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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark one)

 

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

 

For the quarterly period ended June 30, 2023

 

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: 001-35141

 

RENNOVA HEALTH, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   68-0370244

(State or other jurisdiction

of incorporation or organization)

 

(IRS Employer

Identification No.)

     

400 S. Australian Avenue, Suite 800

West Palm Beach, FL

  33401
(Address of principal executive offices)   (Zip Code)

 

(561) 855-1626

(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. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 ☐
Non-accelerated filer Smaller reporting company
  Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No

 

As of August 8, 2023, the registrant had 29,934,322,257 shares of its Common Stock, $0.0001 par value, outstanding.

 

 

 

 

 

 

RENNOVA HEALTH, INC. AND SUBSIDIARIES

FORM 10-Q

 

June 30, 2023

TABLE OF CONTENTS

 

  Page No.
PART I – FINANCIAL INFORMATION 3
     
Item 1. Financial Statements 3
  Condensed Consolidated Balance Sheets as of June 30, 2023 (unaudited) and December 31, 2022 3
  Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2023 and 2022 (unaudited) 4
  Condensed Consolidated Statements of Changes in Stockholders’ Deficit for each of the quarters in the six-month periods ended June 30, 2023 and 2022 (unaudited) 5
  Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2023 and 2022 (unaudited) 7
  Notes to Condensed Consolidated Financial Statements (unaudited) 8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 31
Item 3. Quantitative and Qualitative Disclosures About Market Risk 39
Item 4. Controls and Procedures 39
     
PART II – OTHER INFORMATION 40
     
Item 1. Legal Proceedings 40
Item 1A. Risk Factors 40
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 40
Item 3. Defaults Upon Senior Securities 40
Item 4. Mine Safety Disclosures 40
Item 5. Other Information 40
Item 6. Exhibits 41
     
SIGNATURES 42

 

2
 

 

RENNOVA HEALTH, INC.

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   June 30,   December 31, 
   2023   2022 
   (unaudited)     
ASSETS          
           
Current assets:          
Cash  $725,517   $499,470 
Accounts receivable, net   2,881,150    3,110,969 
Note receivable / receivable from related party   2,334,251    1,457,253 
Inventory   235,365    242,645 
Prepaid expenses and other current assets   383,526    215,365 
Income tax refunds receivable   837,460    837,460 
Total current assets   7,397,269    6,363,162 
           
Property and equipment, net   4,277,790    4,194,299 
Intangible asset   259,443    259,443 
Investment   9,016,072    9,016,072 
Deposits   164,413    165,530 
Right-of-use assets   440,310    574,256 
           
Total assets  $21,555,297   $20,572,762 
           
LIABILITIES AND STOCKHOLDERS’ DEFICIT          
           
Current liabilities:          
Accounts payable (includes related party amounts of $23,155 and $47,636, respectively)  $13,008,981   $11,514,322 
Accrued expenses   19,319,575    19,563,808 
Income taxes payable   1,865,425    1,348,425 
Current portion of notes payable   1,318,315    2,917,390 
Current portion of loan payable, related party   2,253,000    2,995,000 
Current portion of debentures   8,222,240    8,622,240 
Current portion of right-of-use operating lease obligations   168,761    215,063 
Current portion of finance lease obligation   220,461    220,461 
Derivative liability   455,336    455,336 
Current liabilities of discontinued operations   1,464,209    1,456,112 
Total current liabilities   48,296,303    49,308,157 
           
Right-of-use operating lease obligations, net of current portion   271,549    359,193 
Total liabilities   48,567,852    49,667,350 
           
Commitments and contingencies   -    - 
           
Stockholders’ deficit:          
Series H preferred stock, $0.01 par value,  $1,000 stated value per share, 14,202 shares authorized, 10 shares issued and outstanding   -    - 
Series L preferred stock, $0.01 par value, $1.00 stated value per share, 250,000 shares authorized, 250,000 shares issued and outstanding   2,500    2,500 
Series M preferred stock, $0.01 par value, $1,000 stated value per share, 30,000 shares authorized, 20,810 shares issued and outstanding   208    208 
Series N preferred stock, $0.01 par value, $1,000 stated value per share, 50,000 shares authorized, 2,864 and 2,900 shares issued and outstanding, respectively   29    29 
Series O preferred stock, $0.01 par value, $1,000 stated value per share, 10,000 shares authorized, 8,645 and 8,685 shares issued and outstanding, respectively   86    87 
Series P preferred stock, $0.01 par value, $1,000 stated value per share, 30,000 shares authorized, 10,195 shares issued and outstanding   102    102 
Common stock, $0.0001 par value, 250,000,000,000 shares authorized, 29,934,322,257 and 29,084,322,257 shares issued and outstanding, respectively   2,993,432    2,908,432 
Additional paid-in-capital   1,671,486,835    1,671,571,834 
Accumulated deficit    (1,701,494,387)   (1,703,577,780)
Total Rennova stockholders’ deficit   (27,011,195)   (29,094,588)
Noncontrolling interest    

(1,360

)   - 
Total stockholders’ deficit   

(27,012,555

)   

(29,094,588

)
Total liabilities and stockholders’ deficit   $21,555,297   $20,572,762 

 

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

 

3
 

 

RENNOVA HEALTH, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

 

   2023   2022   2023   2022 
   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2023   2022   2023   2022 
                 
Net revenues  $6,389,219   $3,606,236   $11,305,115   $4,750,756 
                     
Operating expenses:                    
Direct costs of revenues   1,834,107    1,571,673    3,687,153    2,946,316 
General and administrative expenses   2,358,758    1,880,167    4,575,428    3,452,503 
Depreciation and amortization   99,357    117,216    193,492    234,040 
Total operating expenses   4,292,222    3,569,056    8,456,073    6,632,859 
                     
Income (loss) from continuing operations before other income (expense), income taxes and net loss attributable to noncontrolling interest   2,096,997    37,180    2,849,042    (1,882,103)
                     
Other income (expense):                    
Other income (expense), net   212,368    (316,369)   255,114    (42,281)
Gain from forgiveness of debt   200,000    334,819    200,000    334,819 
(Loss) gain from legal settlements, net   (276,313)   (76,218)   286,719    (76,218)
Interest expense   (431,484)   (479,253)   (983,747)   (1,100,190)
Total other income (expense), net   (295,429)   (537,021)   (241,914)   (883,870)
                     
Income (loss) from continuing operations before income taxes, including noncontrolling interest    1,801,568    (499,841)   2,607,128    (2,765,973)
Provision for income taxes   (517,000)   -    (517,000)   - 
Net income (loss) from continuing operations, including noncontrolling interest   1,284,568    (499,841)   2,090,128    (2,765,973)
Net loss from discontinued operations   (8,097)   (3,945)   (8,097)   (5,379)
Net income (loss), including noncontrolling interest   1,276,471    (503,786)   2,082,031    (2,771,352)
Net loss attributable to noncontrolling interest   1,362    -    1,362    - 
Net income (loss) attributable to Rennova   

1,277,833

    

(503,786

)   

2,083,393

    

(2,771,352

)
Deemed dividends   -    (194,951,624)   -    (330,876,369)
Net income (loss) available to common stockholders  $1,277,833   $(195,455,410)  $2,083,393   $(333,647,721)
                     
Net income (loss) available to common stockholders per share - basic:                    
Continuing operations  $0.00   $(0.11)  $0.00   $(0.39)
Discontinued operations   (0.00)   (0.00)   (0.00)   (0.00)
Total basic  $0.00   $(0.11)  $0.00   $(0.39)
                     
Net income (loss) available to common stockholders per share - diluted:                    
Continuing operations  $0.00   $(0.11)  $0.00   $(0.39)
Discontinued operations   (0.00)   (0.00)   (0.00)   (0.00)
Total diluted  $0.00   $(0.11)  $0.00   $(0.39)
                     
Weighted average number of shares of common stock outstanding during the period:                     
Basic   29,934,322,257    1,702,149,425    29,845,095,738    858,169,865 
Diluted   482,079,733,368    1,702,149,425    488,414,836,833    858,169,865 

 

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

 

4
 

 

RENNOVA HEALTH, INC.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIT

For Each of the Quarters in the Six-Month Period Ended June 30, 2023

(unaudited)

 

   Shares   Amount   Shares   Amount   capital   Deficit   Deficit   Interest   Deficit 
                   Additional       Rennova       Total 
   Preferred Stock   Common Stock  

paid-in

   Accumulated   Stockholders’   Noncontrolling   Stockholders’ 
   Shares   Amount   Shares   Amount   capital   Deficit   Deficit   Interest   Deficit 
                                     
Balance at December 31, 2022   292,600   $2,926    29,084,322,257   $2,908,432   $1,671,571,834   $(1,703,577,780)  $(29,094,588)  $-   $(29,094,588)
Conversion of Series N Preferred Stock into common stock   (36)   -    400,000,000    40,000    (40,000)        -    -    - 
Conversion of Series O Preferred Stock into common stock   (40)   (1)   450,000,000    45,000    (44,999)        -    -    - 
Net income                       -    805,560    805,560    -    805,560 
Balance at March 31, 2023   292,524    2,925    29,934,322,257    2,993,432    1,671,486,835    (1,702,772,220)   (28,289,028)   -    (28,289,028)
Sale of noncontrolling interest                                      2    2 
Net income   -    -    -    -    -    1,277,833    1,277,833    (1,362)   1,276,471 
Balance at June 30, 2023   292,524   $2,925    29,934,322,257   $2,993,432   $1,671,486,835   $(1,701,494,387)  $(27,011,195)  $(1,360)  $(27,012,555)

 

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

 

5
 

 

RENNOVA HEALTH, INC.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIT

For Each of the Quarters in the Six-Month Period Ended June 30, 2022

(unaudited)

 

   Shares   Amount   Shares   Amount   capital   Deficit   Deficit 
   Preferred Stock   Common Stock  

Additional

paid-in-

   Accumulated   Total Stockholders’ 
   Shares   Amount   Shares   Amount   capital   Deficit   Deficit 
Balance at December 31, 2021   2,045,201   $20,451    4,244,700   $424   $1,342,085,957   $(1,369,408,356)  $(27,301,524)
Conversions of Series N Preferred
Stock into common stock
   (593)   (6)   12,932,500    1,293    (1,287)   -    - 
Issuances of Series P Preferred Stock   1,100    11    -    -    999,989    -    1,000,000 
Deemed dividends from issuances of Series P Preferred Stock   -    -    -    -    222,222    (222,222)   - 
Payment of cash in lieu of
fractional shares
   -    -    (10)   -    (9)   -    (9)
Deemed dividends from triggers of down round provisions   -    -    -    -    135,702,523    (135,702,523)   - 
Net loss   -    -    -    -    -    (2,267,566)   (2,267,566)
Balance at March 31, 2022   2,045,708   $20,456    17,177,190   $1,717   $1,479,009,395   $(1,507,600,667)  $(28,569,099)
Conversions of Series N Preferred
Stock into common stock
   (1,240)   (12)   2,627,145,066    262,715    (262,703)   -    - 
Conversions of Series O Preferred
Stock into common stock
   (179)   (2)   1,581,000,000    158,100    (158,098)   -    - 
Issuance of Series P Preferred
Stock
   550    6    -    -    499,994    -    500,000 
Deemed dividends from issuance of Series P Preferred Stock   -    -    -    -    111,111    (111,111)   - 
Deemed dividends from triggers of down round provisions   -    -    -    -    194,840,513    (194,840,513)   - 
Net loss   -    -    -    -    -    (503,786)   (503,786)
Balance at June 30, 2022   2,044,838   $20,448    4,225,322,256   $422,532   $1,674,040,212   $(1,703,056,077)  $(28,572,885)

 

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

 

6
 

 

RENNOVA HEALTH, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(unaudited)

 

   2023   2022 
   Six Months Ended June 30, 
   2023   2022 
         
Cash flows from operating activities:          
Net income (loss) from continuing operations, including noncontrolling interest  $2,090,128   $(2,765,973)
Adjustments to reconcile net income (loss) to net cash used in operations:          
Depreciation and amortization   193,492    234,040 
Loss on disposition of property and equipment   -    858 
Net (gain) loss from legal settlements   (286,719)   76,218 
Gain on forgiveness of debt   (200,000)   (334,819)
Loss from discontinued operations   (8,097)   (5,379)
Changes in operating assets and liabilities:          
Accounts receivable   229,819    186,131 
Inventory   7,280    36,890 
Prepaid expenses and other current assets   (168,159)   21,304 
Security deposits   1,117    (10,000)
Change in right-of-use assets   133,946    117,871 
Accounts payable   1,494,659    484,458 
Accrued expenses   (531,720)   867,828 
Income taxes payable   517,000    - 
Change in right-of-use operating lease obligations   (133,946)   (117,871)
           
Net cash provided by (used in) operating activities of continuing operations   3,338,800    (1,208,444)
Net cash provided by (used in) operating activities of discontinued operations   8,097    (1,714)
Net cash provided by (used in) operating activities   3,346,897    (1,210,158)
           
Cash flows from investing activities:          
Receivable from related party   (876,998)   (428,943)
Purchases of property and equipment   (276,983)   (33,940)
Net cash used in investing activities of continuing operations   (1,153,981)   (462,883)
           
Cash flows from financing activities:          
Proceeds from issuance of related party loan payable   580,000    750,000 
Payments of related party loan payable   (1,322,000)   - 
Payments of debentures   (400,000)   - 
Payments of notes payable   (824,869)   (1,171,603)
Receivables paid under accounts receivable sales agreements   -    (317,647)
Proceeds from issuances of preferred stock   -    1,500,000 
Proceeds from HHS Provider Relief Funds   -    314,651 
Cash paid for fractional shares in connection with reverse stock split   -    (9)
Net cash (used in) provided by financing activities of continuing operations   (1,966,869)   1,075,392 
           
Net change in cash   226,047    (597,649)
           
Cash at beginning of period   499,470    724,524 
           
Cash at end of period  $725,517   $126,875 

 

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 Six Months Ended June 30, 2023 and 2022

(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 and an operating rural health clinic in Kentucky. In addition, the Company owns a subsidiary pursuing opportunities in the behavioral health sector and, on August 14, 2023, commenced operations of an alcohol and drug treatment facility on the campus of its hospital in Oneida, Tennessee. The Company’s operations consist of only one segment.

 

Scott County Community Hospital (d/b/a 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 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 $1.0 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.

 

CarePlus Clinic

 

On March 5, 2019, we acquired certain assets related to an outpatient clinic located in Williamsburg, Kentucky. The clinic and its associated assets, which were acquired from CarePlus Rural Health Clinic, LLC, offers compassionate care in a modern, patient-friendly facility. The CarePlus Clinic is located 32 miles northwest of our Big South Fork Medical Center.

 

Myrtle Recovery Centers, Inc.

 

In the second quarter of 2022, the Company formed a subsidiary, Myrtle Recovery Centers, Inc. (“Myrtle”), to pursue opportunities in the behavioral health sector, initially in our core, rural markets. We intend to focus on leveraging our existing physical locations and corporate and regional infrastructure to offer behavioral health services, including substance abuse treatment. Services will be provided on either an inpatient, residential basis or an outpatient basis.

 

On August 10, 2023, Myrtle was granted a license under the rules of the Department of Mental Health and Substance Abuse Services of Tennessee to operate an alcohol and drug treatment facility in Oneida Tennessee. The facility, which is located at Rennova’s Big South Fork Medical Center campus, commenced operations and began accepting patients on August 14, 2023. The facility offers alcohol and drug residential detoxification and residential rehabilitation treatment services for up to 30 patients. Myrtle intends to offer outpatient opioid treatment services at its Oneida facility in the future.

 

On April 11, 2023, Myrtle sold shares of its common stock equivalent to a 1.961% ownership stake in the subsidiary for de minimis value to an unaffiliated individual licensed as a physician in Tennessee. The shares have certain transfer restrictions, including the right of the subsidiary to transfer the shares to another physician licensed in Tennessee for de minimis value. The shares were sold to the individual for Tennessee healthcare regulatory reasons.

 

Jamestown Regional Medical Center

 

On June 1, 2018, we 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.

 

8
 

 

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, 2022. 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 June 30, 2023, and the results of its operations and changes in stockholders’ deficit for the three and six months ended June 30, 2023 and 2022 and its cash flows for the six months ended June 30, 2023 and 2022. Such adjustments are of a normal recurring nature. The results of operations for the three and six months ended June 30, 2023 may not be indicative of results for the year ending December 31, 2023.

 

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 and majority-owned subsidiaries. All intercompany transactions and balances have been eliminated in the consolidation.

 

Comprehensive Income (Loss)

 

During the three and six months ended June 30, 2023 and 2022, comprehensive income (loss) was equal to the net income (loss) 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 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, 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.

 

Revenue Recognition

 

We recognize revenue in accordance with Accounting Standard Codification (“ASC”), “Revenue from Contracts with Customers (Topic 606),” including subsequently issued updates. Under the accounting guidance, 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). As of June 30, 2023, $1.0 million of Medicare cost report settlement reserves were recorded as liabilities on the condensed balance sheet, as more fully discussed in Note 5.

 

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 June 30, 2023 and 2022, estimated contractual allowances of $8.5 million and $5.1 million, respectively, and estimated implicit price concessions of $1.4 million and $2.7 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, after estimated implicit price concessions and contractual and related allowance adjustments to revenues of $9.9 million and $7.8 million, respectively, for the three months ended June 30, 2023 and 2022, we reported net revenues of $6.4 million and $3.6 million, respectively.

 

During the six months ended June 30, 2023 and 2022, estimated contractual allowances of $19.6 million and $13.2 million, respectively, and estimated implicit price concessions of $2.4 million and $4.1 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 six months ended June 30, 2023 and 2022, after estimated implicit price concessions and contractual and related allowance adjustments to revenues of $22.0 million and $17.3 million, respectively, we reported net revenues of $11.3 million and $4.8 million, respectively.

 

We continue to review the provisions for implicit price concessions and contractual allowances. See Note 4 – Accounts Receivable.

 

10
 

 

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”) 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 either based on 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 six months ended June 30, 2023 and 2022.

 

Leases in Accordance with ASU No. 2016-02

 

We account for leases in accordance with Accounting Standards Update (“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 operating 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. For finance leases, we record the present value of the lease payments as finance lease obligations. 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 June 30, 2023 and December 31, 2022, we applied the Level 3 fair value hierarchy in determining the fair value of InnovaQor, Inc.’s Series B-1 Non-Voting Convertible Preferred Stock (the “InnovaQor Series B-1 Preferred Stock”), which is reflected on our unaudited condensed consolidated balance sheets as an investment. Also, on June 30, 2023 and December 31, 2022, 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. Our determination of fair value is more fully discussed in Note 9.

 

11
 

 

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 and diluted 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 six months ended June 30, 2023 and 2022, there were no changes in the fair values of the Company’s convertible debentures with down round provision features as these debentures issued in 2018 have floors of $0.052 per share and were not in-the-money during these periods. Debentures are more fully discussed in Note 6.

 

There were no triggers of down round provisions to warrants during the three and six months ended June 30, 2023. The incremental value of modification to warrants as a result of triggers of the down round provisions of $194.7 million and $330.5 million were recorded as deemed dividends in the three and six months ended June 30, 2022, respectively. See Note 9 for an additional discussion of derivative financial instruments and deemed dividends.

 

In addition, we recorded deemed dividends of approximately $0.2 million and $0.3 million during the three and six months ended June 30, 2022, respectively, 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.

 

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 (or reducing a tax asset) that would reduce net assets. The Company did not have an unrecognized tax benefit at June 30, 2023 and December 31, 2022.

 

12
 

 

 

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 earnings (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 earnings (loss) per share for the three and six months ended June 30, 2023 and 2022.

 

Reverse Stock Split

 

On March 15, 2022, the Company effected a 1-for-10,000 reverse stock split (the “Reverse Stock Split”). As a result of the Reverse Stock Split, 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 Split. 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 Split.

 

Amendment to Certificate of Incorporation

 

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.

 

Note 2 – Liquidity and Financial Condition

 

Going Concern

 

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, Presentation of Financial Statements-Going Concern (Subtopic 205-40) (“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 June 30, 2023, the Company had a working capital deficit and a stockholders’ deficit of $40.9 million and $27.0 million, respectively. While the Company incurred net income of $2.1 million for the six months ended June 30, 2023, it incurred a net loss of $3.3 million for the year ended December 31, 2022 and as of the date of this report, its cash is deficient and payments for its operations in the ordinary course are not being made. The prior year loss and other related factors, including past due accounts payable and payroll taxes, as well as payment defaults under the terms of 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 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 maintain 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.

 

13
 

 

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 June 30, 2023, our facilities have received approximately $13.6 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 June 30, 2023, we have recognized a net of $13.0 million of these funds as income of which $0.6 million, $4.4 million and $8.0 million were recognized as income during the years ended December 31, 2022, 2021 and 2020, respectively. Accordingly, approximately $0.6 million of relief funds received as of June 30, 2023 are included on our balance sheets in accrued expenses – see Note 5.

 

As of June 30, 2023, the Company’s estimate of the amount for which it is reasonably assured of meeting the underlying terms and conditions of the grants was based on, among other things, the various notices issued by HHS on September 19, 2020, October 22, 2020, and January 15, 2021 and the Company’s results of operations during the three and six months ended June 30, 2023 and the years ended December 31, 2022, 2021 and 2020. The Company believes that it was appropriate to recognize a net of $13.0 million of the HHS Provider Relief Funds as income in various periods, as discussed in the paragraph above. Accordingly, the $13.0 million is not recognized as a liability at June 30, 2023. 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.

 

The Company has been served with a qui tam complaint with regards to the use of monies received from HHS Provider Relief Funds, as more fully discussed in Note 12.

 

Note 3 – Earning (Loss) Per Share

 

The earnings (loss) per share accounting guidance is discussed in Note 1. The following table sets forth the computation of the Company’s basic and diluted net earnings (loss) per share available to common stockholders (unaudited) for the three and six months ended June 30, 2023 and 2022:

   2023   2022   2023   2022 
   Three Months Ended June 30,   Six Months Ended June 30, 
   2023   2022   2023   2022 
Numerator                
Net income (loss) from continuing operations  $1,285,930   $(499,841)  $2,091,490   $(2,765,973)
Deemed dividends   -    (194,951,624)   -    (330,876,369)
Net income (loss) available to common stockholders, continuing operations   1,285,930    (195,451,465)   2,091,490    (333,642,342)
Net loss from discontinued operations   (8,097)   (3,945)   (8,097)   (5,379)
Net income (loss) available to common stockholders  $1,277,833   $(195,455,410)  $2,083,393   $(333,647,721)
                     
Denominator                    
Weighted average number of shares of common stock outstanding during the period - basic   29,934,322,257    1,702,149,425    29,845,095,738    858,169,865 
  Warrants   -    -    6,335,103,465    - 
  Preferred stock   452,145,411,111    -    452,234,637,630    - 
Weighted average number of shares of common stock outstanding during the period - diluted   482,079,733,368    1,702,149,425    488,414,836,833    858,169,865 
                     
Net earnings (loss) available to common stockholders per share - basic:                    
Continuing operations  $0.00   $(0.11)  $0.00   $(0.39)
Discontinued operations   (0.00)   (0.00)   (0.00)   (0.00)
Total basic   $0.00   $(0.11)  $0.00   $(0.39)
Net earnings (loss) available to common stockholders per share - diluted:                    
Continuing operations  $0.00   $(0.11)  $0.00   $(0.39)
Discontinued operations   (0.00)   (0.00)   (0.00)   (0.00)
Total diluted  $0.00   $(0.11)  $0.00   $(0.39)

 

14
 

 

Diluted earnings (loss) per share excludes all dilutive potential shares if their effect is anti-dilutive.

 

For the three months ended June 30, 2023 and 2022, the following potential common stock equivalents were excluded from the calculation of diluted earnings (loss) per share as their effect was anti-dilutive:

 

   2023   2022 
   Three Months Ended June 30, 
   2023   2022 
Common stock warrants   511,333,351,089    511,333,351,097 
Convertible preferred stock   -    477,576,633,334 
Convertible debentures   28,777,833,333    28,777,833,333 
Stock options   26    26 
Anti-dilutive shares   540,111,184,448    1,017,687,817,790 

 

For the six months ended June 30, 2023 and 2022, the following potential common stock equivalents were excluded from the calculation of diluted earnings (loss) per share as their effect was anti-dilutive:

 

   2023   2022 
   Six Months Ended June 30, 
   2023   2022 
Common stock warrants   504,998,247,624    511,333,351,097 
Convertible preferred stock   -    477,576,633,334 
Convertible debentures   28,777,833,333    28,777,833,333 
Stock options   26    26 
Anti-dilutive shares   533,776,080,983    1,017,687,817,790 

 

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 and 10). These provisions have resulted in significant dilution of the Company’s common stock.

 

As a result of the Voting Agreement and Irrevocable Proxy (the “Voting Agreement”) discussed in Note 10 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 outstanding rights to acquire potentially dilutive common shares.

 

As a result of these down round provisions, the potential common stock and common stock equivalents totaled 1.0 trillion at August 8, 2023. See Note 10 for a discussion of the number of shares of the Company’s authorized common and preferred stock.

 

15
 

 

Note 4 – Accounts Receivable

 

Accounts receivable at June 30, 2023 (unaudited) and December 31, 2022 consisted of the following:

 

   June 30,   December 31, 
   2023   2022 
         
Accounts receivable  $12,268,792   $13,046,646 
Less:          
Allowance for contractual obligations   (8,190,137)   (8,529,904)
Allowance for doubtful accounts   (1,197,505)   (1,405,773)
Accounts receivable, net  $2,881,150   $3,110,969 


 

Note 5 – Accrued Expenses

 

Accrued expenses at June 30, 2023 (unaudited) and December 31, 2022 consisted of the following:

   June 30,   December 31, 
   2023   2022 
Accrued payroll and related liabilities  $8,327,011   $8,533,710 
HHS Provider Relief Funds   552,099    552,099 
Accrued interest   6,308,052    5,736,096 
Accrued legal expenses and settlements   498,000    534,550 
Medicare cost report settlement reserves   990,062    2,101,837 
Other accrued expenses   2,644,351    2,105,516 
Accrued expenses  $19,319,575   $19,563,808 

 

Accrued payroll and related liabilities included approximately $7.3 million and $7.0 million, respectively, for accrued past due payroll taxes and associated penalties and interest as of June 30, 2023 and December 31, 2022, respectively.

 

As of December 31, 2022, the Company had Medicare cost reports settlement reserves of $2.1 million. During the six months ended June 30, 2023, the Company reduced its reserve amount by $1.1 million due to payments (recoupments) and various final and estimated cost report settlements leaving Medicare cost report settlement reserves of $1.0 million at June 30, 2023.

 

Note 6 – Debt

 

At June 30, 2023 (unaudited) and December 31, 2022, debt consisted of the following:

 

  

June 30,

2023

  

December 31,

2022

 
         
Notes payable- third parties  $1,318,315   $2,917,390 
Loan payable – related party   2,253,000    2,995,000 
Debentures   8,222,240    8,622,240 
Total debt   11,793,555    14,534,630 
Less current portion of debt   (11,793,555)   (14,534,630)
Total debt, net of current portion  $-   $- 

 

16
 

 

At June 30, 2023 (unaudited) and December 31, 2022, notes payable with third parties consisted of the following:

 

Notes Payable – Third Parties

  

June 30,

2023

  

December 31,

2022

 
         
         
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. Issued net of $0.4 million of debt discount and financing fees.   -    1,137,380 
           
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.   1,026,758    1,488,453 
           
Note payable   1,318,315    2,917,390 
Less current portion   (1,318,315)   (2,917,390)
Notes payable - third parties, net of current portion  $-   $- 

 

On December 7, 2016, the holders of the Tegal Notes filed suit against the Company seeking payment for the amounts due under the notes and accrued interest. On April 23, 2018, the holders of the Tegal Notes received a judgment against the Company in the amount of $384,384 plus post-judgment interest. On June 1, 2023, the Company and the holders of the Tegal Notes agreed to settle all amounts owed pursuant to the judgment for a total of $462,500 comprised of an initial payment of $200,000 followed by six monthly payments of $43,750. The Company has made all required payments to date, including the initial payment of $200,000, which was applied to accrued interest.

 

On September 27, 2019, the Company issued a promissory note payable to Anthony O’Killough in the principal amount of $1.9 million with payments due in November and December 2019. These payments were not made. In February 2020, Mr. O’Killough sued the Company and Christopher Diamantis, as guarantor and in May 2020, the Company, Mr. Diamantis, as guarantor, and Mr. O’Killough entered into a Stipulation providing for 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. On various dates during the remainder of 2022, Mr. Diamantis made additional payments to Mr. O’Killough totaling $300,000 and the Company gave Mr. Diamantis $350,000 for further payment to Mr. O’Killough. The Company is obligated to repay Mr. Diamantis for the payments, plus interest, that he made to Mr. O’Killough. As a result of these payments, the past due balance owed to Mr. O’Killough was $1.1 million on December 31, 2022. During the six months ended June 30, 2023, the parties entered into a final settlement wherein the Company and Mr. Diamantis settled the obligation in full for $580,000. As a result of the settlement, the Company recorded a $0.6 million gain on legal settlement during the six months ended June 30, 2023.

 

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 were due no later than August 30, 2022. The Company paid $0.2 million to the note holders upon issuance of the notes. On May 12, 2023, the Company and Western Healthcare, LLC agreed to reduce the aggregate principal amount of the notes by $400,000 in exchange for a cash payment of $200,000. As a result of the reduction of the principal balance in excess of the amount paid, during the three and six months ended June 30, 2023, the Company recorded a gain on forgiveness of debt of $0.2 million. The Company has not made all of the monthly installments due under the notes and the notes are past due.

 

17
 

 

Loan Payable – Related Party

 

At June 30, 2023 (unaudited) and December 31, 2022, loan payable - related party consisted of the following:

 

  

June 30,

2023

  

December 31,

2022

 
         
Loan payable to Christopher Diamantis  $2,253,000   $2,995,000 
Less current portion of loan payable, related party   (2,253,000)   (2,995,000)
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 six months ended June 30, 2023 and 2022, Mr. Diamantis loaned the Company $580,000 and $750,000, respectively, which the Company used to pay amounts owed under the note payable to Mr. O’Killough. These payments and the note payable to Mr. O’Killough are more fully discussed above under the heading Notes Payable –Third Parties. During the six months ended June 30, 2023, the Company made payments on the principal amount of the loans from Mr. Diamantis of $1.3 million. No principal payments were made on loans from Mr. Diamantis during the six months ended June 30, 2022.

 

During the three months ended June 30, 2023 and 2022, the Company did not incur interest expense on the loans from Mr. Diamantis. During the six months ended June 30, 2023 and 2022, the Company incurred interest expense on the loans from Mr. Diamantis of $58,000 and $0.1 million, respectively.

 

No accrued interest was owed to Mr. Diamantis at June 30, 2023 and December 31, 2022. Interest accrues on loans from Mr. Diamantis at a rate of 10% of the amount loaned.

 

Debentures

 

The carrying amount of all outstanding debentures with institutional investors as of June 30, 2023 (unaudited) and December 31, 2022 was as follows:

 

  

June 30,

2023

  

December 31,

2022

 
         
March 2017 Debenture  $2,580,240   $2,580,240 
2018 Debentures   5,642,000    5,642,000 
October 2022 Debentures   -    400,000 
Debentures, Gross   8,222,240    8,622,240 
Less current portion   (8,222,240)   (8,622,240)
Debentures, net of current portion  $-   $- 

 

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 June 30, 2023 and December 31, 2022, including a 30% late-payment penalty of $0.6 million. The March 2017 Debenture is past due by its original terms. The March 2017 Debenture bears default interest at the rate of 18% per annum and is secured by a first priority lien on all of the Company’s assets. The Company incurred default interest expense on this past due debenture of $0.1 million and $0.1 million, respectively, during the three months ended June 30, 2023 and 2022 and $0.2 million and $0.2 million, respectively, during the six months ended June 30, 2023 and 2022. As of June 30, 2023, accrued default interest on the March 2017 Debenture totaled $2.0 million.

 

On June 30, 2023, the March 2017 Debenture is convertible into shares of the Company’s common stock, at a conversion price, which has been adjusted pursuant to its terms, of $0.00009 per share or 28.7 billion shares of the Company’s 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 (the “March Warrants”), which are exercisable into shares of the Company’s common stock until March 21, 2024. During the three and six months ended June 30, 2022, the Company recorded $194.8 million and $330.5 million of deemed dividends, respectively, as a result of the down round provisions of March Warrants. No deemed dividends were recorded in the three and six months ended June 30, 2023 as there was no change in the exercise prices of the March Warrants during the periods. Deemed dividends and outstanding warrants are more fully discussed in Notes 1, 9 and 10.

 

18
 

 

2018 Debentures

 

During 2018, the Company closed various offerings of debentures (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 June 30, 2023 and is subject to a floor of $0.052 per share. At June 30, 2023 and December 31, 2022, the outstanding principal balance of the 2018 Debentures, including 30% late-payment penalties of $1.3 million, was $5.6 million and the debentures were convertible into 108.5 million shares of the Company’s common stock. 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. The Company incurred default interest expense on these past due debentures of $0.3 million and $0.3 million, respectively, during the three months ended June 30, 2023 and 2022 and $0.5 million and $0.5 million, respectively, during the six months ended June 30, 2023 and 2022. As of June 30, 2023, accrued default interest on the 2018 Debentures totaled $3.8 million.

 

See Notes 3 and 10 for a discussion of the dilutive effect of the outstanding convertible debentures and warrants as of June 30, 2023.

 

October 2022 Debentures

 

On October 12, 2022, the Company issued non-convertible, non-interest bearing debentures to institutional investors in the amount of $550,000, including $50,000 of original issue discounts, for net proceeds of $500,000. These debentures were due by their initial terms on February 12, 2023 and were secured by a portion of the Company’s investment in InnovaQor Series B-1 Preferred Stock. On December 15, 2022, the Company and the institutional investors agreed to revise the repayment terms of these debentures as follows: (i) payment of $150,000 on December 15, 2022; and (ii) monthly payments of $100,000 due by the 12th day of January, February, March and April 2023. The debentures were fully repaid in April 2023.

 

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 six months ended June 30, 2023 and 2022:

 

Alcimede Limited

 

Pursuant to a consulting agreement, Alcimede Limited billed $0.1 million and $0.1 million for services for the three months ended June 30, 2023 and 2022, respectively, and $0.2 million and $0.2 million for the six months ended June 30, 2023 and 2022, respectively. Seamus Lagan, the Company’s President and Chief Executive Officer, is the Managing Director of Alcimede Limited.

 

InnovaQor, Inc.

 

In addition to the investment in InnovaQor’s Series B-1 Preferred Stock (see Notes 1 and 9), at June 30, 2023 and December 31, 2022, the Company had a note receivable / related party receivable resulting from working capital advances to InnovaQor, Inc. (“InnovaQor”) of approximately $2.3 million and $1.5 million, respectively. From January 1, 2023 to June 30, 2023, the Company advanced $0.9 million to InnovaQor to finance its working capital requirements. The balance at June 30, 2023 and December 31, 2022 includes amounts due under a note receivable as discussed below.

 

As of July 1, 2022, the Company had an outstanding related party receivable from InnovaQor of $803,416. InnovaQor signed a promissory note, dated July 1, 2022, in favor of the Company that provided that InnovaQor repay the Company $883,757 on December 31, 2022 (inclusive of 10% original issue discount). Effective December 31, 2022, the Company and InnovaQor agreed to restructure the promissory note receivable in favor of the Company in the amount of $883,757 and additional monies owed in the amount of $441,018 for a new promissory note receivable with a principal amount of $1,457,253 (inclusive of a 10% original issue discount, or $132,478) and an original maturity date of June 30, 2023 except that InnovaQor will pay 25% of any capital it receives from new capital secured prior to the maturity date. The note receivable, in the event of default, bears interest at 18% per annum. During the year ended December 31, 2022, the Company recognized original issue discounts totaling $0.2 million as interest income. On August 9, 2023, certain modifications were made to the note receivable, as more fully discussed in Note 15.

 

During the three months ended June 30, 2023 and 2022, the Company contracted with InnovaQor to provide it with ongoing health information technology-related services totaling approximately $0.1 million and $50,000, respectively, and during the six months ended June 30, 2023 and 2022, the Company contracted with InnovaQor to provide such services totaling approximately $0.2 million and $0.1 million, respectively. In addition, InnovaQor currently subleases office space from the Company at a cost of approximately $10,200 per month for rent and utilities.

 

19
 

 

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 operating 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 June 30, 2023 (unaudited) and December 31, 2022:

 

   Balance Sheet Classification 

June 30,

2023

  

December 31,

2022

 
            
Assets:             
Operating leases  Right-of-use operating lease assets  $440,310   $574,256 
Finance lease  Property and equipment, net   -    - 
              
Total lease assets     $440,310   $574,256 
              
Liabilities:             
Current:             
Operating leases  Right-of-use operating lease obligations  $168,761   $215,063 
Finance lease  Finance lease obligation   220,461    220,461 
              
Long-term  Right-of-use operating lease obligations   271,549    359,193 
              
Total lease liabilities     $660,771   $794,717 
              
Weighted-average remaining term:             
Operating leases      2.33 years    2.59 years 
Finance lease (1)      N/a    N/a 
Weighted-average discount rate:             
Operating leases      13.0%   13.0%
Finance lease      4.9%   4.9%

 

20
 

 

The following table presents certain information related to lease expense for finance and operating leases for the three and six months ended June 30, 2023 and 2022 (unaudited):

 

   Three Months Ended June 30, 2023   Three Months Ended June 30, 2022   Six Months Ended June 30, 2023   Six Months Ended June 30, 2022 
Finance lease expense:                    
Depreciation/amortization of leased assets  $-   $-   $-   $- 
Interest on lease liabilities   -    -    -    - 
Operating leases:                    
Short-term lease expense (2)   82,347    97,681    174,915    165,039 
Total lease expense  $82,347   $97,681   $174,915   $165,039 

 

Other Information

 

The following table presents supplemental cash flow information for the six months ended June 30, 2023 and 2022 (unaudited):

 

  

Six Months
Ended

June 30, 2023

  

Six Months
Ended

June 30, 2022

 
Cash paid for amounts included in the measurement of lease liabilities:          
Operating cash flows for operating leases  $175,460   $162,539 
Operating cash flows for finance lease  $-   $- 
Financing cash flows for finance lease payments  $-   $- 

 

(1) As of June 30, 2023 and December 31, 2022, 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.

 

Aggregate future minimum lease payments under right-of-use operating and finance leases are as follows:

 

   Right-of-Use Operating Leases   Finance Lease 
Twelve months ending June 30:          
2024  $216,239   $224,252 
2025   222,712    - 
2026   74,598    - 
2027   -    - 
2028   -    - 
Thereafter   -    - 
Total   513,549    224,252 
           
Less interest   (73,239)   (3,791)
Present value of minimum lease payments   440,310    220,461 
           
Less current portion of lease obligations   (168,761)   (220,461)
Lease obligations, net of current portion  $271,549   $- 

 

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 June 30, 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.

 

21
 

 

The following table sets forth the financial assets and liabilities carried at fair value measured on a recurring basis as of June 30, 2023 (unaudited) and December 31, 2022:

 

   Level 1   Level 2   Level 3   Total 
                 
As of June 30, 2023:                    
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, 2022:                    
Asset - InnovaQor Series B-1 Preferred Stock  $-   $-   $9,016,072   $9,016,072 
Liability - Embedded conversion option of debenture   -    -    455,336    455,336 

 

InnovaQor Series B-1 Preferred Stock

 

During 2021, the Company sold several subsidiaries to InnovaQor. As consideration for the sale, the Company received 14,950 shares of InnovaQor’s Series B-1 Preferred Stock of which 100 shares were used in 2021 to settle an outstanding liability leaving a balance of 14,850 shares at June 30, 2023 and December 31, 2022. The fair value of the Company’s InnovaQor Series B-1 Preferred Stock investment was 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.

 

In reviewing the fair value of the InnovaQor Series B-1 Preferred Stock, the Company believes that the value recorded at June 30, 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 June 30, 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 and six months ended June 30, 2023 and 2022 and the year ended December 31, 2022 as there was no change in the conversion price terms during the periods.

 

Deemed Dividends

 

During the three and six months ended June 30, 2023, there were no triggers of down round provisions of outstanding warrants and, therefore, no associated deemed dividends were recorded in the periods. During the three and six months ended June 30, 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 June 30, 2022: risk free rates ranging from 2.37% to 2.73%, volatility ranging from 717% to 792% and terms ranging from 1.83 to 2.39 years. The following assumptions were utilized in the Black Scholes valuation models for the six months ended June 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. The incremental value of modifications to warrants as a result of the down round provisions of $194.7 million and $330.5 million were recorded as deemed dividends during the three and six months ended June 30, 2022, respectively.

 

In addition, deemed dividends of $0.2 million and $0.3 million were recorded in the three and six months ended June 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 are also discussed in Notes 1 and 3.

 

22
 

 

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 June 30, 2023, 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”), 2,864.31 shares of its Series N Convertible Redeemable Preferred Stock (the “Series N Preferred Stock”), 8,644.59 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 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. Mr. Lagan is the sole manager of Alcimede LLC. 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 June 30, 2023, the Series L Preferred Stock was convertible into approximately 2.8 billion shares of the Company’s common stock at a conversion price of $0.00009 per share.

 

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 June 30, 2023 and December 31, 2022.

 

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 the Voting Agreement with 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.

 

23
 

 

During the year ended December 31, 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 warrants have a three-year term and, as of June 30, 2023, 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 June 30, 2023, 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 six months ended June 30, 2023 and 2022, the holders converted 36 shares and 1,833.71 shares, respectively, of their Series N Preferred Stock with a stated value of $36,000 and $1.8 million, respectively, into 400.0 million and 2.6 billion shares, respectively, of the Company’s common stock. On June 30, 2023, 2,864.31 shares of Series N Preferred Stock remained outstanding and were convertible into 31.8 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.

 

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. 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.

 

24
 

 

During the six months ended June 30, 2023, the holders converted 40.5 shares of their Series O Preferred Stock with a stated value of $40,500 into 450.0 million shares of the Company’s common stock. During the six months ended June 30, 2022, the holders converted 179.46 shares of their Series O Preferred Stock with a stated value of $0.2 million into 1.6 billion shares of the Company’s common stock. On June 30, 2023, 8,644.59 shares of Series O Preferred Stock remained outstanding and were convertible into 96.1 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 three and six months ended June 30, 2022, the Company recorded $0.1 million and $0.3 million of deemed dividends, respectively, as a result of the issuances of shares of its Series P Preferred Stock during the periods. 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 June 30, 2023, 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 29.9 billion and 29.1 billion shares of its common stock issued and outstanding at June 30, 2023 and December 31, 2022, respectively. During the six months ended June 30, 2023, the Company issued 400 million shares of its common stock upon the conversion of 36 shares of its Series N Preferred Stock and 450 million shares of its common stock upon conversion of 40.5 shares of its Series O Preferred Stock. During the six months ended June 30, 2022, the Company issued 2.6 billion shares of its common stock upon the conversions of 1,833.71 shares of its Series N Preferred Stock and 1.6 billion shares of its common stock upon the conversions of 179.46 shares of its Series O Preferred Stock.

 

25
 

 

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 Split, which is more fully discussed in Note 1.

 

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 outstanding rights to acquire potentially dilutive common shares.

 

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 June 30, 2023 and December 31, 2022, the Company had 26 stock options outstanding and exercisable with a weighted average exercise price of $2.9 million per share. At June 30, 2023, the weighted average remaining contractual life was 2.87 years for options outstanding and exercisable. The intrinsic value of options exercisable at June 30, 2023 and December 31, 2022 was $0. As of June 30, 2023 and 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 Company, as part of financing transactions, has issued warrants to purchase shares of the Company’s common stock exercisable into a total of 511.3 billion shares at June 30, 2023.

 

The following summarizes the information related to warrant activity during the six months ended June 30, 2023:

 

  

Number of

Shares of

Common Stock

Issuable for

Warrants

  

Weighted

average exercise price

 
Balance at December 31, 2022   511,333,351,090   $0.00009 
Issuance of warrants   -    - 
Expiration of warrants   (1)   (794,998.13)
Balance at June 30, 2023   511,333,351,089   $0.00009 

 

26
 

 

Included in the warrants outstanding at June 30, 2023 were the March 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. On June 30, 2023, the March 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 June 30, 2023, 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 June 30, 2023, the Series B Warrants were exercisable for 127.6 billion shares of the Company’s common stock. They were exercisable upon issuance in March 2017, and had an initial term of exercise of eighteen months, which was extended until March 21, 2022. On June 30, 2023, 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. On June 30, 2023, 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 as 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 down round provisions of the outstanding warrants, 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 and 3 for a discussion of the dilutive effect on the Company’s common stock as a result of the outstanding warrants.

 

Deemed Dividends

 

During the three and six months ended June 30, 2022, reductions in the exercise prices of the warrants gave 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