Fair Value, Derivative Financial Instruments and Deemed Dividends
|3 Months Ended|
Mar. 31, 2023
|Fair Value Derivative Financial Instruments And Deemed Dividends|
|Fair Value, Derivative Financial Instruments and Deemed Dividends||
Note 9 – Fair Value, Derivative Financial Instruments 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 March 31, 2023 and December 31, 2022, the carrying value of the Company’s accounts receivable, note receivable / receivable from related party, 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 March 31, 2023 (unaudited) and December 31, 2022:
Schedule of Fair Value of Assets and Liabilities Measured on Recurring Basis
InnovaQor Series B-1 Preferred Stock
During 2021, the Company sold several subsidiaries to InnovaQor. As consideration for the sale, the Company received 100 shares were used in 2021 to settle an outstanding liability leaving a balance of shares at March 31, 2023 and December 31, 2022. The fair value of the Company’s InnovaQor Series B-1 Preferred Stock investment was initially determined 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. shares of InnovaQor’s Series B-1 Preferred Stock of which
In reviewing the fair value of the InnovaQor Series B-1 Preferred Stock, the Company believes that the value recorded at March 31, 2023 and December 31, 2022 of $9.0 million represents its fair value. In determining fair value, consideration was given to: (i) the variable rate conversion feature of the InnovaQor Series B-1 Preferred Stock in that changes in the price of the common stock do not affect conversion value; (ii) recent sales and offering prices by InnovaQor of shares of its common stock; (iii) that InnovaQor is actively seeking additional capital; and (iv) other considerations that we believe will bolster the underlying liquidity of InnovaQor’s common stock.
Embedded Conversion Option
The Company utilized the following method to value its derivative liability as of March 31, 2023 and December 31, 2022 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 months ended March 31, 2023 and the year ended December 31, 2022 as there was no change in the conversion price terms during the periods.
During the three months ended March 31, 2023, there were no triggers of down round provision of outstanding warrants and, therefore, no associated deemed dividends were recorded in the period. During the three months ended March 31, 2022, the conversions of preferred stock triggered a reduction in the exercise prices of warrants 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 prices, was measured using Black Scholes. The following assumptions were utilized in the Black Scholes valuation models for the three months ended March 31, 2022: risk free rates ranging from 0% to 2.55%, volatility ranging from 1.94% to 1,564% and terms ranging from 0.01 to 2.45 years. The incremental value of modifications to warrants as a result of the down round provisions of $135.7 million were recorded as deemed dividends during the three months ended March 31, 2022.
In addition, deemed dividends of $0.2 million were recorded in the three months ended March 31, 2022 as a result of the issuance of shares of our Series P Preferred Stock, as more fully discussed in Note 10. Deemed dividends are also discussed in Notes 1 and 3.
The entire disclosure for derivatives and fair value of assets and liabilities.
Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef