Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q/A

Amendment No. 1

(Mark One)

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

 

For the quarterly period ended September 30, 2018

 

☐	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: 000-20190

 

AEON GLOBAL HEALTH CORP.

(Exact name of registrant as specified in its charter)

 

Delaware			14-1673067
(State or other jurisdiction			( I.R.S. Employer
of incorporation or organization)			Identification No.)
2225 Centennial Drive
Gainesville, GA 30504			30504
(Address of principal executive offices)			(zip code)

 

1-888-661-0225 (Registrant's telephone number, including area code)

 

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

 

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

 

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

 

Large accelerated filer ☐	Accelerated filer ☐
Non-accelerated filer ☒	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 ☐ No ☒

           

As of October 25, 2018 there were 7,383,706 shares of common stock, $0.001 par value per share, outstanding.

 

EXPLANATORY NOTE

               

           Aeon Global Health Corp.  (the "Company") is filing this Amendment No. 1 to its Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2018, previously filed with the Securities and Exchange Commission on November 9, 2018 (the "Original Form 10-Q") to amend and restate in their entirety the following items in the Original Form 10-Q:  (i) the unaudited interim financial statements as of and for the fiscal quarter ended September 30, 2018 set forth in Item 1 Part 1; (ii) the "Management's Discussion and Analysis of Financial Condition and Results of Operations" set forth in Item 2 of Part 1, and (iii) the discussion involving the Company's disclosure controls and internal controls over financial reporting, set forth in Item 4 of Part 1.  We have also updated the signature pages, the certifications of our Chief Executive Officer and our financial statements formatted in Extensible Business Reporting Language ("XBRL").  The restatement and the other aforementioned matters are described in Note 2 and Note 11 to the unaudited condensed consolidated financial statements included in this Amendment No. 1 on Form 10-Q/A (the "Amended Form 10-Q").

 

           As described in more detail in Note 2 to the unaudited condensed consolidated financial statements included in this Amended Form 10-Q, the restatement of the unaudited interim financial statements included in the Original Form 10-Q corrects an error in the Company's classification of an aggregate principal amount of $1,698,169 of notes payable as current liabilities instead of long-term liabilities on the condensed consolidated balance sheet included in the Original Form 10-Q, which resulted in an overstatement of the Company's working capital deficit for such period.  In addition, the change in classification of such notes payable required the Company to revalue the beneficial conversion feature of such notes, which resulted in an expense increase of $(185,851) to "Other (expense) income" on the condensed consolidated statement of operations.  The reclassification of these notes and the corresponding fair value of the beneficial conversion of such notes from current to long-term liabilities on the Company's condensed consolidated balance sheets resulted in a reduction of total current liabilities for the quarter ended September 30, 2018 from $7,603,761 to $5,531,328 and a corresponding increase in total liabilities resulting from the change in fair value of the beneficial conversion feature of these notes.  As a result of such additional expense, the net loss and net loss available to common shareholders also increased by the amount of the change to "Other (expense) income".  The adjustments to the fair value of the notes payable are further described in greater detail in Note 11 to the unaudited condensed consolidated financial statements included in this Amended Form 10-Q.  In addition, the condensed consolidated statements of shareholders' equity and cash flows have been revised to reflect these adjustments.

 

           The information in the Original Form 10-Q is amended to read in its entirety as set forth in this Amended Form 10-Q.  Except to reflect the restatement of the interim financial statements and other matters specifically identified as amended or restated in the first paragraph of this Explanatory Note, the information in the Original Form 10-Q and this Amended Form 10-Q has not been updated or otherwise changed to reflect any events, conditions or other developments that have occurred or existed since the date the Original Form 10-Q was filed with the SEC.  Accordingly, except solely with regard to the restatement and other matters specifically identified as amended or restated in the first paragraph of this Explanatory Note, all information in this Amended Form 10-Q speaks only as of November 9, 2018.  References made in this Amended Form 10-Q to "this Form 10-Q" or similar statements, means this Amendment on Form 10-Q/A unless the context requires otherwise.  For more information about the restatement, please see the Company's Current Report on Form 8-K filed on January 24, 2019.

 

 

		Page
PART I FINANCIAL INFORMATION
ITEM 1.	FINANCIAL STATEMENTS
	Condensed Consolidated Balance Sheets at September 30, 2018 (unaudited) and June 30, 2018	2
	Condensed Consolidated Statements of Operations (unaudited)	3
	Condensed Consolidated Statements of Cash Flows (unaudited)	5
	Notes to Unaudited Condensed Consolidated Financial Statements (unaudited)	6
ITEM 2.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	22
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	32
ITEM 4.	CONTROLS AND PROCEDURES	32
PART II OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS	34
ITEM 1A.	RISK FACTORS	34
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	37
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	37
ITEM 4.	MINE SAFETY DISCLOSURES	37
ITEM 5.	OTHER INFORMATION	37
ITEM 6.	EXHIBITS	37
SIGNATURES		38

 

 

PART I - FINANCIAL INFORMATION 

 

 

ITEM 1.

FINANCIAL STATEMENTS

 

 

Aeon Global Health Corporation and Subsidiaries

Consolidated Balance Sheets

 

 

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

 

 

Aeon Global Health Corporation and Subsidiaries

Consolidated Statements of Operations

 

 

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

 

 

Aeon Global Healthcare Corporation and Subsidiaries

Consolidated Statements of Shareholders' Equity

 

 

 

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

 

 

Aeon Global Health Corporation and Subsidiaries

Consolidated Statements of Cash Flows

 

 

 

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

 

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

Certain statements in this Quarterly Report on Form 10-Q are "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. When used in this Quarterly Report, words such as "may," "should," "seek," "believe," "expect," "anticipate," "estimate," "project," "intend," "strategy" and similar expressions are intended to identify forward looking statements regarding events, conditions and financial trends that may affect the Company's future plans, operations, business strategies, operating results and financial position. Forward looking statements are subject to a number of known and unknown risks and uncertainties that may cause actual results, trends, performance or achievements of the Company, or industry trends and results, to differ materially from the future results, trends, performance or achievements expressed or implied by such forward looking statements. These risks and uncertainties include:

 

•

Changes in U.S., state, local and third-party payer regulations or policies or other future reforms in the healthcare system (or in the interpretation of current regulations), new insurance or payment systems, including state, regional or private insurance cooperatives (e.g., Health Insurance Exchanges), affecting governmental and third-party coverage or reimbursement for clinical laboratory testing;

 

•

Significant fines, penalties, costs and/or damage to the Company's reputation arising from the failure to comply with U.S. and international privacy and security laws and regulations, including the Health Insurance Portability and Accountability Act of 1996, Health Information Technology for Economic and Clinical Health Act, U.S. state laws and regulations, and laws and regulations of the European Union and other countries;

 

•

Loss or suspension of a license or imposition of a fine or penalties under, or future changes in, or interpretations of, the law or regulations of the Clinical Laboratory Improvement Act of 1967, and the Clinical Laboratory Improvement Amendments of 1988;

 

•

Penalties or loss of license arising from the failure to comply with the U.S. Occupational Safety and Health Administration requirements and the U.S. Needlestick Safety and Prevention Act, or similar laws and regulations of U.S., state, local or international agencies;

 

•

Fines, unanticipated compliance expenditures, suspension of manufacturing, enforcement actions, injunctions, or criminal prosecution arising from failure to maintain compliance with current good manufacturing practice (cGMP) regulations and other applicable requirements of various regulatory agencies;

   

•

Changes in testing guidelines or recommendations by government agencies, medical specialty societies and other authoritative bodies affecting the utilization of laboratory tests;

 

 

•

Increased competition, including price competition, competitive bidding and/or changes or reductions to fee schedules and competition from companies that do not comply with existing laws or regulations or otherwise disregard compliance standards in the industry;

 

•

Failure to obtain and retain new customers or a reduction in tests ordered, specimens submitted or services requested by existing customers;

 

•

Customers choosing to insource services that are or could be purchased from the Company;

 

•

Damage or disruption to the Company's facilities;

 

•

Failure to identify, successfully close and effectively integrate and/or manage newly acquired businesses; and

 

•

Adverse results in litigation matters.

 

These and certain other factors are discussed in this Quarterly Report and from time-to-time in other Company reports filed with the Securities and Exchange Commission (the “SEC”). The Company expressly disclaims any obligation to update or revise any forward-looking statements, whether because of new information, future events or otherwise, except as required by law.

  

The AEON Acquisition 

 

On January 27, 2016, AEON was merged into a newly formed acquisition subsidiary of Aeon Global Health Corp. (formerly, Authentidate Holding Corp. (the “Aeon Acquisition”)) pursuant to a definitive Amended and Restated Agreement and Plan of Merger dated January 26, 2016, as amended on May 31, 2016 and December 15, 2016 (collectively the “Merger Agreement”). The merger certificate was filed with the Secretary of State of Georgia on January 27, 2016, and AEON survived the merger as a wholly-owned subsidiary of Aeon Global Health Corp. The closing of the AEON acquisition occurred on January 27, 2016 and the Company filed a Current Report on Form 8-K on February 1, 2016 regarding the AEON Acquisition in accordance with the SEC regulations. In accordance with the Merger Agreement, the members of AEON prior to the effective time of the AEON Acquisition became holders of shares of the Company’s common stock, issuable in tranches as described in below. The acquisition of AEON requires that the Company pay certain Earn-out Payments (as defined and described below) to the former members of AEON upon achievement of certain financial milestones. The Earn-out Payments must be paid in shares of the Company’s common stock. While the Earn-out Payments were initially set forth in the Merger Agreement, in July 2018, the Company, AEON and the former members of AEON (the “Former Members”), entered into a Settlement and Restructuring Agreement (the “Settlement Agreement”), which among other things, resolved certain disagreements among themselves relating to the interpretation of certain provisions of the Merger Agreement, including a number of elements of the Earn-out Payments. With respect to the determination of the Earn-out payments, pursuant to the terms of the Merger Agreement and the relevant provisions of the Settlement Agreement, the following terms apply:

  

•

Following the AEON Acquisition, AEON is operated as a separate entity.

 

•

The former members of AEON prior to the effective time of the AEON Acquisition became holders of shares of common stock issuable in tranches as follows (the payments referred to in (b) through (f) below are hereinafter be referred to as the “Earn-out Payments”):

 

(a)    At the closing of the AEON Acquisition, the membership interests of AEON were converted into the right to receive such number of validly issued, fully paid and non-assessable shares of our common stock as is equal to 19.9% of the issued and outstanding shares of our common stock (rounded to the nearest whole share) as of the close of business on the business day immediately prior to the closing date of the AEON Acquisition (958,030 shares of our common stock).

 

(b)    In December 2016, we issued to the former AEON members 240,711 shares of common stock, representing 5% of the issued and outstanding shares of our common stock as of the close of business on the business day immediately prior to the closing date of the AEON Acquisition, following the approval of our shareholders of the Earn-out Payments.

 

(c)    In December 2016, we issued to the former AEON members 1,155,415 shares of common stock, representing 24% of the issued and outstanding shares of our common stock as of the close of business on the business day immediately prior to the closing date of the AEON Acquisition, due to the determination that AEON achieved at least $16,000,000 in EBITDA for the calendar year ending December 31, 2015.

 

 

(d) Under the Settlement Agreement, in the event AEON achieves EBITDA (as adjusted in accordance with the Merger Agreement) of at least $21,483,749, in the aggregate, for the three calendar years ending December 31, 2018, (the “2018 Target”) then, on October 1, 2019,  subject to the completion of the audited financial statements of AEON for the calendar year ending December 31, 2018, the Company will issue the Former Members a fixed amount of 3,000,000 shares of the Company’s common stock (instead of such number of additional shares such that the total number of shares of the Company’s common stock issuable to the Former Members shall equal 85% of the issued and outstanding shares of the Company’s common stock on a post-issuance and fully diluted (as was defined in the Merger Agreement) basis). However, if the 2018 Target is not achieved, but AEON achieves EBITDA for the three calendar years ending December 31, 2018 of at least 75% of the 2018 Target, then on October 1, 2019, subject to the completion of the audited financial statements of AEON for the calendar year ending December 31, 2018, the Company shall issue the Former Members a fixed amount of 2,250,000 shares of the Company’s common stock.

 

(e) The Settlement Agreement likewise provides that in the event AEON achieves EBITDA (as adjusted in accordance with the Merger Agreement) of at least $32,600,530, in the aggregate, for the four calendar years ending December 31, 2019 (the “2019 Target”), the Company will issue to the Former Members a fixed amount of 4,000,000 shares of the Company’s common stock (instead of such number of additional shares equal to an additional 5% of the total issued and outstanding shares of the Company on a post-issuance and fully diluted (as was defined in the Merger Agreement) basis; resulting in the Former Members owing 90% of the issued and outstanding shares of the Company). However, if the 2019 Target is not achieved, but AEON achieves EBITDA for the four calendar years ending December 31, 2019 of at least 75% of the 2019 Target, then the Company shall issue the Former Members a fixed amount of 3,000,000 shares of the Company’s common stock. 

 

(f)    Lastly, the Settlement Agreement states that if the 2019 Target is achieved, the Former Members would be entitled to an “earn-out credit” equal to the amount by which such target is exceeded. If an earn-out credit is available, and AEON did not achieve the 2018 Target (or the adjusted 2018 Target), the earn-out credit would be applied to its EBITDA for the 2018 Target and the determination of whether the 2018 Target was achieved (at either the full or the 75% level) will be recomputed. If the addition of the earn-out credit results in AEON achieving the 2018 Target (at either level) then additional shares of common stock shall be issued to the Former Members in accordance with the Settlement Agreement.

 

In consideration of the restructuring of the consideration due to the Former Members under the Merger Agreement, the Company agreed to issue an aggregate of 2,500,000 shares of its common stock to the Former Members.  Such additional shares shall be issued to the Former Members pro rata based on their respective percentage ownership of AEON prior to the Merger and shall be deemed earned and issued on February 28, 2019.

 

Basis of Presentation

 

On January 27, 2016, AEON completed the transactions contemplated by the Merger Agreement with the Company under which AEON merged with a wholly-owned subsidiary of the Company, operating as a separate entity. The merger was accounted for as a reverse acquisition with AEON treated as the acquirer for accounting purposes. As such, the financial statements of AEON were treated as the historical financial statements of the Company. For the periods prior to the closing of the revers acquisition, the disclosure below relates to the historical business and operations of AEON.

 

Overview of AEON Business

 

Prior to the closing of the AEON Acquisition, AEON was a privately-held Georgia limited liability company. Subsequent to the Acquisition, the AEON business constitutes the majority of the combined Company's business.

 

AEON’s primary business focus is on production of actionable medical information for the provision of value-based medicine. This includes the testing of an individual’s urine or saliva for the presence of drugs or chemicals and the patient’s DNA profile.

 

AEON’s services are paid through a mix of reimbursement from Medicare, Medicaid and private health insurance along with a direct pay clientele. Currently, the top 50 payers represent over 90% of AEON’s billings with over 55% of these billings representing in-network insurance charges versus an industry average of 43.2%. For the fiscal quarter ended September 30, 2018, one customer accounted for approximately 15% of AEON’s revenue.

 

AEON supports its national client base from its Gainesville, Georgia headquarters, AEON is focused on technology on technology innovation and efficiency, utilizing state of the art testing equipment and its proprietary methodologies to provide some of the fastest and most reliable test results in the nation. AEON focuses on a service model that emphasizes the importance of the test result for both the medical provider and their patient. By focusing on fast, accurate turnaround of test results and the ability to integrate directly with the electronic medical records of clients, AEON believes it can provide a unique service that larger clinical laboratories cannot match. Because of the emphasis on its service model, AEON believes it is ideally positioned to be a preferred lab provider for personalized medicine. While the majority of AEON’s current testing volume is in toxicology, AEON has recently placed its focus and emphasis on growing its DNA pharmacogenomics and cancer genetic testing services in response to rapidly growing market demand for personalized medical testing.

 

 

Overview of Web-Based Software Business

 

The Company, through its legacy AHC business, provides secure web-based revenue cycle management applications and telehealth products and services that enable health care organizations to (i) increase revenues, (ii) improve productivity, (iii) reduce costs, (iv) organize care for patients, and (v) enhance related administrative and clinical workflows and compliance with regulatory requirements. These web-based services are delivered as Software as a Service (SaaS) to its customers interfacing seamlessly with billing and document management systems. These solutions incorporate multiple features and security technologies such as business rules-based electronic forms, intelligent routing, transaction management, electronic signatures, identity credentialing, content authentication, automated audit trails and remote patient management capabilities. Both web and fax-based communications are integrated into automated, secure and trusted workflow solutions.

 

Outlook and Trends

 

The health care system in the United States is evolving and significant change is taking place in the system. We expect that the evolution of the health care industry will continue, and that industry change is likely to be extensive. There are a number of key trends that are having, and that we expect to continue to have, a significant impact on the diagnostic information services business in the United States. These trends present both opportunities and risks. Nevertheless, because of the nature of the services we provide, we believe that the industry will continue to grow over the long-term and that we are well positioned to benefit from the long-term growth expected in the industry.

 

Consistent with the last few years, we experienced additional reimbursement pressure for the AEON business during fiscal 2018, and we expect this trend to continue for fiscal 2019. Health care market participants, including governments, are focusing on controlling costs by (i) changing reimbursement for health care services (including but not limited to a shift from fee for service to capitation), (ii) changing medical coverage policies (e.g., health care benefits design), (iii) pre-authorization of laboratory testing, (iv) requiring co-pays, (v) introductory laboratory spend management utilities, and payment, and (vi) patient care innovations. As health plans and government programs require greater levels of patient cost-sharing, patient collections could be negatively impacted and adversely impact bad debt expense and potentially causing a shift to capitation arrangements where we agree to a predetermined monthly reimbursement rate for each member enrolled in a restricted plan, regardless of volume of our cost of services.

 

Fees for the laboratory services we provide are reimbursed by Medicare, Medicaid and commercial payers and are established in the clinical laboratory fee schedule (“CLFS”). Historically, these fee schedules are subject to annual adjustments. During the three months ended September 30, 2018 and 2017, approximately 23.5% and 39%, respectively, of the Company’s laboratory testing revenue was reimbursed from Medicare under the CLFS with the balance of the Company’s revenue derived from commercial insurance providers and Medicaid. For the three months ended September 30, 2018, approximately 93% of the Company’s revenues from laboratory testing services were derived from the provision of toxicology testing services. For the three months ended September 30, 2017, approximately 79% of the Company’s revenues from laboratory testing services were derived from the provision of toxicology testing services.

 

Over the past several years, the Company has experienced governmental reimbursement reductions as a direct result of the Patient Protection and Affordable Care Act (“ACA”) and other laws. The Protecting Access to Medicare Act (“PAMA”), which became law on April 1, 2014, is expected to result in a future net reduction in reimbursement revenue under the CLFS. These laws include provisions designed to control health care expenses reimbursed by governmental programs through a combination of reductions to fee schedules, incentives to physicians to participate in alternative payment models such as risk-sharing and new methods to establish and adjust fees.

 

Beginning in calendar year 2016, commercial and governmental payers focused on reducing payments to clinical laboratories by imposing more stringent payment guidelines in their adjudication processes. Additionally, effective January 2016, the Centers for Medicare and Medicaid Services (“CMS”) significantly reduced the unit reimbursement rate for many of the tests typically performed by the Company, along with the number of tests that CMS would reimburse. Because Medicare and Medicaid accounts for close to 30% of our annual revenue, this reduction in reimbursement rates had a substantial negative impact on 2016 revenue. During calendar year 2017, CMS reimbursement rates for the test we performed increased by an average of 18% to $253.87 and decreased 2.7% to $246.92 for calendar year 2018.

 

We experienced an overall 11% increase in revenues for the three months ended September 30, 2018, as compared to the to the three months ended September 30, 2017, which was largely due to an increase in revenue from one new customer. This customer provided us toxicology samples on a trial basis to assess our testing services. Although no certainty can be given, we anticipate that this customer may generate a large volume of toxicology testing revenue for us in the near future.           

 

Further payment reductions to Medicare, Medicaid and other government programs could have a direct adverse effect on the Company’s net earnings and cash flows. The Company cannot predict whether changes will be implemented that will result in further payment reductions. In addition to changes in reimbursement rates, the Company is also impacted by changes in coverage policies for laboratory tests. For example, CLFS coding and billing changes related to toxicology and other procedures were implemented in 2017 and 2018, and we experienced delays in the pricing and implementation of these new codes, which may continue. While the impact on price and margin is currently unclear, the Company anticipates that some of the impact will be mitigated by timely negotiation with payers impacted by these changes.

 

 

During 2017 and 2018, the President of the United States and the federal legislature also have taken substantial efforts in an attempt to repeal and replace the Affordable Care Act (“ACA”). Further congressional efforts to repeal, amend, replace, or reform the ACA are possible, and the individual mandate component of the ACA was repealed as part of the Tax Cuts and Jobs Act of 2017. If additional legislation were to be enacted, it could have a significant impact on the U.S. health care system. The ongoing uncertainty regarding the ACA could create uncertainty generally in the health care market. Also, the trend of consolidating, converging and diversifying among customers and payers has continued. Consolidation is increasing price transparency and bargaining power and encouraging internalization of clinical testing.

 

Despite the market changes regarding reimbursement discussed above, the Company believes that the volume of clinical laboratory testing is positively influenced by several factors, including an expansion of Medicaid, managed care, and private insurance exchanges. Additional factors that may lead to future volume growth include an increase in the number and types of tests that are readily available (due to advances in technology and increased cost efficiencies) for the diagnosis of disease, and the general aging of the U.S. population.

 

Critical Accounting Policies

 

The Company's Critical Accounting Policies are listed in Note 3 of the Notes to Condensed Consolidated Financial Statements.

 

Recent Accounting Pronouncements

 

See Note 3 of the Notes to Condensed Consolidated Financial Statements for further information of certain accounting standards that have been adopted during fiscal 2018 and the first quarter of fiscal 2019 and certain accounting standards that we have not yet been required to implement but may be applicable to our future operations.

 

Results of Operations

 

Three months ended September 30, 2018 compared to three months ended September 30, 2017

 

Revenues were $3,741,190 for the three months ended September 30, 2018 compared to $3,358,052 for the three months ended September 30, 2017. The increase in revenues was largely from our business development efforts and establishing new customer relationships. In particular, one new customer provided us toxicology samples on a trial basis to assess our testing services.  

 

Cost of revenues for the three months ended September 30, 2018 was $1,456,650 (39% of total net revenues) compared to $1,128,576 (34% of total net revenues) for the three months ended September 30, 2017. The increase in revenue is primarily due to the timing of the purchase of lab testing supplies.

  

Gross margin as a percent of revenue for the three months ended September 30, 2018 was 61% as compared to 66% for the three months ended September 30, 2017.  The decrease in the gross margin percentage for the current year period is due to the increase in cost of revenues as a percentage of revenues to 39% from 34% in the prior year. The percentage increase in cost of revenues was due to the timing of lab testing supplies.

 

 Selling, general and administrative (SG&A) expenses were $2,176,977 (58% of total net revenues) for the three months ended September 30, 2018 as compared to $3,072,428 (92% of total net revenues) for the three months ended September 30, 2017. The decrease in SG&A costs is principally due to lower commissions as the result of an increase in non-commissionable revenue in the first quarter of 2018.

 

Share based compensation expense was $69,400 for the three months ended September 30, 2018 versus $68,785 for the three months ended September 30, 2018. The increase in 2018 was due to our grants of restricted stock units to our chief executive officer and other non-executive employees in consideration of their agreement to accept such restricted stock units instead of cash for their gross wages.

 

Depreciation and amortization expense was $125,777 and $222,584 for the three months ended September 30, 2018 and 2017, respectively. In the first quarter of 2018, a larger number of fixed assets were fully depreciated resulting in the reduced depreciation expense for such period.

 

Other income (expense) was $(312,443) and $7,798 for the three months ended September 30, 2018 and 2017, respectively. On July 19, 2018, approximately $1,351,000 of notes payable was restructured from notes with common stock conversion derivatives to notes without derivatives. The valuation of the warrants and notes payable combined was increased by $134,885, resulting in additional expense of such amount in the first quarter of 2019.

 

 

(Expense) benefit for income taxes was $(9,166) and zero for the three months ended September 30, 2018 and 2017, respectively.

 

Net loss available to common shareholders for the three months ended September 30, 2018 was $(494,938) or $(0.07) per basic and a diluted common share as compared to a net loss available to common shareholders of $(1,211,073) or ($0.17) per basic and diluted common share in the prior year due to the reasons mentioned above.

 

 

         

 

 

 

Liquidity and Capital Resources

 

Overview

 

The Company’s operations and product development activities have required substantial capital investment to date. As discussed in more detail below, our recurring operating losses and capital needs, among other factors, raise substantial doubt about our ability to continue as a going concern. Our condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Cash Flows

 

At September 30, 2018, unrestricted cash and cash equivalents amounted to approximately $570,000 and total assets at that date were approximately $10,867,000 compared to cash and cash equivalents at September 30, 2017 of approximately $734,000 and total assets of approximately $15,852,000. As of September 30, 2018, the Company had a working capital deficit of approximately $1,773,000.  Our current estimated monthly cash requirement is approximately $1,200,000. Currently, our available cash and cash equivalents as of the filing date of this Quarterly Report on Form 10-Q is approximately $457,000. Net cash used by operating activities for the three months ended September 30, 2018 was approximately $154,000.

 

Going Concern

 

As of the filing date of this Quarterly Report on Form 10-Q, and after giving effect to the recent note exchange transaction described in greater detail in Note 7 of the Notes to Condensed Consolidated Financial Statements, there is outstanding an aggregate principal amount of $3,113,618 of notes, consisting of (i) an aggregate principal amount of $1,698,169 of senior secured convertible notes with a maturity date of March 20, 2020, (ii) a maximum aggregate principal amount of $2.0 million of senior secured grid notes with an aggregate outstanding principal amount of $1,415,449 with a maturity date of June 30, 2020. In addition, there is outstanding secured note subordinated to the interests of the existing senior lenders with a remaining principal amount of $81,000, which is currently due and payable.We continue to make principal payments each month on this subordinated note while discussing an extension. We expect existing resources, revenues generated from operations, and proceeds received from other transactions we are considering (of which there can be no assurance) to satisfy working capital requirements for at least the next twelve months, however, no assurances can be given, that we will be able to generate sufficient cash flow from operations or complete other transactions to satisfy our other obligations. The accompanying condensed consolidated financial statements do not include any adjustments to the recoverability and classification of assets carrying amounts or the amounts and classifications of liabilities that might result from the outcome of these uncertainties. Accordingly, the Company needs to raise additional capital and is exploring potential transactions to improve its capital position. Unless we increase revenues substantially or generate additional capital from other transactions, current cash resources will only satisfy working capital needs for a limited period of time.

 

 

Management has concluded that due to the conditions described above, there is substantial doubt about the entity's ability to continue as a going concern.  We have evaluated the significance of the conditions in relations to our ability to meet our obligations and believe that our current cash balance, together with revenues generated from operations and proceeds received from other transactions we are considering, will provide sufficient capital to continue operations through fiscal 2019.  We cannot assure you that financing will be available on acceptable terms.  Furthermore, despite our optimism regarding the future of the Company, even if the Company is adequately funded, there is no guarantee that any of our services will perform as hoped or that such services can be successfully commercialized.

 

The Company does not have a bank line-of-credit or other fixed source of capital reserves and is exploring potential transactions to improve its capital position to ensure it is able to meet financing and working capital requirements. In addition to our efforts to improve our capital position through commercial operations and/or product partnering opportunities, we are considering capital raising alternatives, including credit lines from external financing sources.  We would expect to raise additional funds through obtaining a credit facility from an institutional lender or undertaking private debt financing. Raising additional funds by issuing equity or convertible debt securities may cause stockholders to experience substantial dilution in their ownership interests and new investors may have rights superior to the rights of other stockholders. Raising additional funds through debt financing or preferred stock, if available, may involve covenants that restrict the Company’s business activities and options and such additional securities may have powers, designations, preferences or rights senior to currently outstanding securities. We may also enter into financing transactions which involve the granting of liens on the Company’s assets or which grant preferences of payment from its revenue streams, all of which could adversely impact the Company’s ability to rely on revenue from operations to support ongoing operating costs. Alternatively, we may seek to obtain new financing from existing security holders, which may include reducing the exercise or conversion prices of outstanding securities, or the issuance of additional equity securities. Currently we do not have any definitive agreements with any third parties for such transactions and there can be no assurance that we will be successful in raising additional capital or securing financing when needed or on terms satisfactory to the Company. If we are unable to raise additional capital when required, or on acceptable terms, we will risk defaulting on our existing loans and need to reduce costs and operations substantially or potentially suspend operations, any of which would have a material adverse effect on the Company’s business, financial condition and results of operations.

 

Contractual Commitments

 

          

		Total				Less than 1 year				1-3 years				4-5 years				More than 5 years
Leases
Operating		$	5,407,001			$	557,000			$	1,542,001			$	1,373,000			$	1,935,000
Capital			8,052				8,052				-				-				-
Total lease obligations			5,415,053				565,052				1,542,001				1,373,000				1,935,000
Total debt obligations			3,346,145				81,000				3,265,145				-				-
Total obligations		$	8,761,198				646,052			$	4,807,146			$	1,373,000			$	1,935,000

 

 

AEON leases its facilities under a lease agreement dated March 1, 2014, as amended January 20, 2016.  The lease, amended, provided for a term of 12 years expiring March 2026.  In connection with the lease agreement, as security for its rent and other obligations under the lease, AEON has provided to the landlord a first priority lien and security interest in substantially all of its assets. Such lien is subordinated to the liens granted to the holders of our senior debt.

 

The landlord under the lease is Centennial Properties of Georgia, LLC, a Georgia limited liability company. Centennial is owned by Sonny Roshan, Shawn Desai, Pyarali Roy and Sohail Ali, all of whom are former members, or their spouses were former members, of AEON and have received and may in the future receive common stock because from the Merger.

 

The Company has entered into an amended lease for its offices in New Jersey in September 2015, which has a term of six years and annual rentals ranging from approximately $135,000 in the first year to $148,000 in the final year. The lease also provides the Company with a one-time option to review the lease for the term of five years at the then-current market rate and, provided the Company pays an early termination fee, allows the Company an early termination option on each of the 18^th month, 27^th month, and 36^th month anniversary dates of the effective date of the amendment. As part of the lease agreement, the Company reduced its letter-of-credit securing its lease payments to approximately $121,000. The Company is currently in negotiations to terminate this lease obligation and although not guaranteed, expects to be successful during fiscal year 2019. The Company is evaluating its possible lease obligations and considering its alternatives, and although not guaranteed, expects to be successful.

 

Other Matters

 

The events and contingencies described below have impacted or may impact our liquidity and capital resources.

 

 

In connection with the private placement of Series D Preferred Stock in June 2013, we issued 665,000 shares of Series D 5% Convertible Preferred Stock.  Presently, there are 605,000 shares of Series D Preferred Stock outstanding.  The shares of Series D Preferred Stock are convertible into 619,154 shares of common stock at the conversion rate of $9.77139 per share. Each share of Series D Preferred Stock has a stated value of $10.00 per share.  The Company has the right to repurchase these shares at the stated value per share, plus accrued and unpaid dividends and to require the holders to convert such securities into common stock starting in June 2016.  Each holder of Series D Preferred Stock has the right to require the holders to convert such securities into common stock at any time commencing on the six-month anniversary date of the issue date.  The Series D Preferred Stock pays dividends at the rate of 5% per annum, payable in cash or shares of common stock, at the rate of 5% per annum, payable in cash or shares of common stock, at the Company's option, subject to certain limitations.  At September 30, 2018, the Company has accrued dividends on the shares of Series D Preferred Stock in the amount of approximately $76,592 which remain unpaid.

 

Further, there are 25,000 shares of Series E Preferred Stock outstanding which also accrue dividends at the annual rate of 5% of the issue price payable on a semi-annual basis.  The shares of Series E Preferred Stock were issued in March 2017 in exchange for the surrender of the previously outstanding shares of Series B Preferred Stock.  At September 30, 2018, the Company has accrued dividends in the amount of approximately $9,349 on the shares of Series E Preferred Stock which remain unpaid. 

 

On March 1, 2017, the Company extended the expiration date of an aggregate of 309,547 outstanding common stock purchase warrants which were original issued in March and September 2012 in separate private placements of the Company’s securities. Of the warrants extended, an aggregate of 124,370 warrants would otherwise have expired on March 15, 2017, and 185,177 would have expired on September 29, 2017. In both cases, the expiration date of the warrants has been extended to September 29, 2018. These warrants have an exercise price of $12.06 per share. On September 26, 2018, the Company extended the expiration date of these for a period of one year to September 29, 2019. Other than the extension of the term of these warrants, the provisions of the warrants remain unchanged.

 

Debt Exchange and Restructuring Transactions

 

March 2017

 

On March 20, 2017, the Company entered into a note exchange agreement with the holders of an aggregate principal amount of $2,170,000 of outstanding promissory notes (the “Original Notes”), which were due and payable, pursuant to which the Company agreed to issue the holders of such notes, in consideration of the cancellation of the Original Notes, new promissory notes in the aggregate principal amount of $2,545,199, which were equal to the sum of the aggregate principal amount of the original notes plus the accrued but unpaid interest on the Original Notes (the “Senior Notes”). The Senior Notes are convertible into shares of the Company’s common stock at an initial conversion price of $2.03 per share. Based on the initial conversion prices, the Senior Notes are convertible into shares of the Company’s common stock at an initial conversion price of $2.03 per share. Based on the initial conversion prices, the Senior Notes were convertible into up to 1,253,792 shares of common stock. If the Company issued or sold shares of its common stock, rights to purchase shares of its common stock, or securities convertible into shares of its common stock for a price per share that was less than the conversion price then in effect, such conversion price would be decreased to equal 85% of such lower price. The foregoing adjustments to the conversion price would not apply to certain exempt issuances, including issuances pursuant to certain employee benefit plans. In addition, the conversion price is subject to adjustment upon stock splits, reverse stock splits, and similar capital changes. All the Senior Notes had a maturity date of one year from the closing date.

 

The Senior Notes earn interest at a rate of 5% per annum with interest payable upon maturity, the conversion of the Senior Notes or on any earlier redemption date. Commencing one month after the Company’s common stock is listed for trading on national securities exchange the Company will have the right to redeem all or any portion of the outstanding principal balance of the Senior Notes, plus all accrued but unpaid interest at a price equal to 110% of such amount. The holders of the Senior Notes have the right to convert any or the entire amount to be redeemed into common stock to redemption. Subject to certain exceptions, the Senior Notes contain customary covenants against incurring additional indebtedness and granting additional liens and contained customary events of default. Upon the occurrence of an event of default under the Senior Notes, the holders have the right to require the Company to repay all or a portion of the note in cash, at a price equal to 110% of the principal, plus accrued and unpaid interest.

 

In connection with the above note exchange transaction consummated in March 2017, the Company exchanged all outstanding shares of Series B Convertible Preferred Stock (the “Series B Preferred Stock”) for shares of a new series of convertible preferred stock designated as Series E Convertible Preferred Stock (the “Series E Preferred Stock”). Accordingly, on March 20, 2017, the Company also entered into a separate exchange agreement with the holder of the shares of Series B Preferred Stock, to exchange such shares for a total of 25,000 shares of Series E Preferred Stock. The Shares of Series E Preferred Stock are initially convertible by the holder into an aggregate of 187,000 shares of commons stock at the initial conversion rate of $4.00 per share. The conversion price of the new preferred stock will be subject to adjustment solely in the event of stock dividends, combinations, splits recapitalizations, and similar corporate events and does not provide for general price-based anti-dilution adjustments. Each share of Series E Preferred Stock has a stated value of $30.00 per share. On March 20, 2017, the Company filed with the State of Delaware a Certificate of Designations, Rights and Preferences and Number of Shares of Series E Convertible Preferred Stock, referred to as the Series E Designation. The Series E Preferred Stock has the following rights and preferences: (i) each holder of the Series E Preferred Stock will have the right, at any time, to convert the shares of Series E Preferred Stock into shares of common stock, (ii) the Series E Preferred Stock will be redeemable at option commencing one year after the closing date (provided that the Company’s common stock is listed on a national securities exchange at such time and (iii) the Series E Preferred Stock will pay dividends at a rate of 5% per annum in cash. Pursuant to the exchange for the preferred stock, the holder of the shares of Series B Preferred Stock agreed to waive all unpaid dividends that had accrued on the shares of Series B Preferred Stock.

 

 

March 2018

 

On March 27, 2018, the Company entered into an agreement with the holders of the Senior Notes to amend certain terms of such notes (the “Note Amendment Transaction”). In the Note Amendment Transaction, the holders of the Senior Notes entered into a consent and amendment agreement with the Company (the “Consent Agreement”), pursuant to which the Senior Notes were amended to extend the maturity date for a period of twelve months, to March 20, 2019 and in consideration thereof, the conversion rate of the Senior Notes was reduced to equal $1.20 per share. Based on the adjusted conversion price, the principal amount of the Senior Notes will be convertible into up to 2,120,199 shares of common stock. As the conversion price of the Senior Notes was further reduced, the exercise price of outstanding warrants to purchase an aggregate of 825,184 shares of common stock, which was adjusted to $2.07 following the 2017 note exchange transaction, was further reduced to $1.22 per share.

 

Contemporaneously with the Note Amendment Transaction, the Company entered into a note exchange agreement (the “Note Exchange Agreement”) with its Chief Executive Officer, who held a separate promissory note in the aggregate principal amount of $500,000, to exchange such note for a new senior note on terms substantially the same as the Senior Notes (the “2018 Note Exchange Transaction”). Pursuant to the Note Exchange Agreement, the Company issued its Chief Executive Officer, in consideration of the calculation of the then-existing note, a new senior secured note (the “Additional Senior Note”) in the aggregate principal amount of $504,452, which is equal to the sum of the aggregate principal amount of the prior note, plus the accrued but unpaid interest thereon. The closing of the 2018 Note Exchange Transaction occurred on March 27, 2018. The Additional Senior Note is the same, in all material respects, as the Senior Notes described above in the Note Amendment Transaction and is convertible into shares of the Company’s Common Stock at an initial conversion price of $1.20. Based on the initial conversion price, this note is convertible into up to 420,376 shares of common stock. Further the conversion price of the Additional Senior Note may be adjusted upon the occurrence of the same events which would result in an adjustment of the conversion price of the Senior Notes, as described above, including the issuance of securities at a price per share less than the current conversion price. Similarly, the maturity date, interest rate, events of default, redemption and other terms of such Additional Senior Note are the same as for the Senior Notes. The Additional Senior Note is on parity with the Senior Notes and, subject to certain exceptions, is senior to other existing and future indebtedness of the Company and, together with the Senior Notes, is secured by a first priority lien on all of the Company’s assets to the extent and as provided in the Security Agreement, as amended.

 

July 2018

 

Pursuant to the Settlement Agreement, Mr. Roshan and Optimum Ventures, LLC (the “Lenders”) agreed to restructure the loans that they previously made to the Company, as evidenced by the Senior Notes held by them and to exchange their existing notes for a new senior credit instrument pursuant to which they will provide up to $2.0 million of credit to the Company. The Company entered into a note exchange agreement dated July 19, 2018 (the “July Exchange Agreement”) with the Lenders, who collectively held senior secured convertible notes in the aggregate principal amount of $1,351,482. Pursuant to the July Exchange Agreement, the Company issued the Lenders new senior secured Grid Notes in the maximum aggregate principal amount of $2.0 million in consideration of the cancellation of their original Senior Notes. The Grid Notes are structured to provide the Company with a credit facility pursuant to which it can borrow, pay, and re-borrow any portion of the maximum principal amount of credit available under these instruments. The Grid Notes are senior, secured obligations and are not convertible into any equity securities of the Company. The Grid Notes bear interest at the rate of 7.5% per annum with interest payable upon maturity or sooner in accordance with the prepayment mechanism of the Grid Notes. The maturity date of the Grid Notes is June 30, 2020.

 

The Grid Notes were issued in consideration of the exchange of (i) an aggregate principal amount of $759,869 of Senior Notes held by Mr. Roshan and (ii) an aggregate principal amount of $591,613 of Senior Notes held by Optimum Ventures, LLC. Upon the closing, a Grid Note was issued to each of the Lenders in a maximum principal amount based on the relative percentages of the original notes that were held by them. The maximum principal amount under the Grid Note issued to Mr. Roshan is $1,100,000 and the maximum principal amount under the Grid Note issued to Optimum is $900,000. Each Grid Note issued also reflects an outstanding principal amount equal to the sum of the aggregate principal amount of the Senior Notes held by each Lender, plus the accrued but unpaid interest thereon. The aggregate principal amount of the Grid Notes outstanding as of the closing date of the Note Restructuring Transaction, and at September 30, 2018 was $1,415,449.  The closing of this transaction occurred on July 19, 2018. The Grid Notes are on parity with an outstanding principal amount of $1,698,169 of the other outstanding convertible Senior Notes and, subject to certain exceptions, are senior to other existing and future indebtedness of the Company and, together with the remaining Senior Notes, are secured by a first priority lien on all of the Company’s assets to the extent and as provided in a Security Agreement entered into between the Company, the Lenders and the holders of the other Senior Notes (the “Convertible Note Holders”). The Grid Notes contain customary covenants against incurring additional indebtedness and granting additional liens and contains customary events of default, which terms are substantially the same as the corresponding provisions of the original notes. Upon the occurrence of an event of default under the Grid Notes, the Lenders may require the Company to repay all or a portion of the note in cash, at a price equal to 110% of the principal, plus accrued and unpaid interest.

 

In connection with this restructuring transaction, the Company entered into a consent and amendment agreement with the Convertible Note Holders to obtain their consent to the issuance of the Grid Note. In consideration thereof, the Company and Convertible Note Holders agreed to extend the maturity date of the Senior Convertible Notes for a period of one year to March 20, 2020 and to modify the redemption mechanism of such instruments. In addition, the parties entered into the amendment to the Security Agreement to provide that the Grid Notes shall be secured by the collateral defined in such earlier Security Agreement.

 

 

Subordinated Note

 

On April 24, 2017, the Company entered into a settlement and mutual release with its former Chief Financial Officer, William A. Marshall to resolve an outstanding arbitration proceeding. Pursuant to the separation agreement and general release, the Company agreed to provide the following to the former Chief Financial Officer: (i) cash payments totaling $170,000 to be paid over time through May 15, 2018, (ii) a lump sum severance payment of $160,000 that was payable on June 15, 2018, (iii) the issuance of a total of 12,835 vested shares of common stock pursuant to the terms of the restricted stock units granted in January 2013 and January 2017, and (iv) 27,388 stock options previously granted became vested and exercisable for the duration of their original exercise periods, subject, however to the terms of a lockup agreement. Pursuant to the settlement agreement, the Company issued a secured senior promissory note, subordinated to the interests of the existing lenders, which provides for events of default that are customary for similar transactions. We continue to make principal payments against the subordinated note each month while discussing an extension, have reduced the outstanding principal of such note to $81,000 as of the date of this report, and expect to extinguish the obligation in full by April 2019. Although no guarantee can be given, management anticipates that it will be able to extend or otherwise modify the Company’s obligations under the notes for an additional period or periods.

 

Off-Balance Sheet Arrangements

 

We have not created and are not party to any special-purpose or off-balance sheet entities for raising capital, incurring debt or operating parts of our business that are not consolidated into our financial statements. We do not have any arrangements or relationships with entities that are not consolidated into the Company’s financial statement that are reasonably likely to materially affect liquidity or the availability of capital resources. We have entered into various agreements by which we may be obligated to indemnify the other party with respect to certain matters. These indemnification provisions are generally included in contracts arising in the normal course of business under which we customarily agree to hold the indemnified party harmless against losses arising from a breach of representations related to such matters as intellectual property rights. Payments by us under such indemnification clauses are generally conditioned on the other party making a claim. Such claims are generally subject to challenge by us and to dispute resolution procedures specified in the particular contract. Further, obligations under these arrangements may be limited in terms of time and/or amount and, in some instance, we may have recourse against third parties for certain payments made by us. It is not possible to predict maximum potential amount of future payments under these indemnification agreements due to the conditional nature of these obligations and the unique facts of each particular agreement. We have not historically made any payments under these agreements that have been material individually of in the aggregate. As of September 30, 2018, we are not aware of any obligations under such indemnification agreements that would require material payments.

 

Effects of Inflation and Changing Prices

 

The impact of general inflation on our operations has not been significant to date and we believe inflation will continue to have an insignificant impact on us.

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

 As of September 30, 2018, we are not exposed to significant financial market risks from changes in foreign currency exchange rates and are only minimally impacted by changes in interest rates. Nevertheless, in the future, we may enter into transactions denominated in non-U.S. currencies or increase the level of our borrowings, which could increase our exposure to these market risks. We have not used, and currently do not contemplate using, any derivative financial instruments.

 

Interest Rate Risk

 

At any time, fluctuations in interest rates could affect interest earnings on the Company's cash and marketable securities. We believe that the effect, if any, of reasonably possible near-term changes in interest rates on our financial position, results of operations, and cash flows would not be material. We have not used derivative financial instruments in our investment portfolio.

 

At September 30, 2018, unrestricted cash totaled approximately $570,000 and was in non-interest-bearing checking accounts used to pay operating expenses.

 

ITEM 4.

CONTROLS AND PROCEDURES.

 

Evaluation of Disclosure Controls and Procedures

 

We maintain a system of disclosure control and procedures, as defined in 13a-15 (e) and 15d-15 (e) of the Exchange Act, that are designed to ensure that information required to be disclosed in our reports within the time periods specified in the SEC's rules and forms.  This information required to be disclosed in our reports within the time periods specified in the SEC's rules and forms.  This information is also accumulated and communicated to management, including our Chief Executive Officer ("CEO") and interim Chief Financial Officer ("CFO"), as appropriate, to allow timely decisions regarding required disclosure.  As of the date of this Amended Form 10-Q/A our CEO also serves as our CFO.  Our management, under the supervision and with the participation of its CEO and CFO, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report.  Our management identified material weaknesses in the control environment described below, and based on that evaluation, because of these material weaknesses, our CEO and CFO concluded that our disclosure controls and procedures were not effective as of September 30, 2018.  In light of the material weaknesses described below, we performed additional analysis and other post-closing procedures to ensure that our financial statements were prepared in accordance with GAAP.  Accordingly, the CEO and CFO believe that the financial statements included in this report fairly represent in all material respects (and in accordance with U.S GAAP) our financial condition, results of operations and cash flows for the periods presented.

 

 

As reported on our Annual Report on Form 10-K for the fiscal year ended June 30, 2018, management identified the following material weaknesses in the Company's control environment:

 

•

We have inadequate controls to ensure that information necessary to properly record transactions is adequately communicated on a timely basis from non-financial personnel to those responsible for financial reporting.  Management evaluated the impact of the lack of timely communication between non-financial personnel and financial personnel on the assessment of disclosure control and procedures and has concluded that the control deficiency represents a material weakness.

 

•

There is a lack of sufficient resources in its accounting function and an insufficient level of monitoring and oversight which resulted in the inadequate segregation of duties on the assessment of disclosure controls and procedures and which restricted the Company’s ability to gather, analyze, and properly review information in a timely manner.

 

•	There is a lack of effective controls over the identification of reduced revenue collections due to modifications of payer claims adjudication processes and a lack of communication between financial personnel and non-financial personnel.

 

•	Due to these weaknesses in our system of internal controls, we also determined that our accounting of inventory was not correct in the interim financial statements for the periods ended September 30, 2016, December 31, 2016 and March 31, 2017.

 

             In addition to the foregoing, however, as described in Note 2 to the Condensed Consolidated Interim Financial Statements included in this Amended Form 10-Q/A, the Company has recently determined that the error in the classification of certain notes payable on the balance sheet of the Original Form 10-Q, and related error in valuing the conversion feature of such notes represent a material weakness in our internal control over financial reporting resulting in the conclusion by management and the Audit Committee that our Condensed Consolidated Interim Financial Statements for the three-month period ended September 30, 2018 required restatement.  The restated Condensed Consolidated Interim Financial Statements for the three-month period ended September 30, 2018 are included in this Amended Form 10-Q.

 

Remedial Actions to Date to Correct Material Weaknesses in Internal Control over Financial Reporting

 

Considering the material weakness described herein, we have designed and implemented improvements in our internal control over financial reporting to address these material weaknesses. Management is committed to continued planning and implementation of remediation efforts to address the material weaknesses and to enhance our overall financial control environment. In this regard these initiatives include:

 

Control Environment – to remediate the control environment deficiencies, the leadership team, including the CEO and CFO, have undertaken to reaffirm and reemphasize the importance of internal controls, including general ethical climate and the control environment.  To address the recent departure of our former CFO, the Company is seeking to appoint a qualified individual to serve as our CFO.  In addition, we previously implemented the following remedial measures:

 

●

Hired additional non-executive personnel in the accounting department with sufficient U.S. GAAP and financial reporting experience to provide additional oversight of the accounting function and to participate in the preparation of our Company’s financial statements and SEC reports;

 

●

Improved the documentation around conclusions reached in applying GAAP to the financial statements;

 

●

Provided training to personnel in our accounting and reporting functions on a continuing basis to ensure the correct application of GAAP to our financial statements and adherence to the written policies and procedures; and

 

●

Reviewed and upgraded the design of the procedures and implemented controls for the preparation of financial statements.

 

Notwithstanding these remedial measures, due to the size and nature of the Company, segregation of all conflicting duties may not always be possible and may not be economically feasible. Nevertheless, to the extent possible, the initiation of transactions, the custody of assets and the recording of transactions should be performed by separate individuals.

  

Monitoring and Control Activities – To further strengthen internal control over financial reporting at the process level, we have performed certain remedial actions, including conducting an internal evaluation of accounting methodologies, reporting architecture, review existing personnel and propose a specific course of action to ensure compliance with all facets of accounting and external reporting. During fiscal 2019, accounting personnel have reviewed and revised written policies and procedures with detailed controls incorporated for each transaction cycle within the Company, including the procedures and controls that need to be in place to properly account and communicate transactions on a timely basis to financial and non-financial personnel.

 

 

Management does not believe that these corrective measures have been operative for a sufficient period of time to warrant independent testing of their effectiveness and therefore, does not believe that all of the material weaknesses described above have been remediated.  The Company intends to fully test the remedial measures that it has implemented to determine whether the Company's internal control over financial reporting and system of disclosure controls and procedures are effective.  In addition, in light of the recent departure of our former Chief Financial Officer, we intend to appoint a new qualified individual to serve as our Chief Financial Officer in order to address the weakness in our control system resulting from the departure of our former Chief Financial Officer.  

 

Changes in Internal Control over Financial Reporting

 

Other than the ongoing remediation efforts described above, there have been no changes in our internal control over financial reporting during the quarter ended September 30, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

PART II - OTHER INFORMATION

 

ITEM 1.

LEGAL PROCEEDINGS.

 

See Item 1 of Part I, "Financial Statements - Note 12 - Commitments and Contingencies.

 

ITEM 1A.

RISK FACTORS.

  

As provided for under the Private Securities Litigation Reform Act of 1995, we wish to caution shareholders and investors that the following important factors, among others discussed throughout this Quarterly Report on Form 10-Q is set forth below. Our operating results and financial condition have varied in the past and may in the future vary significantly depending on a number of factors. In addition to the risks described below and the other information set forth elsewhere in this report, you should carefully consider the factors discussed in the "Risk Factors" section in our Annual Report on Form 10-K for the year ended June 30, 2018 and in our other reports filed with the SEC for a discussion of the risks associated with our business, financial condition and results of operations. These risks have affected, and in some cases, could, have a material adverse effect upon our business, results of operations, financial condition or liquidity and cause our actual results to differ materially from those contained in statements made in this report and presented elsewhere by management from time to time. The risks identified by the Company in its reports are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently believe are immaterial also may materially adversely affect our business, results of operations, financial condition or liquidity. If any of the matters or events described in the following risks occurs, our business, financial condition or results of operations could be harmed. In such case, the trading price of our common stock could decline, and you may lose all or part of your investment due to any of these risks. Except as set forth below, we believe there have been no material changes in our risk factors from those disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2018 and our other reports filed with the SEC.

 

Our capital requirements are significant and unless our revenues can sufficiently support our operating costs, we expect to raise additional capital to finance our operations and repay outstanding debt obligations.

 

The Company’s capital requirements have been and will continue to be significant. We are expending significant amounts of capital to develop, promote and market our services. Available cash and cash equivalents as of September 30, 2018 totaled approximately $570,000 and as of such date our working capital deficit was approximately $1,773,000. Available cash and cash equivalents as of the filing date of this Quarterly Report on Form 10-Q is approximately $457,000 and estimated monthly operational requirements are approximately $1,200,000. We used approximately $154,000 and $509,000 in cash from operations for the fiscal quarters ended September 30, 2018 and 2017, respectively. Further, as of the filing date of this Quarterly Report on Form 10-Q, there is outstanding an aggregate principal amount of $3,113,618 of notes, consisting of (i) an aggregate principal amount of $1,698,169 of senior secured convertible notes with a maturity date of March 20, 2020, and (ii) a maximum aggregate principal amount of $2.0 million of senior secured grid notes with an aggregate outstanding principal amount of $1,415,449 with a maturity date of June 30, 2020.  In addition, there is outstanding a secured note subordinated to the interests of the senior lenders with a remaining principal balance of $81,000 to the Company’s former CFO, which is currently due and payable. We continue to make payments each month on the subordinated note while discussing an extension. Although no guarantee can be given, management anticipates that it will be able to extend or otherwise modify the Company’s obligations under the notes for an additional period or periods. We expect the Company’s existing resources, revenues generated from operations, and proceeds received from other transactions we are considering (of which there can be no assurance) to satisfy working capital requirements for at least the next twelve months, although no assurances can be given that we will be able to generate sufficient cash flow from operations or complete other transactions to satisfy other obligations. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying condensed consolidated financial statements do not include any adjustments to the recoverability and classification of assets carrying amounts or the amounts and classification of liabilities that might result from the outcome of these uncertainties. Accordingly, we need to raise additional capital from other transactions, the Company’s current cash resources will only satisfy working capital needs for a limited period of time.

 

 

We are exploring potential transactions to improve the Company’s capital position to ensure we are able to meet financing and working capital requirements. We would expect to raise additional funds through obtaining a credit facility from an institutional lender or undertaking private debt financing. Raising additional funds by issuing equity or convertible debt securities may cause stockholders to experience substantial dilution in their ownership interests and new investors may have rights superior to the rights of other stockholders. Raising additional funds through debt financing or preferred stock, if available, may involve covenants that restrict business activities and options and such additional securities may have powers, designations, preferences or rights senior to currently outstanding securities. We may also enter into financial transactions which involve the granting of liens on the Company’s assets or which grant preferences of payment from revenue streams, all of which could adversely impact the Company’s ability to rely on revenue from operations to support ongoing operating costs. Alternatively, we may seek to obtain new financing from existing security holders, which may include reducing the exercise or conversion prices of outstanding securities, or the issuance of additional equity securities. Currently, the Company does not have any definitive agreements with any third parties for such transactions, and there can be no assurance that we will be successful in raising additional capital or securing financing when needed or on terms satisfactory to the Company. If we are unable to raise additional capital when required, or on acceptable terms, we will need to reduce costs and operations substantially or potentially suspend operations, any of which would have a material adverse effect on the Company’s business, financial condition and results of operations. Future capital requirements will depend on, and could increase substantially as a result of many factors including:

 

●

the need to utilize cash to support research and development activities and to make incremental investments in our organization;

 

●

the ability to achieve targeted revenue, gross profit margins and cost management objectives;

 

●

the success of our sales and marketing efforts;

 

●

the need to repay indebtedness;

 

●

the extent and terms of any development marketing or other arrangements; and

 

●

changes in economic, regulatory or competitive conditions, including changes in payer reimbursement rates or claim adjudication processes.

 

We have identified material weaknesses in internal control over financial reporting, which could continue to impact negatively the Company's ability to report results of operations and financial condition accurately and in a timely manner.

 

As required by Section 404 of the Sarbanes-Oxley Act of 2002, management conducted an evaluation of the effectiveness of internal control over financial reporting as of June 30, 2018. As reported in our Annual Report on Form 10-K for the fiscal year ended June 30, 2018, we identified material weaknesses in our internal control over financial reporting and concluded that we did not maintain effective control over financial reporting based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. For a detailed description of these material weaknesses, See Item 4, “Controls and Procedures”. Moreover, other material weaknesses may be identified. Each of our material weaknesses results in more than a remote likelihood that a material misstatement of the annual or interim financial statements that we prepare will not be prevented or detected. As a result, we must perform extensive additional work to obtain reasonable assurance regarding the reliability of our financial statements.

 

We are in the process of remedying all the identified material weaknesses, including testing compliance with our new written policies and procedures. This work will continue during fiscal 2019 and perhaps beyond. For a detailed description of the Company’s remedial efforts, see Item 4, “Controls and Procedures.” There can be no assurance as to when all the material weaknesses will be remedied. Until the Company’s remedial efforts are completed, management will continue to devote significant time and attention to these efforts, and we will continue to incur expenses associated with the additional procedures and resources required to prepare the condensed consolidated financial statements. Certain of the Company’s remedial actions, such as hiring additional qualified personnel to implement the reconciliation and review procedures, will be ongoing and will result in the Company incurring additional costs even after the material weaknesses are remedied.

 

 

If we are unsuccessful in implementing or following the remediation plan, or fail to update the Company’s internal control over financial reporting as the business evolves or to integrate acquired businesses into the Company’s controls system, we may not be able to timely or accurately report the Company’s financial condition, results of operations or cash flows or to maintain effective disclosure controls and procedures, we could be subject to, among other things: (i) regulatory or enforcement actions by the SEC, (ii) an inability for us to be accepted for listing on any national securities exchange in the near future, (iii) securities litigation, or (iv) a general loss of investor confidence, any one of which could adversely affect the Company’s business prospects and the market value of its common stock. Further there are inherent limitations to the effectiveness of any system of controls and procedures, including the possibility of human error and the circumvention or overriding of controls and procedures. We could face additional litigation exposure and a greater likelihood of an SEC enforcement or other regulatory action if further restatements were to occur or other accounting-related problems emerge, which may adversely affect the Company’s financial condition, results of operations and cash flows.

 

The Company's outstanding debt may impair our financial and operating flexibility.

 

   As of September 30, 2018, there was an aggregate principal amount of senior indebtedness of $3,113,618, which consisted of (i) an aggregate principal amount of $1,698,169 of senior secured convertible notes with a maturity date of March 20, 2019, and (ii) a maximum aggregate principal amount of $2.0 million of senior secured grid notes with an aggregate outstanding principal amount of $1,415,449 with a maturity date of June 30, 2020. In addition, there is outstanding secured note subordinated to the interests of the existing senior lenders with a remaining principal amount of $96,000, which is the amount due and payable at September 30, 2018. All of the outstanding notes contain covenants and events of default customary for transactions of this nature. For example, the outstanding senior secured notes include restrictions against incurring additional indebtedness and granting further security interests on the Company’s assets. Without the consent of the holders of these senior debt instruments, we must comply with these restrictions. Among the defined events of default are defaults of the Company’s payment obligations. Breach of any material covenant or representation of the notes or the related transaction agreements, and the commencement of proceedings under applicable U.S. federal or state bankruptcy, insolvency, reorganization or other similar laws either against us or by us. In the event of default under the notes, a holder may require us to repay all or a portion of the outstanding principal, plus interest and certain of the outstanding debt instruments also require that any repayment due to a default will require immediate repayment of the principal and accrued and unpaid interest. If we are unable to consummate an additional financing prior to the maturity date of these debt instruments, or otherwise further extend or exchange them, we will be required to repay these securities, which may have an adverse effect on the Company’s cash position. If we are unable to make the scheduled principal and interest payments on these debt instruments or comply with applicable covenants contained therein, we may be in default under one or more of these securities which would likely have a material adverse effect on the business, financial condition and results of operations. Further, if we are unable to repay the secured debt instruments when due, or upon an event of default, the holders could foreclose on the Company’s encumbered assets.

 

The exercise of the Company’s outstanding options, restricted stock units and warrants, or conversion of our outstanding convertible debt and convertible preferred stock, may depress our stock price and dilute your ownership of the company.

 

As of September 30, 2018, the following options, restricted stock units and warrants were outstanding:

 

●

Employee stock options to purchase approximately 236,179 shares of common stock at exercise prices ranging from $1.75 to $36.00 per share, not all of which are immediately exercisable. The weighted average exercise price of the outstanding stock options is $7.54 per share.

 

●

Director stock options to purchase approximately 550,060 shares of common stock at exercise prices ranging from $1.58 to $36.54 per share, all of which are exercisable. The weighted average exercise price of the outstanding and exercisable options is $3.04 per share

 

●

Warrants to purchase approximately 3,397,714 shares of common stock with a weighted average exercise price of $3.25 per share.

 

●

An aggregate of approximately 715,391 unvested restricted stock units.

 

There are presently outstanding 25,000 shares of Series E Convertible Preferred Stock, which the holder may convert into an aggregate of 187,500 shares of common stock at the initial conversion price of $4.00 per share. Further there is currently outstanding 605,000 shares of Series D Preferred Stock, which are convertible into an aggregate of 619,154 shares of common stock at the initial conversion rate of $9.77 per share (exclusive of any additional shares of common stock that we may elect to issue in lieu of paying cash dividends on the Series D Preferred Stock). Shares of common stock issued upon conversion of Series D or Series E Preferred Stock may be resold from time-to-time by a holder in accordance with Rule 144 under the Securities Act.

 

As of September 30, 2018, there was an aggregate principal amount of $1,698,169 of outstanding convertible debt, which, subject to certain limitations, may be convertible by holders into an aggregate of 1,415,140 shares of common stock.

 

To the extent that these securities are extent that these securities are exercised or converted, or we issue additional common shares, dilution to stockholders will occur. In addition, the terms upon which we will be able to obtain additional equity capital may be adversely affected since the holders of these securities can be expected to exercise or convert them at a time when we could expect to be able to obtain needed capital on terms more favorable to us than the exercise and conversion terms provided by those securities. Further, in the event the conversion price of outstanding convertible debentures or shares of convertible preferred stock is lower than the actual trading price on the day of conversion, the holders could immediately sell their converted common shares, which would have a dilutive effect on the value of the outstanding common shares. The significant downward pressure on the trading price of common stock as preferred stock or debentures holders converted these securities and sell the common shares received on conversion could encourage short sales by the holders of preferred stock or other security holders. This would place further downward pressure on the trading price of common stock. Even the mere perception of eventual sales of common shares issued on the conversion of the shares of preferred stock or debentures could lead to a decline in the trading price of common stock.

 

In addition, as described in greater detail above, in July 2018, the Company, AEON and the Former Members entered into the Settlement Agreement, which, among other things, resolved certain disagreements among themselves relating to the interpretation of certain provisions of the Merger Agreement, including a number of elements of the Earn-Out Payments.  To the extent that these additional common shares are issued, substantial dilution to stockholders will occur, which may adversely impact the trading price of common stock and the terms on which we could raise additional equity capital.  The sale of these shares of common stock may adversely affect the market price of the Company's common stock and the stock price may decline substantially.

  

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

 

a)

Sales of Unregistered Securities

 

Except as previously disclosed in reports filed with the SEC pursuant to the Securities and Exchange Act of 1934, as amended, or as described elsewhere in this Quarterly Report on Form 10-Q, we did not sell unregistered securities during the quarter ended September 30, 2018.

 

b)

Not applicable

 

c)

Repurchase of Equity Securities

 

We did not repurchase any of our equity securities during the quarter ended September 30, 2018.

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES.

 

       None.      

 

ITEM 4.

MINE SAFETY DISCLOSURES.

 

Not applicable.

  

ITEM 5.

OTHER INFORMATION.

 

None. 

 

ITEM 6.

EXHIBITS.

  

Exhibit Number		Description
4.1		Form of Grid Note (filed as Exhibit 4.1 to Current Report on Form 8-K, filed July 24, 2018).
10.1		Form of Note Exchange Agreement dated July 18, 2018 (filed as Exhibit 10.2 to Current Report on Form 8-K, filed July 24, 2018).
10.2		Form of Consent and Amendment Agreement dated July 18, 2018 (filed as Exhibit 10.3 to Current Report on Form 8-K, filed July 24, 2018).
10.3		Form of Amendment to Amended and Restated Security Agreement dated July 18, 2018 (filed as Exhibit 10.4 to Current Report on Form 8-K, filed July 24, 2018).
31.1		Certification Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (*)
32.1		Section 1350 Certification of Chief Executive Officer (*)
101.INS		XBRL Instance Document (*)
101.SCH		XBRL Taxonomy Extension Schema (*)
101.CAL		XBRL Taxonomy Extension Calculation Linkbase (*)
101.DEF		XBRL Taxonomy Extension Definition Linkbase (*)
101.LAB		XBRL Taxonomy Extension Label Linkbase (*)
101.PRE		XBRL Taxonomy Extension Presentation Linkbase (*)

 

(*)	Filed herewith.

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

	AEON GLOBAL HEALTH CORP.
	By:	/s/ Hanif A. Roshan
		Hanif A. Roshan
		Chief Executive Officer and interim Principal Accounting Officer

 

Dated:    January 25, 2019

 

 

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