UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended March 31, 2020

 

OR

 

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

 

For the transition period from ______________

 

Commission File Number: 1-9927

 

ADVANZEON SOLUTIONS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware		95-2594724
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

 

2901 W. Busch Blvd. Suite 701 Tampa, FL		33618
(Address of principal executive offices)		(Zip Code)

 

813-517-8484

(Registrant’s telephone number, including area code)

 

(Former name, former address and former fiscal year, if changed since last report)

 

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 fling 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, 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 May 19, 2020, the Registrant had outstanding 71,661,656 shares of its $0.01 par value Common Stock.

  

 

ADVANZEON SOLUTIONS, INC.

  

TABLE OF CONTENTS

		Pages
PART I.	Financial Information
Item 1.	Consolidated Financial Statements
	Consolidated Balance Sheets as of March 31, 2020 (unaudited) and December 31, 2019	1 - 2
	Consolidated Statements of Operations for the Three Month Periods Ended March 31, 2020 and 2019 (unaudited)	3
	Consolidated Statement of Stockholders’ Deficiency For the Three Month Period Ended March 31, 2020 (unaudited) and at December 31, 2019	4
	Consolidated Statements of Cash Flows for the Three Month Periods Ended March 31, 2020 and 2019 (unaudited)	5
	Notes to Consolidated Financial Statements	6 - 14
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15 - 20
Item 3.	Quantitative and Qualitative Disclosure about Market Risk	21
Item 4.	Controls and Procedures	21 - 22
PART II.	Other Information
Item 1.	Legal Proceedings	23
Item 1A.	Risk Factors	23
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	23
Item 3.	Exhibits	23

 

  

ADVANZEON SOLUTIONS, INC.

 

PART I – FINANCIAL INFORMATION

 

CONSOLIDATED BALANCE SHEETS

March 31, 2020 (unaudited) and December 31, 2019

  

ASSETS
		March 31, 2020				December 31,
		(unaudited)				2019
CURRENT ASSETS
Cash		$	14,874			$	69,327
Accounts receivable			47,340				29,769
Current portion of right of use asset			94,410				113,911
Other current assets			667,082				826,597
Total current assets			823,706				1,039,604
PROPERTY, PLANT, AND EQUIPMENT
Property and equipment, net			5,995				1,239
Total property, plant, and equipment			5,995				1,239
RIGHT OF USE ASSET, NET OF CURRENT PORTION			121,322				146,880
TOTAL ASSETS		$	951,023			$	1,187,723

 

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

 

  

ADVANZEON SOLUTIONS, INC.

 

CONSOLIDATED BALANCE SHEETS (CONTINUED)

March 31, 2020 (unaudited) and December 31, 2019

  

LIABILITIES AND STOCKHOLDERS’ DEFICIENCY
		March 31, 2020				December 31,
		(unaudited)				2019
CURRENT LIABILITIES
Related party loans payable		$	257,729			$	342,670
Account payable			309,003				99,441
Debt			12,534,189				12,352,189
Contingent liability			642,659				642,659
Current portion of lease liability			94,410				113,911
Other accrued expenses			16,321,871				15,891,787
Total current liabilities			30,159,861				29,442,657
LEASE LIABILITY, NET OF CURRENT PORTION			121,322				146,880
TOTAL LIABILITIES			30,281,183				29,589,537
STOCKHOLDERS’ DEFICIENCY
Preferred stock, $.001 par value; 1,000,000 shares authorized, as of March 31, 2020 and December 31, 2019			-				-
Series C Convertible Preferred; $.001 par value; 14,400 shares authorized; 10,434 shares issued and outstanding as of March 31, 2020 and December 31, 2019			10				10
Series D Convertible Preferred; $.001 par value; 7,000 shares authorized; 250 shares issued issued and outstanding as of March 31, 2020 and December 31, 2019			-				-
Remaining Preferred stock; $.001 par value; 978,600 shares as of March 31, 2020 and December 31, 2019			-				-
Common stock, $0.01 par value; 1,000,000,000 shares authorized; 71,661,656 shares issued and outstanding as of March 31, 2020 and December 31, 2019			716,617				716,617
Additional paid in capital			28,719,246				28,719,246
Accumulated deficit			(58,766,033	)			(57,837,687	)
Total stockholders’ deficiency			(29,330,160	)			(28,401,814	)
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIENCY		$	951,023			$	1,187,723

 

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

 

  

ADVANZEON SOLUTIONS, INC.

 

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three Month Periods Ended March 31, 2020 and 2019 (unaudited)

 

		Three-Month Period Ended
		March 31,
		2020				2019
Revenues:
Obstructive sleep apnea (OSA)		$	127,548				67,923
Total revenues			127,548				67,923
Costs and expenses:
Costs of revenues			64,909				41,660
General and administrative			596,065				425,804
Depreciation and amortization			311				205
Total costs and expenses			661,285				467,669
Loss from operations			(533,737	)			(399,746	)
Other income (expense):
Interest expense			(394,629	)			(328,015	)
Interest income			20				-
Total other income (expense)			(394,609	)			(328,015	)
Income taxes			-				-
Net loss		$	(928,346	)		$	(727,761	)
PER SHARE INFORMATION
Net Loss Per Common Share		$	(0.01	)		$	(0.01	)
Weighted Average Number of Common Shares Outstanding			71,661,656				69,690,545

 

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

 

  

ADVANZEON SOLUTIONS, INC.

 

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIENCY

For the Three Month Period Ended March 31, 2020 (unaudited) and at December 31, 2019

 

		Series C				Series C
		Convertible				Convertible				Common
		Preferred				Preferred				Stock				Common				Additional
		Stock Number				Stock				Stock Number				Stock				Paid-in				Accumulated
		of Shares				Amount				of Shares				Amount				Capital				Deficit				Total
Balance at December 31, 2019			10,434			$	10				71,661,656			$	716,617			$	28,719,246			$	(57,837,687	)		$	(28,401,814	)
Net loss			-				-				-				-				-				(928,346	)			(928,346	)
Balance at March 31, 2020			10,434			$	10				71,661,656			$	716,617			$	28,719,246			$	(58,766,033	)		$	(29,330,160	)

 

 

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

 

  

ADVANZEON SOLUTIONS, INC.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Three Month Periods Ended March 31, 2020 and 2019 (unaudited)

   

		Three Month Periods Ended
		March 31,
		2020				2019
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss		$	(928,346	)		$	(727,761	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			311				205
Stock issued for services			-				16,000
Amortization of right of use assets			45,059				12,087
Net changes in assets and liabilities:
Accounts receivable			(17,571	)			3,251
Other current assets			159,515				(172,296	)
Payments on lease liabilities			(45,059	)			(12,087	)
Accounts payable			124,621				138,528
Other accrued expenses			430,084				363,948
Net cash used in operating activities			(231,386	)			(378,125	)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant, and equipment			(5,067	)			(1,549	)
Net cash used in investing activities			(5,067	)			(1,549	)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from promissory notes			182,000				355,000
Sale of stock			-				15,000
Net cash provided by financing activities			182,000				370,000
Net decrease in cash			(54,453	)			(9,674	)
CASH - Beginning of Year			69,327				25,036
CASH - END OF PERIOD		$	14,874			$	15,362
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest		$	-			$	-
Income taxes		$	-			$	-
Recording of right of use assets under lease agreements (ASU 2016-02)		$	-			$	119,640

 

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

  

  

ADVANZEON SOLUTIONS, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1.	DESCRIPTION OF THE COMPANY’S BUSINESS AND BASIS OF PRESENTATION

 

The consolidated financial statements include the accounts of Advanzeon Solutions, Inc and its wholly owned subsidiary, and its respective subsidiaries (collectively referred to herein as, the “Company,” “Advanzeon,” “we”, “us,” or “our”).

 

In the opinion of management, the accompanying unaudited financial statements contain all adjustments necessary to present fairly the Company’s financial position as of December 31, 2019, the changes therein for the three month periods then ended and the results of operations for the three month periods ended March 31, 2020 and 2019.

 

The financial statements included in the Form 10-Q are presented in accordance with the requirements of the Form and do not include all of the disclosures required by accounting principles general accepted in the United States of America. For additional information, reference is made to the Company’s annual report on Form 10-K for the year ended December 31, 2019, filed April 9, 2020. The results of operations for the three month periods ended March 31, 2020 and 2019 are not necessarily indicative of operating results for the full year.

 

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Established in 1969, Advanzeon Solutions, Inc., (formerly Comprehensive Care Corp.) (“Advanzeon”, “we”, “Parent”, or the “Company”), through its wholly-owned subsidiary Pharmacy Value Management Solutions, Inc.,(“PVMS”) and its wholly-owned subsidiaries during 2015, and partly in 2016, provided managed care services by acting as the administrator for certain administrative service agreements in the behavioral health and substance abuse fields. We primarily offered these services to commercial, Medicare, Medicaid, Children’s Health Insurance Program (“CHIP”) health plans, as well as self-insured companies. Our managed care operations consisted solely of servicing administrative service agreements. Starting in July of 2015, we implemented our comprehensive sleep apnea program, called “SleepMaster Solutions” ™. SleepMaster Solutions (“SMS”) utilizes an administrative system for the convenient identification/testing and therapy of Obstructive Sleep Apnea (“OSA”). We partnered with a national health care provider by initiating a sleep apnea wellness program whereby we screened, tested and when needed, offered treatment programs for treating this disorder. We also contracted with a union to treat its driver members. Beginning in 2017, our only business was our SMS sleep apnea program.

 

The Company has elected to not adopt the option available under United States generally accepted accounting principles (“GAAP”) to measure any eligible financial instruments or other items at fair market value at this time. Accordingly, the Company measures all of its assets and liabilities on the historical cost basis of accounting, except as otherwise required by GAAP.

 

Inter-company accounts and transactions have been eliminated in consolidation. Certain minor reclassifications of prior period amounts have been made to conform to the current period presentation.

 

Use of Estimates - The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates that affect the reported amounts. Actual results could differ from these estimates. Estimates involved in the determination of an allowance for doubtful accounts receivable are considered by management as particularly susceptible to material change in the next year. Other significant estimates relate to stock-based compensation, warrants and beneficial conversion features.

 

 

ADVANZEON SOLUTIONS, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Accounts Receivable - Accounts receivable is carried at its estimated collectible value. Since customer credit is generally extended on a short-term basis, accounts receivable does not bear interest and are uncollateralized. We manage credit risk and determine necessary allowances by evaluating customers’ credit worthiness before extending credit and periodically for collectability, based primarily on customers’ past credit history and current financial conditions and general economic conditions, results of prior collection efforts, the relative strength of our relationship therewith and, in the event of a dispute, its legal position and the estimated cost of proposed collection proceedings. Management has not established a policy for when to charge off uncollectible accounts receivable or to use external collection agencies and makes such decisions on a case-by-case basis. The maximum losses that the Company would incur if a customer failed to pay would be limited to the carrying value of the receivable.

 

Revenue Recognition- In accordance with FASB ASC Topic 606, "Revenue from contracts with customers", the Company recognizes revenue when obligations under the terms of a contract with the customer are satisfied. Generally, this occurs upon shipment of the CPAP to their customer or when the test is performed.

 

Property and Equipment - Property and equipment, as described in Note 4, is stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives ranging from 2 to 12 years.

 

Leasehold Improvement - Leasehold improvement, as described in Note 5, is stated at cost less accumulated amortization. Leasehold improvements are amortized over the shorter of the lease term or the asset’s useful life.

 

Fair Value Measurements - The carrying amounts of cash, accounts receivable and accounts payable approximate their estimated fair value due to the short-term nature of these instruments. Since our other financial liabilities are not traded in an open market, we generally use a present value technique, which is a level 3 input, as defined in GAAP, to measure the estimated fair value of these financial instruments, except for valuing stock options and warrants (see below). The rate used for discounting expected cash flows is a risk-free rate adjusted for systematic and unsystematic risk.

 

The carrying amounts of long-term debt and estimated fair values of the attached warrants at March 31, 2020 and December 31, 2019 are as follows:

 

		March 31, 2020								December 31, 2019
						Estimated								Estimated
						Fair Value of								Fair Value of
		Carrying				Attached				Carrying				Attached
		Amount				Warrants				Amount				Warrants
Convertible promissory notes		$	7,746,173			$	-			$	7,564,173			$	-
Short term notes payable			4,788,016				-				4,788,016				-
Loan payable related party			257,729				-				342,670				-
		$	12,791,918			$	-			$	12,694,859			$	-

  

During the three month period ended March 31, 2020, there have been 4 additional convertible notes issued totaling $182,000.

  

 

ADVANZEON SOLUTIONS, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Cost of Revenues- Costs of services consist of supplies and operating expenses. Supplies are recognized in the period in which a patient actually receives the supplies.

 

Right of Use Assets and Lease Liabilities - During the quarter ended March 31, 2019, the Company implemented Accounting Standards Update 2016-02, Leases. Under the new guidance, a lessee must record a liability for lease payments (referred to as the lease liability) and an asset for the right to use the leased asset during the lease term (referred to at the right of use asset) for all leases, regardless of whether they are designated as finance or operating leases. This election requires the lessee to recognize lease expense on a straight-line basis over the lease term. The right of use assets and corresponding right of use liabilities have been recorded using the present value of the leases. See Notes 10 and 11 within the financial statement for additional disclosure on leases.

 

Income Taxes - We are subject to the income tax jurisdictions of the U.S. and multiple state tax jurisdictions. However, our provisions for income taxes for 2020 and 2019 include only state income taxes.

 

Management has evaluated our tax positions taken or to be taken on income tax returns that remain subject to examination (i.e., tax years 2017 and thereafter federally), and has concluded that there have been no uncertain tax positions (as defined in GAAP) taken that require recognition or disclosure in the consolidated financial statements. In the event of any income tax-related interest or penalties are incurred, they would be included in general and administrative expense.

 

Stock Options and Warrants - We grant stock options and warrants to our employees, non-employee directors, note holders and certain consultants allowing them to purchase our common stock pursuant to approved terms. The estimated value of the warrants issued with debt instruments is recorded as a discount on notes payable and amortized as interest expense over the term of the notes using the effective interest method.

 

3.	OTHER CURRENT ASSETS

 

Other current assets consists of the following at March 31, 2020 and December 31, 2019:

 

		March 31, 2020				December 31, 2019
Loans to others		$	34,406			$	42,676
Security and lease deposits			3,500				3,500
Capitalized portion of lease			1,523				1,808
Prepaid expenses			301,319				452,953
Miscellaneous receivable			326,334				325,660
Other current asset		$	667,082			$	826,597

  

 

ADVANZEON SOLUTIONS, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

4.	PROPERTY AND EQUIPMENT

 

Property and equipment, net, consists of the following at March 31, 2020 and December 31, 2019:

 

		March 31, 2020				December 31, 2019
Property and equipment		$	6,616			$	1,549
Less accumulated depreciation			(621	)			(310	)
Property and equipment - net		$	5,995			$	1,239

  

Depreciation expense for the three month periods ended March 31, 2020 and 2019 is $311 and $56, respectively. A laptop was acquired in January of 2020.

 

5.	LEASEHOLD IMPROVEMENT

 

Leasehold improvement, net, consists of the following at March 31, 2020 and December 31, 2019:

 

		March 31, 2020				December 31, 2019
Leasehold improvements		$	2,992			$	2,992
Less accumulated amortization			(2,992	)			(2,992	)
Leasehold improvements - net		$	-			$	-

  

Amortization expense for the three month periods ended March 31, 2020 and 2019 is $0 and $149, respectively.

 

6.	RELATED PARTY LOANS PAYABLE

 

The Company has received financing from Management of the Company as well as from members of our Board of Directors. These individuals are deemed to be related parties to the Company and their indebtedness must be disclosed separately.

 

As of March 31, 2020 and December 31, 2019, there are the following related party notes payable:

 

		March 31,  2020				December 31, 2019
Related party loans payable		$	257,729			$	342,670

  

 

ADVANZEON SOLUTIONS, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

7.

DEBT

 

As of March 31, 2020 and December 31, 2019, the balance was as follows:

 

		March 31, 2020				December 31, 2019
Notes payable		$	12,534,189			$	12,352,189

  

During the three month period ended March 31, 2020, there have been 4 additional convertible-promissory notes totaling $182,000.

 

Break-out of debt between the parent company and our subsidiary PVMS is as follows:

 

		March 31, 2020				December 31, 2019
Advanzeon parent		$	5,010,016			$	5,010,016
PVMS			7,524,173				7,342,173
		$	12,534,189			$	12,352,189

  

At PVMS, the total of notes issued year-to-date and their dollar values were as follows:

 

		March 31, 2020				December 31, 2019
Number of notes issued			4				51
Dollar value		$	182,000			$	2,289,250

  

All debt is short-term in nature, one-year maturity date. All debt issued has a stated interest rate of 12% per year.

  

8.	CONTINGENT LIABILITY

 

Contingent liability consisted of 3 items:

 

1.

A lawsuit against the Company for $450,000 from the son of a deceased promissory note holder. This matter has been dismissed twice by the judge but is ongoing due to appeals. This case is anticipated to expire in June or July for lack of prosecution.

 

2.

Interest payable in the amount of $171,247 to the same person listed in (1). This interest is related to the lawsuit referenced in (1).

 

3.

Advanzeon won a decision on a court case against Universal Healthcare. The attorney’s fees relating to this matter total $21,412. This fee will be paid out of the proceeds of the case when collected.

  

 

ADVANZEON SOLUTIONS, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

As of March 31, 2020 and December 31, 2019, the balance of this indebtedness is as follows:

 

		March 31, 2020				December 31, 2019
Disputed note payable		$	450,000			$	450,000
Disputed interest payable			171,247				171,247
Pending attorney fees			21,412				21,412
Total contingent liability		$	642,659			$	642,659

  

9.	OTHER ACCRUED LIABILITIES

 

As of March 31, 2020 and December 31, 2019, the balance of other accrued liabilities is as follows:

 

		March 31, 2020				December 31, 2019
Management compensation		$	8,873,802			$	8,873,802
Accrued interest non-related party			6,347,826				5,956,368
Board of Director fees			1,087,500				1,050,000
State fees			-				2,800
Payroll liabilities			3,803				-
Other accrued liabilities			8,940				8,817
Total other accrued debt		$	16,321,871			$	15,891,787

  

10.	RIGHT OF USE ASSETS

 

The Company entered into two leases for office space and one automobile lease that are classified as right of use assets and lease liabilities. The lease for the Company’s office spaces expire in April 2020 and June 2022. The lease for the automobile expires in June 2021. As the implicit interest rate is not readily identifiable in the leases, the Company calculated the present value of the leases using the average commercial real estate interest rate of 5.50% at the commencement of the office leases and the interest rate of 2.99% for the automobile lease. Applying the commercial rate, the Company calculated the present value of $294,203 for the office leases and $29,037 for the automobile leasing, that are being amortized over the life of the leases.

 

 

ADVANZEON SOLUTIONS, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

As of March 31, 2020, the right of use assets associated with future operating leases are as follows:

 

Total present value of right of use assets under lease agreements		$	323,240
Amortization of right of use assets			(107,508	)
Total right of use assets as of March 31, 2020		$	215,732

  

Total amortization expense related to the right of use assets under the lease agreements was $45,059 and $12,087 for the three month periods ended March 31, 2020 and 2019, respectively.

 

11.	RIGHT OF USE LEASE LIABILITIES

 

As disclosed in Note 10, the Company entered into two leases for office space and automobile lease that are classified as right of use assets and lease liabilities.

 

As of March 31, 2020, the lease liabilities associated with future payments due under the leases are as follows:

 

Total present value of future lease payments		$	323,240
Principal payments made as of the quarter ended March 31, 2020			(107,508	)
Total right of use lease liabilities as of March 31, 2020		$	215,732

  

The following is a schedule of future minimum lease payments under the right of use lease agreements together with the present value of the net minimum lease payments as of March 31, 2020:

 

Total future minimum lease payments		$	229,376
Less present value discount			13,644
Total right of use lease liabilities as of March 31, 2020			215,732
Less current portion due within one year			94,410
Long-term right of use liabilities		$	121,322

  

 

ADVANZEON SOLUTIONS, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Total maturities of lease liabilities as of March 31, 2020 are as follows:

 

		Total future
		minimum lease				Present value				Right of use
		payments				discount				lease liabilities
2020		$	103,639			$	9,229			$	94,410
2021			101,095				4,191				96,904
2022			24,642				224				24,418
		$	229,376			$	13,644			$	215,732

  

12.	COMMON STOCK

 

During the three month period ended March 31, 2020, the Company has not issued any shares.

 

During the three month period ended March 31, 2019, the Company issued 700,000 shares of its common stock as follows:

 

On March 21, 2019, the Company issued 200,000 shares of its common stock to its Securities Exchange Commission counsel, who elected to take common stock in the Company as partial payment of its legal fees. The total value shares were valued at $0.08 per share on the total value of $16,000.

 

Additionally, on March 29, 2019, the Company issued 500,000 shares of its common stock to an existing shareholder and warrant holder, who elected to exercise his warrants to purchase 500,000 shares of the Company’s common stock for $15,000. The warrants were issued during May of 2017 for $0.03 per share.

 

13.	LEGAL PROCEEDINGS

 

The Company previously reported that the litigation between Rotech Healthcare, Inc. and Pharmacy Value Management Solutions, Inc. settled. The Company rejected the draft settlement terms and continues to aggressively defend this litigation.

 

Except as disclosed above and in Item 1, all of the legal proceedings for the three month period ended March 31, 2020, are disclosed in our annual report on Form10-K for the year ended December 31, 2019, filed on April 9, 2020.

  

 

ADVANZEON SOLUTIONS, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

14.	SUBSEQUENT EVENTS

 

In accordance with ASC Topic 855, “Subsequent Events”, the Company evaluated subsequent events through May 19, 2020, the date these financial statements were available to be issued. During its evaluation, the following subsequent events were identified:

 

Issuance of debt and warrants

 

Subsequent to the balance sheet date, the Company has issued $109,180 of convertible-promissory notes. All of the debt matures in 2021 and has a stated interest rate of 10% and is unsecured. Concurrent with the issuance of debt, the Company has issued 196,058 warrants at an average exercise price of $0.23 At the time of issuance, all warrants had a three or five year term.

 

On April 27, 2020, the Company filed a report on Form 8-K regarding our entry into a material definitive agreement and the creation of a direct financial obligation which report is hereby incorporated herein by reference.

 

Agreements

 

On May 13, 2020, we entered into an Exchange Agreement (the “Agreement”) with certain holders of our 10% Senior Debt Due April 15, 2012 (collectively, the “Noteholders”). The Agreement provides that the Noteholders with Notes, totaling $2,916,869 of principal and accrued but unpaid interest, exchange their Notes for 14,584,350 shares of the Company’s Common Stock and 5,121,105 Common Stock purchase warrants. The exchange rate was $0.20 per share, which was the market price of the Common Stock as of April 21, 2020. The warrants are for a term of five years and the exercise price is $0.25 per share. The Agreement further provides that the Noteholders lock-up their acquired shares until the earlier of (a) one year from the date of the Agreement, or (b) the average daily trading volume of the Company’s Common Stock is no less than 500,000 shares for 30 consecutive trading days (collectively, the “Lock-up Period”). Following the Lock-up Period and for a period of 18 months from the date of the Agreement, if the Noteholders intend to sell more than 200,000 shares on any single trading day, the Noteholders shall give the Company prior notice of the amount of shares they intend to sell and the Company shall have a right to purchase all, but not less than all, of the offered shares at the closing bid price of the Common Stock on the date of the notice. The Agreement is in further implementation of the Company’s strategy to position the Company for the relisting of its securities on a national stock exchange such as the New York Exchange, the American Exchange or NASDAQ.

 

  

ADVANZEON SOLUTIONS, INC.

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

General

 

The following information should be read in conjunction with the financial statements and notes thereto and in conjunction with Managements’ Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

 

This report includes forward-looking statements, the realization of which may be affected by certain important factors discussed previously above under Item 1A, “Risk Factors.”

 

Overview

 

The Company through its wholly owned subsidiary Pharmacy Value Management Solutions, Inc. administers and operates a medically driven sleep apnea program branded SleepMaster Solutions™ (“SMS”). Management believes that SMS is the largest provider of these combined services in the nation. We are in all 50 states and provide a turnkey solution designed to effectively keep drivers on the road with no down time, compliant with DOT regulations, improve their health, and significantly decrease legal liability risk for the employer. We are vertically integrated, and we provide a “Program” of services that addresses all the needs of a corporate transportation system, union or other driver-related organizations. We believe we are the only company capable of providing the full range of needed services in a timely manner.

 

Our services start with the identification of the target population and the potential risk the client currently has. We can do this through our SMS Program, which includes the ability to screen every driver to identify if signs and symptoms of sleep apnea are present. We can then take this data and provide the employer with a list of those drivers that should be tested and the statistical likelihood of the percentage of those drivers who will test positive for obstructive sleep apnea (OSA). Together with the employer/union, SMS provides a realistic time frame, actual total cost, and process for testing all drivers who need to be tested. For those drivers testing positive for OSA, we then provide the appropriate treatment such that the driver will meet the DOT requirements and remain on the road. We monitor 365 days per year driver’s usage of the treatment device according to DOT standards and we report that usage to all stakeholders as required/permitted. We utilize mathematical algorithms to determine if the driver is predicatively meeting the annual DOT requirements for usage. Using those predictive algorithms, we reach out to those drivers and provide case management, encouragement designed to solve problems such that the driver increases usage, if necessary, and remains compliant.

 

PVMS constructed its model based upon the foregoing principles. The SMS Program includes all processes attended in sleep apnea screening, testing, treatment, monitoring and overall management of commercial drivers’ as well as their employers’ needs. We have successfully established relationships with national health care clinic providers, all with certified medical examiner (“CME”) status. These clinics total almost 1,000 throughout the U.S. We also have both formal and informal relationships with employers; municipalities; a significant veteran’s group; union and non-union driving organizations; suppliers of home sleep testing equipment and a variety of OSA treatment devices; and, a national network of telemedicine sleep specialists covering all 50 states. We have an internal medical team for governance and protocol purposes and a customer service department that interfaces directly with our drivers. We also have a marketing team that regularly interfaces with our existing accounts and markets our services to potential new accounts. Our services are performed utilizing a best medical practices model and an efficient, cost-effective delivery system. We obtain the required equipment on a per order basis from a durable medical equipment distributor.

 

 

ADVANZEON SOLUTIONS, INC.

 

Revenue is recognized when billed, which is approximately when the testing service is performed, or CPAP machine is shipped.

 

The first quarter of 2020 saw the beginnings of a dramatic shift in the economic business structure of the U.S., ultimately resulting in substantial nationwide business closures and employee layoffs/furloughs. Unemployment went from a low of 3.6% to over 14% in April 2020 – an almost overnight shift. All of this was a result of the rapid spread of COVID-19. Caught up in the business closures during a national “stay at home” directive, were a significant number of Concentra clinics. During this same period, the federal government, specifically the Department of Transportation (“DOT”), suspended the need for interstate commercial drivers to report for previously mandated DOT physical exams and lifted the commercial drivers’ driving time restrictions. While the Company is substantially dependent upon the commercial drivers’ need for these physical exams, their attendance at various Concentra clinics for these exams and the referral of the drivers by these clinics to the Company when sleep apnea is suspected, these closures and the suspension of the DOT physical exams did not adversely impact on the Company as much as might have been anticipated. The company was well positioned to withstand these events and had established itself securely enough with both the still open Concentra clinics and new business accounts to maintain its referral momentum, albeit not at the same pace.

  

The Company’s sales in January 2020 were up 74% compared to its sales in January 2019. The Company’s sales in February 2020 increased 101% over its sales in February 2019. The Company’s overall sales during the first quarter of 2020 increased over 88%. This increase resulted largely from the Company’s senior management’s positioning with senior management of Concentra, its sales reps’ strategic restarting of their regional contacts with Concentra clinic managers and the hiring of additional customer service representatives, adding depth to an already solid rep force. The Company’s growth over 2019 has continued into the second quarter of 2020 with current sales being up an additional 7% over last year’s comparable period. It is also notable that during the first quarter of 2020, approximately 7% of the Company’s increased sales over the comparable period of 2019 were occasioned by relationships established by the Company at the end of 2019 with new third-party payers such as The Pacific Gas & Electric Company (PG&E); the United States Postal Service in Indianapolis, Indiana; a West Coast-based Workers’ Compensation organization with substantial national accounts; and the Transit Authority in Baltimore, Maryland. We expect our growth pattern to continue in 2020 as the Company spends more time encouraging these new accounts to utilize the Company’s services, exclusively, and as relationships established by the Company with labor in the latter part of 2019 and into 2020 mature and strengthen.

  

Additionally, the Company would note that while its staff was offered the choice of working from home or at the Company’s offices, 100% of the Company’s employees elected to work from the Company’s offices. Thus, notwithstanding the fact that many of the Company’s accounts were not reachable, either personally or by phone, during the first quarter of 2020, the Company’s staff diligently pursued those contacts and new accounts in a coordinated effort to maintain and increase the Company’s business.

  

 

ADVANZEON SOLUTIONS, INC.

 

While a number of labor-related programs were put on hold during the first quarter of 2020, the Company elected to engage in a modified launch of its program with CoreChoice. In March of 2020, the Company prepared for this launch to a limited number of CoreChoice facilities (350 clinics). This launch occurred in late April 2020, and while revenues have not yet commenced from these clinics, management fully expects same to occur within the next 30 – 45 days as the CoreChoice clinics reopen.

  

In addition, the Company hired two senior labor consultants whose directive is to enhance our sales revenue from the Western Teamsters Welfare Trust Fund, a long-standing Company account, and increase the Company’s revenue through new accounts from the labor/union market.

  

Additionally, the Company accelerated the development of its CPAP sanitizing device and daily sanitizing wipes product line (see our announcement of April 13, 2020). In April 2020, we commenced taking orders for this product line and first deliveries to our customers are expected to occur by the end of May. The Company’s sales reps market our sanitizer and sanitizing wipes products in tandem with sales of the Company’s CPAP device.

  

The Company believes that its sales activities will shortly place the Company in a position to move forward with its expressed intent to relist the Company on NASDAQ. In the first quarter of 2020, the Company commenced activities aimed at reducing Company debt, much of which existed with the Company for decades. In the second quarter of 2020, the Company successfully negotiated with debt holders holding debt against the Company of approximately $2.9 million to convert that debt into Common Stock of the Company (equity). Additionally, the Company has received commitments to convert another approximately $7 million of debt into equity of the Company. The Company intends to pursue these efforts with the goal of ultimately converting much, if not all, of the Company’s long-standing debt (as opposed to continuing operation expenses) into equity in the Company, bringing it one step closer to its “up-listing” goal.

 

Sources of Revenue

 

A quantitative summary of our revenues by source category for the three month periods ended March 31, 2020 and 2019:

 

		2020				2019				Change
OSA- related		$	127,548			$	67,923			$	59,625

  

Results of Operations

 

OSA services increased to $127,548 in 2020 from $67,923 in 2019. The increase was primarily the result of the timing of the Concentra launch. Last year, on May 14, 2019, we reached an agreement with Concentra whereby Concentra engaged the Company, and the Company accepted the engagement, to serve as Concentra’s preferred national sleep apnea services provider. The launch by Concentra of this program included notifying all of the Concentra clinics of same. The launch was delayed but was initiated during the fourth quarter of 2019.

 

Cost of revenues increased to $64,909 in 2020 from $41,660 in 2019 due to an increase in sales.

  

 

ADVANZEON SOLUTIONS, INC.

 

General and administrative expense

 

General and administrative expense in total for the three month periods ended March 31, 2020 and 2019 was as follows:

 

2020		$	596,065
2019			425,804
Change		$	170,261
Percentage Change			39.99	%

  

We evaluate expenses at the Parent company level as well as at our PVMS subsidiary. Expenses at the Parent company level include overhead and the cost of being a public entity. Expenses at PVMS are solely related to the OSA services segment. A breakdown of these expenses for the three month periods ended March 31, 2020 and 2019 is as follows:

 

														Percent
		2020				2019				Change				Change
Parent		$	243,222			$	196,135			$	47,087				24.01	%
PVMS			352,843				229,669				123,174				53.63	%
Total		$	596,065			$	425,804			$	170,261				39.99	%

  

Parent Company Level

 

														Percent
		2020				2019				Change				Change
Professional fees		$	166,376			$	124,461			$	41,915				33.68	%
Travel expense			67				3,000				(2,933	)			-97.77	%
Board of Directors fees			37,500				37,500				-				0.00	%
Rent expense			23,181				25,829				(2,648	)			-10.25	%
Other			16,098				5,345				10,753				201.18	%
Total general and administrative		$	243,222			$	196,135			$	47,087				24.01	%

  

Explanations of variations by line item follow:

 

Travel expense decreased by $2,933 due to main operations moving to the subsidiary level.

 

Professional fees increased by $41,915. There was increase due to a new consulting service expenses in the total of $118,000 and an increase of $11,197 in legal fees in the three month period ended March 31, 2020 compared to the three month period ended March 31, 2019. Audit fees decreased by $63,550 and accounting fees decreased by $19,832 due to the fact that the 2019 10-K was filed in April 2020.

 

Rent expense has stayed relatively the same.

 

Other general and administrative expense increased by $10,753. This increase was due to a new D&O Insurance expense of $12,780 while other miscellaneous items decreased by $2,000.

 

  

 

ADVANZEON SOLUTIONS, INC.

 

PVMS Subsidiary Level

 

														Percent
		2020				2019				Change				Change
Payroll related		$	175,872			$	102,145			$	73,727				72.18	%
Travel and related expense			66,165				39,427				26,738				67.82	%
Professional fees			51,792				42,497				9,295				21.87	%
Marketing costs			16,834				7,500				9,334				124.45	%
Automobile expense			7,394				5,561				1,833				32.96	%
Office supplies			2,942				8,859				(5,917	)			-66.79	%
Rent expense			11,837				10,549				1,288				12.21	%
Other			20,007				13,131				6,876				52.36	%
Total general and administrative		$	352,843			$	229,669			$	123,174				53.63	%

  

Explanations of variations by line item follow:

 

Payroll related expenses increased $73,727. There are 5 additional subcontractors in the three months ended March 31, 2020 that were used in the comparable period in 2019.

 

Travel expense increased by 26,738 due to the company’s increased travel between states.

 

Professional Fees increase by $9,295. The company hired 5 new consultants to bring in additional revenue.

 

Marketing costs increased by $9,334. In August 2019, the company hired a new advertising firm to work on the company’s website.

 

Office supplies decreased by $5,917 due to office supplies were fully stocked going into the new year of 2020.

 

Rent expense stayed relatively the same.

 

Other general and administrative expense increased by $6,876. This is due to revamp of website, employee benefits, and printing and postage for a conference.

  

 

ADVANZEON SOLUTIONS, INC.

 

Interest expense

 

Interest expense in total for the three month periods ended March 31, 2020 and 2019 was as follows:

 

2020		$	394,629
2019			328,015
Change		$	66,614
Percentage Change			20.31	%

   

A breakdown of the interest expense for the three month periods ended March 31, 2020 and 2019 is as follows:

  

		2020				2019				Change
Parent		$	144,113			$	163,092			$	(18,979	)
PVMS			250,516				164,923				85,593
Total		$	394,629			$	328,015			$	66,614

 

 

ADVANZEON SOLUTIONS, INC.

 

Financial Condition

 

Liquidity and Capital Resources

 

During the three month period ended March 31, 2020, we funded our operations from revenues and $182,000 in private borrowings. We will continue to fund our operations from these sources until we are able to produce operating revenue sufficient to cover our cost structure. In the event we are not able to secure such funding, our operations will be adversely affected.

 

Short Term: We funded our operations with revenues from sales and private borrowings.

 

Subsequent Events

 

Subsequent to March 31, 2020, we issued a convertible promissory note in the principal amount of $109,180. The term of the note is 12 months and the interest rate is 10% per annum.

 

On April 27, 2020, we filed a report on Form 8-K regarding our entry into a material definitive agreement and the creation of a direct financial obligation which report is hereby incorporated herein by reference.

 

Agreements

 

On May 13, 2020, we entered into an Exchange Agreement (the “Agreement”) with certain holders of our 10% Senior Debt Due April 15, 2012 (collectively, the “Noteholders”). The Agreement provides that the Noteholders with Notes, totaling $2,916,869 of principal and accrued but unpaid interest, exchange their Notes for 14,584,350 shares of the Company’s Common Stock and 5,121,105 Common Stock purchase warrants. The exchange rate was $0.20 per share, which was the market price of the Common Stock as of April 21, 2020. The warrants are for a term of five years and the exercise price is $0.25 per share. The Agreement further provides that the Noteholders lock-up their acquired shares until the earlier of (a) one year from the date of the Agreement, or (b) the average daily trading volume of the Company’s Common Stock is no less than 500,000 shares for 30 consecutive trading days (collectively, the “Lock-up Period”). Following the Lock-up Period and for a period of 18 months from the date of the Agreement, if the Noteholders intend to sell more than 200,000 shares on any single trading day, the Noteholders shall give the Company prior notice of the amount of shares they intend to sell and the Company shall have a right to purchase all, but not less than all, of the offered shares at the closing bid price of the Common Stock on the date of the notice. The Agreement is in further implementation of the Company’s strategy to position the Company for the relisting of its securities on a national stock exchange such as the New York Exchange, the American Exchange or NASDAQ.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk:

 

As a smaller reporting company, we are not required to make any disclosure.

 

Item 4. Controls and Procedures

 

Our management is responsible for establishing and maintaining adequate internal control over our financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance to our management and board of directors regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.

 

Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions; (ii) provide reasonable assurance that transactions are recorded as necessary for preparation of our financial statements; (iii) provide reasonable assurance that receipts and expenditures of company assets are made in accordance with management authorization; and (iv) provide reasonable assurance that unauthorized acquisition, use or disposition of company assets that could have a material effect on our financial statements would be prevented or detected on a timely basis.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because changes in conditions may occur or the degree of compliance with the policies or procedures may deteriorate.

 

Our management assessed the effectiveness of our internal control over financial reporting as of March 31, 2020. This evaluation was based on criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO, Internal Control-Integrated Framework. Based upon such assessment, our CFO concluded that, as of March 31, 2020, our internal controls over financial reporting were not optimally effective in the specific areas described in the paragraphs below.

  

 

ADVANZEON SOLUTIONS, INC.

 

As of March 31, 2020, our CFO identified the following specific material weaknesses in the Company’s internal controls over its financial reporting processes:

 

●

Policies and Procedures for the Financial Close and Reporting Process – During the period of this report, the Company’s policies or procedures did not clearly define the roles in the financial reporting process. The various roles and responsibilities related to this process should be defined, documented, updated and communicated. Not having clear policies and procedures in place amounts to a material weakness in the Company’s internal controls over its financial reporting processes.

 

●

Representative with Financial Expertise – For three month period ended March 31, 2020, the Company did not continuously have an employee with the requisite knowledge and expertise to review the financial statements and disclosures at a sufficient level to monitor the financial statements and disclosures to the Company. Failure to have, continuously, an employee with such knowledge and expertise amounts to a material weakness to the Company’s internal controls over its financial reporting processes.

 

As a result of our retaining the services of an Outside Accountant in January 2018 and appointing an internal Company employee to interface with the Outside Accountant, we have instituted the following policies and procedures designed to address the material weaknesses cited above.

 

●

All billing invoices prepared by the billing department are sent to the Outside Accountant for review and approval before sending out to the customer.

 

●

Copies of all incoming payable invoices are sent to the Outside Accountant for review, approval and data entry into the accounting system. That way Corporate Office has the originals and the outside accountants have duplicate copies. Accounts Payable Aging Report is sent once a week from the Outside Accountants to the Corporate office. The Corporate office, along with Outside Accountants, decide on which bills to pay weekly. Electronic payments have a duel control approval system (one person is initiating the payment and another person is approving the payment). We also appointed the principle from our Outside Accountants to be our Chief Accounting Officer.

 

●

Paperwork on all customer invoices, credit card payments and check payments received at Corporate are copied and forwarded to Outside Accountants. Customer invoices are recorded daily. Customer payments received are recorded daily. Customer payments are reconciled with the bank on a daily basis. Aged Accounts Receivable Reports are sent to Corporate by the Outside Accountants with suggestions on a regular basis.

 

●

All bank accounts are reconciled monthly.

 

●

Financial Statements are prepared and reviewed monthly.

 

The Company plans to further augment its addressing of material weaknesses, on an as-needed basis, by hiring additional accounting personnel once its initial corrective steps have been fully implemented, tested and found to be effective.

  

 

ADVANZEON SOLUTIONS, INC.

 

PART II-OTHER INFORMATION

 

Item 1. Legal Proceedings

 

With the exception of the matter set forth below, all of the legal proceedings for the three month period ended March 31, 2020, are disclosed in our annual report on Form 10-K for the year ended December 31, 2019, filed on April 9, 2020.

 

Item 1A. Risk Factors

 

The risk factors included in our Annual Report on Form 10-K for the year ended December 31, 2019 have not materially changed.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

With the exception of the matter set forth below, the sale of unregistered securities for the three month period ended March 31, 2020 were disclosed in our annual report on Form 10-K for the year ended December 31, 2019, filed on April 9, 2020.

 

On March 22, 2020, we issued 50,000 warrants to a member of our Medical Advisory Board, an accredited investor. The warrants have a term of three years and an exercise price of $0.25 per warrant.

 

On March 31, 2020, we issued 169,551 warrants to our Chief Executive Officer in lieu of 2020 first quarter salary. The warrants have a term of five years and an exercise price of $0.39 per warrant.

 

We relied on Section 4 (2) of the Securities Act of 1933, as amended and or Section 501 of Regulation D promulgated under said Act as the exemption from registration under the Act.

 

Item 3. Exhibits

 

Documents filed as part of this Report.

 

Exhibit 31.1 Certification of Clark A. Marcus pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

Exhibit 31.2 Certification of Lloyd K. Marcus pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

Exhibit 32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

Exhibit 32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

Exhibit 10.0 Current Report on Form 8-K dated April 27, 2020

 

  

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.

  

	Advanzeon Solutions, Inc.
	Registrant
Date: May 19, 2020	By:	/s/ Clark A. Marcus
		Clark A. Marcus,
		Chief Executive Officer
Date: May 19, 2020	By:	/s/ Lloyd K. Marcus
		Lloyd K. Marcus,
		Chief Accounting Officer

 

 

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