QHSLab, Inc 10-Q for FY2021 Q3
QHSLab, Inc. (USAQ)
About this 10-Q
QHSLab, Inc filed this 10-Q on November 15, 2021, covering the quarter ended September 30, 2021 (FY2021 Q3).
Headline figures
Quarter ended September 30, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $324.48K
- Net loss
- $300.77K
- compared with a net loss of $93.45K a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For
the quarterly period ended
Commission
file number
(Exact Name Of Registrant As Specified In Its Charter)
(State of Incorporation) |
(I.R.S. Employer Identification No.) |
| (Address of Principal Executive Offices) | (ZIP Code) |
Registrant’s
Telephone Number, Including Area Code:
Securities Registered Pursuant to Section 12(g) of The Act:
| Title of Each Class | Trading Symbol(s) | Name of each Exchange on Which Registered | ||
| NA |
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ | Smaller
reporting company |
Emerging
Growth Company
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
On November 15, 2021, the Registrant had shares of common stock outstanding.
TABLE OF CONTENTS
| Item | Description | Page | ||
| PART I - FINANCIAL INFORMATION | ||||
| ITEM 1. | FINANCIAL STATEMENTS. | 3 | ||
| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. | 16 | ||
| ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. | 20 | ||
| ITEM 4. | CONTROLS AND PROCEDURES. | 20 | ||
| PART II - OTHER INFORMATION | ||||
| ITEM 1. | LEGAL PROCEEDINGS. | 21 | ||
| ITEM 1A. | RISK FACTORS. | 21 | ||
| ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. | 21 | ||
| ITEM 3. | DEFAULTS UPON SENIOR SECURITIES. | 21 | ||
| ITEM 4. | MINE SAFETY DISCLOSURES. | 21 | ||
| ITEM 5. | OTHER INFORMATION. | 21 | ||
| ITEM 6. | EXHIBITS. | 21 |
| 2 |
Cautionary Note Regarding Forward-Looking Statements
This report contains forward-looking statements. Certain of the matters discussed herein concerning, among other items, our operations, cash flows, financial position and economic performance including, in particular, future sales, product demand, competition and the effect of economic conditions, include forward-looking statements.
Forward-looking statements are predictive in nature and do not relate strictly to historical or current facts and generally include words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates” and similar expressions. Although we believe that the forward-looking statements contained in this report are based upon reasonable assumptions, these statements and other projections contained herein expressing opinions about future outcomes and non-historical information, are subject to uncertainties and, therefore, there is no assurance that the outcomes expressed in these statements will be achieved.
Investors are cautioned that forward-looking statements are not guarantees of future performance and actual results or developments may differ materially from the expectations expressed in forward-looking statements contained herein. Given these uncertainties, you should not place any reliance on these forward-looking statements which speak only as of the date hereof. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws. You are advised, however, to consult any additional disclosures we make in our reports filed with the Securities and Exchange Commission (“SEC”).
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (unaudited)
| 3 |
USA Equities Corp.
Condensed Consolidated Balance Sheets
| September 30, 2021 | December 31, 2020 | |||||||
| (Unaudited) | ||||||||
| Assets | ||||||||
| Current Assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable | ||||||||
| Inventory | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Non-current assets: | ||||||||
| Capitalized software development costs | ||||||||
| Intangible assets, net | - | |||||||
| Total assets | $ | $ | ||||||
| Liabilities and Stockholders’ Equity (Deficit) | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Loans payable, current portion | - | |||||||
| Other current liabilities | ||||||||
| Convertible note payable, related party | - | |||||||
| Total current liabilities | ||||||||
Non-current liabilities: | ||||||||
| Accrued interest expenses | ||||||||
| Convertible notes payable | ||||||||
| Loans payable, non-current portion | - | |||||||
| Total long-term liabilities | ||||||||
| Total liabilities | ||||||||
| Stockholders’ Equity (Deficit): | ||||||||
| Preferred stock, shares authorized, $ par value; shares issued and outstanding at September 30, 2021 and December 31, 2020 | ||||||||
| Common stock, shares authorized, $ par value; shares issued and outstanding at September 30, 2021 and shares issued and outstanding at December 31, 2020 | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ equity (deficit) | ( | ) | ||||||
| Total liabilities and stockholders’ equity (deficit) | $ | $ | ||||||
See accompanying notes to the unaudited condensed consolidated financial statements.
| 4 |
USA Equities Corp.
Condensed Consolidated Statements of Operations
(Unaudited)
| Three Months | Three Months | Nine Months | Nine Months | |||||||||||||
| Ended | Ended | Ended | Ended | |||||||||||||
| September 30, 2021 | September 30, 2020 | September 30, 2021 | September 30, 2020 | |||||||||||||
| Revenue | $ | $ | $ | $ | ||||||||||||
| Cost of revenue | - | - | ||||||||||||||
| Gross profit | - | - | ||||||||||||||
| Operating Expenses: | ||||||||||||||||
| Research and development | ||||||||||||||||
| Sales and marketing | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Loss on extinguishment of debt | - | - | - | |||||||||||||
| Amortization | - | - | ||||||||||||||
| Total Operating Expenses | ||||||||||||||||
| Net operating loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Interest expense | ||||||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Basic and diluted net loss per share | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted average shares outstanding: (Basic and diluted) | ||||||||||||||||
See accompanying notes to the unaudited condensed consolidated financial statements.
| 5 |
USA Equities Corp.
Condensed Consolidated Statements of Stockholders’ Equity (Deficit)
(Unaudited)
| Common Stock | Preferred Stock | Additional Paid-In | Accumulated | Total Stockholders’ Equity | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | (Deficit) | ||||||||||||||||||||||
| Balance at January 1, 2021 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||
| Shares issued for services | - | - | ||||||||||||||||||||||||||
| Shares issued for services, net of cancellation | ||||||||||||||||||||||||||||
| Shares issued for services, net of cancellation, shares | ||||||||||||||||||||||||||||
| Shares issued for asset purchase | ||||||||||||||||||||||||||||
| Shares issued for asset purchase, shares | ||||||||||||||||||||||||||||
| Share purchase | ||||||||||||||||||||||||||||
| Share purchase, shares | ||||||||||||||||||||||||||||
| Shares issued in funding | ||||||||||||||||||||||||||||
| Shares issued in funding, shares | ||||||||||||||||||||||||||||
| Warrants issued with convertible note payable | ||||||||||||||||||||||||||||
| Unearned compensation – shares issued for services | - | - | - | - | ( | ) | - | ( | ) | |||||||||||||||||||
| Conversion of notes payable | - | - | ||||||||||||||||||||||||||
| Cancellation of shares | ( | ) | ( | ) | - | - | - | |||||||||||||||||||||
| Stock-based compensation expense | - | - | - | - | - | |||||||||||||||||||||||
| Net loss | - | - | - | - | - | ( | ) | ( | ) | |||||||||||||||||||
| Balance at March 31, 2021 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||
| Shares issued for services, net of cancellation | ( | ) | ( | ) | - | ( | ) | - | ( | ) | ||||||||||||||||||
| Unearned compensation – shares issued for services | - | - | - | - | - | |||||||||||||||||||||||
| Conversion of notes payable | - | - | ||||||||||||||||||||||||||
| Stock-based compensation expense | - | - | - | - | - | |||||||||||||||||||||||
| Shares issued for asset purchase | - | - | ||||||||||||||||||||||||||
| Share purchase | - | - | ||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | ( | ) | ( | ) | |||||||||||||||||||
| Balance at June 30, 2021 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Shares issued for services | - | - | ||||||||||||||||||||||||||
| Warrants issued with convertible note payable | - | - | - | - | - | |||||||||||||||||||||||
| Unearned compensation – shares issued for services | - | - | - | - | - | |||||||||||||||||||||||
| Stock-based compensation expense | - | - | - | - | - | |||||||||||||||||||||||
| Shares issued in funding | - | - | ||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | ( | ) | ( | ) | |||||||||||||||||||
| Balance at September 30, 2021 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Balance at January 1, 2020 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||
| Stock-based compensation expense | - | - | - | - | - | |||||||||||||||||||||||
| Net loss | - | - | - | - | - | ( | ) | ( | ) | |||||||||||||||||||
| Balance at March 31, 2020 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||
| Shares issued for services | - | - | ||||||||||||||||||||||||||
| Unearned compensation – shares issued for services | - | - | - | - | ( | ) | - | ( | ) | |||||||||||||||||||
| Stock-based compensation expense | - | - | - | - | - | |||||||||||||||||||||||
| Net loss | - | - | - | - | - | ( | ) | ( | ) | |||||||||||||||||||
| Balance at June 30, 2020 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||
| Shares issued for services | - | - | ||||||||||||||||||||||||||
| Unearned compensation – shares issued for services | - | - | - | - | ( | ) | - | ( | ) | |||||||||||||||||||
| Stock-based compensation expense | - | - | - | - | - | |||||||||||||||||||||||
| Net loss | - | - | - | - | - | ( | ) | ( | ) | |||||||||||||||||||
| Balance at September 30, 2020 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||
See accompanying notes to the unaudited condensed consolidated financial statements.
| 6 |
USA Equities Corp.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| For the Nine Months Ended | For the Nine Months Ended | |||||||
| September 30, 2021 | September 30, 2020 | |||||||
| Operating activities | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Amortization | - | |||||||
| Amortization of debt and warrant issuance costs | - | |||||||
| Stock-based compensation | ||||||||
| Shares issued for services | ||||||||
| Loss on extinguishment of debt | - | |||||||
| Changes in net assets and liabilities: | ||||||||
| Decrease in accounts receivable | - | |||||||
| Increase in inventory | ( | ) | - | |||||
| Increase in accrued interest | ||||||||
| Increase in prepaid expenses and other current assets | ( | ) | ( | ) | ||||
| (Decrease)/increase in accounts payable and accrued expenses | ( | ) | ||||||
| Cash flows from operating activities | ( | ) | ( | ) | ||||
| Investing activities: | ||||||||
| Capitalized software | ( | ) | ( | ) | ||||
| Cash flows from investing activities | ( | ) | ( | ) | ||||
| Financing activities: | ||||||||
| Proceeds from sales of common stock | - | |||||||
| Issuance of convertible notes payable | ||||||||
| Proceeds of loan borrowings | - | |||||||
| Repayments of loan borrowings | ( | ) | - | |||||
| Payment of debt issuance costs | ( | ) | - | |||||
| Proceeds of related-party borrowings | - | |||||||
| Cash flows from financing activities | ||||||||
| Change in cash | ||||||||
| Cash - beginning of year | ||||||||
| Cash - end of period | $ | $ | ||||||
| Supplemental noncash investing and financing activity: | ||||||||
| Debt and accrued interest converted to shares of common stock | $ | $ | ||||||
| Debt and common stock issued for intangible assets (Note 4) | $ | $ | ||||||
| Common stock issued for debt issuance costs | $ | $ | ||||||
| Warrants issued in conjunction with convertible note payable | $ | |||||||
| Conversion of due to related party to long-term debt | $ | $ | ||||||
See accompanying notes to the unaudited condensed consolidated financial statements.
| 7 |
USA Equities Corp.
Notes to the Condensed Consolidated Financial Statements
Note 1. The Company
USA Equities Corp. (the “Company”, “We” or the “Registrant”) was incorporated in Delaware on September 1, 1983. In 2015 the Company changed its name to USA Equities Corp. On September 23, 2021, the Company changed its state of incorporation from Delaware to Nevada as a result of a merger with and into its newly formed wholly-owned subsidiary, USA Equities Corp., a Nevada corporation (“USA Equities Nevada”), the surviving entity pursuant to an Agreement and Plan of Merger. The reincorporation was approved by the stockholders of the Company and USA Equities Nevada is deemed to be the successor to USA Equities Corp, the Delaware corporation.
On December 20, 2019 the Company entered into and consummated a share exchange with the former stockholders of Medical Practice Income, Inc. (“MPI”) pursuant to a share exchange agreement (the “Exchange Agreement”) by which the Company issued shares of common stock, $ par value (the “common stock”) to the former stockholders of MPI in exchange for all of the then issued and outstanding shares of common stock of MPI (the “Share Exchange”). MPI, based in West Palm Beach, Florida, is focused on value-based healthcare, informatics and algorithmic personalized medicine including digital therapeutics, behavior-based remote patient monitoring, chronic care and preventive medicine.
Prior
to the transaction with MPI, the owner of a majority of the outstanding Class A voting shares of MPI owned approximately
Note 2. Going Concern
The accompanying condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern. The Company has incurred losses since inception, has negative operating cash flows and began recognizing revenues in the fourth quarter of fiscal 2020. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The continuation of the Company’s business is dependent upon its ability to achieve profitability and positive cash flows and, pending such achievement, future issuances of equity or other financings to fund ongoing operations. However, access to such funding may not be available on commercially reasonable terms, if at all. These financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
Note 3. Basis of Presentation
The condensed consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”). In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting of only normal recurring accruals, necessary for a fair statement of financial position, results of operations, and cash flows. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the consolidated financial statements and the accompanying notes included in our Annual Report on Form 10- K for the year ended December 31, 2020.
The accounting policies are described in the “Notes to the Consolidated Financial Statements” in the 2020 Annual Report on Form 10-K and updated, as necessary, in this Form 10-Q. The year-end balance sheet data presented for comparative purposes was derived from audited consolidated financial statements but does not include all disclosures required by accounting principles generally accepted in the United States. The results of operations for the three and nine months ended September 30, 2021 and 2020 are not necessarily indicative of the operating results for the full year or for any other subsequent interim period.
Risks Related to COVID-19 Pandemic
The COVID-19 pandemic is affecting the United States and global economies and may affect the Company’s operations and those of third parties on which the Company relies. While the potential economic impact brought by, and the duration of, the COVID-19 pandemic is difficult to assess or predict, the impact of the COVID-19 pandemic could negatively impact the Company’s liquidity, capital resources and operations. The ultimate impact of the COVID-19 pandemic is highly uncertain and the Company does not yet know the full extent of potential impacts on its business, financing or global economy as a whole.
Accounting Policies
: The preparation of condensed consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statement and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from the estimates.
| 8 |
Principles of Consolidation: The condensed consolidated financial statements include the accounts of USA Equities Corp and its wholly owned subsidiaries USAQ Corporation, Inc., and Medical Practice Income, Inc. All significant inter-company balances and transactions have been eliminated.
Cash and Cash Equivalents: For financial statement presentation purposes, the Company considers those short-term, highly liquid investments with original maturities of three months or less to be cash or cash equivalents.
Accounts Receivable: The Company extends unsecured credit to its customers on a regular basis. Management monitors the payments on outstanding balances and will establish a reserve for uncollectible balances as necessary based on experience.
Inventories: Inventories are stated at the lower of cost or estimated net realizable value, on a first-in, first-out, or FIFO, basis. We use actual costs to determine our cost basis for inventories. Inventories consist of only finished goods.
Capitalized Software Development Costs: Software development costs for internal-use software are accounted for in accordance with ASC 350-40, Intangibles, Internal-Use Software. Development costs that are incurred during the application development stage begin to be capitalized when two criteria are met: (i) the preliminary project stage is completed and (ii) it is probable that the software will be completed and used for its intended function. Capitalization ceases once the software is substantially complete and ready for its intended use. Costs incurred during the preliminary project stage of software development and post-implementation operating stages are expensed as incurred. Amortization is calculated on a straight-line basis over the remaining economic life of the software (typically three to five years) and will be included in the operating expense on the Consolidated Statements of Operations once amortization begins.
The estimated useful lives of software are reviewed at least annually and will be tested for impairment whenever events or changes in circumstances occur that could impact the recoverability of the assets.
Capitalized
software development costs for internal-use software totaled $
Intangible Assets: Intangible assets represent the value the Company paid to acquire assets including a trademark, patent and web domain on June 23, 2021. The provisional allocation of the purchase price to each of these assets was determined based on ASC 805-50-30, Business Combination, Related Issues, Initial Measurement. These assets are accounted for in accordance with ASC 350-30, Intangibles, General Intangibles Other Than Goodwill. The cost of the assets is amortized over the remaining useful life of the assets as follows:
Schedule of Indefinite-Lived Intangible Assets
| U.S. Method Patent | |
| Web Domain | |
| Trademark |
Revenue Recognition: Pursuant to ASC Topic 606, Revenue from Contracts with Customers, or ASC 606, the Company recognizes revenue upon transfer of control of goods, in an amount that reflects the consideration that is expected to be received in exchange for those goods. The Company does not allow for the return of products and therefore does not establish an allowance for returns.
To determine the revenue to be recognized for transactions that the Company determines are within the scope of ASC 606, the Company follows the established five-step framework as follows:
| (i) | identify the contract(s) with a customer; | |
| (ii) | identify the performance obligations in the contract(s); | |
| (iii) | determine the transaction price; | |
| (iv) | allocate the transaction price to the performance obligations in the contract(s); and | |
| (v) | recognize revenue when (or as) the Company satisfies a performance obligation. |
The Company sells allergy diagnostic-related products and immunotherapy treatments to physicians. Revenue is recognized once the Company satisfies its performance obligation which occurs at the point in time when title and possession of products have transitioned to the customer, typically upon delivery of the products.
The Company includes shipping and handling fees billed to customers in revenue.
There are several practical expedients and exemptions allowed under ASC 606 that impact timing of revenue recognition and disclosures. The Company elected to treat similar contracts as a portfolio of contracts, as allowed under ASC 606. The contracts that fall within the portfolio have the same terms and management has the expectation that the result will not be materially different from the consideration of each individual contract.
Research
and Development:
Research and development expense is primarily related to developing and improving methods related to the Company’s Software as
a Service (SaaS) platform. Research and development expenses are expensed when incurred. For the
nine months ended September 30, 2021 and 2020, there was $
| 9 |
Income Taxes: The Company accounts for income taxes in accordance with ASC 740, Income Taxes, which requires recognition of estimated income taxes payable or refundable on income tax returns for the current year and for the estimated future tax effect attributable to temporary differences and carry-forwards. Measurement of deferred income tax is based on enacted tax laws including tax rates, with the measurement of deferred income tax assets being reduced by available tax benefits not expected to be realized.
The
Company has net operating losses of $
Recently Issued Accounting Standards
In August 2020, the FASB issued ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40), or ASU 2020-06. The updated guidance is part of the FASB’s simplification initiative, which aims to reduce unnecessary complexity in U.S. GAAP. Consequently, more convertible debt instruments will be reported as single liability instruments with no separate accounting for embedded conversion features. ASU 2020-06 also removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for the exception. In addition, ASU 2020-06 also simplifies the diluted net income per share calculation in certain areas. The Company adopted the provisions of ASU 2020-06 using a modified retrospective approach, which resulted in no cumulative effect adjustment to stockholders’ deficit as of January 1, 2021.
This Quarterly Report on Form 10-Q does not discuss recent pronouncements that are not anticipated to have a current and/or future impact on or are unrelated to the Company’s financial condition, results of operations, cash flows or disclosures.
| 10 |
Note 4. Capitalized Software and Intangible Assets
Non-current assets consist of the following at September 30, 2021 and December 31, 2020:
Schedule of Intangible Assets
Estimated Useful Life (in years) | September 30, 2021 | December 31, 2020 | ||||||||||
| Capitalized Software TBD | $ | $ | ||||||||||
| Intangible Assets: | ||||||||||||
| U.S. Method Patent | - | |||||||||||
| Web Domain | N/A | - | ||||||||||
| Trademark | N/A | - | ||||||||||
| Total Intangible Assets | $ | $ | ||||||||||
| Accumulated amortization | ( | ) | - | |||||||||
| Intangible assets, net | $ | $ | ||||||||||
Capitalized
software represents the development costs for internal-use software. The software application is still in development with costs continuing
to be capitalized and no amortization expense being recognized yet. Capitalization will cease and amortization will begin once development
is substantially complete. The Capitalized software costs will be amortized over the estimated life of the software. There were
The
intangible assets represent the value the Company paid to acquire the trademark “AllergiEnd”, the web domain “AllergiEnd.com”
along with the U.S. Method Patent registration relating to the allergy testing kit and related materials the Company distributes to physician
clients. The Company acquired the intangible assets from MedScience Research Group as of June 23, 2021. The provisional allocation of
the purchase price to each of these assets was determined based on ASC 805-50-30, Business Combination, Related Issues, Initial Measurement.
The assets are being amortized over their useful lives beginning July 1, 2021. The Trademark and Web Domain are determined to have
an indefinite life and will be tested annually for impairment in accordance with ASC 350-30-35, Intangibles, General Intangibles Other
Than Goodwill. There was $
Note 5. Loans Payable
On
June 21, 2021, the Company entered into a fixed-fee short-term loan with its merchant bank and received $
On
June 23, 2021, the Company entered into a purchase agreement to acquire certain assets from MedScience Research Group, Inc (“MedScience”)
(See Note 4 for additional information). As part of that purchase agreement, the Company issued a Promissory Note with a principal sum
of $
Note 6. Convertible Notes Payable
Convertible notes payable at September 30, 2021 and December 31, 2020 consist of the following:
Schedule of Convertible Notes Payable
| September 30, 2021 | December 31, 2020 | |||||||
| Note 1 and accrued interest and premium – Principal shareholder | $ | $ | ||||||
| Note 2 and accrued interest – Principal shareholder | ||||||||
| Note 3 and accrued interest – Shareholder | ||||||||
| Note 4 and accrued interest – Principal shareholder | ||||||||
| Note 5 and accrued interest – Accredited investors | ||||||||
| Note 6 and accrued interest – Principal shareholder | ||||||||
| Note 7 and accrued interest – Accredited investors | ||||||||
| Note 8 and accrued interest – Accredited investors | ||||||||
| Note 9 and accrued interest – Shareholder | ||||||||
| Note 10 and accrued interest, net of discount and issuance costs – Mercer Note | ||||||||
| Total Convertible notes payable and accrued interest | $ | $ | ||||||
Note
1 – In October 2009, the Company issued a Convertible Promissory Note with a principal amount of $ to its principal shareholder
(Note 1). The note bears interest at the rate of % per annum until paid or the note and accrued interest is converted into shares of
the Company’s common stock. On February 27, 2020, the note was modified to extend the maturity date to
Note 2 – Effective September 1, 2019, the Company issued a Convertible Promissory Note in the principal amount of $ to its principal shareholder in consideration for advances previously made to the Company (Note 2). This note bears interest at the rate of % per annum and is due and payable on . The Note is convertible into shares of common stock at a price of $ per share. As of September 30, 2021 and December 31, 2020, this note had accumulated $ and $, respectively of accrued interest.
Note 3 – Effective September 12, 2019, the Company issued a Convertible Promissory Note in the principal amount of $ to a shareholder (Note 3). This Note bore interest at the rate of % per annum and principal plus any accrued but unpaid interest was due and payable on January 1, 2021. The Note was convertible at the option of the holder into shares of common stock at a price of $ per share. On January 1, 2021, the shareholder elected to convert the outstanding principal of $ along with accrued interest of $ into common stock at a price of $ per share resulting in the issuance of shares of common stock.
Note 4 – Effective December 27, 2019, the Company issued a Convertible Promissory Note in the principal amount of $ to its principal shareholder in consideration for advances previously made to the Company (Note 4). This note bore interest at the rate of % per annum and was due and payable on . The Note was convertible into shares of common stock at a price of $ per share. On March 15, 2021, the majority shareholder assigned this convertible note along with all accrued and future interest to a third-party shareholder. On March 31, 2021 the shareholder elected to convert the outstanding principal of $ along with accrued interest of $ into common stock at a price of $ per share resulting in the issuance of shares of common stock. As of September 30, 2021 and December 31, 2020, this note had accumulated $ and $, respectively of accrued interest.
| 11 |
Note
5 – Under subscription agreements dated September 25, 2020, the Company issued Convertible Promissory Notes (the “Notes”)
to various individuals totaling $
As
of March 31, 2021 one of the note holders had elected to convert outstanding principal of $
As of June 17, 2021 the other note holder had elected to convert outstanding principal of $ along with accrued interest into shares of common stock at a price of $. Additionally, the shareholder received warrants, exercisable for two years, to purchase common shares at $ per share.
As
of September 30, 2021 and December 31, 2020, these notes had accumulated $
Note 6 – Effective September 30, 2020, the Company issued a Convertible Promissory Note in the principal amount of $ to its principal shareholder in consideration for advances previously made to the Company (Note 6). This note bears interest at the rate of % per annum and is due and payable on . The Note is convertible into shares of common stock at a price of $ per share. As of September 30, 2021 and December 31, 2020, this note had accumulated $ and $, respectively of accrued interest.
Note
7 – Effective October 27, 2020, the Company issued a Convertible Promissory Note in the principal amount of $
Note
8 – Effective December 23, 2020, the Company issued a Convertible Promissory Note in the principal amount of $
Note 9 – Effective May 7, 2021, the Company issued a Convertible Promissory Note in the principal amount of $ to a shareholder (Note 9). The Note bears interest at the rate of per annum and matures on (the “Maturity Date”) at which date all outstanding principal and accrued and unpaid interest are due and payable unless a Default Event, as defined, occurs. As of September 30, 2021, this note had accumulated $ of accrued interest.
Note
10 – Effective August 10, 2021, the Company entered into a Securities Purchase Agreement with an accredited investor pursuant to
which it issued to the investor an Original Issue Discount Secured Convertible Promissory Note (the “Note”) in the principal
amount of $
The principal amount of the Note and all interest accrued thereon is payable on August 10, 2022, and are secured by a lien on substantially all of the Company’s assets. The Note provides for interest at the rate of % per annum, payable at maturity, and is convertible into common stock at a price of $per share. In addition to customary anti-dilution adjustments upon the occurrence of certain corporate events, the Note provides, subject to certain limited exceptions, that if we issue any common stock or common stock equivalents, as defined in the Note, at a per share price lower than the conversion price then in effect, the conversion price will be reduced to the per share price at which such stock or common stock equivalents were sold. The conversion price of the Note had been subject to a potential decrease if the average closing price of the Company’s common stock during any ten consecutive trading days beginning September 16, 2021, and ending on November 15, 2021, was below $. As the trading price of the common stock has not been below $ since September 21, 2021, this provision is no longer operative.
The Warrants are initially exercisable for a period of three years at a price of $ per share, subject to customary anti-dilution adjustments upon the occurrence of certain corporate events as set forth in the Warrant. The shares issuable upon conversion of the Note and exercise of the Warrants are to be registered under the Securities Act of 1933, as amended, for resale by the investor as provided in the Registration Rights Agreement. If at any time after February 10, 2022, there is no effective registration statement covering the resale of the shares issuable upon exercise of the Warrants at prevailing market prices, then the Warrants may be exercised by means of a “cashless exercise” in which event the investor would be entitled to receive a number of shares determined in accordance with a customary formula set forth in the Warrant.
The Company accounts for the allocation of its issuance costs to its Warrants in accordance with ASC 470-20, Debt with Conversion and Other Options. Under this guidance, if debt or stock is issued with detachable warrants, the proceeds need to be allocated to the two instruments using either the fair value method, the relative fair value method, or the residual value method. The Company used the relative fair value at the time of issuance to allocate the value received between the convertible note and the warrants.
The Company estimated the fair value of warrants utilizing the Black-Scholes pricing model, which is dependent upon several assumptions such as the expected term of the Warrants, expected volatility of the Company’s stock price over the expected term, expected risk-free interest rate over the expected term and expected dividend yield rate over the expected term. The Company believes this valuation methodology is appropriate for estimating the fair value of warrants. The value allocated to the relative fair value of the Warrants was recorded as debt issuance costs and additional paid in capital.
The
principal, net of the original issue discount and debt issuance costs, including the allocated relative fair value of the Warrants,
which are being recognized over the life of the note, along with associated interest, is recorded with current liabilities on the
Company’s Condensed Consolidated Balance Sheet. As of September 30, 2021, this note had accumulated $
Note 7. Preferred Stock
Issuance of Series A Preferred Stock
Effective
September 1, 2019, the Company issued shares of Series A Preferred Stock in satisfaction
of a previously issued convertible promissory note held by its principal shareholder in the initial principal amount of $
The
shares of Series A Preferred Stock have a stated value of $ per share and are initially convertible into shares of common stock at
a price of $
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Schedule of Anti-dilutive Securities Excluded From Calculation of Earning Per Share
Nine Months Ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| Stock options | ||||||||
| Stock warrants | ||||||||
| Total shares excluded from calculation | ||||||||
During the nine months ended September 30, 2021 and 2020, there was $ and $, respectively, in stock-based compensation associated with stock options included in Research and development expense. Additionally, during the same periods there was $ and $, respectively, of expense associated with shares issued for services. The following table shows where the expense has been recorded.
| Nine Months Ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| Research and development | $ | $ | ||||||
| Sales and marketing | ||||||||
| General and administrative | ||||||||
| Total expense – shares issued for services | $ | $ | ||||||
During the nine months ended September 30, 2021, there were options granted to certain scientific and business advisors (“Advisors”) with a weighted-average exercise price of $. The options vest in equal annual installments over beginning in April 2021 and expire after grant date. During the nine months ended September 30, 2020, there were options granted to certain scientific and business advisors (“Advisors”) with a weighted-average exercise price of $. The options vest in equal annual installments over beginning in July 2020 and expire after grant date. There were no options exercised, forfeited or cancelled during either period.
As
of September 30, 2021, there was $ of unrecognized compensation related to the of outstanding options which is expected
to be recognized over a weighted-average period of months. The options are being expensed over the vesting period for each Advisor.
The weighted-average grant date fair value for options granted during the nine months ended September 30, 2021 was $
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Schedule of Fair Value of Option Grant of Weighted-average Assumptions
| Nine Months Ended September 30, 2021 | Nine Months Ended September 30, 2020 | |||||||
| Risk-free interest rate | % | % | ||||||
| Expected life of the options | years | years | ||||||
| Expected volatility of the underlying stock | % | % | ||||||
| Expected dividend rate | % | % | ||||||
The risk-free interest rates are derived from the U.S. Treasury yield curve in effect on the date of grant for instruments with a remaining term similar to the expected term of the options. The expected life of the options is based on the option term. Due to the Company’s limited historical data, the expected volatility is calculated based upon the historical volatility of comparable companies whose share prices are publicly available for a sufficient period of time. The dividend rate is based on the Company never paying or having the intent to pay any cash dividends.
On March 8, 2021, the Company entered into a Consulting Agreement (“Agreement 1”) with an Investor Relations Consultant, pursuant to which the Investor Relations Consultant was to provide investor relations services to the Company for consideration of shares of common stock of the Company (the “Share Payment”) in addition to monthly cash payments for a term of three months. Agreement 1 contains a clause providing the Company the right to cancel the shares of common stock pursuant to the terms of Agreement 1. The value of the shares were to be expensed when the Investor Relations Consultant met the terms of the Consulting Agreement. The Company notified the Consultant that the Agreement was terminated effective April 7, 2021 without the terms of the Consulting Agreement being met. The Company cancelled the Share Payment associated with the Consulting Agreement.
On
March 10, 2021, the Company entered into a Consulting Agreement (“Agreement 2”) with a Legal Consultant to provide legal
services to the Company for consideration of shares of common stock of the Company (the “Share Payment”). The term
of Agreement 2 is
On
May 5, 2021, the Company entered into a Consulting Agreement (“Agreement 3”) with a Strategic Advisory Consultant to provide
strategic and advisory services to the Company for consideration of shares of common stock of the Company (the “Share
Payment”). The term of Agreement 3 was
On June 14, 2021, the Company entered into a one-month Consulting Agreement (“Agreement 4”) with a Strategic Advisory Consultant to provide strategic and advisory services to the Company for consideration of shares of common stock of the Company (the “Share Payment”).
On July 16, 2021, the Company entered into a one-month Consulting Agreement (“Agreement 5”) with a Strategic Advisory Consultant to provide strategic and advisory services to the Company for consideration of shares of common stock of the Company (the “Share Payment”).
On August 16, 2021, the Company entered into a one-month Consulting Agreement (“Agreement 6”) with a Strategic Advisory Consultant to provide strategic and advisory services to the Company for consideration of shares of common stock of the Company (the “Share Payment”).
Schedule of Options Outstanding and Exercisable
| Date Issued | Number Outstanding | Number Exercisable | Exercise Price | Expiration Date | ||||||||||
| $ | ||||||||||||||
| $ | ||||||||||||||
| $ | ||||||||||||||
| Total | ||||||||||||||
Warrants outstanding at September 30, 2021 consist of:
Schedule of Warrants Outstanding and Exercisable
| Date Issued | Number Outstanding | Number Exercisable | Exercise Price | Expiration Date | ||||||||||
| $ | ||||||||||||||
| $ | ||||||||||||||
| $ | ||||||||||||||
| $ | ||||||||||||||
| Total | ||||||||||||||
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Note 10. Related-Party Transactions
Convertible notes payable, related party: See Note 6.
Note 11. Commitments and Contingencies
On
February 9, 2021, the Company entered into a Receivables Purchase and Security Agreement (“Factoring Agreement”) with a Factoring
Company. The Factoring Agreement has an initial term of
Under
the terms of the agreement, designated receivables are sold for periodic advances of up to $
Amounts due from the Factoring Company, net of fees, are typically included in Prepaid expenses and other current assets on the Condensed Consolidated Balance Sheet. As of September 30, 2021, the balance due to the Factoring Company is included with other current liabilities on the Condensed Consolidated Balance Sheet.
There are no pending or threatened legal proceedings as of September 30, 2021. The Company has no non-cancellable operating leases.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Overview
We are a medical device technology and software as a service (SaaS) company focused on enabling primary care physicians (PCP’s) to increase their revenues by providing them with relevant, value-based tools to evaluate and treat chronic disease as well as provide preventive care through reimbursable procedures. In some cases, the products we will provide our physician clients will enable them to diagnose and treat patients with chronic diseases which they historically have referred to specialists, allowing them to increase their practice revenue. As part of our mission, we are providing PCP’s with the software, training and devices necessary to allow them to treat their patients using value-based healthcare, informatics and algorithmic personalized medicine, including digital therapeutics. Our virtual and point of care solutions also support remote patient monitoring, to address chronic care and preventive medicine and are reimbursable to the medical practice.
In November 2020, we began shipping AllergiEnd® diagnostic related products and immunotherapy treatments to PCPs in response to their requests based upon courses of treatment recommended for their patients building on the capabilities of QHSLab, our primary SaaS tool. The Company’s revenue generated from sales of AllergiEnd® products was $124,532 in the fourth of quarter 2020 and $1,084,436 for the first nine months of 2021 of which $324,479 was generated in the third quarter.
In June 2021, the Company announced that it had acquired the method patent, trademark and website associated with AllergiEnd®’s diagnostic and allergen immunotherapy product portfolio from MedScience Research Group, Inc. The acquisition of the AllergiEnd® assets provides the Company the opportunity to more fully integrate and leverage the product portfolio across our marketing platform, customer relationships and cost structure.
Based on the success of PCPs using our QHSLab allergy diagnostics combined with the products acquired from MedScience, we intend to increase our revenues by charging physicians a monthly subscription fee for the use of QHSLab and soliciting additional PCPs to increase their revenues by using our proven revenue generating QHSLab and AllergiEnd® line of products. We also plan to introduce additional point of care diagnostic and treatments, and digital medicine programs that PCPs can use and prescribe in their practices. In all cases, PCPs will be paid under existing government and private insurance programs, based upon analyses conducted utilizing QHSLab and treatments provided as a result of such analyses.
Recent Market Conditions
During March 2020, a global pandemic was declared by the World Health Organization related to the rapidly growing outbreak of a novel strain of coronavirus (“COVID-19”). The pandemic has significantly impacted economic conditions in the United States and throughout the world. The ultimate impact of the COVID-19 pandemic is highly uncertain and we do not yet know the full extent of potential impacts on our business, financing or global economy as a whole. However, these effects could have a material impact on our liquidity, capital resources and operations.
COVID-19 has accelerated both the healthcare provider and patient acceptance of virtual care and remote monitoring and therapeutic technologies supported by a physician’s direct involvement. Regulators and insurance companies are also recognizing what health care technologists have been saying for nearly 15 years, which is that most chronic conditions are better managed with more frequent and short patient encounters than infrequent visits to a medical professional. The Centers for Medicare and Medicaid Services (CMS) and commercial health insurers are beginning to recognize that AI enabled digital medicine technologies such as those provided through QHSLab can provide the necessary tools and support to foster patient treatment adherence in between visits to a physician.
Our ability to operate profitably is determined by our ability to generate revenues from the licensing of our QHSLab and the sale of diagnostic related products and treatment protocols and the provision of services through our QHSLab. Currently, we are generating revenues from the sale of AllergiEnd® diagnostic related products and immunotherapy treatments. Our ability to generate a profit from these sales is determined by our ability to increase the number of physicians using these products. We will continue to upgrade QHSLab’s offerings in an effort to increase the number of products sold based upon the services it can provide and for which we are able to charge a fee for its use.
Our revenues are largely determined by the volume of product delivered and the prices at which such products are sold. The principal factors determining our costs are the cost of improvements to QHSLab, the costs of products sold to PCPs, marketing expenses to recruit new PCPs and introduce new products and financing costs. As our business grows, these costs should be leveraged over a wider base of PCPs leading to a reduction in costs per sale and, helping to increase our gross margin.
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Results of Operations
Three months and nine months ended September 30, 2021 as compared to the three months and nine months ended September 30, 2020
Revenues
During the fourth quarter of 2020 we began to sell the AllergiEnd® Products, consisting of AllergiEnd® Allergy Diagnostics and Allergen Immunotherapy treatments, to physicians. For the three months ended September 30, 2021, we generated revenues of $324,479 compared to $0 revenues in the comparable period of 2020 when we were focused on developing our software. For the nine months ended September 30, 2021, we generated revenues of $1,084,436 compared to $0 revenues in the comparable period of 2020. The revenue increases for the three and nine months ended September 30, 2021, sequentially and as compared to the comparable periods in 2020, were primarily driven by sales of Allergy Diagnostic Kits of $186,122 and Immunotherapy Treatment services of $127,174 for the three months ended September 30, 2021, and sales of Allergy Diagnostic Kits of $646,394 and Immunotherapy Treatment services of $404,606 for the nine months ended September 30, 2021 as we continued to expand the roll-out of our product lines and customer base.
We anticipate that our revenues on the fourth quarter of 2021 will exceed those of the third quarter as third quarter revenues were impacted by a combination of a seasonal decline due to summer vacations, the demand for our PCPs to perform physical examinations on students returning to school, decreased patient visits due to the onset of the delta variant of Covid-19, as well as a shortage of medical assistants necessary to perform tests using our products. Should revenues increase in the fourth quarter as we anticipate, we will likely continue to generate negative cash flow from our operations.
Our revenues consisted of the following:
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Allergy Diagnostic Kit Sales | $ | 186,122 | $ | - | $ | 646,394 | $ | - | ||||||||
| Immunotherapy Treatment Sales | 127,174 | - | 404,606 | - | ||||||||||||
| Shipping and handling | 11,183 | - | 33,436 | - | ||||||||||||
| Total revenue | $ | 324,479 | $ | - | $ | 1,084,436 | $ | - | ||||||||
Cost of Revenues and Gross Profit
Cost of revenues consists of the cost of the AllergiEnd® test kit products and allergen immunotherapy pharmacy prepared treatment sets, shipping costs to our customers as well as labor expenses directly related to product sales.
For the three months ended September 30, 2021 and 2020, cost of revenues was $167,393 and $0, respectively.
The Company generated a gross profit of $157,086, or a 48.4% gross margin for the three months ended September 30, 2021. The increase in gross margin as compared to the first six months of 2021 was primarily attributable to the larger base of sales as well as shifts in the customer and product mix.
For the nine months ended September 30, 2021 and 2020, cost of revenues was $586,651 and $0, respectively.
The Company generated a gross profit of $497,785, or a 45.9% gross margin for the nine months ended September 30, 2021. Due to the absence of sales, there was no gross profit in the first nine months of 2020.
We are introducing new products at an early stage in our development cycle and the gross margins may vary significantly between periods, due, among other things, to differences among our customers and products sold, customer negotiating strengths, and product mix.
Research and Development
Research and development expenses (“R&D”) includes expenses incurred in connection with the research and development of our medical device technology solution. R&D costs are expensed as they are incurred.
For the three months ended September 30, 2021, R&D expenses totaled $19,609 which is a decrease of $544, or 3%, compared to $20,153 for the three months ended September 30, 2020.
For the nine months ended September 30, 2021, R&D expenses totaled $62,901 which is a decrease of $5,164, or 8%, compared to $68,065 for the nine months ended September 30, 2020.
The decreases in R&D expenses for the three and nine months ended September 30, 2021, as compared to the comparable periods of 2020, are primarily due to a reduction in the amount of time associated with R&D contractors. We expect that our R&D expenses will increase as we invest in and expand our operations and further develop new products and services as part of the Company’s growth strategy.
Selling and Marketing
Selling and marketing expenses consist primarily of costs associated with selling and marketing our products to PCP’s, principally ongoing sales efforts to recruit new PCP’s and maintain our relationships with PCP’s already using our software and products. Beginning in January 2021, these expenses included newly hired employees of the Company in addition to third-party consultants. For the three months ended September 30, 2021, selling and marketing expenses totaled $181,820 compared to $29,021 for the three months ended September 30, 2020.
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For the nine months ended September 30, 2021, selling and marketing expenses totaled $455,128 compared to $48,871 for the nine months ended September 30, 2020.
We expect our selling and marketing expenses to increase as we grow our customer base and launch additional products. However, sales and marketing expenses as a percentage of revenue may decrease if we are successful in onboarding a sufficient number of PCP’s and maintaining our relationships with these PCP’s once they begin to purchase our products.
General and Administrative
General and administrative expenses consist primarily of costs associated with operating a business including accounting, legal and management consulting fees.
For the three months ended September 30, 2021, general and administrative expenses totaled $149,741, an increase of $112,317, compared to $37,424 for the three months ended September 30, 2020.
For the nine months ended September 30, 2021, general and administrative expenses totaled $354,831, an increase of $279,229, compared to $75,602 for the nine months ended September 30, 2020.
The increases in general and administrative expenses for the three and nine months ended September 30, 2021, as compared to the comparable periods of 2020, were primarily due to increased consulting fees for legal, investor relations and management services associated with the increase in our business activities. Additionally, we incurred expenses associated with processing payments on the sales invoices generating revenue.
Other Expense
For the three months ended September 30, 2021, interest expense increased by $81,808 to $88,658 from $6,850 for the three months ended September 30, 2020
For the nine months ended September 30, 2021, interest expense increased by $86,800 to $106,680 from $19,880 for the nine months ended September 30, 2020. The increases in interest expenses for the three and nine months ended September 30, 2021, were due to increases in the convertible note payable balances and recently incurred debt at September 30, 2021 and the amortization of the related discounts as compared to September 30, 2020.
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Liquidity and Capital Resources
Liquidity is a measure of a company’s ability to generate funds to support its current and future operations, satisfy its obligations, and otherwise operate on an ongoing basis. On September 30, 2021, we had current assets totaling $720,206, including $543,311 of cash, $38,338 of accounts receivable, $101,236 of inventory, and $37,321 related to prepaid balances and other current assets. At such date we had total current liabilities of $879,328 consisting of $87,560 in accounts payable, $776,911 relating to current portions of loan balances and $14,857 in accrued expenses and other current liabilities. Our long-term liabilities balance of $990,669 consisted of convertible notes totaling $407,377 and $464,456 associated with the long-term portion of loans payable, and accrued interest expenses of $118,836.
On December 31, 2020, we had $297,863 of current assets including $94,342 of cash, $60,522 of accounts receivable, $99,701 of inventory, $11,598 related to the prepayment of service contracts. We had total current liabilities of $214,620 consisting of $159,620 in accounts payable and accrued expenses and $55,000 in a convertible note payable. Our long-term liabilities at such date of $691,569 consisted of seven convertible notes in the aggregate principal and premium amount of $576,003 along with accrued interest expenses of $115,566. As of December 31, 2020, we had total liabilities of $906,189.
The increase in our assets and liabilities from December 31, 2020, to September 30, 2021, relates primarily to the promissory note of $750,000 issued in connection with our acquisition of certain assets related to our AllergiEnd® products and the Original Issue Discount Secured Convertible Promissory Note in the principal amount of $806,000 (the “OID Note”) issued along with warrants to purchase 930,000 shares of our common stock for aggregate consideration of $750,000. The acquisition of the assets related to our AllergiEnd® products should enable us to increase our margins on the sale of these products enabling us to satisfy the $750,000 Note. The net proceeds of the OID Note primarily will be used to increase our sales and marketing efforts.
The changes in accounts receivable, inventory and accounts payable primarily relate to sales of AllergiEnd® Products.
We used cash of $236,131 and $126,429 in operations during the nine-month periods ending September 30, 2021 and 2020, respectively. We began to generate revenues in the fourth quarter of 2020. Nevertheless, we continued to generate negative cash flows which were financed primarily through our entry into a factoring agreement for our receivables, a loan from our credit card processor and related-party borrowings as we had done previously. As a result, we owed $422,213, including principal and accrued interest, to our principal shareholder as of September 30, 2021, in addition to increased amounts due to third parties discussed below. In addition, to preserve our cash, we paid our obligations to certain of our vendors by issuances of an aggregate of 156,145 shares of our common stock during the first nine months of 2021, net of cancelled shares.
Our convertible notes payable were reduced during the first nine months of 2021 as four notes totaling $326,288, inclusive of accrued interest, were converted into 760,290 shares of our common stock and 89,793 warrants. In addition, in the second quarter of 2021 we sold 50,000 shares of our common stock to one individual for $30,000.
Although we are now generating revenues from the sale of our AllergiEnd® products we are likely to continue to require funds to support our operations for the immediate future. If our business continues to grow, we will seek to satisfy our cash needs by issuances of our equity securities or debt. In the past, we have had to rely on our principal shareholder to support our operations. More recently, we have borrowed money from third parties. If we are unable to obtain the funds we need from third parties, there is no assurance that any of our related parties will continue to provide such capital as may be necessary to continue our business or, if such funds are provided, that the agreed upon terms of any advance will be favorable to us.
To facilitate the expansion of our operations, on August 10, 2021, we entered into a Securities Purchase Agreement with Mercer Street Global Opportunity Fund, LLC (“Buyer”), pursuant to which we issued an Original Issue Discount Secured Convertible Promissory Note (the “Note”) in the principal amount of $806,000 and warrants to purchase 930,000 shares of our common stock (the “Warrants”) for which we received consideration from the Buyer of $750,000 and from which, after payment of brokerage commissions and other expenses, we derived net proceeds of approximately $665,000. In addition, we entered into a Registration Rights Agreement with the Buyer.
The principal amount of the Note and all interest accrued thereon is payable on August 10, 2022, and is secured by a lien on substantially all of our assets. The Note provides for interest at the rate of 5% per annum, payable at maturity, and is convertible into shares of our common stock at a price of $0.65 per share, subject to anti-dilution adjustments in the event of certain corporate events as set forth in the Note, provided that if the average closing price of the Company’s common stock during any ten consecutive trading days beginning on September 16 and ending on November 15, 2021 is below $0.65, the conversion price shall be reduced to such average price but in no event less than $0.455 per share. In addition to customary anti-dilution adjustments the Note provides, subject to certain limited exceptions, that if we issue common stock or common stock equivalents at a per share price lower than the conversion price then in effect, the conversion price will be reduced to the per share price at which such shares or common share equivalents are sold.
The Warrants are exercisable for a period of three years at a price of $1.25 per share, subject to customary anti-dilution adjustments. The shares issuable upon conversion of the Note and exercise of the Warrants are to be registered under the Securities Act for resale by the Buyer as provided in the Registration Rights Agreement. If at any time after the six-month anniversary of the date of the Purchase Agreement, there is no effective registration statement covering the resale of the shares issuable upon exercise of the Warrants, then the Warrant may be exercised by means of a “cashless exercise.”
Plan of Operation and Funding
The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. We had an accumulated deficit of $2,248,502 at September 30, 2021, generated net losses of $499,783 and $233,717 for the nine months ended September 30, 2021 and 2020, respectively, and used cash of $236,131 and $126,429 in operations in these periods. Although we began to generate revenue during the fourth quarter of 2020, we anticipate that we will continue to generate negative cash flow for the immediate future. These factors, among others, raise substantial doubt about our ability to continue as a going concern for a reasonable period of time. Our continuation as a going concern is dependent upon our ability to obtain necessary equity or debt financing and ultimately from generating revenues and positive cash flow to continue operations. The condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
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We expect that working capital requirements will continue to be funded through a combination of our existing funds, further issuances of securities and borrowings, and that we will remain highly leveraged as we seek to expand our business. Our working capital requirements are expected to increase in line with the growth of our business, as we incur marketing expenses and the cost of building an inventory. Existing working capital, further advances and debt instruments, and anticipated cash flow are expected to be adequate to fund our operations over the next twelve months. We have entered into a Receivables Purchase and Security Agreement providing us with up to $150,000 against certain accounts receivable and received a short-term from our merchant bank with repayments tied to future credit card payment transactions. Generally, we have financed operations to date through the proceeds of the private placement of equity and debt instruments and advances from our principal shareholder. In connection with our business plan, management anticipates additional increases in operating expenses and capital expenditures relating to: (i) developmental expenses associated with a start-up business and (ii) marketing expenses. We intend to finance these expenses by raising additional capital or, when available, borrowing additional funds. Additional issuances of equity or convertible debt securities will result in dilution to our current shareholders. Further, such securities might have rights, preferences or privileges senior to our common stock. Additional financing may not be available upon acceptable terms, or at all. If adequate funds are not available or are not available on acceptable terms, we may not be able to take advantage of prospective new business endeavors or opportunities, which could significantly and materially restrict our business operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not required.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures.
As of September 30, 2021, the Company’s chief executive officer and chief financial officer conducted an evaluation regarding the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15I or 15d-15I under the Exchange Act. Based upon the evaluation of these controls and procedures as provided under the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (2013), our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were ineffective as of the end of the period covered by this report. Management has identified corrective actions for the weakness and will periodically reevaluate the need to add personnel and implement improved review procedures as they can be supported by the growth in our business.
Changes in internal controls.
During the quarterly period covered by this report, no changes occurred in our internal control over financial reporting that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 1A. RISK FACTORS.
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1. Description of Business, subheading Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2020, which could materially affect our business, financial condition or future results.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
During the third quarter of 2021, in connection with the sale of the OID Note, we issued 36,145 shares of our common stock to Carter, Terry & Company as part of its fee for services rendered.
During the first nine months of 2021 we issued an aggregate of 120,000 shares of common stock to three individuals for services rendered or to be rendered.
The issuance of our shares to Carter, Terry and the individuals were exempt from the registration requirements of the Securities Act of 1933, as amended, under Section 4(1) as the transaction was negotiated individually and not pursuant to any public solicitation; the parties which acquired the shares was either an accredited investor or had sufficient experience in the acquisition of restricted securities to evaluate the merits of acquiring the shares and acknowledged that the shares were being acquired for investment and had not been registered under the Securities Act and could not be sold in the absence of registration under the Securities Act or the availability of an exemption from such registration requirements. In each case, an appropriate restrictive “Securities Act” legend or stop transfer orders were placed on the certificate representing the shares or in the records of the Company’s transfer agent. The 36,145 shares of our common stock issued to Carter, Terry were included among the shares registered pursuant to our Registration Statement on Form S-1 declared effective on September 16, 2021.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. MINE SAFETY DISCLOSURES.
Note Applicable.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS.
| The following documents are filed as exhibits to this report on Form 10-Q or incorporated by reference herein. Any document incorporated by reference is identified by a parenthetical reference to the SEC filing that included such document. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
| USA Equities Corp. | ||
| By: | /s/ Troy Grogan | |
| Troy Grogan | ||
| Chief Executive Officer and Chief Financial Officer | ||
| Date: | November 15, 2021 | |
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