RENNOVA HEALTH INC SPECIAL NOTE CONCERNING FORWARD-LOOKING STATEMENTS
Certain statements made in this Form 10-Q are "forward-looking statements" (within the meaning of the Private Securities Litigation Reform Act of 1995) regarding the plans and objectives of management for future operations. Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. The forward-looking statements included herein are based on current expectations that involve numerous risks and uncertainties. The Company's plans and objectives are based, in part, on assumptions involving its continued business operations. Assumptions related to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond the control of the Company. Although the Company believes its assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove to be inaccurate and, therefore, there can be no assurance the forward-looking statements included in this report will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by the Company or any other person that the objectives and plans of the Company will be achieved. The forward-looking statements included in this Form 10-Q and referred to elsewhere are related to future events or our strategies or future financial performance. In some cases, you can identify forward-looking statements by terminology such as "may," "should," "believe," "anticipate," "future," "potential," "estimate," "expect," "intend," "plan," or the negative of such terms or comparable terminology. All forward-looking statements included in this Form 10-Q are based on information available to us as of the filing date of this report, and the Company assumes no obligation to update any such forward-looking statements, except as required by law. Our actual results could differ materially from the forward-looking statements. Important factors that might cause our actual results to differ materially from the results contemplated by the forward-looking statements are contained in the "Risk Factors" section of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2018 (the "2018 Form 10-K") and in our subsequent filings with theSecurities and Exchange Commission . The following discussion of our results of operations should be read in conjunction with the audited financial statements contained within the 2018 Form 10-K and with our unaudited condensed consolidated financial statements and related notes thereto included elsewhere in this report. COMPANY OVERVIEW Our Services
We have operated in two business segments: Hospital Operations and Clinical Laboratory Operations.
Our Hospital Operations represented approximately 99.9% and 99.0% of our revenues for the three and six months endedJune 30 2019 , respectively. Our Hospital Operations began with the opening of ourBig South Fork Medical Center onAugust 8, 2017 , following the receipt of the required licenses and regulatory approvals. Our clinical laboratory operations outside of our hospitals are now minimal and the Company is actively discussing the disposal of the laboratory operations outside of the hospital locations. There can be no guarantee that any discussions will lead to a successful sale. OnJanuary 31, 2018 , the Company entered into an asset purchase agreement to acquire from Community Health Systems, Inc. certain assets related to an acute care hospital located inJamestown, Tennessee , referred to asJamestown Regional Medical Center . The purchase was completed onJune 1, 2018 . The hospital was acquired by a newly formed subsidiary,Jamestown TN Medical Center, Inc. , and is an 85-bed facility of approximately 90,000 square feet on over eight acres of land, which offers, when operating, a 24-hourEmergency Department with two spacious trauma bays and seven private exam rooms, inpatient and outpatient medical services and a Progressive Care Unit which provides telemetry services. The Company suspended operations of the hospital inJune 2019 but is currently planning the reopening of the hospital. The acquisition also included a separate physician practice which now operates under Rennova asMountain View Physician Practice, Inc. Jamestown is located 38 miles west ofBig South Fork Medical Center . In addition, onMarch 5, 2019 , we closed an asset purchase agreement (the "Purchase Agreement") whereby we acquired certain assets related to an acute care hospital located inJellico, Tennessee and an outpatient clinic located inWilliamsburg, Kentucky . The hospital is known asJellico Community Hospital and the clinic is known as the CarePlus Center. The hospital and the clinic and their associated assets were acquired fromJellico Community Hospital, Inc. andCarePlus Rural Health Clinic, LLC , respectively.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.Jellico is located 33 miles east of ourBig South Fork Medical Center . 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. We refer to theJellico Community Hospital and CarePlus Center collectively asJellico Community Hospital . The purchase price was approximately$0.7 million . This purchase price was made available byMr. Diamantis , a director of the Company. Annual net revenues in recent years have been approximately$12,000,000 , with government payors, including Medicare and Medicaid, accounting for in excess of 70% of the payor mix. The Company does not expect that payor mix to change in the near future. 38 Our Hospital Operations generated revenues of approximately$4.1 million and$3.2 million during the three months endedJune 30, 2019 and 2018, respectively, and approximately$9.2 million and$4.7 million during the six months endedJune 30, 2019 and 2018, respectively. Going forward, we expect our Hospital Operations to provide us with a stable revenue base, as well as the potential for significant synergistic opportunities with ourClinical Laboratory Operations business segment. Prior to our focus on our Hospital Operations, our principal line of business had been clinical laboratory blood and urine testing services, with a particular emphasis on the provision of urine drug toxicology testing to physicians, clinics and rehabilitation facilities inthe United States . Our Clinical Laboratory Operations generated approximately$5,415 and$0.1 million of our revenues for the three months endedJune 30, 2019 and 2018, respectively, and$0.1 million and$0.2 million of our revenues for the six months endedJune 30, 2019 and 2018, respectively. Departure of Director
OnDecember 11 2019 Dr.Kamran Ajami resigned as a director of the Company. In submitting his resignation,Dr. Ajami did not express any disagreement with the Company on any matter relating to the Company's operations, policies or practices.Dr. Ajami had served as a director sinceApril 9, 2017 . Discontinued Operations OnJuly 12, 2017 , the Company announced plans to spin off itsAdvanced Molecular Services Group ("AMSG") and in the third quarter 2017 the Company's Board of Directors voted unanimously to spin off the Company's wholly-owned subsidiary,Health Technology Solutions, Inc. ("HTS"), as independent publicly traded companies by way of tax-free distributions to the Company's stockholders. While these spin offs have taken longer than anticipated, completion of these spin offs is now expected to occur in the first quarter of 2020. The spin offs are subject to numerous conditions, including effectiveness of Registration Statements on Form 10 to be filed with theSecurities and Exchange Commission , and consents, including under various funding agreements previously entered into by the Company. A record date to determine those stockholders entitled to receive shares in the spin offs should be approximately 30 to 60 days prior to the dates of the spin offs. The strategic goal of the spin offs is to create three public companies, each of which can focus on its own strengths and operational plans. In addition, after the spin offs, each company will provide a distinct and targeted investment opportunity. The Company has reflected the amounts relating to AMSG and HTS as disposal groups classified as held for sale and included in discontinued operations in the Company's accompanying unaudited condensed consolidated financial statements. Outlook We believe that the addition of our Hospital Operations to our business model offers a more predictable and stable revenue base, as well as the potential for significant synergistic opportunities with our Clinical Laboratory Operations business segment. To date, our focus is on rural hospitals, which provide a much-needed service to their local communities. These hospitals reduce our reliance on commission based sales employees to generate sales. Our hospitals, CarePlus center and a doctor's office practice are in the same general geographic location, which has created numerous efficiencies in purchasing, staffing and provision of needed services to the local communities. We are confident that this is a sustainable model we can continue to grow through acquisition and development and believe that we can benefit from the compliance and IT and software capabilities we already have in place. The Company is focusing on centralizing certain functions like ordering of supplies, revenue cycle management and financial management of the acquired facilities and is planning to share certain services that one facility alone could not sustain. Management believes that these actions when complete will enable the operations to be profitable and cash flow positive. Our Clinical Laboratory Operations revenues have decreased significantly over the past number of years. This decline in revenues has had a material adverse impact on our liquidity, results of operations and financial condition, and is the result of lower third-party reimbursement and while we secured numerous in-network contracts with payers our status in many cases is as an "out of network" service provider. These trends have impacted our entire industry, and have been accompanied by allegations of irregularities in the practices of a number of our competitors and substance abuse facilities. In response, we have put in place a robust compliance program that we are implementing in all facets of our business. We believe that our ability to grow our Clinical Laboratory Operations revenues inside our Hospital Operations and return this division to profitability is dependent on our ability to secure additional "in-network" contracts with insurance companies and other third-party payers, which will then ensure adequate and timely payment for the toxicology, clinical pharmacogenetics and other testing services we perform. These third-party payers are now generally unwilling to reimburse service providers who are not part of their network, a departure from prior industry practices and a trend that has accelerated during the past several years. However, we do anticipate that significant new opportunities to become credentialed with certain large third-party payers will arise in 2020 and 2021, which would have a significant positive impact on our future revenues. In addition, we have made a number of changes to our onboarding policies and procedures to ensure that, on a going forward basis, substantially all services that we perform will be reimbursable. We believe that a successful spin off of AMSG and HTS as two independent publicly traded companies by way of tax-free distributions to the Company's stockholders would allow each to focus on its own strengths and operational plans. In addition, after the spin offs, each company will provide a distinct and targeted investment opportunity. The Company believes it will be able to recognize the expenditures to date with regard to AMSG and HTS, which are in excess of$20 million , as an investment after the spinoff(s) are complete.
39
Our net loss from continuing operations for the three months endedJune 30, 2019 was$13.3 million , as compared to net income of$45.5 million for the same period of a year ago. The change was due to an increase in the loss from continuing operations before other income (expense) and income taxes of$2.7 million and an increase in interest expense of$3.4 million in the three months endedJune 30, 2019 compared to the 2018 period, income from the change in fair value of derivative instruments in the 2018 period of$44.2 million and a gain on bargain purchase ofJamestown Regional Medical Center of$7.7 million in the 2018 period. Our net loss from continuing operations for the six months endedJune 30, 2019 was$26.2 million as compared to a net loss of$101.3 million for the same period a year ago. The change was due to an increase in the loss from continuing operations before other income (expense) and income taxes of$3.5 million , an increase in interest expense of$7.8 million , a reduction in the gain on bargain purchase of$7.5 million and a reduction in the loss from change in fair value of derivative instruments of$95.5 million in the six months endedJune 30, 2019 as compared to the 2018 period.
Comparison for the three months ended
The following table summarizes the results of our consolidated continuing
operations for the three months ended
Three Months Ended June 30,
2019 2018
$ % $ %
Net revenues $ 4,061,189 100.0 % $ 3,292,217 100.0 %
Operating expenses:
Direct costs of revenue 4,680,333 115.2 % 2,369,813 72.0 %General and administrative expenses 4,290,935 105.7 % 2,998,055 91.1 % Depreciation and amortization 186,236 4.6 % 317,734 9.7 % Loss from continuing operations before other income (expense) and income taxes (5,096,315 ) -125.5 % (2,393,385 ) -72.7 % Interest expense (7,871,798 ) -193.8 % (4,446,090 ) -135.0 % Other income (expense) (311,463 ) -7.7 % 409,092 12.4 % Gain on Bargain Purchase - 0.0 % 7,732,302 234.9 % Change in fair value of derivative instruments - 0.0 % 44,162,579 1341.4 % Provision for income taxes - 0.0 % - 0.0 % Net (loss) income from continuing operations$ (13,279,576 ) -327.0 %$ 45,464,498 1381.0 % Net Revenues
Consolidated net revenues were$4.1 million for the three months endedJune 30, 2019 , as compared to$3.3 million for the three months endedJune 30, 2018 , an increase of$0.8 million . The increase in net revenues was due to$2.1 million in revenue fromJellico Community Hospital and CarePlus Center, which were acquired onMarch 5, 2019 . Partially reducing hospital net revenue in the three months endedJune 30, 2019 as compared to the 2018 period was a reduction in net revenue from ourBig South Fork Medical Center of$0.9 million and a reduction of net revenue fromJamestown Regional Medical Center of$0.4 million . The increase in Hospital Operations revenue was offset by an approximately$85,385 decrease in Clinical Laboratory Operations revenue for the 2019 period compared to the 2018 period. Net revenue for the three months endedJune 30, 2019 and 2018, include bad debt expense elimination of$2.3 million and$0.7 million , respectively, for doubtful accounts and$29.1 million and$6.9 million , respectively, for contractual allowances. In a continued effort to refine our revenue recognition estimates, the Company practices the full retrospective approach, evaluating and analyzing the realizability of gross service revenues monthly, to make certain that we are properly allowing for bad debt and contractual adjustments. Direct Cost of Revenue Direct costs of revenue increased by$2.3 million compared to the three months endedJune 30, 2018 . The increase was related to the Hospitals Operations. As a percentage of net revenue, direct costs increased to 115.2% in the three months endedJune 30, 2019 as compared to 72.0% in the comparable period. We attribute the increase primarily to the Company's decision to suspend operations atJamestown Regional Medical Center in the second quarter of 2019 following the termination of the Medicare program. OnJune 10, 2019 , the Company hired a new CEO to oversee the reopening of the hospital and took steps to re-enter the
Medicare program. 40
General and Administrative Expenses
General and administrative expenses increased by$1.3 million , or 43.1%, in the three months endedJune 30, 2019 compared to the same period a year ago. The increase was primarily due to a$1.2 million increase in our Hospital Operations' general and administrative expenses.
Depreciation and Amortization Expenses
Depreciation and amortization expense was
Loss from Continuing Operations Before Other Income (Expense) and Income Taxes
Loss from continuing operations before other income (expense) and income taxes increased by$2.7 million for the three months endedJune 30, 2019 as compared to same period a year ago. We attribute the increase primarily to the results from our Hospital Operations. Other Income (Expense) Other expense was$0.3 million for the three months endedJune 30, 2019 , compared to other income of$0.4 million for the same period a year ago. The expense in the three months endedJune 30, 2019 was due to the loss on sale of receivables under a factoring arrangement. The income in the three months endedJune 30, 2018 was due primarily to a gain on the disposal of assets under finance leases. Gain on Bargain Purchase The gain on bargain purchase of$7.7 million for the three months endedJune 30, 2018 resulted primarily from real property ofJamestown Regional Medical Center , which was acquired onJune 1, 2018 .
Change in Fair Value of Derivative Instruments
The change in the fair value of derivative instruments of$44.2 million for the three months endedJune 30, 2018 was primarily due to the decrease in the spread between the price of our common stock and the exercise/conversion prices of the derivatives fromMarch 31, 2018 andJune 30, 2018 . We did not incur a change in fair value of derivative instruments in the 2019 period. Interest Expense
Interest expense for the three months endedJune 30, 2019 was$7.9 million , as compared to$4.4 million for the three months endedJune 30, 2018 . Interest expense for the three months endedJune 30, 2019 includes$0.6 million for interest on loans from a member of our board of directors,$1.5 million for the amortization of debt discount and deferred financing costs related to debentures and$5.4 million in interest expense associated with the modification of warrants. Interest expense for the three months endedJune 30, 2018 included$2.5 million for the amortization of debt discount and deferred financing costs related to convertible debentures and warrants and$2.0 million for notes payable and finance lease obligations.
Net Loss/Income From Continuing Operations
Our net loss from continuing operations was$13.3 million for the three months endedJune 30, 2019 , as compared to net income of$45.5 million for the three months endedJune 30, 2018 . The loss for the three months endedJune 30, 2019 was due primarily to the loss from continuing operations before other income (expense) and income taxes of$5.1 million and interest expense of$7.9 million . The income for the three months endedJune 30, 2018 was due primarily to the change in value of our derivative instruments of$44.2 million . Also contributing to the income in the 2018 versus the loss in the 2019 period was a$7.7 million bargain purchase gain related to theJamestown Regional Medical Center acquisition onJune 1, 2018 . 41 The following table presents key financial metrics for our Hospital Operations segment: Three Months Ended June 30, 2019 2018 Change % Hospital Operations Net revenues$ 4,055,774 $ 3,177,481 $ 878,293 27.6 % Operating expenses: Direct costs of revenue 4,680,333 2,349,203 2,331,130 -99.2 % General and administrative expenses 3,201,283 1,960,051 1,241,232 -63.3 % Depreciation and amortization 176,371 99,991 76,380 -76.4 % Loss from operations$ (4,002,213 ) $ (1,231,764 ) $ (2,770,449 ) -224.9 % Number of Patients Served 12,737 5,070 7,667 Key Operating Measures - Net revenues per patient served:$ 318.42 $ 626.72 N/A Key Operating Measures - Direct cost of revenue per patient:$ 367.46 $ 463.35 N/A
In the three months endedJune 30, 2019 , we reassessed our revenue rate atBig South Fork Medical Center to recognize revenue after contractual allowances at 10% based on the Company's historical data compared to using an industry standard rate of 20% in the compared 2018 period.
The following table presents key financial and operating metrics for our Clinical Laboratory Operations segment:
Three Months Ended June 30,
2019 2018 Change %
Clinical Laboratory Operations
Net revenues (1) $ 5,415 $ 114,736 $ (109,321 ) -95.3 %
Operating expenses:
Direct costs of revenue - 20,609 (20,609 ) -100.0 %General and administrative expenses 175,760 338,902
(163,142 ) -48.1 %
Sales and marketing expenses - - 0.0 %
Depreciation and amortization 9,683 217,496 (207,813 ) -95.5 %
Loss from operations $ (180,028 ) $ (462,271 ) $ 282,243 61.1 %
Key Operating Measures - Revenues: (1)
Insured tests performed - 840 (840 ) -100.0 %
Net revenue per insured test $ - $ 136.59 $ (136.59 ) 100.0 %
Key Operating Measures - Direct Costs:
Total samples processed - 1,282 (1,282 ) -100.0 %
Direct costs per sample $ - $ 16.08 $ (16.08 ) -100.0 %
(1) The revenue for the three months ended
of bad debt.
42
The following table presents key financial metrics for our Corporate group:
Three Months Ended June 30,
2019 2018 Change %
Corporate
Operating expenses:General and administrative expenses$ 913,892 $ 699,102 $ 214,790 30.7 % Depreciation and amortization 182 248
(66 ) -26.6 %
Loss from operations $ (914,074 ) $ (699,350 ) $ (214,724 ) 30.7 %
Comparison for the six months ended
The following table summarizes the results of our consolidated continuing
operations for the six months ended
Six Months Ended June 30,
2019 2018
$ % $ %
Net revenues $ 9,251,839 100.0 % $ 4,893,877 100.0 %
Operating expenses:
Direct costs of revenue 8,844,733 95.6 % 4,459,179 91.1 %General and administrative expenses 9,567,071 103.4 % 5,888,858 120.3 % Depreciation and amortization 409,822 4.4 % 651,248 13.3 % Loss from continuing operations before other income (expense) and income taxes (9,569,787 ) -103.4 % (6,105,408 ) -124.8 % Interest expense (15,591,766 ) -168.5 % (7,753,103 ) -158.4 % Other income (1,195,742 ) -12.9 % 421,061 8.6 % Gain on bargain purchase 250,000 2.7 % 7,732,302 158.0 % Change in fair value of derivative instruments (105,076 ) -1.1 % (95,616,653 ) -1953.8 % Provision for income taxes - 0.0 %
(76 ) 0.0 %
Net loss from continuing operations
Net Revenues Consolidated net revenues were$9.3 million for the six months endedJune 30, 2019 , as compared to$4.9 million for the six months endedJune 30, 2018 , an increase of$4.4 million . The increase in net revenues was due to$3.0 million in revenue fromJellico Community Hospital and CarePlus Center, which were acquired onMarch 5, 2019 and$1.8 million in revenue fromJamestown Regional Medical Center acquired onJune 1, 2018 . Partially reducing hospital net revenue in the six months endedJune 30, 2019 as compared to the 2018 period was a reduction in net revenue from ourBig South Fork Medical Center of$0.3 million . The increase in Hospital Operations revenue was offset by an approximately$69,521 decrease in Clinical Laboratory Operations revenue for the 2019 period compared to the 2018 period. Net revenue for the six months endedJune 30, 2019 and 2018, include bad debt expense elimination of$3.9 million and$1.3 million , respectively, for doubtful accounts and$60.9 million and$17.4 million , respectively, for contractual allowances. In a continued effort to refine our revenue recognition estimates, the Company practices the full retrospective approach, evaluating and analyzing the realizability of gross service revenues monthly, to make certain that we are properly allowing for bad debt and contractual adjustments. Direct Cost of Revenue Direct costs of revenue increased by$4.4 million compared to the six months endedJune 30, 2018 . The increase is related to our Hospitals Operations. As a percentage of net revenue, direct costs increased to 95.6% in the six months endedJune 30, 2019 as compared to 91.1% in the comparable period. We attribute the increase primarily to the Company's decision to suspend operations atJamestown Regional Medical Center in the second quarter of 2019 following the termination of the Medicare program. OnJune 10, 2019 , the Company hired a new CEO to oversee the reopening of the hospital and took steps to re-enter the
Medicare program. 43
General and Administrative Expenses
General and administrative expenses increased by$3.7 million , or 62.5%, compared to the same period a year ago. The increase was primarily due to a$4.3 million increase in our Hospital Operations general and administrative expenses, partially offset by a decrease in general and administrative expenses from Clinical Laboratory Operations of$0.4 million and from Corporate of$0.2 million .
Depreciation and Amortization Expenses
Depreciation and amortization expense was$0.4 million for the six months endedJune 30, 2019 as compared to$0.7 million for the same period a year ago. The decrease was due to fully depreciating certain fixed assets during 2018.
Loss From Continuing Operations Before Other Income (Expense) and Income Taxes
Loss from continuing operations before other income (expense) and income taxes increased by$3.5 million for the six months endedJune 30, 2019 as compared to same period a year ago due to an increase in the loss from our Hospital Operations of$4.5 million , which was partially offset by a decrease in the loss from operations of our Clinical Laboratory Operations of$0.8 million and a decrease in Corporate's general and administrative expenses of$0.2 million . Other Income (Expense) Other expense was$1.2 million for the six months endedJune 30, 2019 , compared to other income of$0.4 million for the same period a year ago. The expense in the six months endedJune 30, 2019 was due primarily to the loss on sale of receivables under a factoring arrangement of$0.7 million and a penalty for non-payment of a debenture of$0.6 million . The income in the six months endedJune 30, 2018 was due primarily to a gain on the disposal of assets under finance leases. Gain on Bargain Purchase
The gain on bargain purchase of$0.3 million for the six months endedJune 30, 2019 resulted primarily from intangible assets ofJellico Community Hospital and CarePlus Center, which was acquired onMarch 5, 2019 . The gain on bargain purchase of$7.7 million for the three months endedJune 30, 2018 resulted primarily from real property ofJamestown Regional Medical Center , which was acquired onJune 1, 2018 .
Change in Fair Value of Derivative Instruments
The change in the fair value of derivative instruments for the six months endedJune 30, 2019 was due to the increase in the number of shares issuable under the conversion terms of theMarch 2017 debenture. The principal amount of the debenture increased as a result of a penalty for non-payment of the debenture on the maturity date, which in turn increased the fair value of the derivative liability associated with the debenture. The increase in the fair value of the derivative instruments for the six months endedJune 30, 2018 was primarily due to the increase in the number of shares issuable pursuant to warrants as a result of ratchet provisions and the increase in the spread between the price of our common stock and the exercise prices of the derivatives. Because the exercise price of a significant portion of outstanding warrants were exercisable at prices below the current market price onJune 30, 2018 , and subject to further reduction in their exercise price in the event of future issuances at lower prices, the fair value of the warrants increased. Interest Expense
Interest expense for the six months endedJune 30, 2019 was$15.6 million , as compared to$7.8 million for the six months endedJune 30, 2018 . Interest expense for the six months endedJune 30, 2019 includes$0.7 million for interest on loans from a member of our board of directors and$5.0 million for the amortization of debt discount and deferred financing costs related to debentures and$9.5 million in interest expense associated with the modification of warrants. Interest expense for the six months endedJune 30, 2018 includes$7.1 million for the amortization of debt discount and deferred financing costs related to convertible debentures and warrants.
Net Loss From Continuing Operations
Our net loss from continuing operations for the six months endedJune 30, 2019 was$26.2 million as compared to a net loss of$101.3 million for the same period a year ago. The change was primarily due to an increase in the loss from continuing operations before other income (expense) and income taxes of$3.5 million , an increase in interest expense of$7.8 million , a reduction in the gain on bargain purchase of$7.5 million and a reduction in the loss due to the change in fair value of derivative instruments of$95.5 million in the six months endedJune 20, 2019 as compared to the 2018 period. 44 The following table presents key financial metrics for our Hospital Operations segment: Six Months Ended June 30, 2019 2018 Change % Hospital Operations Net revenues$ 9,161,039 $ 4,733,556 $ 4,427,483 93.5 % Operating expenses: Direct costs of revenue 8,841,951 4,418,158 4,423,793 -100.1 % General and administrative expenses 7,146,261 2,882,044 4,264,217 -148.0 % Depreciation and amortization 350,147 137,717 212,430 -154.3 % Loss from operations$ (7,177,320 ) $ (2,704,363 ) $ (4,472,957 ) -165.4 % Number of Patients Served 23,692 8,844 N/A Key Operating Measures - Revenues per patient served:$ 386.67 $ 535.23
N/A
Key Operating Measures - Direct costs of revenue per patients served:$ 373.20 $ 499.57 N/A In the six months endedJune 30, 2019 , we reassessed our revenue rate atBig South Fork Medical Center to recognize revenue after contractual allowances at 10% based on the Company's historical data compared to using an industry standard rate of 20% in the compared 2018 period.
The following table presents key financial and operating metrics for our Clinical Laboratory Operations segment:
Six Months Ended June 30,
2019 2018 Change %
Clinical Laboratory Operations
Net revenues $ 90,800 $ 160,321 $ (69,521 ) -43.4 %
Operating expenses:
Direct costs of revenue 2,782 41,021 (38,239 ) -93.2 %
General and administrative
expenses 434,231 824,685 (390,454 ) -47.3 %
Depreciation and amortization 59,345 512,969 (453,624 ) -88.4 %
Loss from operations $ (405,558 ) $ (1,218,354 ) $ 812,796 -66.7 %
Key Operating Measures -
Revenues:
Insured tests performed 78 1,549 (1,471 ) -95.0 %
Net revenue per insured test (1) $ 1,164.10 $ 103.50 $ 1,060.60 1024.7 %
Revenue recognition percent of
gross billings 11.0 % 13.0 % -2.0 %
Key Operating Measures - Direct Costs: Total samples processed 19 3,240 (3,221 ) -99.4 % Direct costs per sample$ 146.42 $ 12.66 $ 133.76 1056.5 %
(1) Net revenue per insured test was impacted by the recovery of bad debt in the
six months ended
debt, the net revenue per insured test was approximately
The reduction in insured tests performed in the six months ended
2019 negatively impacted our revenues by approximately
the increase in net revenue per insured test was positively impacted by the
recovery of bad debt in the amount of approximately
direct costs per sample resulted in an approximately
direct costs of revenue, while the decrease in the number of samples
processed resulted in an approximately
revenue.
45
The following table presents key financial metrics for our Corporate group:
Six Months Ended June 30,
2019 2018 Change %
Corporate
Operating expenses:General and administrative expenses$ 1,986,579 $ 2,182,129 $
(195,550 ) -9.0 % Depreciation and amortization 330 562 (232 ) -41.3 % Loss from operations$ (1,986,909 ) $ (2,182,691 ) $ 195,782 -9.0 %
LIQUIDITY AND CAPITAL RESOURCES
For the six months endedJune 30, 2019 and the year endedDecember 31, 2018 , we financed our operations primarily from the sale of our equity securities, the issuance of debentures and advances from related parties and in the six months endedJune 30, 2019 from the sale of accounts receivable to several factors. Future cash needs for working capital, capital expenditures and potential acquisitions will require management to seek additional equity or obtain additional credit facilities. The sale of additional equity will result in additional dilution to our stockholders. A portion of our cash may be used to acquire or invest in complementary businesses or products or to obtain the right to use complementary technologies. From time-to-time, in the ordinary course of business, we evaluate potential acquisitions of such businesses, products or technologies. Going Concern and Liquidity Under Accounting Standards Update, or 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 accompanying unaudited condensed consolidated financial statements, atJune 30, 2019 , we had$0.4 million cash on hand from continuing operations, a working capital deficit of$57.2 million , an accumulated deficit of$565.8 million and a stockholders' deficit of$55.6 million . In addition, we incurred a loss from continuing operations of$26.2 million for the six months endedJune 30, 2019 . As of the date of this report, our cash position is deficient and payments are not being made in the ordinary course. In addition, we have not repaid approximately$24.6 million of outstanding principal balance of debentures, including default penalties, which are past due. Our fixed operating expenses include payroll, rent, finance lease payments and other fixed expenses, as well as other costs required to operate our hospitals. Our fixed operating expenses were approximately$2.0 million per month for the six months endedJune 30, 2019 . We need to raise additional funds immediately and continue to do so until we begin to realize positive cash flow from operations. There can be no assurance that we will be able to achieve our business plan, which is to acquire and operate clusters of rural hospitals, raise any additional capital or secure the additional financing necessary to implement our current operating plan. Our ability to continue as a going concern is dependent upon our ability to significantly reduce our operating costs, increase our revenues and eventually regain profitable operations. The accompanying unaudited condensed consolidated financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern. We received approximately$3.8 million in cash from issuances of debentures during the six months endedJune 30, 2019 . In addition, during the six months endedJune 30, 2019 , we entered into three accounts receivable factoring arrangements, as more fully discussed in Note 4 to the accompanying condensed consolidated financial statements, andMr. Diamantis , a member of our board of directors, advanced the Company: (i)$0.7 million for the purchase ofJellico Community Hospital ; (ii)$5.0 million , which was used to repay obligations under a prepaid forward purchase contract related to an accounts receivable financing; (iii)$0.3 million for fees and expenses incurred in connection with the settlement of the prepaid forward purchase contract; and (iv)$3.1 million
for working capital purposes. 46 Subsequent toJune 30, 2019 and throughOctober 31, 2019 ,Mr. Diamantis advanced the Company$4.9 million , which was used to repay obligations under the prepaid forward purchase contract. In additionMr. Diamantis loaned the Company$2.4 million , of which$1.6 million was used for fees and expenses incurred in connection with the settlement of the prepaid forward purchase contract and the remainder was used for working capital purposes. In addition, subsequent toJune 30, 2019 and throughOctober 31, 2019 , we entered into two additional accounts receivable factoring arrangements and received proceeds of$1.5 million from the issuance of a promissory note.
As of
The following table presents our capital resources as ofJune 30, 2019 andDecember 31, 2018 : June 30, December 31, 2019 2018 Change Cash$ 431,314 $ 6,870 $ 424,444 Working capital deficit (57,193,009 ) (39,293,904 ) (17,899,105 ) Total debt, excluding discounts and derivative liabilties 34,042,358 26,418,305 7,624,053 Capital lease obligations 618,282 762,208 (143,926 ) Stockholders' deficit$ (55,646,831 ) $ (39,167,864 ) $ (16,478,967 )
The following table presents the major sources and uses of cash for the six
months ended
Six Months Ended June 30,
2019 2018 Change
Cash used in operations $ (5,519,110 ) $ (5,756,986 ) $ 237,876
Cash (used in) provided by investing
activities (702,252 ) 598,891 (1,301,143 )
Cash provided by financing activities 6,645,806 5,175,153 1,470,653
Net change in cash 424,444 17,058
407,386
Cash and cash equivalents, beginning of the year 6,870 -
6,870
Cash and cash equivalents, end of the period$ 431,314 $ 17,058 $ 414,256
The components of cash used in operations for the six months ended
Six Months Ended June 30,
2019 2018 Change
Net loss from continuing operations
16,003,231 95,878,011 (79,874,780 )
Accounts receivable (2,114,913 ) (1,948,788 ) (166,125 )
Inventory 35,292 (39,689 ) 74,981
Accounts payable, checks issued in
excess of
bank balance and accrued expenses 7,309,154 2,157,5975,151,557
(Loss) income from discontinued operations (653,860 ) 275,216 (929,076 ) Other (39,126 ) 15,022 (54,148 ) Net cash used in operating activities (5,672,593 ) (4,984,508 ) (688,085 ) Cash provided by (used in) discontinued operations 153,483 (772,478 ) 925,961 Cash used in operations$ (5,519,110 ) $ (5,756,986 ) $ 237,876 47 Cash used in investing activities for the six months endedJune 30, 2019 was due to the acquisition ofJellico Community Hospital andCarePlus Center for$0.7 million and the purchase of property and equipment of$43,715 . Cash used in investing activities for the six months endedJune 30, 2018 was due to the acquisition ofJamestown Regional Medical Center for$0.6 million , partially offset by cash from the sale of equipment of$0.4 million . Cash provided by investing activities of discontinued operations for the six months endedJune 30, 2018 consist of the$800,000 received from theFebruary 14, 2018 Common Stock Purchase Agreement with two investors pursuant to which the Company agreed to sell an aggregate of 200,000 shares of common stock of NanoVibronix, Inc. owned by the Company at a purchase price of$4.00 per share. The Company had acquired the shares as a result of an investment originally made in 2011. Cash provided by financing activities for the six months endedJune 30, 2019 consists of$9.1 million from the issuance of related party notes and advances,$3.8 million from the issuances of debentures and$1.2 million from the sale of receivables under factoring arrangements, partially offset by payments of related party notes and advances of$1.5 million , payments of notes payable of$5.0 million , receivables paid to factors of$0.8 million and$0.1 million for repayment of finance lease obligations. Cash provided by financing activities for the six months endedJune 30, 2018 consists of$3.1 million from related party notes and advances, and$5.5 million received from the issuances of debentures, partially offset by payments of related party notes and advances of$2.5 million ,$0.3 million in payments of notes payable and$0.7 million for repayment of finance lease obligations. 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 price of the outstanding warrants, preferred stock or debentures, as the case may be. In addition, the majority of these equity-based securities contain exercise/conversion prices that vary based upon the price of the Company's common stock on the date of exercise/conversion (see Notes 8, 11, 12 and 13 to the accompanying unaudited condensed consolidated financial statements). 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. As a result of these down round provisions, the potential common stock equivalents totaled approximately 759.0 billion as ofDecember 5, 2019 . OTHER MATTERS Inflation
We do not believe inflation has a significant effect on the Company's operations at this time.
Off Balance Sheet Arrangements
UnderSEC regulations, we are required to disclose the Company's off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company's financial condition, results of operations, liquidity, capital expenditures or capital resources that are material to investors. Off-balance sheet arrangements consist of transactions, agreements or contractual arrangements to which any entity that is not consolidated with
us is a party, under which we have:
? Any obligation under certain guarantee contracts.
? Any retained or contingent interest in assets transferred to an unconsolidated
entity or similar arrangement that serves as credit, liquidity or market risk
support to that entity for such assets.
? Any obligation under a contract that would be accounted for as a derivative
instrument, except that it is both indexed to the Company's stock and
classified in stockholder's equity in the Company's statement of financial
position.
? Any obligation arising out of a material variable interest held by us in an
unconsolidated entity that provides financing, liquidity, market risk or
credit risk support to us, or engages in leasing, hedging or research and
development services with us.
As of
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