QHSLab, Inc 10-Q for FY2023 Q3
QHSLab, Inc. (USAQ)
About this 10-Q
QHSLab, Inc filed this 10-Q on November 13, 2023, covering the quarter ended September 30, 2023 (FY2023 Q3).
Headline figures
Quarter ended September 30, 2023, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $336.41K
- up 24.9% from $269.32K a year earlier
- Net loss
- $82.44K
- compared with a net loss of $310.12K a year earlier
- Diluted EPS
- -$0.01
- compared with -$0.03 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For
the quarterly period ended
For the period from ______________ to_______________
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 10, 2023, the Registrant had shares of common stock outstanding.
TABLE OF CONTENTS
| Item | Description | Page | ||
| PART I - FINANCIAL INFORMATION | ||||
| ITEM 1. | FINANCIAL STATEMENTS (UNAUDITED). | 4 | ||
| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. | 19 | ||
| ITEM 4. | CONTROLS AND PROCEDURES. | 23 | ||
| PART II - OTHER INFORMATION | ||||
| ITEM 1A. | RISK FACTORS. | 24 | ||
| ITEM 6. | EXHIBITS. | 24 | ||
| Signatures | 25 | |||
| 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”).
| 3 |
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (unaudited)
| 4 |
QHSLab, Inc.
Condensed Consolidated Balance Sheets
| September 30, 2023 | December 31, 2022 | |||||||
| (Unaudited) | ||||||||
| Assets | ||||||||
| Current Assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Inventory | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Non-current assets: | ||||||||
| Capitalized software development costs, net | ||||||||
| Intangible assets, net | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and Stockholders’ (Deficit) Equity | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Other current liabilities | ||||||||
| Loans payable, current portion | ||||||||
| Convertible notes payable | ||||||||
| Total current liabilities | ||||||||
| Non-current liabilities: | ||||||||
| Loans payable, non-current portion | ||||||||
| Total non-current liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (Note 13) | ||||||||
| Stockholders’ (Deficit) Equity: | ||||||||
| Preferred stock, shares authorized | ||||||||
| Preferred stock Series A, $ par value; shares issued and outstanding | ||||||||
| Preferred stock Series A-2, $ par value; shares issued and outstanding | ||||||||
| Preferred stock, value | ||||||||
| Common stock, shares authorized, $ par value; shares issued and outstanding | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ (deficit) equity | ( | ) | ||||||
| Total liabilities and stockholders’ (deficit) equity | $ | $ | ||||||
See accompanying notes to the unaudited condensed consolidated financial statements.
| 5 |
QHSLab, Inc.
Condensed Consolidated Statements of Operations
| Three Months Ended September 30, 2023 | Three Months Ended September 30, 2022 | Nine Months Ended September 30, 2023 | Nine Months Ended September 30, 2022 | |||||||||||||
| (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
| Revenue | $ | $ | $ | $ | ||||||||||||
| Cost of revenue | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Operating expenses: | ||||||||||||||||
| Sales and marketing | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Research and development | ||||||||||||||||
| Amortization | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Net operating loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income and (expense): | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income | ||||||||||||||||
| Loss on extinguishment of debt | ( | ) | ||||||||||||||
| 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.
| 6 |
QHSLab, Inc.
Condensed Consolidated Statements of Stockholders’ (Deficit) Equity
(Unaudited)
| Preferred Stock- Series A | Preferred Stock - Series A-2 | Common Stock | Unearned Stock | Additional Paid-In | Accumulated | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||||||
| Shares | Shares | Shares | Amount | Compensation | Capital | Deficit | (Deficit) | |||||||||||||||||||||||||||||||||
| Balance at January 1, 2023 | $ | | $ | | $ | $ | $ | | $ | ( | ) | $ | ||||||||||||||||||||||||||||
| Stock-based compensation expense | - | - | - | |||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Balance at March 31, 2023 | $ | $ | $ | $ | $ | $ | ( | ) | $ | ( | ||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Balance at June 30, 2023 | $ | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Balance at September 30, 2023 | $ | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||||
| Balance at January 1, 2022 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||||||||||||||||||
| Shares issued for services | - | - | - | |||||||||||||||||||||||||||||||||||||
| Conversion of notes payable | - | - | ||||||||||||||||||||||||||||||||||||||
| Warrants issued with conversion of notes payable | - | - | ||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | - | - | - | |||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Balance at March 31, 2022 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||||||||||||||||||
| Shares issued for services | - | - | - | |||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | - | - | - | |||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Balance at June 30, 2022 | $ | $ | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||||||||||||
| Balance | $ | $ | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||||||||||||
| Conversion of notes payable | - | - | ||||||||||||||||||||||||||||||||||||||
| Warrants issued with convertible note payable | - | - | - | |||||||||||||||||||||||||||||||||||||
| Share purchase | - | - | ||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | - | - | - | |||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Balance at September 30, 2022 | $ | $ | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||||||||||||
| Balance | $ | $ | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||||||||||||
See accompanying notes to the unaudited condensed consolidated financial statements.
| 7 |
QHSLab, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| For the Nine Months Ended September 30, 2023 | For the Nine Months Ended September 30, 2022 | |||||||
| Operating activities | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash from operating activities: | ||||||||
| Allowance for doubtful accounts | ||||||||
| Amortization | ||||||||
| Amortization of debt and warrant issuance costs | ||||||||
| Stock-based compensation | ||||||||
| Shares issued for services | ||||||||
| Loss on extinguishment of debt | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Inventory | ( | ) | ||||||
| Prepaid expenses and other current assets | ( | ) | ||||||
| Accounts payable | ||||||||
| Other current liabilities | ||||||||
| 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 | ( | ) | ||||||
| Cash flows from financing activities | ( | ) | ||||||
| Change in cash | ( | ) | ( | ) | ||||
| Cash and cash equivalents – beginning of year | ||||||||
| Cash and cash equivalents - end of period | $ | $ | ||||||
| Supplemental disclosures of cash flow activity: | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Cash paid for taxes | $ | $ | ||||||
| Supplemental noncash investing and financing activity: | ||||||||
| Debt and accrued interest converted to shares of common stock | $ | $ | ||||||
| Warrants issued in conjunction with convertible note payable | $ | $ | ||||||
See accompanying notes to the unaudited condensed consolidated financial statements.
| 8 |
QHSLab, Inc.
Notes to the Unaudited Condensed Consolidated Financial Statements
Note 1. The Company
QHSLab, Inc. (the “Company” or the “Registrant”) was incorporated in Delaware on September 1, 1983. In 2019, the Company became engaged in value-based healthcare, informatics and algorithmic personalized medicine including digital therapeutics, behavior based remote patient monitoring, chronic care and preventive medicine. On September 23, 2021, the Company changed its state of incorporation from Delaware to Nevada. On April 19, 2022, the Company changed its name to QHSLab, Inc.
The Company is 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.
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 operational cash flows and only 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 condensed consolidated 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, 2022.
The accounting policies are described in the “Notes to the Consolidated Financial Statements” in the 2022 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, 2023 are not necessarily indicative of the operating results for the full year or for any other subsequent interim period.
Reclassifications
Certain reclassifications were made to the prior condensed consolidated financial statements to conform to the current period presentation. There was no change to the previously reported net loss.
Accounting Policies
Use of Estimates: The preparation of condensed consolidated financial statements in conformity with U.S. GAAP 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 statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from the estimates.
| 9 |
Principles of Consolidation: The condensed consolidated financial statements include the accounts of QHSLab, Inc. 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. Cash and cash equivalents are maintained at banks believed to be stable, occasionally at amounts in excess of federally insured limits, which represents a concentration of credit risk. The Company has not experienced any losses on deposits of cash and cash equivalents to date.
Accounts
Receivable: The Company extends unsecured credit to its customers on a regular basis. Management monitors the payments on outstanding
balances and adjusts the reserve for uncollectible balances to represent future expected credit losses over the life of the receivables
based on past experience, current information and forward-looking economic considerations. The Company controls its credit risk related
to accounts receivable through credit approvals and monitoring. The Company had no customers that generated 10% or more of its revenue
during the nine months ended September 30, 2023 and 2022. As of September 30, 2023, two customers comprised greater than 10% of
the outstanding accounts receivable balance at
Inventories: Inventories are stated at the lower of cost or estimated net realizable value, on a first-in, first-out, or FIFO, basis. The Company uses actual costs to determine its 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 Accounting Standards Codification (“ASC”) 350-40, 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 is included in expenses on the condensed 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 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 |
The estimated useful lives and carrying value of the assets are reviewed at least annually or whenever events or circumstances may result in an impact to the value of the assets.
| 10 |
Convertible Notes Payable: The Company accounts for convertible notes deemed conventional and conversion options embedded in non-conventional convertible notes which qualify as equity under Accounting Standards Update No. 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): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”), which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including certain convertible instruments and contracts on an entity’s own equity. ASU 2020-06 removes the separation models required for convertible debt with cash conversion features and convertible instruments with beneficial conversion features. It also removes certain settlement conditions that were required for equity contracts to qualify for the derivative scope exception and simplifies the diluted earnings per share calculation for convertible instruments. Accordingly, the Company records, as a discount to convertible notes, the intrinsic value of such conversion options based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note. Debt discounts under these arrangements are amortized over the term of the related debt.
Revenue Recognition: Pursuant to ASC Topic 606, Revenue from Contracts with Customers (“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.
The Company also generates revenue through Software-as-a-Service (“SaaS”) agreements whereby the Company provides physicians’ practices access to its proprietary internally-developed software that provides clinical decision support and patient monitoring. The agreements provide for either monthly or annual access to the software. The access to the system begins immediately and revenue is recognized over the agreement term.
The Company provides administrative, billing and support services utilizing the Company’s internally-developed software. Revenue is recognized each month based on actual services provided during that month.
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
SaaS platform. Research and development expenses are expensed when incurred. For the three months ended September 30, 2023 and 2022,
there was $
| 11 |
Income Taxes: The Company accounts for income taxes in accordance with ASC 740, Accounting for 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 June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which supersedes current guidance by requiring recognition of credit losses when it is probable that a loss has been incurred. ASU 2016-13 requires the establishment of an allowance for estimated credit losses on financial assets including trade and other receivables based on historical information, current information and reasonable and supportable forecasts, at each reporting date. The new standard may result in earlier recognition of allowances for losses on trade and other receivables and other contractual rights to receive cash. The Company adopted ASU 2016-13 as of January 1, 2023, and the adoption did not have a material impact on the Company’s unaudited condensed consolidated financial statements and related disclosures.
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.
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Note 4. Accounts Receivable
Accounts receivable is recorded in the condensed consolidated balance sheets when customers are invoiced for revenue to be collected and there is an unconditional right to receive payment. Timing of revenue recognition may differ from the timing of invoicing customers resulting in deferred revenue until the Company satisfies its performance obligation.
Accounts receivable is presented net of an allowance for doubtful accounts. During the year ended December 31, 2022, the Company established an allowance for doubtful accounts that represents future expected credit losses over the life of the receivables based on past experience, current information and forward-looking economic considerations. The beginning and ending balances of accounts receivable, net of allowance, are as follows:
Schedule of Accounts Receivable
| September 30, 2023 | December 31, 2022 | |||||||
| Accounts receivable | $ | $ | ||||||
| Allowance for doubtful accounts | ( | ) | ( | ) | ||||
| Accounts receivable, net | $ | $ | ||||||
Note 5. Capitalized Software and Intangible Assets
Non-current assets consist of the following at September 30, 2023 and December 31, 2022:
Schedule of Intangible Assets
| Estimated Useful Life (in years) | September 30, 2023 | December 31, 2022 | ||||||||
| Capitalized software | $ | $ | ||||||||
| Accumulated amortization | ( | ) | ( | ) | ||||||
| Capitalized software, net | $ | $ | ||||||||
| 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 QHSLab platform software. The Company completed testing of its QHSLab platform
software application at the end of the first quarter of 2022 and began to amortize the capitalized expenses on a straight-line basis
over the useful life of the software. As of September 30, 2023 and December 31, 2022 there was $
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 for total consideration of $
Note 6. Loans Payable
On
June 23, 2021, the Company entered into a purchase agreement to acquire certain assets from MedScience Research Group, Inc (“MedScience”)
(See Note 5 for additional information). As part of that purchase agreement, the Company issued a Promissory Note with a principal sum
of $
On
April 21, 2023, the Company entered into a fixed-fee short-term loan with its merchant bank and received $
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Note 7. Convertible Notes Payable
Convertible notes payable at September 30, 2023 and December 31, 2022, consist of the following:
Schedule of Convertible Notes Payable
| September 30, 2023 | December 31, 2022 | |||||||
| Note 1 – Shareholder | $ | $ | ||||||
| Note 2 – Mercer Note | ||||||||
| Note 3 – Mercer Note #2 | ||||||||
| Total | ||||||||
| Debt discount and issuance costs | ( | ) | ||||||
| Total convertible notes payable | ||||||||
| Less: current portion | ||||||||
| Non-current portion | $ | $ | ||||||
Note 1 – Effective May 7, 2021, the Company issued a Convertible Promissory Note in the principal amount of $ to a shareholder (Note 1). The Note bears interest at the rate of % per annum with an initial maturity on (the “Maturity Date”) at which date all outstanding principal and accrued and unpaid interest became due and payable. On October 1, 2022, the Maturity Date of Note 1 was extended to December 31, 2023. . As of September 30, 2023 and December 31, 2022, this note had $ and $, respectively, of accrued interest, which is included within other current liabilities on the condensed consolidated balance sheets.
Note
2 – 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 was initially payable on August 10, 2022, and is secured by a lien on substantially
all of the Company’s assets. The Note provides for interest at the rate of
On
November 11, 2021, Mercer Street Global Opportunity Fund, LLC, converted $
The
As
a result of the issuance of a $
On
October 17, 2022, and again on July 27, 2023 and November 10, 2023, the Company received notice from the manager of Mercer Fund of
its agreement to forebear from the exercise of any rights it might have as a result of any defaults under the $
As
of September 30, 2023, all original issue discount and debt issuance costs, including the allocated relative fair value of the Warrants,
have been recognized. The remaining principal balance of $
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Note
3 – Effective July 19, 2022, the Company entered into a Securities Purchase Agreement with Mercer Fund pursuant to which it issued
an Original Issue Discount Secured Convertible Promissory Note (the “$440,000 Note”) in the principal amount of $
The
principal amount of the $
The
$
On July 27, 2023 and again on November 10, 2023, the Company received notice from the manager of the Mercer Fund, LLC that it agreed to forebear from exercising any rights it might have as a result of any defaults under the Second OID Note and the related documents between the Company and the Fund, provided that it reserved all of its rights.
The
The
Registration Rights Agreement requires the Company to file with the Securities and Exchange Commission within 60 days following the closing
of the issuance of the $
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 the 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.
| 15 |
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 8. Preferred Stock
Series A Preferred Stock
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 $
Series A-2 Preferred Stock
On December 30, 2021, the Board of Directors of the Company authorized the issuance of of the Company’s Series A-2 Convertible Preferred Shares to its principal shareholder in satisfaction of multiple previously issued convertible promissory notes with initial principal amounts totaling $ together with all interest accrued thereon.
The
shares of Series A-2 Preferred Stock have a stated value of $
Holders of the Series A-2 Convertible Preferred Stock will vote on an as converted basis with the holders of the Company’s common stock and Series A Preferred Shares as to all matters to be voted on by the holders of the common stock. Each Series A-2 Preferred Share shall be entitled to a number of votes equal to five times the number of shares of common stock into which it is then convertible on the applicable record date.
| 16 |
The Company calculates net loss per common share in accordance with ASC 260, Earnings Per Share. Basic and diluted net loss per common share was determined by dividing net loss applicable to common stockholders by the weighted average number of common shares outstanding during the period. The Company’s potentially dilutive shares, which include shares issuable upon exercise or conversion of outstanding common stock options, common stock warrants, and convertible debt have not been included in the computation of diluted net loss per share for the periods ended September 30, 2023 and 2022 as the result would be anti-dilutive.
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Stock options | ||||||||||||||||
| Stock warrants | ||||||||||||||||
| Total shares excluded from calculation | ||||||||||||||||
| Antidilutive securities | ||||||||||||||||
During
the nine months ended September 30, 2023 and 2022, there was $
and $,
respectively, in stock-based compensation associated with stock options included in Research and development expense. During the three months
ended September 30, 2023 and 2022, there was $
and $,
respectively, in stock-based compensation associated with stock options included in Research and development expense. Additionally, there
was expense associated with shares issued for services. During the nine months ended September 30, 2023 and 2022, there was $
There were options exercised, forfeited or cancelled during the period. During the nine months ended September 30, 2023 and 2022 there were options granted.
As of September 30, 2023, all compensation related to the outstanding options has been recognized. The options were expensed over the vesting period for each Advisor.
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Schedule of Options Outstanding and Exercisable
| Date Issued | Number Outstanding | Number Exercisable | Exercise Price | Expiration Date | ||||||||||
| $ | ||||||||||||||
| $ | ||||||||||||||
| $ | ||||||||||||||
| Total | ||||||||||||||
Warrants outstanding at September 30, 2023 consist of:
Schedule of Warrants Outstanding and Exercisable
| Date Issued | Number Outstanding | Number Exercisable | Exercise Price | Expiration Date | ||||||||||
| $ | ||||||||||||||
| $ | ||||||||||||||
| $ | ||||||||||||||
| Total | ||||||||||||||
During
the nine months ended September 30, 2023,
Note 11. Related Party Transactions
Convertible notes payable, related party: See Note 7; Preferred Stock, related party: See Note 8.
Note 12. Income Taxes
For the nine months ended September 30, 2023 and the year ended December 31, 2022, the Company did not record a tax provision as the Company did not earn any taxable income in either period and maintains a full valuation allowance against its net deferred tax assets.
Note 13. 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 $
The
balance of outstanding invoices that the Factoring Company may assign back to the Company if not collected within 90 days is included
in the Company’s Accounts Receivable balance with the amounts received, net of reserves held, included with other current liabilities
on the condensed consolidated balance sheets. The Factoring Agreement was cancelled as of August 3, 2023 so no amounts are outstanding
as of September 30, 2023. The net amount of $
There are no pending or threatened legal proceedings as of September 30, 2023. The Company has no non-cancellable operating leases.
Note 14. Subsequent Events
On October 4, 2023, Mercer
Street Global Opportunity Fund, LLC, converted $
On
October 5, 2023, the Company entered into a fixed-fee loan with its merchant bank and received $
| 18 |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion provides information which management believes is relevant to an assessment and understanding of our results of operations and financial condition. The discussion should be read along with our unaudited condensed consolidated financial statements for the three and nine months ended September 30, 2023 and 2022 and notes thereto contained elsewhere in this Report, and our annual report on Form 10-K for the twelve months ended December 31, 2022 including the consolidated financial statements and notes thereto contained in such Report. The following discussion and analysis contains forward-looking statements, which involve risks and uncertainties. Our actual results may differ significantly from the results, expectations and plans discussed in these forward-looking statements. See “Cautionary Note Concerning Forward-Looking Statements.”
Overview
We are a medical device technology and software as a service (“SaaS”) company focused on enabling primary care physicians (“PCPs”) 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 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 PCPs 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 non face to face clinical decision support and 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. It is estimated, based on the national average payment data for the reimbursement codes for allergy testing and allergen immunotherapy that our PCP customers generated approximately $2,973,300 in revenues utilizing our products during the nine months ended 2023, of which $2,219,000 was the result of providing allergy diagnostic tests to patients and approximately $754,300 was the result of providing allergen immunotherapy treatments.
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 diagnostics 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”). COVID-19 has accelerated both the healthcare provider and patient acceptance of virtual care technologies. Many patients are now open to telemedicine, which is excellent, but it’s not the complete solution, as it typically requires a physician’s direct involvement. Regulators and insurance companies have come to recognize 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 encounters often without a physician’s direct participation, rather than infrequent visits. Health insurers are beginning to recognize that AI enabled digital medicine technologies such as those provided through QHSLab can provide the necessary encounters to foster patient compliance in between visits to a physician leading to better outcomes at reduced costs to the insurer.
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 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. For example, we recently introduced a tool to enable PCPs to quickly assess functional status and recovery from COVID-19 and to provide PCPs with baseline data relating to measuring long COVID symptoms, including, but not limited to, shortness of breath, pain, fatigue, muscle weakness, memory loss, depression, and anxiety as well as a range of functional limitations, such as changes in lifestyle, work, sports, and social activities.
While our revenues are largely determined by the volume of services and products delivered and the prices at which such services and products are sold, our costs are determined by a number of factors. The principal factors impacting 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 spread over a wider base of PCPs leading to a reduction in costs per sale and help to increase our gross margin.
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Results of Operations during the three and nine months ended September 30, 2023 as compared to the three and nine months ended September 30, 2022
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. During the second quarter of 2022, we began to enter into SaaS subscription agreements to provide physicians with access to our proprietary internally-developed QHSLab platform software that provides clinical decision support and patient monitoring for numerous chronic conditions seen in primary care settings including allergy, asthma, mental health, obesity and long COVID for example. During the fourth quarter of 2022, we began entering into Integrated Service Program agreements to provide physicians’ offices with agreed-upon administrative, billing and support services utilizing our QHSLab platform software.
For the three months ended September 30, 2023, we generated revenues of $336,407 compared to $269,323 of revenues for the three months ended September 30, 2022. Revenues in the third quarter of 2023 were primarily driven by sales of Allergy Diagnostic Kits of $148,912 and Immunotherapy Treatment services of $88,934 as we continued to expand the roll-out of our product lines and customer base. At the end of the third quarter of 2022, we launched our Subscription Revenue line. For the three months ended September 30, 2023, we generated $15,922 of revenues from this line compared to $4,930 for the three months ended September 30, 2022. During the end of 2022, we also initiated the Integrated Service Program product line that did not exist during the third quarter of 2022. During the third quarter of 2023, this new service generated revenue of $71,600.
For the nine months ended September 30, 2023, we generated revenues of $1,093,974 compared to $975,469 of revenues for the nine months ended September 30, 2022. Revenues in the first nine months of 2023 were primarily driven by sales of Allergy Diagnostic Kits of $536,738 and Immunotherapy Treatment services of $287,704 as we continued to expand the roll-out of our product lines and customer base. At the end of the second quarter of 2022, we launched our Subscription Revenue line. For the nine months ended September 30, 2023, we generated $55,334 of revenues from this line compared to $6,304 for the nine months ended September 30, 2022. During the end of 2022, we also initiated the Integrated Service Program product line that did not exist during most of 2022. During the nine months of 2023, this new service generated revenue of $184,803.
Our revenues consisted of the following:
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Allergy Diagnostic Kit Sales | $ | 148,912 | $ | 138,265 | $ | 536,738 | $ | 566,176 | ||||||||
| Immunotherapy Treatment Sales | 88,934 | 111,131 | 287,704 | 363,853 | ||||||||||||
| Subscription Revenue | 15,922 | 4,930 | 55,334 | 6,304 | ||||||||||||
| Integrated Service Program | 71,600 | - | 184,803 | - | ||||||||||||
| Training & Other Revenue | 3,225 | 6,937 | 3,225 | 11,038 | ||||||||||||
| Shipping and handling | 7,814 | 8,060 | 26,170 | 28,098 | ||||||||||||
| Total revenue | $ | 336,407 | $ | 269,323 | $ | 1,093,974 | $ | 975,469 | ||||||||
Cost of Revenues and Gross Profit
Cost of revenues consists of the cost of the AllergiEnd® test kits and allergen immunotherapy pharmacy prepared treatment sets, shipping costs to our customers as well as labor expenses directly related to product sales and the amortization of our capitalized software.
For the three months ended September 30, 2023 and 2022, cost of revenues was $146,897 and $143,716, respectively.
The Company generated a gross profit of $189,510 during the three months ended September 30, 2023 compared to $125,607 for the three months ended September 30, 2022. Gross margin improved to 56.3% for the quarter compared to 46.6% during the three months ended September 30, 2022.
For the nine months ended September 30, 2023 and 2022, cost of revenues was $490,294 and $490,965, respectively.
The Company generated a gross profit of $603,680 during the nine months ended September 30, 2023 compared to $484,504 for the nine months ended September 30, 2022. Gross margin increased from 49.7% during the nine months ended September 30, 2022 to 55.2% during the nine months ended September 30, 2023. The increase in gross margin for both the three and nine months ended September 30, 2023 was attributable to a combination of changes in the product mix and improved cost structure since the acquisition of intangible assets from MedScience during the quarter ended June 30, 2021.
As we continue to introduce new products at an early stage in our development cycle, 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.
Sales and Marketing
Sales and marketing expenses consist primarily of costs associated with selling and marketing our products to PCPs, principally ongoing sales efforts to recruit new PCPs and maintain our relationships with PCPs already using our software and products. These expenses include employee compensation and costs of consultants. For the three months ended September 30, 2023, sales and marketing expenses totaled $114,019, a decrease of $40,601 compared to $154,620 for the three months ended September 30, 2022.
For the nine months ended September 30, 2023, sales and marketing expenses totaled $366,055, a decrease of $21,632 compared to $387,687 for the nine months ended September 30, 2022.
The decreases in sales and marketing expenses for the period ended September 30, 2023 compared to the same period in 2022 relates primarily to the shift to internal sales and marketing personnel who are proving to be more cost effective than independent sales representatives offset by an increase in marketing spend in connection with the launch of the Integrated Service Program and Subscription Revenue products. We expect our sales and marketing expenses to increase as we seek to build our customer base and launch additional products. Nevertheless, if we are successful in onboarding a sufficient number of PCPs and maintaining our relationships with these PCPs once they begin to distribute our products, selling and marketing expenses could decrease as a percentage of revenues, though we may increase our marketing efforts as funds become available.
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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, 2023, general and administrative expenses totaled $47,277, a decrease of $60,688 compared to $107,965 for the three months ended September 30, 2022.
For the nine months ended September 30, 2023, general and administrative expenses totaled $205,799 a decrease of $115,774 compared to $321,573 for the nine months ended September 30, 2022.
The decrease is primarily due to decreased fees associated with legal, investor relations and management consulting services combined with a decrease in bad debt expense following the creation of the bad debt reserve in the second quarter of 2022.
Research and Development
Research and development (“R&D”) expenses includes expenses incurred in connection with the research and development of our medical device technology solution, including software development. R&D costs are expensed as they are incurred.
For the three months ended September 30, 2023, R&D expenses totaled $45,419 which is a decrease of $2,986 compared to $48,405 for the three months ended September 30, 2022.
For the nine months ended September 30, 2023, R&D expenses totaled $169,489 which is an increase of $33,491 compared to $135,998 for the nine months ended September 30, 2022.
The decrease in R&D expenses for the three months ended September 20, 2023, as compared to the respective period of 2022 is due to the reduction in ongoing R&D consulting fees. The increase in R&D expenses for the nine months ended September 30, 2023, as compared to the respective period of 2022 was driven by the completion of testing of our QHSLab platform software at the end of the first quarter of 2022. As a result, the spending on development is no longer being capitalized as the software is now in post-implementation stages. Any future development that may result in substantial enhancements or additional functionality for all users will be considered for capitalization as appropriate. 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.
Other Income and Expense
For the three months ended September 30, 2023, interest expense decreased by $58,123 to $48,581 from $106,704 for the three months ended September 30, 2022. For the nine months ended September 30, 2023, interest expense decreased by $170,678 to $192,268 from $362,946 for the nine months ended September 30, 2022.
The decrease was due to timing of the amortization of debt issuance costs including legal fees and warrants issued in connection with certain of our convertible notes payable. Interest expense during the first nine months of 2023 included interest on the outstanding debt as well as the amortization of debt issuance costs including legal fees and warrants issued in connection with the second Mercer note issued in July 2022 (“Second OID Note”) which was lower than the amortization of debt issuance costs including legal fees and warrants issued in connection with the first Mercer note issued in August 2021 (“First OID Note”). The amortization of those costs, which are non-cash expenses, during the quarter ended September 30, 2023 totaled $6,701, or 12% of interest expense during the quarter while the amortization of those costs during the quarter ended September 30, 2022 totaled $59,153, or 55% of interest expense for the quarter. These costs for the nine months ended September 30, 2023 totaled $61,836, or 32% of interest expense and $226,158, or 62% of the interest expense during the nine months ended September 30, 2022.
Other income for the three and nine months ended September 30, 2023 totaled $1,371 and $2,290, respectively, and related to the redemption of awards on a credit card. There was no other income in the comparative periods of 2022.
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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, 2023, we had current assets totaling $176,990, including $50,240 of cash, $83,550 of accounts receivable, $38,954 of inventory, and $4,246 related to prepaid expenses and other current assets. At such date we had total current liabilities of $2,038,413 consisting of $220,237 in accounts payable, $159,395 in other current liabilities and $1,658,781 representing the balance of outstanding loans and convertible notes. There were no long-term liabilities as the balance of loans payable are all in current liabilities.
On December 31, 2022, we had current assets totaling $285,578, including $178,694 of cash, $47,734 of net accounts receivable, $51,840 of inventory, and $7,310 related to prepaid expenses and other current assets. At such date we had total current liabilities of $1,706,826 consisting of $85,743 in accounts payable, $116,774 in other current liabilities and $1,504,309 representing the current portions of outstanding loans and convertible notes. Our long-term liabilities balance of $174,382 is associated with the long-term portion of loans payable.
We used cash of $24,462 and $281,205 in operations during the nine months ending September 30, 2023 and 2022, respectively.
During the third quarter of 2021, we issued a promissory note of $750,000 in connection with our acquisition of assets related to our AllergiEnd® products and an Original Issue Discount Secured Convertible Promissory Note in the principal amount of $806,000 (the “First OID Note”) along with warrants to purchase 930,000 shares of our common stock (the “Warrants”) for aggregate consideration of $750,000. The acquisition of the assets related to our AllergiEnd® products has enabled us to increase our margins on the sale of these products. The net proceeds of the First OID Note primarily were used to increase our sales and marketing efforts. In July 2022, to supplement our cash on hand, we issued to the holder of the First OID Note an Original Issue Discount Secured Convertible Promissory Note (the “Second OID Note”) in the principal amount of $440,000 and warrants to purchase 550,000 shares of our common stock for aggregate consideration of $400,000. The proceeds of this Note were primarily used to fulfill inventory requirements and expand our sales and marketing.
The remaining principal amount of the First OID Note and all interest accrued thereon were payable on August 10, 2022, and are secured by a lien on substantially all of our assets. The Note continues to accrue 5% interest. As noted above in July 2022 we issued the Second OID Note in the principal amount of $440,000 to the holder of the First OID Note. As a result of this issuance, the conversion price of the First OID Note was reduced to $0.20 and in 2022, the holder of the First OID Note converted an aggregate of $50,000 of the First OID Note into shares of our common stock, reducing the outstanding balance and interest accrued on the First OID Note.
The principal amount of the Second OID Note and all interest accrued thereon are payable on July 19, 2023, and are 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 common stock at a price of $0.20 per share. In addition to customary anti-dilution adjustments upon the occurrence of certain corporate events, similar to the First OID Note, the Second OID 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 remaining terms and conditions of the Second OID Note including the events of default are substantially identical to those of the First OID Note.
The 550,000 Warrants are initially exercisable for a period of three years at a price of $0.50 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. The Warrants may be exercised by means of a “cashless exercise” if at any time the shares issuable upon exercise of the Warrant are not covered by an effective registration statement.
On July 27, 2023 and again on November 10, 2023, the Company received notice from the manager of Mercer Street Global Opportunity Fund, LLC, the holder of the First and Second OID Notes that it agreed to forebear from exercising any rights it might have as a result of any defaults under the First OID Note, the Second OID Note and the related documents between the Company and the Fund, provided that it reserved all of its rights.
The Registration Rights Agreement requires the Company to file with the Securities and Exchange Commission within 60 days following the closing of the issuance of the Note, a registration statement (the “Registration Statement”) with respect to all shares which may be acquired upon conversion of the Note and exercise of the Warrant (the “Registrable Securities”) and to cause the Registration Statement to be declared effective no later than 90 days after the date of the issuance of the Note. A registration statement with respect to the shares issuable upon conversion of the Second OID Note and exercise of the 550,000 Warrants was timely filed and has been declared effective.
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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 $3,896,621 at September 30, 2023, generated net losses of $381,725 and $996,001 for the nine months ended September 30, 2023 and the year ended December 31, 2022, respectively, and used cash of $24,462 and $350,994 in operations in these periods. We are currently in default of our obligations under our OID Notes and the note incurred to acquire assets related to our AllergiEnd® products. 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 and, in the interim, to convince the holders of our notes to forbear from exercising any rights they might have as a result of our defaults. 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.
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 though they will not enable us to pay our loans and OID Notes. In the past we have had to rely upon our principal shareholder to support our operations. More recently we have financed our operations through the proceeds from private placements of equity and debt instruments issued to third parties. 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, could cause the conversion prices of our OID Notes to decrease to the detriment of our stockholders and could cause the price of our common stock to decrease. 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.
Our ability to obtain funds through the issuance of debt or equity is dependent upon the state of the financial markets at such time as we may seek to raise funds. The state of the capital markets may be adversely impacted by various risks and uncertainties, including, but not limited to future and current impacts of global events such as COVID-19 and the war in the Ukraine, increases in inflation and other risks detailed in our 2022 Annual Report on Form 10-K.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures.
As of September 30, 2023, the Company’s chief executive officer who is also our chief financial officer conducted an evaluation regarding the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) 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/ 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 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, 2022, which could materially affect our business, financial condition or future results.
ITEM 6. EXHIBITS.
(a) 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.
* Filed herewith
** Furnished herewith
| 24 |
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.
| QHSLab, Inc. | ||
| By: | /s/ Troy Grogan | |
| Troy Grogan | ||
| Chief Executive Officer and Chief Financial Officer | ||
| Date: | November 13, 2023 | |
| 25 |
Exhibit 31
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
AND PRINCIPAL FINANCIAL OFFICER PURSUANT TO RULE 13a-14(a) UNDER THE EXCHANGE ACT
I, Troy Grogan, certify that:
1. I have reviewed this quarterly report of QHSLab, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the issuer as of, and for, the periods presented in this report;
4. As the certifying officer I am responsible for establishing and maintaining disclosure controls and procedures (as 4efined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the issuer and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the issuer’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the issuer’s internal control over financial reporting that occurred during the issuer’s most recent fiscal quarter (the issuer’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the issuer’s internal control over financial reporting; and
5. As the certifying officer I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the issuer’s auditors and the audit committee of the issuer’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the issuer’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the issuer’s internal control over financial reporting.
| Date: November 13, 2023 | |
| /s/ Troy Grogan | |
| CEO and CFO |
Exhibit 32
(18 U.S.C. SECTION 1350)
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of QHSLab, Inc. (the “Company”) on Form 10-Q for the period ended September 30, 2023 (the “Report”), as filed with the Securities and Exchange Commission on the date hereof, I, Troy Grogan, CEO and CFO of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| /s/ Troy Grogan | |
| Troy Grogan | |
| CEO and CFO | |
| Dated: November 13, 2023 |
A signed original of this written statement required by Section 906 has been provided to QHSLab, Inc. and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.