NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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1.
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DESCRIPTION
OF THE COMPANY’S BUSINESS AND BASIS OF PRESENTATION
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The
consolidated financial statements include the accounts of Advanzeon Solutions, Inc and its wholly owned subsidiary, and its respective
subsidiaries (collectively referred to herein as, the “Company” ,“Advanzeon” ,“we”, “us”
or “our”).
In
the opinion of management, the accompanying unaudited financial statements contain all adjustments necessary to present fairly
the Company's financial position as of December 31, 2019, the changes therein for the three and six-month periods then ended and
the results of operations for the three and six-month periods ended June 30, 2020 and 2019.
The
financial statements included in the Form 10-Q are presented in accordance with the requirements of the Form and do not include
all of the disclosures required by accounting principles general accepted in the United States of America. For additional information,
reference is made to the Company's annual report on Form 10-K for the fiscal year ended December 31, 2019, filed April 9, 2020.
The results of operations for the three and six-month periods ended June 30, 2020 and 2019 are not necessarily indicative of operating
results for the full year.
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2.
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SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
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Established
in 1969, Advanzeon Solutions, Inc., (formerly Comprehensive Care Corp.) (“Advanzeon”, “we”, “Parent”,
or the “Company”), through its wholly-owned subsidiary Pharmacy Value Management Solutions, Inc., and its wholly-owned
subsidiaries during 2015, and partly in 2016, provided managed care services by acting as the administrator for certain administrative
service agreements in the behavioral health and substance abuse fields. We primarily offered these services to commercial, Medicare,
Medicaid, Children’s Health Insurance Program (“CHIP”) health plans, as well as self-insured companies. Our
managed care operations consisted solely of servicing administrative service agreements. Starting in July of 2015, we implemented
our comprehensive sleep apnea program, called “SleepMaster Solutions” ™. SleepMaster Solutions (“SMS”)
utilizes an administrative system for the convenient identification/testing and therapy of Obstructive Sleep Apnea (“OSA”).
We partnered with a national health care provider by initiating a sleep apnea wellness program whereby we screened, tested and
when needed, offered treatment programs for treating this disorder. We also contracted with a union to treat its driver members.
Beginning in 2017, our only business was our SMS sleep apnea program.
The
Company has elected to not adopt the option available under United States generally accepted accounting principles (“GAAP”)
to measure any eligible financial instruments or other items at fair market value at this time. Accordingly, the Company measures
all of its assets and liabilities on the historical cost basis of accounting, except as otherwise required by GAAP.
Inter-company
accounts and transactions have been eliminated in consolidation. Certain minor reclassifications of prior period amounts have
been made to conform to the current period presentation.
Use
of Estimates - The preparation of the consolidated financial statements in conformity with GAAP requires management to make
estimates that affect the reported amounts. Actual results could differ from these estimates. Estimates involved in the determination
of an allowance for doubtful accounts receivable are considered by management as particularly susceptible to material change in
the next year. Other significant estimates relate to stock-based compensation, warrants and beneficial conversion features.
Accounts
Receivable - Accounts receivable is carried at its estimated collectible value. Since customer credit is generally extended
on a short-term basis, accounts receivable does not bear interest and are uncollateralized. We manage credit risk and determine
necessary allowances by evaluating customers’ credit worthiness before extending credit and periodically for collectability,
based primarily on customers’ past credit history and current financial conditions and general economic conditions, results
of prior collection efforts, the relative strength of our relationship therewith and, in the event of a dispute, its legal position
and the estimated cost of proposed collection proceedings. Management has not established a policy for when to charge off uncollectible
accounts receivable or to use external collection agencies and makes such decisions on a case-by-case basis. The maximum losses
that the Company would incur if a customer failed to pay would be limited to the carrying value of the receivable.
Revenue
Recognition - In accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC)
Topic 606, "Revenue from Contracts with Customers", the Company recognizes revenue when obligations under the terms
of a contract with the customer are satisfied. Generally, this occurs upon shipment of the CPAP to their customer or when the
test is performed.
Property
and Equipment - Property and equipment (Note 4) is stated at cost less accumulated depreciation. Depreciation and amortization
are computed using the straight-line method over the estimated useful lives ranging from 2 to 12 years.
Leasehold
Improvement - Leasehold improvement (Note 5) is stated at cost less accumulated amortization. Depreciation and amortization
are computed using the straight-line method over the estimated useful lives ranging from 2 to 12 years. Leasehold improvements
are amortized over the shorter of the lease term or the asset’s useful life.
Fair
Value Measurements - The carrying amounts of cash, accounts receivable and accounts payable approximate their estimated fair
value due to the short-term nature of these instruments. Since our other financial liabilities are not traded in an open market,
we generally use a present value technique, which is a level 3 input, as defined in GAAP, to measure the estimated fair value
of these financial instruments, except for valuing stock options and warrants (see below). The rate used for discounting expected
cash flows is a risk-free rate adjusted for systematic and unsystematic risk.
The
carrying amounts of long-term debt and estimated fair values of the attached warrants at June 30, 2020 and December 31, 2019 are
as follows:
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June
30, 2020
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December
31, 2019
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Estimated
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Estimated
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Fair
Value of
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Fair
Value of
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Carrying
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Attached
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Carrying
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Attached
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Amount
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Warrants
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Amount
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Warrants
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Convertible promissory notes
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$
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5,956,533
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$
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—
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$
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7,564,173
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$
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—
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Short term notes payable
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3,215,803
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—
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4,788,016
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—
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Loan payable related
party
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102,229
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—
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342,670
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—
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PPP Loan
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1,243,840
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—
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—
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—
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$
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10,518,405
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$
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—
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$
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12,694,859
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$
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—
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During
the six-month period ended June 30, 2020, there have been 10 additional convertible notes issued totaling $547,360. During the
six-month period ended June 30, 2020, 53 convertible notes totaling $3,727,213 plus accrued interest was converted to stock.
Cost
of Revenues - Costs of services consist of supplies and operating expenses. Supplies are recognized in the period in which
a patient receives the supplies.
Right
of Use Assets and Lease Liabilities - During the quarter ended March 31, 2019, the Company implemented Accounting Standards
Update 2016-02, Leases. Under the new guidance, a lessee must record a liability for lease payments (referred to as the lease
liability) and an asset for the right to use the leased asset during the lease term (referred to at the right of use asset) for
all leases, regardless of whether they are designated as finance or operating leases. This election requires the lessee to recognize
lease expense on a straight-line basis over the lease term. The right of use assets and corresponding right of use liabilities
have been recorded using the present value of the leases. See Notes 10 and 11 within the financial statement for additional disclosure
on leases.
Income
Taxes - We are subject to the income tax jurisdictions of the U.S. and multiple state tax jurisdictions. However, our provisions
for income taxes for 2020 and 2019 include only state income taxes.
Management
has evaluated our tax positions taken or to be taken on income tax returns that remain subject to examination (i.e., tax years
2017 and thereafter federally), and has concluded that there have been no uncertain tax positions (as defined in GAAP) taken that
require recognition or disclosure in the consolidated financial statements. In the event of any income tax-related interest or
penalties are incurred, they would be included in general and administrative expense.
Concentration
of Credit Risk - The Company maintains its cash and cash equivalents with a financial institution which management believes
to be of high credit quality. Their accounts are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 in
coverage. The Company had an uninsured cash balance of $595,340 as of June 30, 2020 and no uninsured cash balances as of December
31, 2019.
Stock
Options and Warrants - We grant stock options and warrants to our employees, non-employee directors, note holders and certain
consultants allowing them to purchase our common stock pursuant to approved terms. The estimated value of the warrants issued
with debt instruments is recorded as a discount on notes payable and amortized as interest expense over the term of the notes
using the effective interest method.
Cash
and Restricted Cash - On April 23, 2020, the Company’s wholly owned subsidiary, Pharmacy Value Management Solutions,
Inc. (‘PVMS”) received a loan in the principal amount of $1,243,840 from Mechanics Bank (the “Bank”) pursuant
to the Paycheck Protection Program “PPP”. On May 22, 2020, the Bank notified PVMS that the loan was in default as
a result of false statements made in the loan application. PVMS disputes the Bank’s claim and believes that it made no false
statements in it's PPP loan application. The statements relate to the number of employees and the monthly payroll amounts. As
a result, PVMS’ account with Mechanics Bank has been frozen with a balance of $845,340. Both PVMS and the Bank are seeking
guidance from the Small Business Administration as to how to resolve this dispute. Until resolved, it is likely that this account
will remain frozen.
Cash
and restricted cash consists of the following at June 30, 2020 and December 31, 2019:
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June 30, 2020
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December 31, 2019
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Cash
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$
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145,915
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$
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69,327
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Restricted Cash
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845,340
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—
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Total cash and restricted cash shown in the
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consolidated statement of cash
flows
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$
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991,255
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$
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69,327
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Other
current assets consists of the following at June 30, 2020 and December 31, 2019:
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June 30, 2020
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December 31, 2019
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Loans to others
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$
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34,406
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$
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42,676
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Security and lease deposits
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3,500
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3,500
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Capitalized portion of lease
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1,237
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1,808
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Prepaid expenses
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288,487
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452,953
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Miscellaneous receivable
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329,395
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325,660
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Other current asset
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$
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657,025
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$
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826,597
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4.
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PROPERTY
AND EQUIPMENT
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Property
and equipment, net, consists of the following at June 30, 2020 and December 31, 2019:
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June 30, 2020
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December 31, 2019
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Property and equipment
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$
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6,616
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$
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1,549
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Less accumulated depreciation
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(933
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)
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(310
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)
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Property and equipment - net
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$
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5,683
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$
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1,239
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Depreciation
expense for the six-month periods ended June 30, 2020 and 2019 is $623 and $141, respectively. A laptop was acquired in January
of 2020.
Leasehold
improvement, net, consists of the following at June 30, 2020 and December 31, 2019:
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June 30, 2020
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December 31, 2019
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Leasehold improvements
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$
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2,992
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$
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2,992
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Less accumulated amortization
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(2,992
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)
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(2,992
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)
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Leasehold improvements - net
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$
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—
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$
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—
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Amortization
expense for the six-month periods ended June 30, 2020 and 2019 is $0 and $299, respectively.
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6.
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RELATED
PARTY LOANS PAYABLE
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The
Company has received financing from Management of the Company as well as from members of our Board of Directors. These individuals
are deemed to be related parties to the Company and their indebtedness must be disclosed separately.
As
of June 30, 2020 and December 31, 2019, there are the following related party notes payable:
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June 30, 2020
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December 31, 2019
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Related party loans payable
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$
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102,229
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$
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342,670
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As
of June 30, 2020 and December 31, 2019, the balance was as follows:
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June 30, 2020
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December 31, 2019
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Notes payable
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$
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10,416,176
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$
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12,352,189
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During
the six-month period ended June 30, 2020, there have been 10 additional convertible-promissory notes totaling $547,360. There
have been 53 convertible-promissory notes totaling $3,727,213 converted to 39,652,283 shares of common stock.
On
April 23, 2020, the Company’s wholly owned subsidiary, Pharmacy Value Management Solutions, Inc. (‘PVMS”) received
a loan in the principal amount of $1,243,840 from Mechanics Bank (the “Bank”) pursuant to the PPP. On May 22, 2020,
the Bank notified PVMS that the loan was in default as a result of false statements made in the loan application. PVMS disputes
the Bank’s claim and believes that it made no false statements in its PPP loan application. The statements relate to the
number of employees and the monthly payroll amounts. As a result, PVMS’ account with Mechanics Bank has been frozen with
a balance of $845,340. Both PVMS and the Bank are seeking guidance from the Small Business Administration as to how to resolve
this dispute. Until resolved, it is likely that this account will remain frozen.
Break-out
of debt between the parent company and our subsidiary PVMS is as follows:
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June 30, 2020
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December 31, 2019
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|
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Advanzeon parent
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$
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3,381,163
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$
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5,010,016
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PVMS
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7,035,013
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7,342,173
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|
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$
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10,416,176
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|
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$
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12,352,189
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At
Advanzeon, the total notes issued year-to-date and their dollar values were as follows:
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June 30, 2020
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December 31, 2019
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|
|
|
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Number of notes issued
|
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|
2
|
|
|
|
—
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|
|
|
|
|
|
|
|
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Dollar value
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$
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165,360
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|
|
$
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—
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All
debts issued during the six-month period ended June 30, 2020 are short-term in nature and have a stated interest rate of 10%.
At
PVMS, the total of notes issued year-to-date and their dollar values were as follows:
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June 30, 2020
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December 31, 2019
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|
|
|
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Number of notes issued
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8
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|
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51
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|
|
|
|
|
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Dollar value
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$
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382,000
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|
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$
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2,289,250
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All
debt is short-term in nature, one-year maturity date. All debt issued has a stated interest rate of 12%.
Contingent
liability consisted of 3 items:
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1.
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A
lawsuit against the Company for $450,000 from the son of a deceased promissory note holder.
This matter has been dismissed twice by the judge but is ongoing due to appeals. The
case has been dormant over a year. The Court has not dismissed it for lack of prosecution
yet. The Court does this on its own motion and because of COVID, it is not doing this
at this time.
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2.
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Interest
payable in the amount of $171,247 to the same person listed in (1). This interest is
related to the lawsuit referenced in (1).
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3.
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Advanzeon
won a decision on a court case against Universal Healthcare. The attorney's fees relating
to this matter total $21,412. This fee will be paid out of the proceeds of the case when
collected.
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As
of June 30, 2020 and December 31, 2019, the balance of this indebtedness is as follows:
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June 30, 2020
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December 31, 2019
|
|
|
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Disputed note payable
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$
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450,000
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|
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$
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450,000
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Disputed interest payable
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|
|
171,247
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|
|
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171,247
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Pending attorney fees
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21,412
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|
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21,412
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|
|
|
|
|
|
|
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Total contingent liability
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$
|
642,659
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|
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$
|
642,659
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9.
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OTHER
ACCRUED LIABILITIES
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As
of June 30, 2020 and December 31, 2019, the balance of other accrued liabilities is as follows:
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June 30, 2020
|
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December 31, 2019
|
|
|
|
|
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Management compensation
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$
|
8,907,258
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|
|
$
|
8,873,802
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Accrued interest non-related party
|
|
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4,760,728
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|
|
|
5,956,368
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|
Board of Director fees
|
|
|
37,500
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|
|
|
1,050,000
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State fees
|
|
|
—
|
|
|
|
2,800
|
|
Payroll liabilities
|
|
|
14,047
|
|
|
|
—
|
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Other accrued liabilities
|
|
|
22,659
|
|
|
|
8,817
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|
Total other accrued debt
|
|
$
|
13,742,192
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|
|
$
|
15,891,787
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The
Company entered into two leases, one for office space and one for an automobile lease that are classified as right of use assets
and lease liabilities. The Company pays the lease payments on a residential unit in California that is used as an office/residential
unit for certain of its marketing personnel. The lease is on a month-to month basis. The Company has occupied this unit for the
past approximately 1-1/2 year period and intends to do so for the foreseeable future. The lease for the Company’s office
space expire in June 2022.The lease for the automobile expires in June 2021.As the implicit interest rate is not readily identifiable
in the leases, the Company calculated the present value of the leases using the average commercial real estate interest rate of
5.50% at the commencement of the office leases and the interest of 2.99% for the automobile lease. Applying the commercial rate,
the Company calculated the present value of $339,833 for the office leases and $29,037 for the automobile leasing that are being
amortized over the life of the leases.
As
of June 30, 2020, the right of use assets associated with future operating leases are as follows:
Total present value of right of use assets
|
|
|
|
|
under lease agreements
|
|
$
|
368,870
|
|
|
|
|
|
|
Amortization of right of use assets
|
|
|
(53,419
|
)
|
|
|
|
|
|
Total right of use assets as of June 30, 2020
|
|
$
|
315,451
|
|
Total
amortization expense related to the right of use assets under the lease agreements was $54,660 and $25,579 for the six-month periods
ended June 30, 2020 and 2019, respectively.
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11.
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RIGHT
OF USE LEASE LIABILITIES
|
As
disclosed in Note 10, the Company entered into two leases for office space prior to the quarter ended June 30, 2020 that are classified
as right of use assets and lease liabilities.
As
of June 30, 2020, the lease liabilities associated with future payments due under the leases are as follows:
Total present value of future lease payments
|
|
$
|
368,870
|
|
|
|
|
|
|
Principal payments made as of the six month period ended June
30, 2020
|
|
|
(53,419
|
)
|
|
|
|
|
|
Total right of use lease liabilities as of June 30, 2020
|
|
$
|
315,451
|
|
The
following is a schedule of future minimum lease payments under the right of use lease agreements together with the present value
of the net minimum lease payments as of June 30, 2020:
Total future minimum lease payments
|
|
$
|
336,671
|
|
|
|
|
|
|
Less present value discount
|
|
|
21,220
|
|
|
|
|
|
|
Total right of use lease liabilities as of June 30, 2020
|
|
|
315,451
|
|
|
|
|
|
|
Less current portion due within one year
|
|
|
136,230
|
|
|
|
|
|
|
Long-term right of use liabilities
|
|
$
|
179,221
|
|
Total
maturities of lease liabilities as of June 30, 2020 are as follows:
|
|
Total future
|
|
|
|
|
|
|
minimum lease
|
|
Present value
|
|
Right of use
|
|
|
payments
|
|
discount
|
|
lease liabilities
|
|
2021
|
|
|
$
|
150,103
|
|
|
$
|
13,873
|
|
|
$
|
136,230
|
|
|
2022
|
|
|
|
146,568
|
|
|
|
6,358
|
|
|
|
140,210
|
|
|
2023
|
|
|
|
40,000
|
|
|
|
989
|
|
|
|
39,011
|
|
|
|
|
|
$
|
336,671
|
|
|
$
|
21,220
|
|
|
$
|
315,451
|
|
During
the six-month period ended June 30, 2020, the Company issued 45,089,783 shares of its common stock as follows:
On
April 01, 2020, the Company issued 3,262,500 shares of its common stock to a board of director member who elected to convert director’s
fees and salary totaling $652,500. The stock was issued at $0.20 per share.
On
April 01, 2020, the Company issued 1,087,500 shares of its common stock to a board of director member who elected to convert director’s
fees and salary totaling $217,500. The stock was issued at $0.20 per share.
On
April 01, 2020, the Company issued 1,087,500 shares of its common stock to a board of director member who elected to convert director’s
fees and salary totaling $217,500. The stock was issued at $0.20 per share.
On April
21, 2020, the Company issued 14,584,350 shares of its common stock to existing note holders who elected to convert promissory
notes plus accrued and unpaid interest totaling $2,916,869. The stock was issued at $0.20 per share.
On
April 21, 2020, the Company issued 1,327,252 shares of its common stock to an existing note holder who elected to convert promissory
notes plus accrued and unpaid interest totaling $265,450. The stock was issued at $0.20 per share.
On
April 21, 2020, the Company issued 2,156,515 shares of its common stock to an existing note holder who elected to convert promissory
notes plus accrued and unpaid interest totaling $431,303. The stock was issued at $0.20 per share.
On
May 15, 2020, the Company issued 1,263,745 shares of its common stock to an existing note holder who elected to convert promissory
notes plus accrued and unpaid interest totaling $139,012. The stock was issued at $0.11 per share.
On
May 15, 2020, the Company issued 4,284,565 shares of its common stock to an existing note holder who elected to convert promissory
notes plus accrued and unpaid interest totaling $471,302. The stock was issued at $0.11 per share.
On
May 15, 2020, the Company issued 7,210,168 shares of its common stock to an existing note holder who elected to convert promissory
notes plus accrued and unpaid interest totaling $793,118. The stock was issued at $0.11 per share.
On
May 18, 2020, the Company issued 700,751 shares of its common stock to an existing note holder who elected to convert promissory
notes plus accrued and unpaid interest totaling $77,083. The stock was issued at $0.11 per share.
On
May 21, 2020, the Company issued 502,434 shares of its common stock to an existing note holder who elected to convert promissory
notes plus accrued and unpaid interest totaling $55,268. The stock was issued at $0.11 per share.
On
May 25, 2020, the Company issued 319,627 shares of its common stock to an existing note holder who elected to convert promissory
notes plus accrued and unpaid interest totaling $35,159. The stock was issued at $0.11 per share.
On
May 25, 2020, the Company issued 333,824 shares of its common stock to an existing note holder who elected to convert promissory
notes plus accrued and unpaid interest totaling $36,721. The stock was issued at $0.11 per share.
On
May 26, 2020, the Company issued 781,206 shares of its common stock to an existing note holder who elected to convert promissory
notes plus accrued and unpaid interest totaling $85,933. The stock was issued at $0.11 per share.
On
May 28, 2020, the Company issued 884,555 shares of its common stock to an existing note holder who elected to convert promissory
notes plus accrued and unpaid interest totaling $97,301. The stock was issued at $0.11 per share.
On
May 29, 2020, the Company issued 937,116 shares of its common stock to an existing note holder who elected to convert promissory
notes plus accrued and unpaid interest totaling $103,083. The stock was issued at $0.11 per share.
On
June 1, 2020, the Company issued 1,024,189 shares of its common stock to an existing note holder who elected to convert promissory
notes plus accrued and unpaid interest totaling $112,661. The stocks was issued at $0.11 per share.
On
June 05, 2020, the Company issued 668,797 shares of its common stock to an existing note holder who elected to convert promissory
notes plus accrued and unpaid interest totaling $73,568. The stock was issued at $0.11 per share.
On
June 05, 2020, the Company issued 603,987 shares of its common stock to an existing note holder who elected to convert promissory
notes plus accrued and unpaid interest totaling $66,439. The stock was issued at $0.11 per share.
On
June 12, 2020, the Company issued 1,564,245 shares of its common stock to an existing note holder who elected to convert promissory
notes plus accrued and unpaid interest totaling $172,067. The stock was issued at $0.11 per share.
On
June 18, 2020, the Company issued 504,957 shares of its common stock to an existing note holder who elected to convert promissory
notes plus accrued and unpaid interest totaling $55,545. The stock was issued at $0.11 per share.
During
the six-month period ended June 30, 2019, the Company issued 700,000 shares of its common stock as follows:
On
March 21, 2019, the Company issued 200,000 shares of its common stock to its Securities Exchange Commission counsel, who elected
to take common stock in the Company as partial payment of its legal fees. The total value shares were valued at $0.08 per share
on the total value of $16,000.
Additionally,
on March 29, 2019, the Company issued 500,000 shares of its common stock to an existing shareholder and warrant holder, who elected
to exercise his warrants to purchase 500,000 shares of the Company's common stock for $15,000. The warrants were issued during
May of 2017 for $0.03 per share.