Note 11 – 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 2. At December 31, 2022 and 2021, 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 December 31, 2022 and 2021:

Schedule of Fair Value of Assets and Liabilities Measured on Recurring Basis  

The fair value of the InnovaQor Series B-1 Preferred Stock of $9.0 million as of December 31, 2022 and 2021 is more fully discussed in Note 15.

Derivative Financial Instrument

The Company utilized the following method to value its derivative liability as of December 31, 2022 and 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 years ended December 31, 2022 and 2021 as there was no change in the conversion price terms during the periods.

Deemed Dividends

During the years ended December 31, 2022 and 2021, the conversions of preferred stock triggered a further reduction in the exercise prices of warrants (and conversion prices of certain debentures in the 2021 period) containing down round provisions. In accordance with U.S. GAAP, the incremental fair value of the warrants (and certain debentures in the 2021 period), 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 year ended December 31, 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. The following assumptions were utilized in the Black Scholes valuation models for the year ended December 31, 2021: risk free rates ranging from 0.04% to 0.85%, volatility ranging from 25% to 574% and terms ranging from one day to three years. Based on the Black Scholes valuations, the incremental value of modifications to warrants (and debentures in the 2021 period) as a result of the down round provisions of $330.5 million and $490.2 million were recorded as deemed dividends during the years ended December 31, 2022 and 2021, respectively.

Deemed dividends of $0.3 million were recorded in the year ended December 31, 2021 as a result of the issuance of warrants to acquire 4,750 shares of the Company’s common stock in connection with the exchange of Series M Convertible Redeemable Preferred Stock (the “Series M Preferred Stock”) into the Company’s common stock, as more fully discussed in Note 12. The fair value of the warrants at issuance was calculated using the Black Scholes valuation model using the following assumptions: risk free rate of 0.41%, volatility of 364% and a term of three years.

The Company extended certain common stock warrants during the year ended December 31, 2021, resulting in deemed dividends of $0.3 million. The fair value of $0.3 million was determined using the Black Scholes valuation model using the following assumptions: risk free rate of 0.05%, volatility of 230% and a term of six months. In addition, deemed dividends of $11.2 million were recorded in the year ended December 31, 2021 as a result of the extension of warrants issued with the March 2017 Debentures per the terms of the November 2021 Exchange Agreements, which are more fully discussed in Note 12. The fair value of these warrants was determined using the Black Scholes valuation model with the following assumptions: risk free rates ranging from 0.05% to 0.525%, volatility ranging from 317.5% to 323.2% and an extension term of 2.0 years.

Deemed dividends of $0.3 million were recorded in the year ended December 31, 2022 as a result of the issuances of shares of our Series P Preferred Stock. Deemed dividends of $2.0 million and $2.4 million were recorded in the year ended December 31, 2021 as a result of the issuances of the Series O Convertible Redeemable Preferred Stock (the “Series O Preferred Stock”) and the Series P Preferred Stock, respectively. Deemed dividends recorded in connection with the issuances of preferred stock are more fully discussed in Note 12. Deemed dividends are also discussed in Notes 2 and 3.