NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For
the Three and Nine Months Ended September 30, 2022 and 2021
(unaudited)
Note
1 – Organization and Summary of Significant Accounting Policies
Description
of Business
Rennova
Health, Inc. (“Rennova”, together with its subsidiaries, the “Company”, “we”, “us”, “its”
or “our”) is a provider of health care services. The Company owns one operating hospital in Oneida, Tennessee, a hospital
located in Jamestown, Tennessee that it plans to reopen and operate, a physician practice in Jamestown, Tennessee that it plans to reopen
and operate and a rural health clinic in Kentucky. We operate in one business segment.
Basis
of Presentation
The
unaudited condensed consolidated financial statements were prepared using generally accepted accounting principles for interim financial
information and the instructions to Form 10-Q and Regulation S-X. Accordingly, these financial statements do not include all information
or notes required by generally accepted accounting principles for annual financial statements and should be read in conjunction with
the consolidated financial statements as filed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
In the opinion of management, the unaudited condensed consolidated financial statements included herein contain all adjustments necessary
to present fairly the Company’s consolidated financial position as of September 30, 2022, and the results of its operations and
changes in stockholders’ deficit for the three and nine months ended September 30, 2022 and 2021 and its cash flows for the nine
months ended September 30, 2022 and 2021. Such adjustments are of a normal recurring nature. The results of operations for the three
and nine months ended September 30, 2022 may not be indicative of results for the year ending December 31, 2022.
Principles
of Consolidation
The
unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted
in the United States of America (“U.S. GAAP”), include the accounts of Rennova and its wholly-owned subsidiaries. All intercompany
transactions and balances have been eliminated in the consolidation.
Comprehensive
(Loss) Income
During
the three and nine months ended September 30, 2022 and 2021, comprehensive (loss) income was equal to the net (loss) income amounts presented
in the unaudited condensed consolidated statements of operations.
Use
of Estimates
The
preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, and disclosure of contingent liabilities at the date of the condensed consolidated
financial statements, and the reported amounts of net revenues and expenses during the reporting period. Actual results could differ
from those estimates. Significant estimates and assumptions include the estimates of fair values of assets acquired and liabilities
assumed in business combinations, contractual allowances and bad debt reserves, the recoverability of long-lived assets, the
valuation allowance relating to the Company’s deferred tax assets, the valuations of investments, equity and derivative
instruments, income from HHS Provider Relief Funds and deemed dividends, litigation and related reserves, among others. Actual
results could differ from those estimates and would impact future results of operations and cash flows.
Reclassifications
Certain
prior year amounts have been reclassified to conform to the current year presentation.
Cash
and Cash Equivalents
The
Company considers all highly liquid temporary cash investments with an original maturity of three months or less to be cash equivalents.
Reverse
Stock Splits
On
July 16, 2021 and March 15, 2022, the Company effected a 1-for-1,000 reverse stock split and a 1-for-10,000 reverse stock split, respectively
(the “Reverse Stock Splits”).
As
a result of the Reverse Stock Splits, every 1,000 shares of the Company’s then outstanding common stock was combined and automatically
converted into one share of the Company’s common stock on July 16, 2021 and every 10,000 shares of the Company’s common stock
then outstanding was combined and automatically converted into one share of the Company’s common stock on March 15, 2022. The conversion
and exercise prices of all of the Company’s outstanding convertible preferred stock, common stock purchase warrants, stock options
and convertible debentures were proportionately adjusted at the applicable reverse split ratio in accordance with the terms of such instruments.
The par value and other terms of the common stock were not affected by the Reverse Stock Splits. All share, per share and capital stock
amounts and common stock equivalents presented herein have been restated where appropriate to give effect to the Reverse Stock Splits.
Amendment
to Certificate of Incorporation, as Amended
Effective
November 5, 2021, the Company filed an Amendment to its Certificate of Incorporation, as amended, with the Secretary of State of the
State of Delaware to provide that the number of authorized shares of the Company’s common stock or preferred stock may be increased
or decreased (but not below the number of shares then outstanding) by the affirmative vote of the holders of a majority in voting power
of the stock of the Company entitled to vote generally in the election of directors, irrespective of the provisions of Section 242(b)(2)
of the General Corporation Law of the State of Delaware (or any successor provision thereto), voting together as a single class, without
a separate vote of the holders of the class or classes the number of authorized shares of which are being increased or decreased unless
a vote by any holders of one or more series of preferred stock is required by the express terms of any series of preferred stock pursuant
to the terms thereof.
Increases
in Authorized Shares of Common Stock
Effective
November 5, 2021, the Company increased the authorized shares of common stock from 10 billion to 50 billion and, effective March 15,
2022, the Company increased the authorized shares of its common stock from 50 billion to 250 billion.
Discontinued
Operations
On
June 25, 2021, the Company sold its subsidiaries, Health Technology Solutions, Inc. (“HTS”) and Advanced Molecular Services
Group, Inc. (“AMSG”), including their subsidiaries, to InnovaQor, Inc. (“InnovaQor”), formerly known as VisualMED
Clinical Solutions Corporation. HTS and AMSG held Rennova’s software and genetic testing interpretation divisions. The financial
results of HTS and AMSG prior to the sale are reflected herein as discontinued operations. The sale is more fully discussed in Note 13.
During the third quarter of 2020, we announced that we had decided to sell our last clinical laboratory, EPIC Reference Labs, Inc. (“EPIC”),
and as a result, EPIC’s operations have been included in discontinued operations for all periods presented. The Company was unable
to find a buyer for EPIC and, therefore, ceased all efforts to sell EPIC and closed down its operations.
Revenue
Recognition
We
recognize revenue in accordance with Accounting Standard Update (“ASU”) 2014-09, “Revenue from Contracts with Customers
(Topic 606),” including subsequently issued updates. Under the accounting guidance, we no longer present the provision for
doubtful accounts as a separate line item and our revenues are presented net of estimated contractual allowances and estimated implicit
price concessions. We also do not present “allowances for doubtful accounts” on our balance sheets.
Our
revenues relate to contracts with patients in which our performance obligations are to provide health care services to the patients.
Revenues are recorded during the period our obligations to provide health care services are satisfied. Our performance obligations for
inpatient services are generally satisfied over periods averaging approximately three days, and revenues are recognized based on charges
incurred. Our performance obligations for outpatient services, including emergency room-related services, are generally satisfied over
a period of less than one day. The contractual relationships with patients, in most cases, also involve a third-party payer (Medicare,
Medicaid, managed care health plans and commercial insurance companies, including plans offered through the health insurance exchanges)
and the transaction prices for the services provided are dependent upon the terms provided by (Medicare and Medicaid) or negotiated with
(managed care health plans and commercial insurance companies) the third-party payers. The payment arrangements with third-party payers
for the services we provide to the related patients typically specify payments at amounts less than our standard charges. Medicare, because
of the Big South Fork Medical Center’s designation as a Critical Access Hospital, generally pays for inpatient and outpatient services
at rates related to the hospital’s costs. Services provided to patients having Medicaid coverage are generally paid at prospectively
determined rates per discharge, per identified service or per covered member. Agreements with commercial insurance carriers, managed
care and preferred provider organizations generally provide for payments based upon predetermined rates per diagnosis, per diem rates
or discounted fee-for-service rates. Management continually reviews the contractual estimation process to consider and incorporate updates
to laws and regulations and the frequent changes in managed care contractual terms resulting from contract renegotiations and renewals.
Our net revenues are based upon the estimated amounts we expect to be entitled to receive from patients and third-party payers. Estimates
of contractual allowances under managed care and commercial insurance plans are based upon the payment terms specified in the related
contractual agreements. Revenues related to uninsured patients and uninsured copayment and deductible amounts for patients who have health
care coverage may have discounts applied (uninsured discounts and contractual discounts). We also record estimated implicit price concessions
(based primarily on historical collection experience) related to uninsured accounts to record self-pay revenues at the estimated amounts
we expect to collect.
Laws
and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation. Estimated reimbursement
amounts are adjusted in subsequent periods as cost reports are prepared and filed and as final settlements are determined (in
relation to certain government programs, primarily Medicare, this is generally referred to as the “cost report” filing
and settlement process). Subsequent to September 30, 2022, the Company’s Big South Fork Medical Center received a communication
from its fiscal intermediary stating that its Medicare cost report for the six months ending December 31, 2021 has been accepted and
the fiscal intermediary has computed a tentative retroactive adjustment reflecting an overpayment by the fiscal intermediary in the
amount of $1.9
million. The Company is working with the fiscal intermediary to file an amended cost report, which we expect to result in a
smaller overpayment and is seeking an extended repayment schedule for any such overpayment. There is no assurance that the Medicare
overpayment will be reduced or a repayment schedule agreed upon. Furthermore, the tentative retroactive adjustment is subject
to a final cost report settlement. The Company has reserved $1.6
million as a liability and reduced net revenues by the same amount in its financial statements for the three and nine months ended
September 30, 2022 as the estimated overpayment.
The
collection of outstanding receivables for Medicare, Medicaid, managed care payers, other third-party payers and patients is our primary
source of operating cash and is critical to our operating performance. The primary collection risks relate to uninsured patient accounts,
including patient accounts for which the primary insurance carrier has paid the amounts covered by the applicable agreement, but patient
responsibility amounts (deductibles and copayments) remain outstanding. Implicit price concessions relate primarily to amounts due directly
from patients. Estimated implicit price concessions are recorded for all uninsured accounts, regardless of the aging of those accounts.
Accounts are written off when all reasonable internal and external collection efforts have been performed. The estimates for implicit
price concessions are based upon management’s assessment of historical write offs and expected net collections, business and economic
conditions, trends in federal, state and private employer health care coverage and other collection indicators. Management relies on
the results of detailed reviews of historical write-offs and collections at facilities that represent a majority of our revenues and
accounts receivable (the “hindsight analysis”) as a primary source of information in estimating the collectability of our
accounts receivable.
Contractual
Allowances and Doubtful Accounts Policy
Accounts
receivable are reported at realizable value, net of estimated contractual allowances and estimated implicit price concessions (also referred
to as doubtful accounts), which are estimated and recorded in the period the related revenue is recorded. The Company has a standardized
approach to estimating and reviewing the collectability of its receivables based on a number of factors, including the period they have
been outstanding. Historical collection and payer reimbursement experience is an integral part of the estimation process related to contractual
allowances and doubtful accounts. In addition, the Company regularly assesses the state of its billing operations in order to identify
issues which may impact the receivables or reserve estimates. Receivables deemed to be uncollectible are charged against the allowance
for doubtful accounts at the time such receivables are written-off. Recoveries of receivables previously written-off are recorded as
credits to the allowance for doubtful accounts. Revisions to the allowances for doubtful accounts are recorded as an adjustment to revenues.
During
the three months ended September 30, 2022 and 2021, estimated contractual allowances of $10.2
million and $6.8
million, respectively, and estimated implicit price concessions of $1.6
million and $1.9
million, respectively, have been recorded as reductions to our revenues and accounts receivable balances to enable us to record our
revenues and accounts receivable at the estimated amounts we expect to collect. As required by Topic 606, for the three months ended
September 30, 2022 and 2021, after estimated implicit price concessions and contractual and related allowance adjustments to
revenues of $11.8
million and $8.7
million, respectively, we reported net revenues of $2.8
million (inclusive of the $1.6 million tentative retroactive Medicare cost report adjustment) and $1.0
million, respectively.
During
the nine months ended September 30, 2022 and 2021, estimated contractual allowances of $23.4 million and $16.2 million, respectively,
and estimated implicit price concessions of $5.7 million and $6.2 million, respectively, have been recorded as reductions to our revenues
and accounts receivable balances to enable us to record our revenues and accounts receivable at the estimated amounts we expect to collect.
As required by Topic 606, for the nine months ended September 30, 2022 and 2021, after estimated implicit price concessions and contractual
and related allowance adjustments to revenues of $29.1 million and $22.4 million, respectively, we reported net revenues of $7.6 million
and $1.3 million, respectively.
Impairment
or Disposal of Long-Lived Assets
We
account for the impairment or disposal of long-lived assets according to the Financial Accounting Standards Board (the “FASB”)
Accounting Standards Codification (“ASC”) Topic 360, Property, Plant and Equipment (“ASC 360”). ASC 360
clarifies the accounting for the impairment of long-lived assets and for long-lived assets to be disposed of, including the disposal
of business segments and major lines of business. Long-lived assets are reviewed when facts and circumstances indicate that the carrying
value of the asset may not be recoverable. When necessary, impaired assets are written down to estimated fair value based on the best
information available. Estimated fair value is generally based on either appraised value or measured by discounting estimated future
cash flows. Considerable management judgment is necessary to estimate discounted future cash flows. Accordingly, actual results could
vary significantly from such estimates. The Company did not record an asset impairment charge during the three and nine months ended
September 30, 2022 and 2021.
Leases
in Accordance with ASU No. 2016-02
We
account for leases in accordance with ASU No. 2016-02, Leases (Topic 842), which requires leases with durations greater than 12
months to be recognized on the balance sheet. Upon adoption in 2019, we elected the package of transition provisions available which
allowed us to carryforward our historical assessments of (1) whether contracts are or contain leases, (2) lease classification and (3)
initial direct costs. We lease property and equipment under finance and operating leases. For leases with terms greater than 12 months,
we record the related right-of-use assets and right-of-use obligations at the present value of lease payments over the term. We do not
separate lease and non-lease components of contracts. Our finance and operating leases are more fully discussed in Note 8.
Fair
Value Measurements
In
accordance with ASC 820, “Fair Value Measurements and Disclosures,” the Company applies fair value accounting for
all financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value in the financial
statements on a recurring basis. Fair value is defined as the price that would be received from selling an asset or paid to transfer
a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements
for assets and liabilities which are required to be recorded at fair value, the Company considers the principal or most advantageous
market in which it would transact and the market-based risk measurements or assumptions that market participants would use in pricing
the asset or liability, such as risks inherent in valuation techniques, transfer restrictions and credit risk. Fair value is estimated
by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization
within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:
|
● |
Level
1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities that we
have the ability to access at the measurement date. |
|
|
|
|
● |
Level
2 applies to assets or liabilities for which there are inputs other than quoted prices included in Level 1 that are observable for
the asset or liability, either directly or indirectly, such as quoted prices for similar assets or liabilities in active markets;
or quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active
markets). |
|
|
|
|
● |
Level
3 applies to assets or liabilities for which fair value is derived from valuation techniques in which one or more significant inputs
are unobservable, including our own assumptions. |
On
September 30, 2022 and December 31, 2021, we applied the Level 3 fair value hierarchy in determining the fair value of the InnovaQor
Series B-1 Preferred Stock, which is reflected on our condensed consolidated balance sheets as an investment, as more fully
discussed in Notes 9 and 13. Also, on September 30, 2022 and December 31, 2021, we applied the Level 3 fair value hierarchy in
determining the fair value of a derivative liability for an embedded conversion option of an outstanding convertible debenture, as
more fully discussed in Note 9.
Derivative
Financial Instruments and Fair Value, Including ASU 2017-11 and ASU 2021-04
In
July 2017, the FASB issued ASU 2017-11, “Earnings Per Share (Topic 260) Distinguishing Liabilities from Equity (Topic 480) Derivatives
and Hedging (Topic 815).” The amendments in Part I of this Update change the classification analysis of certain equity-linked financial
instruments (or embedded features) with down round features. When determining whether certain financial instruments should be classified
as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument
is indexed to an entity’s own stock. The amendments also clarify existing disclosure requirements for equity-classified instruments.
As a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a
derivative liability at fair value as a result of the existence of a down round feature. For freestanding equity classified financial
instruments, the amendments require entities that present earnings (loss) per share (EPS) in accordance with Topic 260 to recognize the
effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to
common stockholders in basic EPS. Convertible instruments with embedded conversion options that have down round features are now subject
to the specialized guidance for contingent beneficial conversion features (in Subtopic 470-20, Debt—Debt with Conversion and Other
Options), including related EPS guidance (in Topic 260).
In
May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic
470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity
(Subtopic 815-40), Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call
Options. The FASB issued this update to clarify and reduce diversity in an issuer’s accounting for modifications or
exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified after
modification or exchange. The guidance clarifies whether an issuer should account for a modification or an exchange of a
freestanding equity-classified written call option that remains equity classified after modification or exchange as (1) an
adjustment to equity (that is, deemed dividends) and, if so, the related earnings per share (EPS) effects, if any, or (2) an expense
and, if so, the manner and pattern of recognition. We adopted this new accounting guidance on January 1, 2022. Under the new
guidance, the FASB decided not to include convertible debt instruments in the guidance because ASU No 2016-01, Financial
Instruments – Overall (Subtopic 825-10) requires that an entity capture the impact of changes in down round provision
features of convertible debt within the fair value of the instruments. During the three and nine months ended September 30, 2022,
there were no changes in the fair values of the Company’s convertible debentures with down round provision features as these
debentures have floors that were not in-the-money at September 30, 2022. Prior to the adoption of the guidance in ASU No 2016-01,
Financial Instruments – Overall (Subtopic 825-10), in the three and nine months ended September 30, 2021, we recorded
deemed dividends for changes in down round provisions of debentures of $5.4
million in both periods. Debentures are more fully discussed in Note 6. There were no triggers of down round provisions to warrants
during the three months ended September 30, 2022. The incremental value of modifications to warrants as a result of the trigger of
down round provisions of $253.5
million were recorded as deemed dividends for the three months ended September 30, 2021. The incremental value of modifications to
warrants as a result of the trigger of down round provisions of $330.6
million and $403.1
million were recorded as deemed dividends for the nine months ended September 30, 2022 and 2021, respectively.
In
addition, we recorded deemed dividends of approximately $0.3 million during the nine months ended September 30, 2022 as a result of the
issuances of shares of our Series P Convertible Redeemable Preferred Stock (the “Series P Preferred Stock”), which is more
fully discussed in Note 10. In addition, we recorded deemed dividends of $0.3 million in both the three and nine months ended September
30, 2021 as a result of the extension of certain common stock warrants and $0.3 million and $0.3 million in both the three and nine months
ended September 31, 2021 in connection with an exchange agreement. The extension of the warrants and the exchange agreement are more
fully discussed in Note 10. See Note 9 for an additional discussion of derivative financial instruments and deemed dividends.
Income
Taxes
Income
taxes are accounted for under the liability method of accounting for income taxes. Under the liability method, future tax liabilities
and assets are recognized for the estimated future tax consequences attributable to differences between the amounts reported in the financial
statement carrying amounts of assets and liabilities and their respective tax bases. Future tax assets and liabilities are measured using
enacted or substantially enacted income tax rates expected to apply when the asset is realized or the liability settled. The effect of
a change in income tax rates on future income tax liabilities and assets is recognized in income in the period that the change occurs.
Future income tax assets are recognized to the extent that they are considered more likely than not to be realized. When projected future
taxable income is insufficient to provide for the realization of deferred tax assets, the Company recognizes a valuation allowance.
In
accordance with U.S. GAAP, the Company is required to determine whether a tax position of the Company is more likely than not to be sustained
upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the
technical merits of the position. The tax benefit to be recognized is measured as the largest amount of benefit that is greater than
fifty percent likely of being realized upon ultimate settlement. Derecognition of a tax benefit previously recognized could result in
the Company recording a tax liability that would reduce net assets. Based on its analysis, the Company has determined that it has not
incurred any liability for unrecognized tax benefits as of September 30, 2022 and December 31, 2021.
Earnings
(Loss) Per Share
The
Company reports earnings (loss) per share in accordance with ASC Topic 260, “Earnings Per Share,” which establishes standards
for computing and presenting earnings (loss) per share. Basic earnings (loss) per share of common stock is calculated by dividing net
earnings (loss) available to common stockholders by the weighted-average shares of common stock outstanding during the period, without
consideration of common stock equivalents. Diluted earnings (loss) per share is calculated by adjusting the weighted-average shares of
common stock outstanding for the dilutive effect of common stock equivalents, including preferred stock, convertible debt, stock options
and warrants outstanding for the period, with options and warrants determined using the treasury stock method. For purposes of the diluted
net loss per share calculation, common stock equivalents are excluded from the calculation when their effect would be anti-dilutive.
See Note 3 for the computation of loss per share for the three and nine months ended September 30, 2022 and 2021.
Note
2 – Liquidity and Financial Condition
Big South Fork Medical Center
On
January 13, 2017, we acquired certain assets related to Scott County Community Hospital, based in Oneida, Tennessee (the “Oneida
Assets”). The Oneida Assets include a 52,000 square foot hospital building and a 6,300 square foot professional building on approximately
4.3 acres. Scott County Community Hospital has 25 beds, a 24/7 emergency department and a laboratory that provides a range of diagnostic
services. Scott County Community Hospital closed in July 2016 in connection with the bankruptcy filing of its parent company, Pioneer
Health Services, Inc. We acquired the Oneida Assets out of bankruptcy for a purchase price of $ million. The hospital, which has since
been renamed Big South Fork Medical Center, became operational on August 8, 2017. The hospital became certified as a Critical Access
Hospital (rural) hospital in December 2021, retroactive to June 30, 2021.
Jamestown
Regional Medical Center and Mountain View Physician Practice
On
June 1, 2018, the Company acquired from Community Health Systems, Inc. certain assets related to an acute care hospital located in Jamestown,
Tennessee, referred to as Jamestown Regional Medical Center, for a purchase price of $0.7 million. The hospital is an 85-bed facility
of approximately 90,000 square feet on over eight acres of land, which offered a 24-hour emergency department with two trauma bays and
seven private exam rooms, inpatient and outpatient medical services and a progressive care unit which provided telemetry services. The
acquisition also included a separate physician practice known as Mountain View Physician Practice, Inc.
The
Company suspended operations at the hospital and physician practice in June 2019, as a result of the termination of the hospital’s
Medicare agreement and other factors. The Company is evaluating whether to reopen the facility as an acute care hospital or as another
type of healthcare facility. Jamestown is located 38 miles west of Big South Fork Medical Center.
Jellico
Community Hospital and CarePlus Rural Health Clinic
On
March 5, 2019, we acquired certain assets related to a 54-bed acute care hospital that offered comprehensive services located in Jellico,
Tennessee known as Jellico Community Hospital and an outpatient clinic located in Williamsburg, Kentucky known as CarePlus Clinic. The
hospital and the clinic and their associated assets were acquired from Jellico Community Hospital, Inc. and CarePlus Rural Health Clinic,
LLC, respectively. On March 1, 2021, the Company closed Jellico Community Hospital, after the City of Jellico issued a 30-day termination
notice for the lease of the building. Jellico Community Hospital was located 33 miles east of our Big South Fork Medical Center.
The
CarePlus Clinic offers compassionate care in a patient-friendly facility. The CarePlus Clinic is located 32 miles northeast of our Big
South Fork Medical Center.
Impact
of the Pandemic
The
coronavirus (“COVID-19”) pandemic was declared a global pandemic by the World Health Organization on March 11, 2020. We have
been closely monitoring the COVID-19 pandemic and its impact on our operations. As more fully discussed in Note 6, we have received Paycheck
Protection Program (“PPP”) loans. We have also received Department of Health and Human Services (“HHS”) Provider
Relief Funds and employee retention credits from the federal government as more fully discussed below. If the COVID-19 pandemic continues
for a further extended period, we expect to incur significant losses and additional financial assistance may be required. Going forward,
the Company is unable to determine the extent to which the COVID-19 pandemic will continue to affect its business.
HHS
Provider Relief Funds
The
Company received HHS Provider Relief Funds, which were provided to eligible healthcare providers out of the $100 billion
Public Health and Social Services Emergency Fund provided for in the Coronavirus Aid, Relief and Economic Security Act (the
“CARES Act”). The funds were allocated to eligible healthcare providers for expenses and lost revenue attributable to
the COVID-19 pandemic. As of September 30, 2022, our facilities have received approximately $13.5 million
in relief funds. The fund payments are grants, not loans, and HHS will not require repayment, but the funds must be used only for
grant approved purposes. Based on an analysis of the compliance and reporting requirements of the Provider Relief Funds and the
impact of the pandemic on our operating results through September 30, 2022, we have recognized a net of $12.1 million
of these funds as income of which $4.4 million
was recognized as income during the nine months ended September 30, 2021 and $8.0 million
was recognized as income in 2020, offset by a reduction of income of $0.3 million
during the three and nine months ended September 30, 2022, based on a review and further analysis of the amount of income previously
recorded. Accordingly, $1.4 million
of relief funds received as of September 30, 2022 are included on our unaudited condensed consolidated balance sheet in accrued
expenses as more fully discussed in Note 5.
As
of September 30, 2022, the Company’s estimate of the amount for which it is reasonably assured of meeting the underlying terms
and conditions was based on, among other things, the various notices issued by HHS in September 19, 2020, October 22, 2020, and January
15, 2021 and the Company’s results of operations during the years ended December 31, 2020 and 2021 and the three and nine months
ended September 30, 2022. The Company believes that it was appropriate to recognize a net of $12.1 million of the HHS Provider Relief
Funds as income in various periods, as discussed in the paragraph above. Accordingly, the $12.1 million is not recognized as a liability
at September 30, 2022. Additional guidance or new and amended interpretations of existing guidance on the terms and conditions of such
payments may result in changes in the Company’s estimate of amounts for which the terms and conditions are reasonably assured of
being met, and any such changes may be material. Additionally, any such changes may result in derecognition of amounts of income previously
recognized, which may be material. If we are unable to attest to or comply with current or future terms and conditions, and there is
no assurance we will be able to do so, our ability to retain some or all of the funds received may be impacted.
Federal
Employee Retention Credits
The
CARES Act, passed by Congress on March 27, 2020, contained the employee retention credit, a refundable payroll tax credit to employers
that have experienced hardship in their operations due to COVID-19. The CARES Act was amended and extended on December 27, 2020 by the
Consolidated Appropriations Act, 2021 (the “CAA”) and in March 2021, the Internal Revenue Code was amended by the American
Rescue Plan Act of 2021 to provide new employee retention credit provisions designed to promote employee retention and hiring. As a result,
the Company received $1.5 million in employee retention credits during the year ended December 31, 2021, which the Company recognized
as other income and applied to its outstanding past-due payroll tax liabilities. See Note 5 for an additional discussion of the employee
retention credit.
Going
Concern
Under
ASU 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40) (“ASC 205-40”), the Company has the
responsibility to evaluate whether conditions and/or events raise substantial doubt about its ability to meet its future financial obligations
as they become due within one year after the date that the financial statements are issued. As required by ASC 205-40, this evaluation
shall initially not take into consideration the potential mitigating effects of plans that have not been fully implemented as of the
date the financial statements are issued. Management has assessed the Company’s ability to continue as a going concern in accordance
with the requirements of ASC 205-40.
At
September 30, 2022, the Company had a working capital deficit and a stockholders’ deficit of $44.0 million and $29.9 million, respectively.
In addition, the Company had a loss from continuing operations of approximately $4.1 million and $4.4 million for the nine months ended
September 30, 2022 and 2021, respectively, and cash used in operating activities was $1.2 million and $5.7 million for the nine months
ended September 30, 2022 and 2021, respectively. As of the date of this report, our cash is deficient and payments for our operations
in the ordinary course are not being made. The continued losses and other related factors, including past due accounts payable and payroll
taxes, as well as payment defaults under the terms of certain outstanding notes payable and debentures, raise substantial doubt about
the Company’s ability to continue as a going concern for 12 months from the filing date of this report.
The
Company’s unaudited condensed consolidated financial statements are prepared assuming the Company can continue as a going concern,
which contemplates continuity of operations through realization of assets, and the settling of liabilities in the normal course of business.
The Company’s current financial condition may make it difficult to attract and maintain adequate expertise in its management team
to successfully operate its remaining healthcare facilities.
There
can be no assurance that the Company will be able to achieve its business plan, raise any additional capital or secure the
additional financing necessary to implement its current operating plan. The ability of the Company to continue as a going concern is
dependent upon its ability to raise adequate capital to fund its operations and repay its outstanding debt and other past due
obligations, fully align its operating costs, increase its net revenues, and eventually gain profitable operations. The unaudited
condensed consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to
continue as a going concern.
Note
3 – Loss Per Share
Basic
loss per share is computed by dividing the loss available to common stockholders by the weighted-average number of shares of common stock
outstanding during the period. Basic loss per share excludes potential dilution of securities or other contracts to issue shares of common
stock. Diluted loss per share reflects the potential dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the income of the Company.
For each of the three and nine months ended September 30, 2022 and 2021, basic loss per share is the same as diluted loss per share.
The
following table sets forth the computation of the Company’s basic and diluted net loss per share (unaudited) during the three and
nine months ended September 30, 2022 and 2021:
Schedule
of Earnings Per Share
| |
| | | |
| | | |
| | | |
| | |
| |
Three Months Ended September 30, | | |
Nine Months Ended September 30, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Numerator | |
| | | |
| | | |
| | | |
| | |
Net (loss) income from continuing operations | |
$ | (1,339,865 | ) | |
$ | 785,565 | | |
$ | (4,105,838 | ) | |
$ | (4,371,860 | ) |
Deemed dividends | |
| - | | |
| (259,530,999 | ) | |
| (330,876,369 | ) | |
| (409,142,478 | ) |
Net loss available to common stockholders, continuing operations | |
| (1,339,865 | ) | |
| (258,745,434 | ) | |
| (334,982,207 | ) | |
| (413,514,338 | ) |
Net (loss) income from discontinued operations | |
| (1,696 | ) | |
| 545,399 | | |
| (7,075 | ) | |
| 10,880,148 | |
Net loss available to common stockholders | |
$ | (1,341,561 | ) | |
$ | (258,200,035 | ) | |
$ | (334,989,282 | ) | |
$ | (402,634,190 | ) |
| |
| | | |
| | | |
| | | |
| | |
Denominator | |
| | | |
| | | |
| | | |
| | |
Weighted average number of shares of common stock outstanding during the period - basic and diluted | |
| 10,569,572,256 | | |
| 43,900 | | |
| 4,130,876,898 | | |
| 15,046 | |
| |
| | | |
| | | |
| | | |
| | |
Net loss per share of common stock available to common stockholders - basic and diluted: | |
| | | |
| | | |
| | | |
| | |
Continuing operations | |
$ | (0.00 | ) | |
$ | (5,893.97 | ) | |
$ | (0.08 | ) | |
$ | (27,483.34 | ) |
Discontinued operations | |
| (0.00 | ) | |
| 12.42 | | |
| (0.00 | ) | |
| 723.13 | |
Total basic and diluted | |
$ | (0.00 | ) | |
$ | (5,881.55 | ) | |
$ | (0.08 | ) | |
$ | (26,760.21 | ) |
Diluted
loss per share excludes all dilutive potential shares if their effect is anti-dilutive. As of September 30, 2022 and 2021, the following
potential common stock equivalents were excluded from the calculation of diluted loss per share as their effect was anti-dilutive:
| |
Nine Months September 30, | |
| |
2022 | | |
2021 | |
Warrants | |
| 511,333,351,092 | | |
| 18,266,394 | |
Convertible preferred stock | |
| 466,707,633,333 | | |
| 8,977,081 | |
Convertible debentures | |
| 28,777,833,333 | | |
| 966,494 | |
Stock options | |
| 26 | | |
| 26 | |
| |
| 1,006,818,817,784 | | |
| 28,209,995 | |
The
terms of certain of the warrants, convertible preferred stock and convertible debentures issued by the Company provide for reductions
in the per share exercise prices of the warrants and the per share conversion prices of the debentures and preferred stock (if applicable
and subject to floors in certain cases) in the event that the Company issues common stock or common stock equivalents (as that term is
defined in the agreements) at an effective exercise/conversion price that is less than the then exercise/conversion prices of the outstanding
warrants, preferred stock or debentures, as the case may be. In addition, many of these securities contain exercise or conversion prices
that vary based upon the price of the Company’s common stock on the date of exercise/conversion (see Notes 6, 9, 10 and 15). These
provisions have resulted in significant dilution of the Company’s common stock.
As
a result of these down round provisions, the potential common stock and common stock equivalents totaled 1.0 trillion at November 10,
2022, as more fully discussed in Note 15. See Note 10 regarding a discussion of the number of shares of the Company’s authorized
common and preferred stock.
Note
4 – Accounts Receivable
Accounts
receivable at September 30, 2022 (unaudited) and December 31, 2021 consisted of the following:
Schedule
of Accounts Receivable
| |
| | | |
| | |
| |
September 30, | | |
December 31, | |
| |
2022 | | |
2021 | |
| |
| | |
| |
Accounts receivable | |
$ | 13,393,254 | | |
$ | 12,961,817 | |
Less: | |
| | | |
| | |
Allowance for contractual obligations | |
| (8,125,400 | ) | |
| (8,737,502 | ) |
Allowance for doubtful accounts | |
| (1,725,356 | ) | |
| (1,456,791 | ) |
Accounts receivable owed under settlements/sales agreements | |
| (211,764 | ) | |
| (688,236 | ) |
Accounts receivable, net | |
$ | 3,330,734 | | |
$ | 2,079,288 | |
Note
5 – Accrued Expenses
Accrued
expenses at September 30, 2022 (unaudited) and December 31, 2021 consisted of the following:
Schedule
of Accrued Expenses
| |
| | | |
| | |
| |
September 30, | | |
December 31, | |
| |
2022 | | |
2021 | |
Accrued payroll and related liabilities | |
$ | 7,833,193 | | |
$ | 7,528,464 | |
HHS Provider Relief Funds | |
| 1,415,549 | | |
| 863,452 | |
Accrued interest | |
| 5,413,828 | | |
| 5,027,459 | |
Accrued legal expenses and settlements | |
| 454,486 | | |
| 632,318 | |
Medicare overpayment reserve | |
| 1,600,000 | | |
| - | |
Other accrued expenses | |
| 2,635,432 | | |
| 1,448,242 | |
Accrued expenses | |
$ | 19,352,488 | | |
$ | 15,499,935 | |
Payroll
and related liabilities at September 30, 2022 and December 31, 2021 included approximately $2.6 million and $2.3 million, respectively,
for penalties associated with approximately $4.1 million and $3.9 million of accrued past due payroll taxes as of September 30, 2022
and December 31, 2021, respectively. This liability account at September 30, 2022 and December 31, 2021 is net of employee retention
credits totaling $1.5 million and $1.5 million, respectively. Employee retention credits are also discussed in Note 2.
As
of September 30, 2022 and December 31, 2021, the Company has accrued $1.4
million and $0.9 million, respectively, of HHS Provider Relief Funds. These funds are more fully discussed in Note 2.
Accrued
interest at September 30, 2022 and December 31, 2021 included accrued interest of $0.1 million and $0.3 million, respectively, on loans
made to the Company by Christopher Diamantis, a former member of the Company’s Board of Directors. The loans from Mr. Diamantis
are more fully discussed in Note 6.
Subsequent to September 30, 2022, the Company’s Big South Fork Medical Center received a communication from its fiscal intermediary stating that
its Medicare cost report for the six months ending December 31, 2021 has been accepted and there was an overpayment by the fiscal intermediary
as more fully discussed in Notes 1 and 15. As a result of the communication, during the three and nine months ended September, 30, 2022,
the Company recorded a $1.6 million reduction in net revenues and a corresponding Medicare overpayment reserve.
Note
6 – Debt
At
September 30, 2022 (unaudited) and December 31, 2021, debt consisted of the following:
Schedule
of Debt
| |
September 30, 2022 | | |
December 31, 2021 | |
| |
| | |
| |
Notes payable- third parties | |
$ | 3,119,505 | | |
$ | 4,667,819 | |
Loan payable – related party | |
| 3,027,000 | | |
| 2,127,000 | |
Debentures | |
| 8,222,240 | | |
| 8,222,240 | |
Total debt | |
| 14,368,745 | | |
| 15,017,059 | |
Less current portion of debt | |
| (14,368,745 | ) | |
| (15,017,059 | ) |
Total debt, net of current portion | |
$ | - | | |
$ | - | |
At
September 30, 2022 (unaudited) and December 31, 2021, notes payable with third parties consisted of the following:
Notes
Payable – Third Parties
Schedule
of Notes Payable Third Parties
| |
September 30, 2022 | | |
December 31, 2021 | |
| |
| | |
| |
| |
| | |
| |
| |
- | | |
250,000 | |
Settlement amount/loan payable to TCA Global Credit Master Fund, L.P. (“TCA”) in the original principal amount of $3 million. Settled on September 30, 2021 for $500,000 pursuant to a payment plan as discussed below. | |
$ | - | | |
$ | 250,000 | |
| |
| | | |
| | |
Notes payable to CommerceNet and Jay Tenenbaum in the original principal amount of $500,000 (the “Tegal Notes”). | |
| 291,557 | | |
| 291,557 | |
| |
| | | |
| | |
Note payable to Anthony O’Killough dated September 27, 2019 in the original principal amount of $1.9 million. Interest is due only upon event of default. Issued net of $0.3 million of debt discount and $0.1 million of financing fees. Payment due in installments through November 2020. | |
| 1,339,495 | | |
| 1,450,000 | |
| |
| | | |
| | |
Notes payable under the PPP loans issued on April 20, 2020 through May 1, 2020. | |
| - | | |
| 400,800 | |
| |
| | | |
| | |
Notes payable dated January 31, 2021 and February 16, 2021 in the original aggregate amount of $245,000 due six months from the date of issuance. The notes bore interest at 10% for the period outstanding. Under the terms of the notes, the holder received 100 shares of InnovaQor’s Series B-1 Preferred Stock held by the Company (see Note 13). | |
| - | | |
| 122,500 | |
| |
| | | |
| | |
Notes payable to Western Healthcare, LLC dated August 10, 2021, in the aggregate principal amount of $2.4 million, bearing interest at 18% per annum, payable in monthly installments aggregating $0.2 million, due August 30, 2022. | |
| 1,488,453 | | |
| 2,152,962 | |
| |
| | | |
| | |
Note payable | |
| 3,119,505 | | |
| 4,667,819 | |
Less current portion | |
| (3,119,505 | ) | |
| (4,667,819 | ) |
Notes payable - third parties, net of current portion | |
$ | - | | |
$ | - | |
In
May 2020, the SEC appointed a Receiver to close down the TCA Global Credit Master Fund, L.P. The Company and the Receiver entered into
a settlement agreement dated effective as of September 30, 2021, under which the Company agreed to pay $500,000 as full and final settlement
of principal and accrued interest, of which $250,000 was paid during 2021 and $250,000 was paid during the nine months ended September
30, 2022. As a result of the settlement, in the three and nine months ended September 30, 2021 the Company recorded a gain from
legal settlement, resulting from the adjustments of principal and accrued interest, of $2.2 million.
The
Company did not make the second annual principal payment under the Tegal Notes that was due on July 12, 2016. On November 3, 2016, the
Company received a default notice from the holders of the Tegal Notes demanding immediate repayment of the outstanding principal at that
time of $341,612 and accrued interest of $43,000. On December 7, 2016, the Company received a breach of contract complaint with a request
for the entry of a default judgment (see Note 12). On April 23, 2018, the holders of the Tegal Notes received a judgment against the
Company. As of September 30, 2022, the Company has paid $50,055 of the principal amount of these notes.
On
September 27, 2019, the Company issued a promissory note payable to Anthony O’Killough in the principal amount of $1.9 million
and received proceeds of $1.5 million, which was net of a $0.3 million original issue discount and $0.1 million of financing fees. The
first principal payment of $1.0 million was due on November 8, 2019 and the remaining $0.9 million was due on December 26, 2019. These
payments were not made. In February 2020, Mr. O’Killough sued the Company and Mr. Diamantis, as guarantor, in New York State Supreme
Court for the County of New York, for approximately $2.2 million for non-payment of the promissory note. In May 2020, the Company, Mr.
Diamantis, as guarantor, and Mr. O’Killough entered into a Stipulation providing for a payment of a total of $2.2 million (which
included accrued “penalty” interest as of that date) in installments through November 1, 2020. The Company made payments
totaling $450,000 in 2020. On January 18, 2022, Mr. Diamantis paid $750,000 and the remaining balance was due 120 days thereafter. Mr.
O’Killough agreed to forebear from any further enforcement action until then. The Company is obligated to repay Mr. Diamantis the
$750,000 payment, plus interest, as well as any further payments that may be made by him. On May 16, 2022, the Company paid $250,000
to Mr. Diamantis for further payment to Mr. O’Killough and on July 18, 2022, Mr. Diamantis paid a further $150,000 to Mr. O’Killough.
As a result of the $750,000 payment to Mr. O’Killough made by Mr. Diamantis on January 18, 2022 and the additional $400,000 in
payments made to Mr. O’Killough on May 16, 2022 and July 18, 2022, the past due balance owed to Mr. O’Killough was $1.3 million
on September 30, 2022. The promissory note and forbearance agreement are also discussed in Note 12.
The
Company, including its subsidiaries, received PPP loan proceeds in the aggregate amount of approximately $2.4 million (the
“PPP Notes”). The PPP Notes and accrued interest were forgivable as long as the borrower used the loan proceeds for
eligible purposes, including payroll, benefits, rent and utilities. As of September 30, 2022, $2.3 million of the principal balance
of the PPP Notes was forgiven of which $0.3 million was forgiven in the nine months ended September 30, 2022, $1.0 million was
forgiven in the three months ended September 30, 2021 and $1.0 million was forgiven in the three months ended December 31, 2021.
During the nine months ended September 30, 2022, the remaining principal balance was repaid.
On
August 10, 2021, the Company entered into two notes payable with Western Healthcare, LLC in the aggregate principal amount of $2.4 million.
The notes were issued under the terms of a settlement agreement related to agreements that the Company had previously entered into for
medical staffing services. The notes bear interest at a rate of 18% per annum and payments consisting of principal and interest are due
no later than August 30, 2022. The Company paid $0.2 million to the note holders upon issuance of the notes. The Company has not
made all of the monthly installments due under the notes.
Loan
Payable – Related Party
At
September 30, 2022 (unaudited) and December 31, 2021, loan payable - related party consisted of the following:
Schedule of Notes Payable Related Parties
| |
September 30, 2022 | | |
December 31, 2021 | |
| |
| | |
| |
Loan payable to Christopher Diamantis | |
$ | 3,027,000 | | |
$ | 2,127,000 | |
Less current portion of loan payable, related party | |
| (3,027,000 | ) | |
| (2,127,000 | ) |
Total loan payable, related party, net of current portion | |
$ | — | | |
$ | — | |
Mr.
Diamantis was a member of the Company’s Board of Directors until his resignation on February 26, 2020. During the nine months ended
September 30, 2022, Mr. Diamantis loaned the Company $0.9 million, which was used to pay principal and accrued interest due under the
note payable to Mr. O’Killough. The note payable to Mr. O’Killough, including payments made in the nine months ended September
30, 2002, is more fully discussed above under the heading Notes Payable –Third Parties. During the nine months ended September
30, 2021, Mr. Diamantis loaned the Company $0.9 million, which was used for working capital purposes and the Company repaid Mr. Diamantis
$0.4 million. In November 2021, Mr. Diamantis requested the Company repay the outstanding note payable to him, which was $3.0 million
at September 30, 2022, and facilitate repayment of the note payable to Mr. O’Killough for which he is a guarantor.
During
the three months ended September 30, 2022 and 2021, the Company incurred interest expense of $15,000 and $0, respectively, on the
loans from Mr. Diamantis and during the nine months ended September 30, 2022 and 2021, the Company incurred interest expense of
$0.1 million and $0.1 million, respectively. During the three and nine months ended September 30, 2022, the Company paid
$0.2 million and $0.3 million, respectively, of accrued interest owed to Mr. Diamantis. As of September 30, 2022 and December 31, 2021, accrued interest on the loans
from Mr. Diamantis totaled approximately $0.1 million and $0.3 million, respectively. Interest accrues on loans from Mr. Diamantis
at a rate of 10% on the majority of the amounts loaned. In addition, the Company incurs interest expense related to the amounts Mr.
Diamantis borrows from third-parties to loan to the Company.
Debentures
The
carrying amount of all outstanding debentures with institutional investors as of September 30, 2022 (unaudited) and December 31, 2021
was as follows:
Schedule of Debentures
| |
September 30, 2022 | | |
December 31, 2021 | |
| |
| | |
| |
Debentures | |
$ | 8,222,240 | | |
$ | 8,222,240 | |
| |
| | | |
| | |
Less current portion | |
| (8,222,240 | ) | |
| (8,222,240 | ) |
Debentures, net of current portion | |
$ | - | | |
$ | - | |
Payment
of all outstanding debentures with institutional investors totaling $8.2 million at both September 30, 2022 and December 31, 2021 was
past due by the debentures’ original terms. A 30% late payment penalty was added to the principal amount of each debenture. Included
in the outstanding debentures as of September 30, 2022 and December 31, 2021 were late payment penalties of $1.9 million. The debentures
bear default interest at the rate of 18% per annum and are secured by a first priority lien on all of the Company’s assets. During
the three months ended September 30, 2022 and 2021, the Company incurred default interest expense on debentures of $0.4 million and $0.6
million, respectively, and during the nine months ended September 30, 2022 and 2021, the Company incurred default interest expense on
debentures of $1.1 million and $1.7 million, respectively. At September 30, 2022 and December 31, 2021, accrued interest on debentures
was $4.7 million and $3.6 million, respectively. The debentures include the March 2017 Debenture and the 2018 Debentures, as described
below.
March
2017 Debenture
In
March 2017, the Company issued a debenture due in March 2019 (the “March 2017 Debenture”) with a principal balance of $2.6
million at both September 30, 2022 and December 31, 2021, including a 30% late-payment penalty. The March 2017 Debenture is convertible
into shares of the Company’s common stock, at a conversion price which has been adjusted pursuant to the terms of the March 2017
Debenture to $0.00009 per share on September 30, 2022, or 28.7 billion shares of common stock. The conversion price is subject to reset
in the event of offerings or other issuances of common stock, or rights to purchase common stock, at a price below the then conversion
price, as well as other customary anti-dilution protections.
The
March 2017 Debenture was issued with warrants exercisable into shares of the Company’s common stock. Outstanding warrants are more
fully discussed in Note 10.
2018
Debentures
During
2018, the Company closed various offerings of the 2018 Debentures with principal balances aggregating $14.5 million, including late-payment
penalties, due in September 2019. The conversion terms of the 2018 Debentures are the same as those of the March 2017 Debenture, as more
fully described above, with the exception of the conversion price, which was $0.052 per share at September 30, 2022 and is subject to
a floor of $0.052 per share. At both September 30, 2022 and December 31, 2021, the outstanding principal balance of the 2018 Debentures,
including late-payment penalties, was $5.6 million and the debentures were convertible into 108.5 million shares of the Company’s
common stock on September 30, 2022.
Note
7 – Related Party Transactions
In
addition to the transactions discussed in Notes 6 and 10, the Company had the following related party activity during the three and nine
months ended September 30, 2022 and 2021:
Alcimede
LLC and Alcimede Limited
On
November 1, 2021, the Company and Alcimede Limited entered into a new Consulting Agreement that replaced the agreement between the Company
and Alcimede LLC. Pursuant to the respective consulting agreements, Alcimede Limited billed $0.1 million and $0.3 million
for services for the three and nine months ended September 30, 2022, respectively, and Alcimede LLC billed $0.1 million
and $0.3 million for services for the three and nine months ended September 30, 2021, respectively. Seamus Lagan, the Company’s
President and Chief Executive Officer, is the sole manager of Alcimede LLC and the Managing Director of Alcimede Limited (also see Note
10).
InnovaQor
In
addition to the investment in InnovaQor’s Series B-1 Preferred Stock resulting from the sale of HTS and AMSG to InnovaQor in June
2021 (see Notes 1 and 13), at September 30, 2022 and December 31, 2021, the Company had a note receivable/related party receivable resulting
from working capital advances to InnovaQor of approximately $1.0 million and $0.4 million, respectively. The balance at September 30,
2022 of $1.0 million includes amounts due under a note receivable as discussed below.
As
of July 1, 2022, the Company had an outstanding receivable from InnovaQor of $803,416. InnovaQor signed a promissory note, dated July
1, 2022, in favor of the Company that provides that InnovaQor will repay the Company $883,757 on December 31, 2022. That amount represents
a 10% original issue discount above the loan amount outstanding on July 1, 2022. The Note, in the event of default, bears interest at
18% per annum. During the three and nine months ended September 30, 2022, the Company recognized $80,156 of the original issue discount
as interest income.
During
the three and nine months ended September 30, 2022, the Company contracted with InnovaQor to provide ongoing health information technology-related
services totaling approximately $53,555 and $133,841, respectively. During the three and nine months ended September 30, 2021, the Company
contracted with InnovaQor to provide ongoing health information technology-related services totaling $51,229. In addition, InnovaQor
currently subleases office space from the Company on a month to month term at a cost of approximately $9,700 per month for rent and utilities.
The
terms of the foregoing activities, and those discussed in Notes 6 and 10, are not necessarily indicative of those that would have been
agreed to with unrelated parties for similar transactions.
Note
8 – Finance and Operating Lease Obligations
We
lease property and equipment under finance and operating leases. For leases with terms greater than 12 months, we record the related
right-of-use assets and right-of-use obligations at the present value of lease payments over the term. We do not separate lease and non-lease
components of contracts.
Generally,
we use our most recent agreed upon borrowing interest rate at lease commencement as our interest rate, as most of our operating leases
do not provide a readily determinable implicit interest rate.
The
following table presents our lease-related assets and liabilities at September 30, 2022 (unaudited) and December 31, 2021:
Schedule of Lease-related Assets and Liabilities
| |
Balance Sheet Classification | |
September 30, 2022 | | |
December 31, 2021 | |
| |
| |
| | |
| |
Assets: | |
| |
| | | |
| | |
Operating leases | |
Right-of-use operating lease assets | |
$ | 640,386 | | |
$ | 821,274 | |
Finance lease | |
Property and equipment, net | |
| 220,461 | | |
| 220,461 | |
| |
| |
| | | |
| | |
Total lease assets | |
| |
$ | 860,847 | | |
$ | 1,041,735 | |
| |
| |
| | | |
| | |
Liabilities: | |
| |
| | | |
| | |
Current: | |
| |
| | | |
| | |
Operating leases | |
Right-of-use operating lease obligations | |
$ | 239,449 | | |
$ | 247,017 | |
Finance lease | |
Current liabilities | |
| 220,461 | | |
| 220,461 | |
Noncurrent: | |
| |
| | | |
| | |
Operating leases | |
Right-of-use operating lease obligations | |
| 400,937 | | |
| 574,257 | |
| |
| |
| | | |
| | |
Total lease liabilities | |
| |
$ | 860,847 | | |
$ | 1,041,735 | |
| |
| |
| | | |
| | |
Weighted-average remaining term: | |
| |
| | | |
| | |
Operating leases | |
| |
| 2.68 years | | |
| 3.57
years | |
Finance lease (1) | |
| |
| 0
years | | |
| 0
years | |
Weighted-average discount rate: | |
| |
| | | |
| | |
Operating leases | |
| |
| 13.0 | % | |
| 13.0 | % |
Finance leases | |
| |
| 4.9 | % | |
| 4.9 | % |
The
following table presents certain information related to lease expense for finance and operating leases for the three and nine months
ended September 30, 2022 and 2021 (unaudited):
Schedule of Lease Expense
| |
Three
Months Ended
September 30, 2022 | | |
Three
Months Ended
September 30, 2021 | | |
Nine
Months Ended
September 30, 2022 | | |
Nine
Months Ended
September 30, 2021 | |
Finance lease
expense: | |
| | | |
| | | |
| | | |
| | |
Depreciation/amortization
of lease assets | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | |
Interest on lease liabilities | |
| - | | |
| - | | |
| - | | |
| - | |
Operating leases: | |
| | | |
| | | |
| | | |
| | |
Short-term
lease expense (2) | |
| 83,211 | | |
| 44,342 | | |
| 248,250 | | |
| 151,025 | |
Total
lease expense | |
$ | 83,211 | | |
$ | 44,342 | | |
$ |
248,250 | | |
$ | 151,025 | |
|
(1) |
As
of September 30, 2022 and December 31, 2021, the Company was in default under its finance lease obligation, therefore, the aggregate
future minimum lease payments and accrued interest under this finance lease in the amount of $0.2 million are deemed to be immediately
due. |
|
|
|
|
(2) |
Expenses
are included in general and administrative expenses in the unaudited condensed consolidated statements of operations. |
Other
Information
The
following table presents supplemental cash flow information for the nine months ended September 30, 2022 and 2021 (unaudited):
Schedule
of Lease Supplemental Cash Flow Information
| |
Nine Months Ended
September 30, 2022 | | |
Nine Months Ended
September 30, 2021 | |
Cash paid for amounts included in the measurement of lease liabilities: | |
| | | |
| | |
Operating cash flows for operating leases obligations | |
$ | 218,846 | | |
$ | 168,923 | |
Operating cash flows for finance lease | |
$ | - | | |
$ | - | |
Financing cash flows for finance lease payments | |
$ | - | | |
$ | 29,524 | |
Aggregate
future minimum lease payments under right-of-use operating and finance leases are as follows (unaudited):
Schedule of Future Minimum Rentals Under Right-of-use Operating and Finance Leases
| |
Right-of-Use Operating Leases | | |
Finance Lease | |
Twelve months ending September 30: | |
| | | |
| | |
2023 | |
$ | 307,082 | | |
$ | 224,252 | |
2024 | |
| 217,839 | | |
| - | |
2025 | |
| 223,795 | | |
| - | |
2026 | |
| 18,650 | | |
| - | |
2027 | |
| - | | |
| - | |
Thereafter | |
| - | | |
| - | |
Total | |
| 767,366 | | |
| 224,252 | |
| |
| | | |
| | |
Less interest | |
| (126,980 | ) | |
| (3,791 | ) |
Present value of minimum lease payments | |
| 640,386 | | |
| 220,461 | |
| |
| | | |
| | |
Less current portion of lease obligations | |
| (239,449 | ) | |
| (220,461 | ) |
Lease obligations, net of current portion | |
$ | 400,937 | | |
$ | - | |
Note
9 – Derivative Financial Instruments, Fair Value and Deemed Dividends
Fair
Value Measurements
The
estimated fair value of financial instruments was determined by the Company using available market information and valuation methodologies
considered to be appropriate. The fair value measurements accounting guidance is more fully discussed in Note 1. At September 30, 2022
and December 31, 2021, the carrying value of the Company’s accounts receivable, accounts payable and accrued expenses approximated
their fair values due to their short-term nature.
The
following table sets forth the financial assets and liabilities carried at fair value measured on a recurring basis as of September 30,
2022 (unaudited) and December 31, 2021:
Schedule of Fair Value of Assets and Liabilities Measured on Recurring Basis
| |
Level 1 | | |
Level 2 | | |
Level 3 | | |
Total | |
| |
| | |
| | |
| | |
| |
As of September 30, 2022: | |
| | | |
| | | |
| | | |
| | |
Asset - InnovaQor Series B-1 Preferred Stock | |
$ | - | | |
$ | - | | |
$ | 9,016,072 | | |
$ | 9,016,072 | |
Liability - Embedded conversion option of debenture | |
| - | | |
| - | | |
| 455,336 | | |
| 455,336 | |
| |
| | | |
| | | |
| | | |
| | |
As of December 31, 2021: | |
| | | |
| | | |
| | | |
| | |
Asset - InnovaQor Series B-1 Preferred Stock | |
$ | - | | |
$ | - | | |
$ | 9,016,072 | | |
$ | 9,016,072 | |
Liability - Embedded conversion option of debenture | |
| - | | |
| - | | |
| 455,336 | | |
| 455,336 | |
The
fair value of the InnovaQor Series B-1 Preferred Stock of $9.0 million as of September 30, 2022 and December 31, 2021 is more fully discussed
in Note 13.
The
Company utilized the following method to value its derivative liability as of September 30, 2022 and December 31, 2021 for an embedded
conversion option related to an outstanding convertible debenture valued at $455,336. The Company determined the fair value by comparing
the conversion price per share, which based on the conversion terms is 85% of the market price of the Company’s common stock, multiplied
by the number of shares issuable at the balance sheet dates to the actual price per share of the Company’s common stock multiplied
by the number of shares issuable at that date with the difference in value recorded as a liability. There was no change in the value
of the embedded conversion option in the three and nine months ended September 30, 2022 and 2021 and the year ended December 31, 2021
as there was no change in the conversion price terms during the periods.
Deemed
Dividends
During
the nine months ended September 30, 2022 and during the three and nine months ended September 30, 2021, the conversions of preferred
stock triggered a further reduction in the exercise prices of warrants (and conversion prices of debentures in the 2021 periods)
containing down round provisions. In accordance with U.S. GAAP, the incremental fair value of the warrants, as a result of the
decreases in the exercise/conversion prices, was measured using Black Scholes valuation models. The following assumptions were
utilized in the Black Scholes valuation models for the three and nine months ended September 30, 2021: risk free rates ranging from
0.04% to 0.55%, volatility ranging from 25.0% to 574.0% and terms ranging from one day to three years. The following assumptions
were utilized in the Black Scholes valuation models for the nine months ended September 30, 2022: risk free rates ranging from 0.0%
to 2.73%, volatility ranging from 1.94% to 1,564% and terms ranging from 0.01 to 2.45 years. Based on the Black Scholes valuations, the
incremental value of modifications to warrants (and debentures in the 2021 periods) as a result of the down round provisions of
$258.9 million were recorded as deemed dividends during the three months ended September 30, 2021 and $330.5 million and $408.5
million were recorded during the nine months ended September 30, 2022 and 2021, respectively.
In
addition, deemed dividends of $0.1 million and $0.3 million were recorded in the three and nine months ended September 30, 2022, respectively,
as a result of the issuances of shares of our Series P Preferred Stock, as more fully discussed in Note 10. Deemed dividends of $0.3
million were recorded in both the three and nine months ended September 30, 2021 as a result of the issuance of warrants to acquire 4,750
shares of the Company’s common stock and deemed dividends of $0.3 million were recorded in both the three and nine months ended
September 2021 as a result of the extension of warrants. These deemed dividends are more fully discussed in Note 10. Deemed dividends
are also discussed in Notes 1 and 3.
Note
10 – Stockholders’ Deficit
Authorized
Capital
The
Company has 250,000,000,000 authorized shares of Common Stock at a par value of $0.0001 per share and 5,000,000 authorized shares of
Preferred Stock at a par value of $0.01 per share.
Preferred
Stock
As
of September 30, 2022, the Company had outstanding shares of preferred stock consisting of 10 shares of its Series H Convertible Preferred
Stock (the “Series H Preferred Stock”), 250,000 shares of its Series L Convertible Preferred Stock (the “Series L Preferred
Stock”), 20,810.35 shares of its Series M Convertible Redeemable Preferred Stock (the “Series M Preferred Stock”),
3,582.96 shares of its Series N Preferred Stock, 9,261.54 shares of its Series O Convertible Redeemable Preferred Stock (the “Series
O Preferred Stock”) and 10,194.87 shares of its Series P Preferred Stock. The Company’s outstanding shares of preferred stock
do not contain mandatory redemption or other features that would require them to be presented on the balance sheet outside of equity
and, therefore, they qualify for equity accounting treatment. As a result of the equity accounting treatment, fair value accounting is
not required in connection with the issuances of the stock and no gains, losses or derivative liabilities have been recorded in connection
with the preferred stock.
Series
F Preferred Stock
On
September 27, 2022, the Company’s then outstanding 17,500 shares of Series F Convertible Preferred Stock that were issued on
September 27, 2017 in connection with the acquisition of Genomas, Inc. and valued at $174,097 were
mandatorily converted into one share of the Company’s common stock in accordance with their
terms.
Series
H Preferred Stock
Each
of the 10 shares of the Series H Preferred Stock has a stated value of $1,000 per share and is convertible into shares of the Company’s
common stock at a conversion price of 85% of the volume weighted average price of the Company’s common stock at the time of conversion.
Series
L Preferred Stock
The
Series L Preferred Stock is held by Alcimede LLC and has a stated value of $1.00 per share. The Series L Preferred Stock is not entitled
to receive any dividends. Each share of the Series L Preferred Stock is convertible into shares of the Company’s common stock at
a conversion price equal to the average closing price of the Company’s common stock on the ten trading days immediately prior to
the conversion date. On September 30, 2022, the Series L Preferred Stock was convertible into 2.5 billion shares of the Company’s
common stock.
Series
M Preferred Stock
On
June 30, 2020, the Company and Mr. Diamantis entered into an exchange agreement wherein Mr. Diamantis agreed to the extinguishment of
the Company’s indebtedness to him totaling $18.8 million, including accrued interest, on that date in exchange for 22,000 shares
of the Company’s Series M Preferred Stock with a par value of $0.01 per share and a stated value of $1,000 per share. See Note
6 for a discussion of the Company’s indebtedness to Mr. Diamantis as of September 30, 2022 and December 31, 2021.
The
terms of the Series M Preferred Stock include: (i) each share of the Series M Preferred Stock is convertible into shares of the Company’s
common stock at a conversion price equal to 90% of the average closing price of the Company’s common stock on the ten trading days
immediately prior to the conversion date but in any event not less than the par value of the Company’s common stock; (ii) dividends
at the rate per annum of 10% of the stated value per share shall accrue on each outstanding share of Series M Preferred Stock from and
after the date of the original issuance of such share of Series M Preferred Stock (subject to appropriate adjustment in the event of
any stock dividend, stock split, combination or other similar recapitalization). The dividends shall accrue from day to day, whether
or not declared, and shall be cumulative and non-compounding; provided, however, that such dividend shall be payable only
when, as, and if declared by the Board of Directors and the Company shall be under no obligation to pay such dividends. No cash dividends
shall be paid on the Company’s common stock unless the dividends are paid on the Series M Preferred Stock; and (iii) each holder
of the Series M Preferred Stock shall be entitled to vote on all matters submitted to a vote of the holders of the Company’s common
stock. Regardless of the number of shares of Series M Preferred Stock outstanding and so long as at least one share of Series M Preferred
Stock is outstanding, the outstanding shares of Series M Preferred Stock shall have the number of votes, in the aggregate, equal to 51%
of all votes entitled to be voted at any meeting of stockholders or action by written consent. Each outstanding share of the Series M
Preferred Stock shall represent its proportionate share of the 51% allocated to the outstanding shares of Series M Preferred Stock in
the aggregate. The Series M Preferred Stock shall vote with the common stock and any other voting securities as if they were a single
class of securities. On August 13, 2020, Mr. Diamantis entered into a Voting Agreement and Irrevocable Proxy with the Company, Mr. Lagan
and Alcimede LLC (of which Mr. Lagan is the sole manager) pursuant to which Mr. Diamantis granted an irrevocable proxy to Mr. Lagan to
vote the Series M Preferred Stock held by Mr. Diamantis. Mr. Diamantis has retained all other rights under the Series M Preferred Stock.
During
the nine months ended September 30, 2021, Mr. Diamantis converted a total of 610.65
shares of his Series M Preferred Stock with a stated value of $0.6
million into 45 shares
of the Company’s common stock. On August 27, 2021, the Company entered into an exchange agreement with Mr. Diamantis. Pursuant
to the exchange agreement, Mr. Diamantis exchanged 570
shares of his Series M Preferred Stock with a stated value of approximately $0.6
million for 9,500
shares of the Company’s common stock and warrants to purchase 4,750
shares of the Company’s common stock at an exercise price of $70.00 per
share. The Company recorded $0.3
million of deemed dividends in both the three and nine months ended September 30, 2021 as a result of the issuance of the warrants.
The warrants have a
three-year term and, as of September 30, 2022, are exercisable into 3.7
billion shares of the Company’s common stock at an exercise price of $0.00009
per share as a result of down-round provision features. On September 30, 2022, 20,810.35
shares of Series M Preferred Stock remained outstanding and were convertible into 208.1 billion shares of the Company’s common
stock.
Series
N Preferred Stock
The
Company’s Board of Directors has designated 50,000 shares of the 5,000,000 shares of authorized preferred stock as the Series N
Preferred Stock. Each share of Series N Preferred Stock has a stated value of $1,000. On August 31, 2020, the Company and its debenture
holders exchanged, under the terms of Exchange, Redemption and Forbearance Agreements, certain outstanding debentures and all of the
then outstanding shares of the Company’s Series I-1 Convertible Preferred Stock and Series I-2 Convertible Preferred Stock for
30,435.52 shares of the Company’s Series N Preferred Stock.
The
terms of the Series N Preferred Stock include: (i) each share of the Series N Preferred Stock is convertible into shares of the Company’s
common stock, at any time and from time to time, at the option of the holder, into that number of shares of common stock determined by
dividing the stated value of such share of Series N Preferred Stock, plus any accrued declared and unpaid dividends, by the conversion
price; (ii) the conversion price is equal to 90% of the lowest VWAP during the 10 trading days immediately prior to the conversion date;
(iii) dividends at the rate per annum of 10% of the stated value per share shall accrue on each outstanding share of Series N Preferred
Stock from and after the date of the original issuance of such share of Series N Preferred Stock (the “Series N Preferred Accruing
Dividends”). The Series N Preferred Accruing Dividends shall accrue from day to day, whether or not declared, and shall be cumulative
and non-compounding; provided, however, that such Series N Preferred Accruing Dividends shall be payable only when, as,
and if declared by the Board of Directors. No cash dividends shall be paid on the common stock unless the Series N Preferred Accruing
Dividends are paid; and (iv) except as provided below or by law, the Series N Preferred Stock shall have no voting rights. However, as
long as any shares of Series N Preferred Stock are outstanding, the Company shall not, without the affirmative vote of the holders of
a majority of the then outstanding shares of the Series N Preferred Stock, (a) alter or change adversely the powers, preferences or rights
given to the Series N Preferred Stock or alter or amend the Certificate of Designation, (b) amend its certificate of incorporation or
other charter documents in any manner that adversely affects any rights of the holders, (c) increase the number of authorized shares
of the Series N Preferred Stock, or (d) enter into any agreement with respect to any of the foregoing.
During
the nine months ended September 30, 2022 and 2021, the holders converted 2,352 shares and 18,350.1 shares, respectively, of their Series
N Preferred Stock with a stated value of $2.4 million and $18.4 million, respectively, into 8.4 billion and 486,186 shares of the Company’s
common stock. As of December 31, 2021, the holders had converted a total of 24,499.64 shares of their Series N Preferred Stock, with
a stated value of $24.5 million, into 4.2 million shares of the Company’s common stock. On September 30, 2022, 3,582.96 shares
of Series N Preferred Stock remained outstanding and were convertible into 39.8 billion shares of the Company’s common stock.
Series
O Preferred Stock
On
May 10, 2021, the Company closed an offering of shares of its newly-authorized Series O Preferred Stock. The offering was pursuant to
the terms of the securities purchase agreement dated as of May 10, 2021. On September 7, 2021, the Company entered into a second securities
purchase agreement and on October 28, 2021, the Company entered into a third securities purchase agreement. These agreements were between
the Company and certain existing institutional investors of the Company. Under these agreements, the Company issued 9,900 shares of its
Series O Preferred Stock and it received $9.0 million in aggregate proceeds of which $5.0 million was received in the nine months ended
September 30, 2021.
The
terms of the Series O Preferred Stock include: (i) each share of the Series O Preferred Stock is convertible into shares of the Company’s
common stock, at any time and from time to time, at the option of the holder, into that number of shares of common stock determined by
dividing the stated value of such share of Series O Preferred Stock, plus any accrued declared and unpaid dividends, by the conversion
price; (ii) the conversion price is equal to 90% of the lowest VWAP during the 10 trading days immediately prior to the conversion date;
(iii) dividends at the rate per annum of 10% of the stated value per share shall accrue on each outstanding share of Series O Preferred
Stock from and after the date of the original issuance of such share of Series O Preferred Stock (the “Series O Preferred Accruing
Dividends”). The Series O Preferred Accruing Dividends shall accrue from day to day, whether or not declared, and shall be cumulative
and non-compounding; provided, however, that such Series O Preferred Accruing Dividends shall be payable only when, as,
and if declared by the Board of Directors. Each share of the Series O Preferred Stock has a stated value of $1,000. No cash dividends
shall be paid on the common stock unless the Series O Preferred Accruing Dividends are paid; and (iv) except as provided below or by
law, the Series O Preferred Stock shall have no voting rights. However, as long as any shares of Series O Preferred Stock are outstanding,
the Company shall not, without the affirmative vote of the holders of a majority of the then outstanding shares of the Series O Preferred
Stock, (a) alter or change adversely the powers, preferences or rights given to the Series O Preferred Stock or alter or amend the Certificate
of Designation, (b) amend its certificate of incorporation or other charter documents in any manner that adversely affects any rights
of the holders, (c) increase the number of authorized shares of the Series O Preferred Stock, or (d) enter into any agreement with respect
to any of the foregoing.
During
the nine months ended September 30, 2022, the holders converted 638 shares of their Series O Preferred Stock with a stated value of $0.6
million into 6.7 billion shares of the Company’s common stock. On September 30, 2022, 9,261.54 shares of Series O Preferred Stock
remained outstanding and were convertible into 102.9 billion shares of the Company’s common stock.
Series
P Preferred Stock
On
November 7, 2021, the Company entered into Exchange and Amendment Agreements (the “November 2021 Exchange Agreements”) with
certain institutional investors in the Company wherein the investors agreed to reduce their holdings of $1.1
million principal value of then outstanding warrant
promissory notes payable and $4.5
million of then outstanding non-convertible debentures,
plus accrued interest thereon of $1.5
million, by exchanging the indebtedness and accrued
interest for 8,544.87
shares of the Company’s Series P Preferred
Stock. Each share of the Series P Preferred Stock has a stated value of $1,000.
In addition, pursuant to the November 2021 Exchange Agreements, the expiration dates of the March Warrants that were issued by the Company
to the debenture holders in March 2017 were extended from March 21, 2022 to March 21, 2024.
On
March 11, 2022, under the terms of a securities purchase agreement dated January 31, 2022, the Company issued to the institutional investors
an additional 1,100 shares of its Series P Preferred Stock for aggregate proceeds of $1.0 million. On April 1, 2022, the Company issued
an additional 550 shares of its Series P Preferred Stock and received proceeds of $0.5 million. During the nine months ended September
30, 2022, the Company recorded $0.3 million of deemed dividends as a result of the issuances of shares of its Series P Preferred Stock.
The deemed dividends resulted from the difference between the stated value of the shares issued and the proceeds received, as well as
the 10% conversion price discount.
The
terms of the Series P Preferred Stock include: (i) each share of the Series P Preferred Stock is convertible into shares of the Company’s
common stock, at any time and from time to time, at the option of the holder, into that number of shares of common stock determined by
dividing the stated value of such share of Series P Preferred Stock, plus any accrued declared and unpaid dividends, by the conversion
price; (ii) the conversion price is equal to 90% of the lowest VWAP during the 10 trading days immediately prior to the conversion date;
(iii) dividends at the rate per annum of 10% of the stated value per share shall accrue on each outstanding share of Series P Preferred
Stock from and after the date of the original issuance of such share of Series P Preferred Stock (the “Series P Preferred Accruing
Dividends”). The Series P Preferred Accruing Dividends shall accrue from day to day, whether or not declared, and shall be cumulative
and non-compounding; provided, however, that such Series P Preferred Accruing Dividends shall be payable only when, as,
and if declared by the Board of Directors. No cash dividends shall be paid on the common stock unless the Series P Preferred Accruing
Dividends are paid; and (iv) except as provided below or by law, the Series P Preferred Stock shall have no voting rights. However, as
long as any shares of Series P Preferred Stock are outstanding, the Company shall not, without the affirmative vote of the holders of
a majority of the then outstanding shares of the Series P Preferred Stock, (a) alter or change adversely the powers, preferences or rights
given to the Series P Preferred Stock or alter or amend the Certificate of Designation, (b) amend its certificate of incorporation or
other charter documents in any manner that adversely affects any rights of the holders, (c) increase the number of authorized shares
of the Series P Preferred Stock, or (d) enter into any agreement with respect to any of the foregoing.
On
September 30, 2022, 10,194.87 shares of the Company’s Series P Preferred Stock were outstanding and were convertible into 113.3
billion shares of the Company’s common stock.
Common
Stock
The
Company had 15.1 billion and 4.2 million shares of its common stock issued and outstanding at September 30, 2022 and December 31, 2021,
respectively.
The
Company has outstanding options, warrants, convertible preferred stock and convertible debentures. Exercise of the outstanding options
and warrants, and conversions of the convertible preferred stock and debentures could result in substantial dilution of the Company’s
common stock and a decline in the market price of the common stock. In addition, the terms of certain of the warrants, convertible preferred
stock and convertible debentures issued by the Company provide for reductions in the per share exercise prices of the warrants and the
per share conversion prices of the debentures and preferred stock (if applicable and subject to a floor in certain cases), in the event
that the Company issues common stock or common stock equivalents (as that term is defined in the agreements) at an effective exercise/conversion
price that is less than the then exercise/conversion prices of the outstanding warrants, preferred stock or debentures, as the case may
be. These provisions, as well as the issuances of debentures and preferred stock with conversion prices that vary based upon the price
of our common stock on the date of conversion, have resulted in significant dilution of the Company’s common stock and have given
rise to reverse splits of its common stock, including the Reverse Stock Splits, which are more fully discussed in Note 1. See Note 15
for a discussion of the number of shares of the Company’s common stock and common stock equivalents outstanding as of November
10, 2022.
On
August 13, 2020, Mr. Diamantis entered into the Voting Agreement with the Company, Mr. Lagan and Alcimede LLC (of which Mr. Lagan is
the sole manager) pursuant to which Mr. Diamantis granted an irrevocable proxy to Mr. Lagan to vote the Series M Preferred Stock held
by Mr. Diamantis. Mr. Diamantis has retained all other rights under the Series M Preferred Stock. Regardless of the number of shares
of Series M Preferred Stock outstanding and so long as at least one share of Series M Preferred Stock is outstanding, the outstanding
shares of Series M Preferred Stock shall have the number of votes, in the aggregate, equal to 51% of all votes entitled to be voted at
any meeting of stockholders or action by written consent. This means that the holders of Series M Preferred Stock have sufficient votes,
by themselves, to approve or defeat any proposal voted on by the Company’s stockholders, unless there is a supermajority required
under applicable law or by agreement.
As
a result of the Voting Agreement discussed above and the November 5, 2021 Amendment to the Company’s Certificate of Incorporation,
as amended, to provide that the number of authorized shares of the Company’s common stock
or preferred stock may be increased or decreased (but not below the number of shares then outstanding) by the affirmative vote of the
holders of a majority in voting power of the stock of the Company, which is more fully discussed in Note 1, as of the date of filing
this report, the Company believes that it has the ability to ensure that it has and or can obtain sufficient authorized shares of its
common stock to cover all potentially dilutive common shares outstanding.
Stock
Options
The
Company maintained and sponsored the Tegal Corporation 2007 Incentive Award Equity Plan (the “2007 Equity Plan”). Tegal Corporation
is the prior name of the Company. The 2007 Equity Plan, as amended, provided for the issuance of stock options and other equity awards
to the Company’s officers, directors, employees and consultants. The 2007 Equity Plan terminated pursuant to its terms in September
2017. As of September 30, 2022 and December 31, 2021, the Company had 26 stock options outstanding with a weighted average exercise price
of $2.9 million per share and a weighted average remaining contractual life of 3.62 years for options outstanding and exercisable. The
intrinsic value of options exercisable at September 30, 2022 and December 31, 2021 was $0. As of September 30, 2022, there was no remaining
compensation expense associated with stock options as all of the outstanding options had fully vested as of December 31, 2019.
Warrants
The
following summarizes the information related to warrant activity during the nine months ended September 30, 2022:
Schedule of Warrants Activity
| |
Number of Shares of Common Stock Issuable for Warrants | | |
Weighted average
exercise price | |
Balance at December 31, 2021 | |
| 54,280,658 | | |
$ | 1.43 | |
Expiration of warrants | |
| (33,601,209 | ) | |
| (0.8970 | ) |
Increase in number of shares of common stock issuable under warrants during the period as a result of down round provisions | |
| 511,312,671,644 | | |
| - | |
Balance at September 30, 2022 | |
| 511,333,351,093 | | |
$ | 0.00009 | |
The
Company, as part of various debt and equity financing transactions, has issued warrants to purchase shares of the Company’s common
stock exercisable into a total of 511.3 billion shares at September 30, 2022. During the nine months ended September 30, 2022, 33.6 million
warrants expired and, as a result of the down round provisions of outstanding warrants, the exercise prices of certain warrants decreased
and they became exercisable into an additional 511.3 billion shares of the Company’s common stock.
Included
in the warrants outstanding at September 30, 2022 were warrants issued in March 2017 in connection with the March 2017 Debenture. (The
March 2017 Debenture is more fully discussed in Note 6.) The Company issued these warrants to purchase shares of the Company’s
common stock to several accredited investors (the “March Warrants”). On September 30, 2022, these warrants were exercisable
into an aggregate of approximately 507.6 billion shares of the Company’s common stock. The March Warrants were issued to the investors
in three tranches, Series A Warrants, Series B Warrants and Series C Warrants. At September 30, 2022, the Series A Warrants were exercisable
for 190.0 billion shares of the Company’s common stock. They were exercisable upon issuance in March 2017 and had an initial term
of exercise equal to five years. On September 30, 2022, the Series B Warrants were exercisable for 127.6 billion shares of the Company’s
common stock and were exercisable, prior to the extension discussed below, until March 21, 2022. On September 30, 2022, the Series C
Warrants were exercisable for 190.0 billion shares of the Company’s common stock and had an initial term of five years provided
such warrants shall only vest if, when and to the extent that the holders exercise the Series B Warrants. On November 7, 2021, the expiration
dates of the March Warrants were extended to March 21, 2024 in connection with the November 2021 Exchange Agreements. On September 30,
2022, the Series A, Series B and Series C Warrants each have an exercise price of $0.00009 per share, which reflects down round provision
adjustments pursuant to their terms. The March Warrants are subject to “full ratchet” and other customary anti-dilution protections.
The
number of shares of common stock issuable under outstanding warrants and the exercise prices of the warrants reflected in the table above
have been adjusted to reflect the full ratchet and other dilutive and down round provisions pursuant to the warrant agreements. As a
result of the full down round provisions of the majority of the outstanding warrants (subject to a floor in some cases), subsequent issuances
of the Company’s common stock or common stock equivalents at prices below the then current exercise prices of the warrants have
resulted in increases in the number of shares issuable pursuant to the warrants and decreases in the exercise prices of the warrants.
See, also, Notes 1, 3, and 15 for a discussion of the dilutive effect on the Company’s common stock as a result of the outstanding
warrants.
Deemed
Dividends
During
the nine months ended September 30, 2022 and the three and nine months ended September 30, 2021, reductions in the exercise prices of the March Warrants have given rise
to deemed dividends. See Note 9 for the assumptions used in the calculations of deemed dividends. Deemed dividends are also discussed
under the heading “Preferred Stock” above and in Notes 1 and 3.
Note
11 – Supplemental Disclosure of Cash Flow Information
Schedule
of Supplemental Cash Flow Information
| |
2022 | | |
2021 | |
| |
Nine
Months Ended September 30, | |
| |
2022 | | |
2021 | |
Cash paid for interest | |
$ | 1,369,955 | | |
$ | - | |
Cash paid for income taxes | |
$ | - | | |
$ | 281,025 | |
| |
| | | |
| | |
Non-cash investing and financing activities: | |
| | | |
| | |
Preferred stock of InnovaQor received from the sale of HTS and AMSG | |
$ | - | | |
$ | 9,117,500 | |
Net liabilities of HTS and AMSG transferred to InnovaQor | |
| - | | |
| 2,227,152 | |
Settlement of liability with InnovaQor preferred stock | |
| - | | |
| 60,714 | |
Issuance of notes payable in settlement of accounts payable and accrued expenses | |
| - | | |
| 2,352,961 | |
Series F Preferred Stock converted into common stock | |
| 17,500 | | |
| - | |
Series M Preferred Stock converted/exchanged into common stock | |
| - | | |
| 1,189,650 | |
Deemed dividends from issuance of common stock warrants under exchange agreement | |
| - | | |
| 341,525 | |
Series N Preferred Stock converted into common stock | |
| 2,352,000 | | |
| 18,355,507 | |
Series O Preferred Stock converted into common stock | |
| 638,000 | | |
| - | |
Preferred Stock converted into common stock | |
| 638,000 | | |
| - | |
Deemed dividends from issuances of Series P Preferred Stock | |
| 333,333 | | |
| - | |
Deemed dividends for trigger of down round provisions | |
| 330,543,036 | | |
| 408,509,361 | |
Deemed dividends from extension of common stock warrants | |
| - | | |
| 291,292 | |
Non-cash interest income | |
| 80,056 | | |
| - | |
Original issue discounts on debt | |
| - | | |
| 52,836 | |
Note
12 – Commitments and Contingencies
Concentration
of Credit Risk
Credit
risk with respect to accounts receivable is generally diversified due to the large number of patients comprising the client base. The
Company does have significant receivable balances with government payers and various insurance carriers. Generally, the Company does
not require collateral or other security to support customer receivables. However, the Company continually monitors and evaluates its
client acceptance and collection procedures to minimize potential credit risks associated with its accounts receivable and establishes
an allowance for uncollectible accounts and as a consequence, believes that its accounts receivable credit risk exposure beyond such
allowance is not material to the financial statements.
The
Company maintains its cash balances in high credit quality financial institutions. The Company’s cash balances may, at times, including
on December 31, 2021, exceed the deposit insurance limits provided by the Federal Deposit Insurance Corp.
Legal
Matters
From
time to time, the Company may be involved in a variety of claims, lawsuits, investigations and proceedings related to contractual disputes,
employment matters, regulatory and compliance matters, intellectual property rights and other litigation arising in the ordinary course
of business. The Company operates in a highly regulated industry which may inherently lend itself to legal matters. Management is aware
that litigation has associated costs and that results of adverse litigation verdicts could have a material effect on the Company’s
financial position or results of operations. The Company’s policy is to expense legal fees and expenses incurred in connection
with the legal proceedings in the period in which the expense is incurred. Management, in consultation with legal counsel, has addressed
known assertions and predicted unasserted claims below.
Biohealth
Medical Laboratory, Inc. and PB Laboratories, LLC (the “Companies”) filed suit against CIGNA Health in 2015 alleging that
CIGNA failed to pay claims for laboratory services the Companies provided to patients pursuant to CIGNA - issued and CIGNA - administered
plans. In 2016, the U.S. District Court dismissed part of the Companies’ claims for lack of standing. The Companies appealed that
decision to the Eleventh Circuit Court of Appeals, which in late 2017 reversed the District Court’s decision and found that the
Companies have standing to raise claims arising out of traditional insurance plans as well as self-funded plans. In July 2019, the Companies
and EPIC filed suit against CIGNA Health for failure to pay claims for laboratory services provided. Cigna Health, in turn, sued for
alleged improper billing practices. The suit remains ongoing but because the Company did not have the financial resources to see the
legal action to conclusion it assigned the benefit, if any, from the suit to Mr. Diamantis for his financial support to the Company and
assumption of all costs to carry the case to conclusion.
In
November of 2016, the IRS commenced an audit of the Company’s 2015 Federal tax return. Based upon the audit results, the Company
made provisions of approximately $1.0 million as a liability and approximately $0.9 million as a receivable in its financial statements
for the year ended December 31, 2018. During the first quarter of 2020, the U.S. Congress approved the CARES Act, which allows a five-year
carryback privilege for federal net operating tax losses that arose in a tax year beginning in 2018 and through 2020. As a result, during
2020, the Company recorded approximately $1.1 million in refunds from the carryback of certain of its federal net operating losses. In
addition, during the year ended December 31, 2020, the Company recorded $0.3 million in refunds related to other net operating loss carryback
adjustments and it received income tax refunds of $0.6 million related to the audit of the Company’s 2015 Federal tax return. During
the year ended December 31, 2021, the Company received income tax refunds of $0.3 million, which represented income tax refunds associated
with the CARES Act. The Company used the $0.3 million of refunds that it received in 2021 to repay a portion of the amount that it owes
for federal income tax liabilities that arose from the 2015 federal income tax audit. As of September 30, 2022 and December 31, 2021,
the Company had federal income tax receivables of $1.1 million and $1.1 million, respectively, and federal income tax liabilities of
$0.7 million and $0.7 million, respectively.
On
September 27, 2016, a tax warrant was issued against the Company by the Florida Department of Revenue (the “DOR”) for unpaid
2014 state income taxes in the approximate amount of $0.9 million, including penalties and interest. The Company entered into a Stipulation
Agreement with the DOR allowing the Company to make monthly installments until July 2019. The Company has made payments to reduce the
amount owed. The balance accrued of approximately $0.4 million remained outstanding to the DOR at September 30, 2022.
In
December of 2016, DeLage Landen Financial Services, Inc. (“DeLage”), filed suit against the Company for failure to make the
required payments under an equipment leasing contract that the Company had with DeLage (see Note 8). On January 24, 2017, DeLage received
a default judgment against the Company in the approximate amount of $1.0 million, representing the balance owed on the lease, as well
as additional interest, penalties and fees. The Company recognized this amount in its consolidated financial statements as of December
31, 2016. On February 8, 2017, a Stay of Execution was filed and under its terms the balance due was to be paid in variable monthly installments
through January of 2019, with an implicit interest rate of 4.97%. The Company and DeLage disposed of certain equipment and reduced the
balance owed to DeLage to $0.2 million, which remained outstanding at September 30, 2022.
On
December 7, 2016, the holders of the Tegal Notes (see Note 6) filed suit against the Company seeking payment for the amounts due under
the notes in the aggregate principal balance of $341,612, and accrued interest of $43,000. A request for entry of default judgment was
filed on January 24, 2017. On April 23, 2018, the holders of the Tegal Notes received a judgment against the Company. As of September
30, 2022, the Company has repaid $50,055 of the principal amount of these notes.
The
Company, as well as many of its subsidiaries, were defendants in a case filed in Broward County Circuit Court by TCA Global Credit Master
Fund, L.P. The plaintiff alleged a breach by Medytox Solutions, Inc. of its obligations under a debenture and claimed damages of approximately
$2,030,000 plus interest, costs and fees. The Company and the other subsidiaries were sued as alleged guarantors of the debenture. The
complaint was filed on August 1, 2018. In May 2020, the SEC appointed a Receiver to close down the TCA Global Credit Master Fund, L.P.
The Company and the Receiver entered into a settlement agreement dated effective as of September 30, 2021, under which the Company agreed
to pay $500,000 as full and final settlement of principal and interest, of which $200,000 was paid on November 4, 2021 and the remaining
$300,000 was due in six consecutive monthly installments of $50,000. Accordingly, the settlement amount was fully paid as of September
30, 2022 (see Note 6). As a result of the settlement, the Company recorded a gain from legal settlement of $2.2 million in the three
and nine months ended September 30, 2021.
On
September 13, 2018, Laboratory Corporation of America sued EPIC, a subsidiary of the Company, in Palm Beach County Circuit Court for
amounts claimed to be owed. The court awarded a judgment against EPIC in May 2019 for approximately $155,000. The Company has recorded
the amount owed as a liability as of September 30, 2022.
In
February 2020, Anthony O’Killough sued the Company and Mr. Diamantis, as guarantor, in New York State Supreme Court for the County
of New York, for approximately $2.0
million relating to the promissory note issued
by the Company in September 2019. In May 2020, the Company, Mr. Diamantis, as guarantor, and Mr. O’Killough entered into a Stipulation
providing for a payment of a total of $2.2
million (which included accrued “penalty”
interest as of that date) in installments through November 1, 2020. The Company made payments totaling $450,000
in 2020. On January 18, 2022, Mr. Diamantis paid
$750,000
and the remaining balance was due 120 days thereafter.
Mr. O’Killough agreed to forebear from any further enforcement action until then. The Company is obligated to repay Mr. Diamantis
the $750,000
payment as well as any further payments that
may be made by him. On May 16, 2022, the Company paid $250,000
to Mr. Diamantis for further payment to Mr. O’Killough
and on July 18, 2022, Mr. Diamantis paid a further $150,000
to Mr. O’Killough. As a result of the $750,000
payment to Mr. O’Killough made by Mr. Diamantis
on January 18, 2022 and the additional $400,000
in payments made to Mr. O’Killough on May 16,
2022 and July 18, 2022, the past due balance owed to Mr. O’Killough was $1.3 million on September 30, 2022. The promissory note
and forbearance agreement are also discussed in Note 6.
In
June 2019, CHSPSC, the former owners of Jamestown Regional Medical Center, obtained a judgment against the Company in the amount of $592,650.
The Company has recorded this judgment as a liability as of September 30, 2022. However, management believes that a number of insurance
payments were made to CHSPSC after the change of ownership that will likely offset portions of the judgment.
In
August 2019, Morrison Management Specialists, Inc. obtained a judgment against Jamestown Regional Medical Center and the Company in Fentress
County, Tennessee in the amount of $194,455 in connection with housekeeping and dietary services. The Company has recorded this liability
as of September 30, 2022.
In
November 2019, Newstat, PLLC obtained a judgment against Big South Fork Medical Center in Knox County, Tennessee in the amount of $190,600
in connection with the provision of medical services. The Company has recorded this liability as of September 30, 2022.
On
June 30, 2021, the Company entered into a settlement agreement with the Tennessee Bureau of Workers’ Compensation. Per the terms
of the settlement agreement, the Company is obligated to pay a total of $109,739, payable in a lump sum payment of $32,922 on or before
August 15, 2021 and in 24 consecutive monthly payments of $3,201 each on or before the 15th day of each month beginning September
15, 2021. The Company has made the required payments due as of September 30, 2022 and has recorded the remaining amounts owed as a liability
as of September 30, 2022.
In
July 2021, WG Fund, Queen Funding and Diesel Funding filed legal actions in New York State Supreme Court for Kings County to recover
amounts claimed to be outstanding on accounts receivable sales agreements entered into in 2020. On September 14, 2021, the Company entered
into separate stipulation of settlement agreements with the three funding parties under which the Company agreed to repay an aggregate
of $0.9 million in equal monthly payments totaling $52,941 through January 1, 2023. The Company has made the required payments through
September 30, 2022 and has reflected the remaining obligations owed as of September 30, 2022 as a reduction of its accounts receivable
(see Note 4).
An
employee of the Big South Fork Medical Center has filed a workers’ compensation claim in the Tennessee Court of Workers’
Compensation for an alleged workplace injury from July 2019. The case is in its early stages. Big South Fork Medical Center intends to
contest the claimed benefits, although there can be no assurance that there will not be some liability.
The
Company has received questions in the form of a civil investigation inquiry from the Department of Justice with regards to the use
of monies received from PPP Notes and HHS Provider Relief Funds. There is no allegation of wrongdoing and no indication that any
additional liability will materialize. HHS Provider Relief Funds are more fully discussed in Notes 2 and 5. The Company is confident
that all PPP Notes and HHS Provider Relief Funds monies were appropriately utilized and accounted for and believes that provision of
the details and records will provide satisfactory answers to the inquiry.
Note
13 – Discontinued Operations
Sale
of HTS and AMSG
On
June 25, 2021, the Company sold the shares of stock of HTS and AMSG to InnovaQor. HTS and AMSG held Rennova’s software and genetic
testing interpretation divisions. In consideration for the shares of HTS and AMSG and the elimination of intercompany debt among the
Company and HTS and AMSG, InnovaQor issued the Company 14,950 shares of its Series B-1 Non-Voting Convertible Preferred Stock (the “InnovaQor
Series B-1 Preferred Stock”), 14,000 of the shares were issued on June 25, 2021 and 950 of the shares were issued in the third
quarter of 2021 as a result of a post-closing adjustment. Each share of InnovaQor Series B-1 Preferred Stock has a stated value of $1,000
and is convertible into that number of shares of InnovaQor common stock equal to the stated value divided by 90% of the average closing
price of the InnovaQor common stock during the 10 trading days immediately prior to the conversion date. Conversion of the InnovaQor
Series B-1 Preferred Stock, however, is subject to the limitation that no conversion can be made to the extent the holder’s beneficial
interest (as defined pursuant to the terms of the InnovaQor Series B-1 Preferred Stock) in the common stock of InnovaQor would exceed
4.99%. The shares of the InnovaQor Series B-1 Preferred Stock may be redeemed by InnovaQor upon payment of the stated value of the shares
plus any accrued declared and unpaid dividends.
As
a result of the sale, the Company recorded the InnovaQor Series B-1 Preferred Stock as a long-term asset valued at $9.1 million and a
gain on the sale of HTS and AMSG of $11.3 million of which $0.6 million and $11.3 million was recorded in the three and nine months ended
September 30, 2021, respectively. The $0.6 million recorded in the three months ended September 30, 2021 resulted from a post-closing
adjustment. Approximately $9.1 million of the gain resulted from the value of the 14,950 shares of InnovaQor Series B-1 Preferred Stock
received and $2.2 million resulted from the transfer to InnovaQor of the net liabilities of HTS and AMSG. The fair value of the InnovaQor
Series B-1 Preferred Stock that the Company received as consideration for the sale of $9.1 million was based on the Option Price Method
(the “OPM”). The OPM treats common and preferred interests as call options on the equity value of the subject company, with
exercise prices based on the liquidation preference of the preferred interests and participation thresholds for subordinated classes.
The Black Scholes model was used to price the call options. The assumptions used were: risk free rate of 0.84%; volatility of 250.0%;
and exit period of 5 years. Lastly, a discount rate of 35% was applied due to the lack of marketability of the InnovaQor Series B-1 Preferred
Stock and the underlying liquidity of InnovaQor’s common stock.
During
the three months ended September 30, 2021, 100 shares of InnovaQor Series B-1 Preferred Stock valued at $60,714 were used to settle accrued
interest that was due under the terms of notes payable dated January 31, 2021 and February 16, 2021, leaving a balance of the InnovaQor
Series B-1 Preferred Stock held by the Company of $9.0 million at September 30, 2022 and December 31, 2021. The notes payable are more
fully discussed in Note 6.
See
Note 7 for a discussion of related party transactions between the Company and InnovaQor.
EPIC
Reference Labs, Inc. and Other Non-Operating Subsidiaries
During
the third quarter of 2020, the Company made a decision to sell EPIC and it made a decision to discontinue several other non-operating
subsidiaries, and as a result, EPIC’s operations and the other non-operating subsidiaries’ liabilities have been included
in discontinued operations for all periods presented. The Company has been unable to find a buyer for EPIC and, therefore, it has ceased
all efforts to sell EPIC and closed down its operations.
Carrying
amounts of major classes of liabilities included as part of discontinued operations in the condensed consolidated balance sheets as of
September 30, 2022 (unaudited) and December 31, 2021 consisted of the following:
Schedule of Discontinued Operation of Balance Sheet and Operation Statement
| |
September 30, 2022 | | |
December 31, 2021 | |
| |
(unaudited) | | |
| |
Accounts payable | |
$ | 1,108,066 | | |
$ | 1,108,066 | |
Accrued expenses | |
| 339,696 | | |
| 341,410 | |
Current liabilities of discontinued operations | |
$ | 1,447,762 | | |
$ | 1,449,476 | |
Major
line items constituting (loss) income from discontinued operations in the unaudited condensed consolidated statements of operations for
the three and nine months ended September 30, 2022 and 2021 consisted of the following:
Consolidated
(Loss) Income from Discontinued Operations:
| |
Three Months Ended September 30, 2022 | | |
Three Months Ended September
30, 2021 | | |
Nine Months Ended September
30, 2022 | | |
Nine Months Ended September
30, 2021 | |
| |
(unaudited) | | |
(unaudited) | | |
(unaudited) | | |
(unaudited) | |
Net revenues | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | 216,941 | |
Cost of revenues | |
| - | | |
| - | | |
| - | | |
| 2,386 | |
Operating expenses | |
| (1,696 | ) | |
| (31,388 | ) | |
| (5,941 | ) | |
| (677,539 | ) |
Other (expense) income | |
| - | | |
| - | | |
| (1,134 | ) | |
| 39,193 | |
Gain on sale | |
| - | | |
| 576,787 | | |
| - | | |
| 11,303,939 | |
Provision for income taxes | |
| - | | |
| - | | |
| - | | |
| - | |
(Loss) income from discontinued operations | |
$ | (1,696 | ) | |
$ | 545,399 | | |
$ | (7,075 | ) | |
$ | 10,880,148 | |
Note
14 – Recent Accounting Pronouncements
In
August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and
Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40). The new guidance provides accounting for convertible instruments
and contracts in an entity’s own equity. The FASB issued this Update to address issues identified as a result of the complexity
associated with applying U.S. GAAP for certain financial instruments with characteristics of liabilities and equity. The Board focused
on amending the guidance on convertible instruments and the guidance on the derivatives scope exception for contracts in an entity’s
own equity. This standard will be effective for us for annual periods beginning on January 1, 2024, including interim periods within
those fiscal years. Early adoption of this standard is not permitted for us because we have already adopted ASU 2017-11 “Earnings
Per Share (Topic 260) Distinguishing Liabilities from Equity (Topic 480) Derivatives and Hedging (Topic 815).” We have not yet
determined the impact of adopting this new accounting guidance on our consolidated financial statements.
In
May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50),
Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic
815-40), Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options. The
FASB issued this Update to clarify and reduce diversity in an issuer’s accounting for modifications or exchanges of freestanding
equity-classified written call options (for example, warrants) that remain equity classified after modification or exchange. The guidance
clarifies whether an issuer should account for a modification or an exchange of a freestanding equity-classified written call option
that remains equity classified after modification or exchange as (1) an adjustment to equity and, if so, the related earnings per share
(EPS) effects, if any, or (2) an expense and, if so, the manner and pattern of recognition. The amendments in this Update are effective
for all entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. An entity should
apply the amendments prospectively to modifications or exchanges occurring on or after the effective date of the amendments. We adopted
this new accounting guidance on January 1, 2022. The impact of the adoption of this new accounting guidance on our consolidated financial
statements is discussed in Note 1.
In
June 2022, the FASB issued ASU 2022-03, Fair Value Measurement (Topic 820), Fair Value Measurement of Equity Securities Subject
to Contractual Sale Restrictions. The FASB is issuing this ASU (1) to clarify the guidance in Topic 820, Fair Value Measurement,
when measuring the fair value of an equity security subject to contractual restrictions that prohibit the sale of an equity security,
(2) to amend a related illustrative example, and (3) to introduce new disclosure requirements for equity securities subject to contractual
sale restrictions that are measured at fair value in accordance with Topic 820. The amendments in this ASU do not change the principles
of fair value measurement. For public business entities, the amendments are effective for fiscal years beginning after December 15, 2023,
and interim periods within those fiscal years. Early adoption is permitted for both interim and annual financial statements that have
not yet been issued or made available for issuance. The Company should apply the amendments prospectively with any adjustments from the
adoption of the amendments recognized in earnings and disclosed on the date of adoption. We have not yet determined the impact of adopting
this new accounting guidance on our consolidated financial statements.
Other
recent accounting standards issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public
Accountants, and the SEC did not or are not believed by management to have a material impact on the Company’s present or future
consolidated financial statements.
Note
15 – Subsequent Events
Conversions
of Series N and Series O Preferred Stock
Subsequent
to September 30, 2022 and through November 10, 2022, the Company issued an aggregate of 14.0 billion shares of its common stock upon conversions
of 682.65 shares of its Series N Preferred Stock with a stated value of $682,650 and 576.45 shares of its Series O Preferred Stock with
a stated value of $576,450.
Potential
Common Stock as of November 10, 2022
The
following table presents the dilutive effect of our various potential shares of common stock as of November 10, 2022:
Schedule of Dilutive Effect of Various Potential Common Shares
| |
November
10,
2022 | |
Shares of common stock outstanding | |
| 29,084,322,257 | |
Dilutive potential shares: | |
| | |
Stock options | |
| 26 | |
Warrants | |
| 511,333,351,092 | |
Convertible debt | |
| 28,777,833,333 | |
Convertible preferred stock | |
| 452,717,633,333 | |
Total dilutive potential shares of common stock, including outstanding common stock | |
| 1,021,913,140,041 | |
As
a result of the Voting Agreement discussed in Note 10 and the November 5, 2021 Amendment to its Certificate of Incorporation, as amended,
providing for the affirmative vote of the holders of a majority in voting power of the stock of the Company to authorize an increase
in the number of authorized shares of the Company’s common stock, as more fully discussed in Note 1, the Company believes that
it has the practical ability to ensure that it has a sufficient number of authorized shares of its common stock to accommodate all potentially
dilutive instruments.
Issuance
of Debentures
On October 12, 2022, the Company issued debentures to institutional investors in the amount of $550,000 for net proceeds of $500,000.
The Debentures are due on February 12, 2023 and are secured by a portion of the Company’s investment in InnovaQor Series B-1 Preferred
Stock.
Big
South Fork Medical Center Cost Report
Subsequent
to September 30, 2022, the Company’s Big South Medical Center Hospital received a communication from its fiscal intermediary
stating that its Medicare cost report for the six months ending December 31, 2021 has been accepted and the fiscal intermediary has
computed a tentative retroactive adjustment reflecting an overpayment by the fiscal intermediary in the amount of $1.9
million. The Company is working with the fiscal intermediary to file an amended cost report which we expect will result in a smaller
overpayment and is seeking an extended repayment schedule for any overpayment. There is no assurance that the overpayment will be
reduced. Furthermore, the tentative retroactive adjustment is subject to a final Medicare cost report settlement. The Company
recognized $1.6
million as a liability and reduced net revenues by a similar amount in its financial statements for the three and nine months ending
September 30, 2022.