RNVA: Rennova Health Analysis and Research Report

2018-08-18 - by Asif , Contributing Analyst - 68 views

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Business overview

Rennova Health, Inc. (together with its subsidiaries, “Rennova”, “we” or the “Company”) is a provider of an expanding group of health care services for healthcare providers, patients and individuals. Beginning in 2018, the Company intends to focus on and operate two synergistic divisions: 1) Clinical diagnostics through its clinical laboratories; and 2) Hospital operations through its Big South Fork Medical Center, which opened on August 8, 2017, and a hospital in Jamestown Tennessee, including a doctor’s practice, the assets of which the company expect to acquire in the second quarter of 2018, pursuant to the terms of a definitive asset purchase agreement that the company entered into on January 31, 2018, as more fully discussed below. The company believe that its approach will produce a more sustainable business model and the capture of multiple revenue streams from medical providers, patients and hospital services. Management determined that because Big South Fork Medical Center was reopened after being closed and contracts with payers had to be negotiated and implemented during the first months of operation, they would recognize a 20% collection rate for the period to December 31, 2017 until there was adequate collection history to analyze and confirm anticipated collections. Jamestown is a fully operating facility.

On July 12, 2017, the Company announced plans to spin off its Advanced 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. Completion of these spinoffs is expected to occur in the third quarter of 2018. The company's Board of Directors is currently considering if AMSG and HTS would be better as one combined spinoff instead of two. The spinoffs are subject to numerous conditions, including effectiveness of Registration Statements on Form 10 to be filed with the Securities 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 spinoffs should be approximately 30 to 60 days prior to the dates of the spinoffs. The strategic goal of the spinoffs is to create three (or two) public companies, each of which can focus on its own strengths and operational plans. In addition, after the spinoffs, 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 consolidated financial statements. Prior to being classified as held for sale, AMSG had been included in the Decision Support and Informatics division, except for the Company’s subsidiary, Alethea Laboratories, Inc., which had been included in the Clinical Laboratories division and HTS had been included in the Company’s Supportive Software Solutions division. The Company believes it will be able to recognize the expenditures to date, which is in excess of $20 million, as an investment after the spinoff(s) are complete.

Rennova Health has received approximately $15.7 million in cash from the issuances of debentures and warrants during 2017 (see Note 8 to the consolidated financial statements), $4.3 million from related parties (see Notes 7 and 8 to the consolidated financial statements) and an additional $4.0 million of proceeds on October 30, 2017 from the issuance of its convertible preferred stock (see Note 12 to the consolidated financial statements). Subsequent to December 31, 2017, the company received $2 million from the issuance of debentures and $0.8 million from the sale of stock the company owned (see Note 20).

The protective covenants in the various agreements combined with the Company’s current inability to issue new shares and nonpayment of certain liabilities means that $12.4 million that might otherwise be treated as equity have been treated as derivative liabilities and had the relative effect applied to the Company’s financial statements including the profit and loss and balance sheet.

The company's net loss from continuing operations for the year ended December 31, 2017 was $50.9 million, as compared to $22.6 million for the same period of a year ago. The change is primarily due to the decrease in operating expenses of $5.1 million and the increase in revenue of $1.3 million offset by $12.4 million additional expense related to the value of derivative liabilities referred to above, an increase of $15.2 million in interest expense, the decrease of $5.3 million in other income (expense), and additional income tax expense of $1.8 million.

History and Development of the Company

Medytox Solutions, Inc. (“Medytox”) was organized on July 20, 2005 under the laws of the State of Nevada. In the first half of 2011, Medytox’s management elected to reorganize as a holding company, and Medytox established and acquired a number of companies in the medical service and software sector between 2011 and 2014.

On November 2, 2015, pursuant to the terms of the Agreement and Plan of Merger, dated as of April 15, 2015, by and among CollabRx, Inc. (“CollabRx”), CollabRx Merger Sub, Inc. (“Merger Sub”), a direct wholly-owned subsidiary of CollabRx formed for the purpose of the merger, and Medytox, Merger Sub merged with and into Medytox, with Medytox as the surviving company and a direct, wholly-owned subsidiary of CollabRx (the “Merger”). Prior to closing, the Company amended its certificate of incorporation to effect a 1-for-10 reverse stock split and to change its name to Rennova Health, Inc. In connection with the Merger, (i) each share of common stock of Medytox was converted into the right to receive 0.4096 shares of common stock of the Company, (ii) each share of Series B Preferred Stock of Medytox was converted into the right to receive one share of a newly-authorized Series B Convertible Preferred Stock of the Company, and (iii) each share of Series E Convertible Preferred Stock of Medytox was converted into the right to receive one share of a newly-authorized Series E Convertible Preferred Stock of the Company. This transaction was accounted for as a reverse merger in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and, as such, the historical financial statements of Medytox became the historical financial statements of the Company.

Holders of Company equity prior to the closing of the Merger (including all outstanding Company common stock and all restricted stock units, options and warrants exercisable for shares of Company common stock) held 10% of the Company’s common stock immediately following the closing of the Merger, and holders of Medytox equity prior to the closing of the Merger (including all outstanding Medytox common stock and all outstanding options exercisable for shares of Medytox common stock, but less certain options that were cancelled upon the closing pursuant to agreements between Medytox and such optionees) held 90% of the Company’s common stock immediately following the closing of the Merger, in each case on a fully diluted basis, provided, however, outstanding shares of Series B Convertible Preferred Stock and Series E Convertible Preferred Stock, certain outstanding convertible promissory notes exercisable for Company common stock after the closing and certain option grants expected to be made following the closing of the Merger were excluded from such ownership percentages.

Common Stock Listing

On November 3, 2015, the common stock of Rennova Health, Inc. commenced trading on The NASDAQ Capital Market under the symbol “RNVA.” Prior to that date, its common stock was listed on The NASDAQ Capital Market under the symbol “CLRX.”

On April 18, 2017, the Company was notified by NASDAQ that the stockholders’ equity balance reported on the Company’s Form 10-K for the year ended December 31, 2016 fell below the $2.5 million minimum requirement for continued listing under The Nasdaq Capital Market’s Listing Rule 5550(b)(1) (the “Rule”). In accordance with the Rule, the Company submitted a plan to Nasdaq outlining how it intended to regain compliance. On August 17, 2017, Nasdaq notified the Company that its plan to correct the stockholders’ equity deficiency did not contain sufficient evidence to support a correction being achieved in the required time frame. The Company appealed this decision to a Hearing Panel which, on October 23, 2017, maintained this position and denied the Company a continued listing. Effective October 25, 2017, the Company’s common stock (RNVA) and warrants to purchase common stock (RNVAW) were no longer listed on The Nasdaq Capital Market but began trading on the OTCQB instead.

Reverse Stock Splits

On February 7, 2017, the Company’s Board of Directors approved an amendment to the Company’s Certificate of Incorporation to effect a 1-for-30 reverse stock split of the Company’s shares of common stock effective on February 22, 2017 and on September 21, 2017, the Company’s Board of Directors approved an amendment to the Company’s Certificate of Incorporation to effect a 1-for-15 reverse stock split effective October 5, 2017 (the “Reverse Stock Splits”). The stockholders of the Company had approved these amendments to the Company’s Certificate of Incorporation on December 22, 2016 for the February 22, 2017 reverse stock split and on September 20, 2017 for the October 5, 2017 reverse stock split. In both cases, the Company’s stockholders had granted authorization to the Board of Directors to determine in its discretion the specific ratio, subject to limitations, and the timing of the reverse splits within certain specified effective dates.

As a result of the Reverse Stock Splits, every 30 shares of the Company’s then outstanding common stock was combined and automatically converted into one share of the Company’s common stock, par value $0.01 per share, on February 22, 2017 and every 15 shares of the Company’s then outstanding common stock was combined and automatically converted into one share of the Company’s common stock, par value $0.01 per share, on October 5, 2017. In addition, the conversions and exercise prices of all of the Company’s outstanding preferred stock, common stock purchase warrants, stock options, restricted stock, equity incentive plans and convertible notes payable were proportionately adjusted at the 1:30 reverse split ratio and again at the 1:15 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 Splits, other than as a result of the rounding up of fractional shares in the February reverse split and the payment of cash in lieu of fractional shares in the October reverse split, as no fractional shares were issued in connection with the Reverse Stock Splits.

The par value and other terms of the common stock were not affected by the Reverse Stock Splits. The authorized capital of the Company of 500,000,000 shares of common stock and 5,000,000 shares of preferred stock were also unaffected by the Reverse Stock Splits. All share, per share and capital stock amounts as of and for the years ended December 31, 2017 and 2016 have been restated to give effect to the Reverse Stock Splits.

Services

Rennova Health is a healthcare enterprise that delivers products and services to healthcare providers, their patients and individuals. The company operate in two synergistic divisions: 1) Clinical diagnostics services through its clinical laboratories; and 2) Hospital operations through its Big South Fork Medical Center and a hospital in Jamestown, Tennessee, the assets of which the company expect to acquire in the second quarter of 2018. The company aspire to create a more sustainable relationship with its customers by offering needed and interoperable solutions to capture multiple revenue streams from medical providers.

Clinical Diagnostics

The company's principal line of business over the past few years has 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 in the United States. As the company expand its customer base to include pain management and other healthcare providers, testing services to rehabilitation facilities represented approximately 51% of the Company’s revenues for the year ended December 31, 2017 and approximately 100% of the Company’s revenues for the year ended December 31, 2016. The company believe that Rennova Health is responding to the challenges faced by today’s healthcare providers to adopt paper free and interoperable systems, and to market demand for solutions by strategically expanding its offering of diagnostics services to include a full suite of clinical laboratory services. The drug and alcohol rehabilitation and pain management sectors provide an existing and sizable target market, where the need for its services already exists and opportunity is being created by a continued secular growth and need for compliance. This sector has been fraught with difficulties over the past two years as payers reduce reimbursement and cover for diagnostics in this sector. The lack of consistency between payer’s policies and their requirement for proof of medical necessity has created uncertainty for ordering physicians and testing laboratories and their ability to receive payment. Rennova Health has reduced the number of laboratories the company operate in first quarter 2018 to one facility in West Palm Beach, Florida.

The Company owns and operates the following products and services to support its business objectives and to enable it to offer these services to its customers:

Medytox Diagnostics, Inc. (“MDI”)

Through its CLIA certified laboratories, Rennova offers toxicology, clinical pharmacogenetics and esoteric testing. Rennova seeks to provide these testing services with superior logistics and specimen integrity, competitive turn-around times and excellent customer service.

Clinical Laboratory Operations

The Company, through its wholly-owned MDI subsidiary, owns and operates the following clinical laboratory:

EPIC Reference Labs, Inc.                 Riviera Beach, FL

During the year 2016 and year ended December 31, 2017, the Company experienced a substantial decline in the volume of samples processed at its laboratories and continued difficulty in receiving reimbursement for certain diagnostics. As result, in an effort to reduce costs, the Company is currently operating all of its Clinical Laboratory Operations business segment out of its EPIC Reference Labs, Inc. (“EPIC”) laboratory, and cost reduction efforts are continuing in response to the operating losses incurred. MDI formed EPIC as a wholly-owned subsidiary on January 29, 2013 to provide reference, confirmation and clinical testing services. The Company acquired necessary equipment and licenses in order to allow EPIC to test urine for drugs and medication monitoring. Operations at EPIC began in January 2014 using approximately 2,500 square feet and the premises has since been expanded to occupy approximately 12,500 square feet.

The Company’s Medytox Medical Marketing & Sales, Inc. subsidiary was formed on March 9, 2013 as a wholly-owned subsidiary to provide marketing, sales, and customer service exclusively for its clinical laboratories.

Hospital Operations

The Company believes that the acquisition or development of rural hospitals will create a stable revenue base as a needed service and believes that it can expand the sales of its products and services to surrounding medical providers and doctors’ groups.

On January 13, 2017, the company acquired the Hospital Assets in Oneida Tennessee, which include a 52,000-square foot hospital building and 6,300 square foot professional building on approximately 4.3 acres. Scott County Community Hospital, since renamed Big South Fork Medical Center, is classified as a Critical Access Hospital (rural) with 25 beds, a 24/7 emergency department, operating rooms and a laboratory that provides a range of diagnostic services. The hospital began operations on August 8, 2017, following the receipt of the required licenses and regulatory approvals and generated revenues of approximately $1.8 million during the period from August 8, 2017 to December 31, 2017.

he hospital had unaudited annual revenues of approximately $12 million, and a normalized EBITDA of approximately $1.3 million for Fiscal 2015, the last full year of the hospital’s operation. These revenues were attributable to the typical services of a rural acute care hospital, including emergency room visits, outpatient procedures, diagnostic ancillary tests, physical therapy and inpatient hospital stays. Based on the hospital’s historical information, the company believe the hospital offers an established patient and stable revenue base as it serves the general healthcare needs of its community and supports local physicians. Management determined that because Big South Fork Medical Center was reopened after being closed and contracts with payers had to be negotiated and implemented during the first months of operation, they would recognize a 20% collection rate for the period to December 31, 2017 until there was adequate collection history to analyze and confirm anticipated collections.

On January 31, 2018, the company entered into an asset purchase agreement (the “Purchase Agreement”) to acquire certain assets related to an acute care hospital and separate doctor’s practice located in Jamestown, Tennessee. The hospital is known as Tennova Healthcare – Jamestown. The transaction is expected to close in the second quarter of 2018, subject to customary regulatory approvals and closing conditions. Tennova Healthcare – Jamestown is a fully-operational 85-bed facility including a 24/7 emergency department, radiology department, surgical center, and a wound care and hyperbaric center. The purchase includes a 90,000-square foot hospital building on approximately eight acres. Tennova Healthcare – Jamestown is located 38 miles from the Company’s existing hospital, the Big South Fork Medical Center, which is located in Oneida Tennessee.

Marketing Strategy

Rennova provides a suite of products and services to the medical services sector. The company endeavor to be a single source for multiple business solutions that serve the medical services industry. The Company intends to expand, through its acquisition and subsequent integration of businesses, into a robust business model providing an extensive range of services to medical providers that demonstrate improved patient care and outcomes.

Competition

The Company competes in a fragmented diagnostics industry split between independently-owned and physician-owned laboratories. There are three predominant players in the industry that operate as full-service clinical laboratories (processing blood, urine and other tissue). In addition, the competition ranges from smaller privately-owned laboratories (3-6 employees) to large publicly-traded laboratories with significant market capitalizations. The healthcare industry is highly competitive among hospitals and other healthcare providers for patients, affiliations with physicians and acquisitions. The most significant competition its hospital, and any other hospitals the company may acquire, face comes from hospitals that provide more complex services, other healthcare providers, including outpatient surgery, orthopedic, oncology and diagnostic centers that also compete for patients. The company's hospitals, its competitors, and other healthcare industry participants are increasingly implementing physician alignment strategies, such as acquiring physician practice groups, employing physicians and participating in ACOs or other clinical integration models, which may impact its competitive position. In addition, increasing consolidation within the payor industry, vertical integration efforts involving payors and healthcare providers, and cost-reduction strategies by large employer groups and their affiliates may impact its ability to contract with payors on favorable terms and otherwise affect its competitive position.


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