2020,
and January 15, 2021 and the Company’s results of operations during the three and nine months ended September 30, 2023 and the
years ended December 31, 2022, 2021 and 2020. The Company believes that it was appropriate to recognize a net of $
The Company has been served with a qui tam complaint with regards to the use of monies received from HHS Provider Relief Funds, as more fully discussed in Note 12.
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Numerator | ||||||||||||||||
| Net income (loss) from continuing operations | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||
| Deemed dividends | ( | ) | ||||||||||||||
| Net income (loss) available to common stockholders, continuing operations | ( | ) | ( | ) | ( | ) | ||||||||||
| Net loss from discontinued operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net income (loss) available to common stockholders | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||
| Denominator | ||||||||||||||||
| Weighted average number of shares of common stock outstanding during the period - basic | ||||||||||||||||
| Warrants | ||||||||||||||||
| Convertible preferred stock | ||||||||||||||||
| Weighted average number of shares of common stock outstanding during the period - diluted | ||||||||||||||||
| Net income (loss) per share of common stock available to common stockholders - basic: | ||||||||||||||||
| Continuing operations | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||
| Discontinued operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total basic | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||
| Net income (loss) per share of common stock available to common stockholders - diluted: | ||||||||||||||||
| Continuing operations | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||
| Discontinued operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total diluted | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||
| 14 |
For the three months ended September 30, 2023 and 2022, the following potential common stock equivalents were excluded from the calculation of diluted loss per share as their effect was anti-dilutive:
| Three Months September 30, | ||||||||
| 2023 | 2022 | |||||||
| Warrants | ||||||||
| Convertible preferred stock | ||||||||
| Convertible debentures | ||||||||
| Stock options | ||||||||
For the nine months ended September 30, 2023 and 2022, the following potential common stock equivalents were excluded from the calculation of diluted loss per share as their effect was anti-dilutive:
| Nine Months September 30, | ||||||||
| 2023 | 2022 | |||||||
| Warrants | ||||||||
| Convertible preferred stock | ||||||||
| Convertible debentures | ||||||||
| Stock options | ||||||||
The terms of certain of the warrants, convertible preferred stock and convertible debentures issued by the Company provide for reductions in the per share exercise prices of the warrants and the per share conversion prices of the debentures and preferred stock (if applicable and subject to floors in certain cases) in the event that the Company issues common stock or common stock equivalents (as that term is defined in the agreements) at an effective exercise/conversion price that is less than the then exercise/conversion prices of the outstanding warrants, preferred stock or debentures, as the case may be. In addition, many of these securities contain exercise or conversion prices that vary based upon the price of the Company’s common stock on the date of exercise/conversion (see Notes 6, 9 and 10). These provisions have resulted in significant dilution of the Company’s common stock.
As a result of the Voting Agreement and Irrevocable Proxy (the “Voting Agreement”) discussed in Note 10 and the November 5, 2021 Amendment to the Company’s Certificate of Incorporation, as amended, to provide that the number of authorized shares of the Company’s common stock or preferred stock may be increased or decreased (but not below the number of shares then outstanding) by the affirmative vote of the holders of a majority in voting power of the stock of the Company, which is more fully discussed in Note 1, as of the date of filing this report, the Company believes that it has the ability to ensure that it has and/or can obtain sufficient authorized shares of its common stock to cover all outstanding rights to acquire potentially dilutive common shares.
As a result of these down round provisions, the potential common stock and common stock equivalents totaled at November 6, 2023. See Note 10 for a discussion of the number of shares of the Company’s authorized common and preferred stock.
Note 4 – Accounts Receivable