UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark one)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the quarterly period ended
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ______ to ______.
Commission
File Number:
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
(IRS Employer Identification No.) | |
| (Address of principal executive offices) | (Zip Code) |
(Registrant’s telephone number, including area code)
Securities registered under Section 12(b) of the Act:
| Title of Each Class | Trading Symbol(s) | Name of each exchange on which registered | ||
| None | None | None |
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.0001 Par Value
Indicate
by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
| Large accelerated filer ☐ | Accelerated filer ☐ |
| Smaller
reporting company | |
| Emerging
growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
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As of November 10, 2022, the registrant had shares of its Common Stock, $0.0001 par value, outstanding.
RENNOVA HEALTH, INC. AND SUBSIDIARIES
FORM 10-Q
September 30, 2022
TABLE OF CONTENTS
| 2 |
RENNOVA HEALTH, INC.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
CONDENSED CONSOLIDATED BALANCE SHEETS
| September 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| (unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Note receivable / receivable from related party | ||||||||
| Inventory | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Income tax refunds receivable | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Intangible asset | ||||||||
| Investment | ||||||||
| Deposits | ||||||||
| Right-of-use assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| Current liabilities: | ||||||||
| Accounts payable (includes related party amounts of $ | $ | $ | ||||||
| Accrued expenses (includes related party amounts of $ | ||||||||
| Income taxes payable | ||||||||
| Current portion of notes payable | ||||||||
| Current portion of loan payable, related party | ||||||||
| Current portion of debentures | ||||||||
| Current portion of right-of-use operating lease obligations | ||||||||
| Current portion of finance lease obligation | ||||||||
| Derivative liabilities | ||||||||
| Current liabilities of discontinued operations | ||||||||
| Total current liabilities | ||||||||
| Right-of-use operating lease obligations, net of current portion | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies | ||||||||
| Stockholders’ deficit: | ||||||||
| Series F preferred stock, $ par value, $ stated value per share, shares authorized, and shares issued and outstanding, respectively | ||||||||
| Series H preferred stock, $ par value, $ stated value per share, shares authorized, shares issued and outstanding | ||||||||
| Series L preferred stock, $ par value, $ stated value per share, shares authorized, shares issued and outstanding | ||||||||
| Series M preferred stock, $ par value, $ stated value per share, shares authorized, shares issued and outstanding | ||||||||
| Series N preferred stock, $ par value, $ stated value per share, shares authorized, and shares issued and outstanding, respectively | ||||||||
| Series O preferred stock, $ par value, $ stated value per share, shares authorized, and shares issued and outstanding, respectively | ||||||||
| Series P preferred stock, $ par value, $ stated value per share, shares authorized, and shares issued and outstanding, respectively | ||||||||
| Common stock, $ par value, shares authorized, and shares issued and outstanding, respectively | ||||||||
| Additional paid-in-capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ deficit | ( | ) | ( | ) | ||||
| Total liabilities and stockholders’ deficit | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 3 |
RENNOVA HEALTH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Net revenues | $ | $ | $ | $ | ||||||||||||
| Operating expenses: | ||||||||||||||||
| Direct costs of revenues | ||||||||||||||||
| General and administrative expenses | ||||||||||||||||
| Depreciation and amortization | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Loss from continuing operations before other income (expense) and income taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expense): | ||||||||||||||||
| Other income (expense), net | ( | ) | ||||||||||||||
| Gain from forgiveness of debt | ||||||||||||||||
| Gain (loss) from legal settlements, net | ( | ) | ||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total other income (expense), net | ( | ) | ( | ) | ||||||||||||
| Net (loss) income from continuing operations before income taxes | ( | ) | ( | ) | ( | ) | ||||||||||
| Provision for income taxes | ||||||||||||||||
| Net (loss) income from continuing operations | ( | ) | ( | ) | ( | ) | ||||||||||
| Loss from discontinued operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Gain from sale | ||||||||||||||||
| Net (loss) income from discontinued operations | ( | ) | ( | ) | ||||||||||||
| Net (loss) income | ( | ) | ( | ) | ||||||||||||
| Deemed dividends | ( | ) | ( | ) | ( | ) | ||||||||||
| Net loss available to common stockholders | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net loss per share of common stock available to common stockholders - basic and diluted: | ||||||||||||||||
| Continuing operations | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Discontinued operations | ( | ) | ( | ) | ||||||||||||
| Total basic and diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted average number of shares of common stock outstanding during the period: | ||||||||||||||||
| Basic and diluted | ||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 4 |
RENNOVA HEALTH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT
For each of the quarters in the period ended September 30, 2022
(unaudited)
| Preferred Stock | Common Stock | Additional paid-in- | Accumulated | Total Stockholders’ | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | capital | Deficit | Deficit | ||||||||||||||||||||||
| Balance at December 31, 2021 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||
| Conversion of Series N Preferred Stock into common stock | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
| Issuance of Series P Preferred Stock | - | |||||||||||||||||||||||||||
| Deemed dividends from issuance of Series P Preferred Stock | - | - | ( | ) | ||||||||||||||||||||||||
| Payment of cash in lieu of fractional shares | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||
| Deemed dividends from triggers of down round provisions | - | - | ( | ) | ||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance at March 31, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||
| Conversion of Series N Preferred Stock into common stock | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
| Conversion of Series O Preferred Stock into common stock | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
| Issuance of Series P Preferred Stock | - | |||||||||||||||||||||||||||
| Deemed dividends from issuance of Series P Preferred Stock | - | - | ( | ) | ||||||||||||||||||||||||
| Deemed dividends from triggers of down round provisions | - | - | ( | ) | ||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance at June 30, 2022 | | $ | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||
| Conversion of Series F Preferred Stock into common stock | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
| Conversion of Series N Preferred Stock into common stock | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
| Conversion of Series O Preferred Stock into common stock | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance at September 30, 2022 | $ | | $ | | $ | | $ | ( | ) | $ | ( | ) | ||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 5 |
RENNOVA HEALTH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT
For each of the quarters in the period ended September 30, 2021
(unaudited)
| Preferred Stock | Common Stock | Additional paid-in- | Accumulated | Total Stockholders’ | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | capital | Deficit | Deficit | ||||||||||||||||||||||
| Balance at December 31, 2020 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||
| Conversion of Series N Preferred Stock into common stock | ( | ) | ( | ) | ||||||||||||||||||||||||
| Deemed dividends from triggers of down round provisions | - | - | ( | ) | ||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance at March 31, 2021 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||
| Conversion of Series M Preferred Stock into common stock | ( | ) | ( | ) | ||||||||||||||||||||||||
| Conversion of Series N Preferred Stock into common stock | ( | ) | ( | ) | ||||||||||||||||||||||||
| Issuance of Series O Preferred Stock | - | |||||||||||||||||||||||||||
| Deemed dividends from triggers of down round provisions | - | - | ( | ) | ||||||||||||||||||||||||
| Net income | - | - | ||||||||||||||||||||||||||
| Balance at June 30, 2021 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||
| Exchange of Series M Preferred Stock for common stock | ( | ) | ( | ) | ||||||||||||||||||||||||
| Conversion of Series N Preferred Stock into common stock | ( | ) | ( | ) | ||||||||||||||||||||||||
| Deemed dividends from extensions of warrants | - | - | ( | ) | ||||||||||||||||||||||||
| Issuance of Series O Preferred Stock | - | |||||||||||||||||||||||||||
| Deemed dividends from issuance of warrants under exchange agreement | - | - | ( | ) | ||||||||||||||||||||||||
| Payment of cash in lieu of fractional shares | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Deemed dividends from triggers of down round provisions | - | - | ( | ) | ||||||||||||||||||||||||
| Net income | - | - | ||||||||||||||||||||||||||
| Balance at September 30, 2021 | | $ | | | $ | $ | | $ | ( | ) | $ | ( | ) | |||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 6 |
RENNOVA HEALTH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
| Nine Months Ended September 30, | ||||||||
| 2022 | 2021 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss from continuing operations | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operations: | ||||||||
| Depreciation and amortization | ||||||||
| Non-cash interest (income) expense | ( | ) | ||||||
| Other income from forgiveness of PPP notes payable | ( | ) | ( | ) | ||||
| Loss (gain) from legal settlements | ( | ) | ||||||
| Loss on disposal of equipment | ||||||||
| Loss (income) from federal government provider relief funds | ( | ) | ||||||
| Gain on sale of discontinued operations | ( | ) | ||||||
| (Loss) income from discontinued operations | ( | ) | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Inventory | ||||||||
| Prepaid expenses and other current assets | ( | ) | ||||||
| Security deposits | ( | ) | ||||||
| Change in right-of-use assets | ||||||||
| Accounts payable | ||||||||
| Accrued expenses | ||||||||
| Change in right-of-use operating lease obligations | ( | ) | ( | ) | ||||
| Net cash used in operating activities of continuing operations | ( | ) | ( | ) | ||||
| Net cash (used in) provided by operating activities of discontinued operations | ( | ) | ||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash flows from investing activities: | ||||||||
| Purchases of equipment | ( | ) | ||||||
| Note receivable/receivable from related party | ( | ) | ( | ) | ||||
| Net cash used in investing activities of continuing operations | ( | ) | ( | ) | ||||
| Net cash (used in) provided by investing activities of discontinued operations | ||||||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from the issuances of notes payable | ||||||||
| Proceeds from issuance of related party loan | ||||||||
| Payments on related party loan | ( | ) | ||||||
| Payments on notes payable | ( | ) | ( | ) | ||||
| Receivables paid under accounts receivable sales agreements | ( | ) | ( | ) | ||||
| Federal government provider relief funds | ||||||||
| Proceeds from issuance of Series O Preferred Stock | ||||||||
| Proceeds from issuances of Series P Preferred Stock | ||||||||
| Payment on finance lease obligation | ( | ) | ||||||
| Cash paid for fractional shares in connection with reverse stock splits | ( | ) | ( | ) | ||||
| Net cash provided by financing activities of continuing operations | ||||||||
| Net cash provided by financing activities of discontinued operations | ||||||||
| Net cash provided by financing activities | ||||||||
| Net change in cash | ( | ) | ||||||
| Cash at beginning of period | ||||||||
| Cash at end of period | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 7 |
RENNOVA HEALTH, INC.
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.
| 8 |
Reverse Stock Splits
On
July 16, 2021 and March 15, 2022, the Company effected a
As
a result of the Reverse Stock Splits, every 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
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.
Effective November 5, 2021, the Company increased the authorized shares of common stock from billion to billion and, effective March 15, 2022, the Company increased the authorized shares of its common stock from billion to 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.
| 9 |
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 $
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.
| 10 |
During
the three months ended September 30, 2022 and 2021, estimated contractual allowances of $
During
the nine months ended September 30, 2022 and 2021, estimated contractual allowances of $
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. |
| 11 |
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 $
In
addition, we recorded deemed dividends of approximately $
| 12 |
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.
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
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 $
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.
| 13 |
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 $
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 $
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 $
| 14 |
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 $
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.
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.
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Numerator | ||||||||||||||||
| Net (loss) income from continuing operations | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||
| Deemed dividends | ( | ) | ( | ) | ( | ) | ||||||||||
| Net loss available to common stockholders, continuing operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net (loss) income from discontinued operations | ( | ) | ( | ) | ||||||||||||
| Net loss available to common stockholders | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Denominator | ||||||||||||||||
| Weighted average number of shares of common stock outstanding during the period - basic and diluted | ||||||||||||||||
| Net loss per share of common stock available to common stockholders - basic and diluted: | ||||||||||||||||
| Continuing operations | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Discontinued operations | ( | ) | ( | ) | ||||||||||||
| Total basic and diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| 15 |
| Nine Months September 30, | ||||||||
| 2022 | 2021 | |||||||
| Warrants | ||||||||
| Convertible preferred stock | ||||||||
| Convertible debentures | ||||||||
| Stock options | ||||||||
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 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:
| September 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Accounts receivable | $ | $ | ||||||
| Less: | ||||||||
| Allowance for contractual obligations | ( | ) | ( | ) | ||||
| Allowance for doubtful accounts | ( | ) | ( | ) | ||||
| Accounts receivable owed under settlements/sales agreements | ( | ) | ( | ) | ||||
| Accounts receivable, net | $ | $ | ||||||
| 16 |
Note 5 – Accrued Expenses
Accrued expenses at September 30, 2022 (unaudited) and December 31, 2021 consisted of the following:
| September 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Accrued payroll and related liabilities | $ | $ | ||||||
| HHS Provider Relief Funds | ||||||||
| Accrued interest | ||||||||
| Accrued legal expenses and settlements | ||||||||
| Medicare overpayment reserve | ||||||||
| Other accrued expenses | ||||||||
| Accrued expenses | $ | $ | ||||||
Payroll
and related liabilities at September 30, 2022 and December 31, 2021 included approximately $
As
of September 30, 2022 and December 31, 2021, the Company has accrued $
Accrued
interest at September 30, 2022 and December 31, 2021 included accrued interest of $
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 $
Note 6 – Debt
At September 30, 2022 (unaudited) and December 31, 2021, debt consisted of the following:
September 30, 2022 | December 31, 2021 | |||||||
| Notes payable- third parties | $ | $ | ||||||
| Loan payable – related party | ||||||||
| Debentures | ||||||||
| Total debt | ||||||||
| Less current portion of debt | ( | ) | ( | ) | ||||
| Total debt, net of current portion | $ | $ | ||||||
| 17 |
At September 30, 2022 (unaudited) and December 31, 2021, notes payable with third parties consisted of the following:
Notes Payable – Third Parties
September 30, 2022 | December 31, 2021 | |||||||
| Settlement amount/loan payable to TCA Global Credit Master Fund, L.P. (“TCA”) in the original principal amount of $ | $ | $ | ||||||
| Notes payable to CommerceNet and Jay Tenenbaum in the original principal amount of $ | ||||||||
| Note payable to Anthony O’Killough dated September 27, 2019 in the original principal amount of $ | ||||||||
| Notes payable under the PPP loans issued on April 20, 2020 through May 1, 2020. | ||||||||
| Notes payable dated January 31, 2021 and February 16, 2021 in the original aggregate amount of $ | ||||||||
| Notes payable to Western Healthcare, LLC dated August 10, 2021, in the aggregate principal amount of $ | ||||||||
| Less current portion | ( | ) | ( | ) | ||||
| 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 $
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 $
| 18 |
On
September 27, 2019, the Company issued a promissory note payable to Anthony O’Killough in the principal amount of $
The
Company, including its subsidiaries, received PPP loan proceeds in the aggregate amount of approximately $
On
August 10, 2021, the Company entered into two notes payable with Western Healthcare, LLC in the aggregate principal amount of $
Loan Payable – Related Party
At September 30, 2022 (unaudited) and December 31, 2021, loan payable - related party consisted of the following:
September 30, 2022 | December 31, 2021 | |||||||
| Loan payable to Christopher Diamantis | $ | $ | ||||||
| Less current portion of loan payable, related party | ( | ) | ( | ) | ||||
| 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 $
During
the three months ended September 30, 2022 and 2021, the Company incurred interest expense of $
| 19 |
Debentures
The carrying amount of all outstanding debentures with institutional investors as of September 30, 2022 (unaudited) and December 31, 2021 was as follows:
September 30, 2022 | December 31, 2021 | |||||||
| Debentures | $ | $ | ||||||
| Less current portion | ( | ) | ( | ) | ||||
| Debentures, net of current portion | $ | $ | ||||||
Payment
of all outstanding debentures with institutional investors totaling $
March 2017 Debenture
In
March 2017, the Company issued a debenture due in March 2019 (the “March 2017 Debenture”) with a principal balance of $
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 $
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 $
| 20 |
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 $
As
of July 1, 2022, the Company had an outstanding receivable from InnovaQor of $
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 $
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:
| Balance Sheet Classification | September 30, 2022 | December 31, 2021 | ||||||||
| Assets: | ||||||||||
| Operating leases | Right-of-use operating lease assets | $ | $ | |||||||
| Finance lease | Property and equipment, net | |||||||||
| Total lease assets | $ | $ | ||||||||
| Liabilities: | ||||||||||
| Current: | ||||||||||
| Operating leases | Right-of-use operating lease obligations | $ | $ | |||||||
| Finance lease | Current liabilities | |||||||||
| Noncurrent: | ||||||||||
| Operating leases | Right-of-use operating lease obligations | |||||||||
| Total lease liabilities | $ | $ | ||||||||
| Weighted-average remaining term: | ||||||||||
| Operating leases | ||||||||||
| Finance lease (1) | ||||||||||
| Weighted-average discount rate: | ||||||||||
| Operating leases | % | % | ||||||||
| Finance leases | % | % | ||||||||
| 21 |
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):
| 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) | ||||||||||||||||
| Total lease expense | $ | | $ | $ |
| $ | ||||||||||
| (1) | ||
| (2) |
Other Information
The following table presents supplemental cash flow information for the nine months ended September 30, 2022 and 2021 (unaudited):
| 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 | $ | | $ | |||||
| Operating cash flows for finance lease | $ | $ | ||||||
| Financing cash flows for finance lease payments | $ | $ | ||||||
Aggregate future minimum lease payments under right-of-use operating and finance leases are as follows (unaudited):
| Right-of-Use Operating Leases | Finance Lease | |||||||
| Twelve months ending September 30: | ||||||||
| 2023 | $ | $ | ||||||
| 2024 | ||||||||
| 2025 | ||||||||
| 2026 | ||||||||
| 2027 | ||||||||
| Thereafter | ||||||||
| Total | ||||||||
| Less interest | ( | ) | ( | ) | ||||
| Present value of minimum lease payments | ||||||||
| Less current portion of lease obligations | ( | ) | ( | ) | ||||
| Lease obligations, net of current portion | $ | $ | ||||||
| 22 |
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:
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| As of September 30, 2022: | ||||||||||||||||
| Asset - InnovaQor Series B-1 Preferred Stock | $ | $ | $ | $ | ||||||||||||
| Liability - Embedded conversion option of debenture | ||||||||||||||||
| As of December 31, 2021: | ||||||||||||||||
| Asset - InnovaQor Series B-1 Preferred Stock | $ | $ | $ | $ | ||||||||||||
| Liability - Embedded conversion option of debenture | ||||||||||||||||
The
fair value of the InnovaQor Series B-1 Preferred Stock of $
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 $
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
| 23 |
In
addition, deemed dividends of $
Note 10 – Stockholders’ Deficit
Authorized Capital
The Company has authorized shares of Common Stock at a par value of $ per share and authorized shares of Preferred Stock at a par value of $ per share.
Preferred Stock
As of September 30, 2022, the Company had outstanding shares of preferred stock consisting of shares of its Series H Convertible Preferred Stock (the “Series H Preferred Stock”), shares of its Series L Convertible Preferred Stock (the “Series L Preferred Stock”), shares of its Series M Convertible Redeemable Preferred Stock (the “Series M Preferred Stock”),shares of its Series N Preferred Stock, shares of its Series O Convertible Redeemable Preferred Stock (the “Series O Preferred Stock”) and 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 Stoc