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 ☐ No
On November 13, 2024, the Registrant had shares of common stock outstanding.
TABLE OF CONTENTS
| Item | Description | Page | ||
| PART I - FINANCIAL INFORMATION | ||||
| ITEM 1. | FINANCIAL STATEMENTS. | 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 6. | EXHIBITS. | 24 |
| 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, 2024 | December 31, 2023 | |||||||
| (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 | ||||||||
| 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: | ||||||||
| 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 | ||||||||
| Common stock, shares authorized, $ par value; and shares issued and outstanding at September 30, 2024 and December 31, 2023, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ deficit | ( | ) | ( | ) | ||||
| Total liabilities and stockholders’ deficit | $ | $ | ||||||
See accompanying notes to the unaudited condensed consolidated financial statements.
| 5 |
QHSLab, Inc.
Condensed Consolidated Statements of Operations
| Three Months Ended September 30, 2024 | Three Months Ended September 30, 2023 | Nine Months Ended September 30, 2024 | Nine Months Ended September 30, 2023 | |||||||||||||
| (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 income (loss) | ( | ) | ( | ) | ||||||||||||
| Other income and (expense): | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income | ||||||||||||||||
| Net income (loss) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| Basic net income (loss) per share | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| Diluted net income (loss) per share | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| Weighted average shares outstanding: | ||||||||||||||||
| Basic | ||||||||||||||||
| Diluted | ||||||||||||||||
See accompanying notes to the unaudited condensed consolidated financial statements.
| 6 |
QHSLab, Inc.
Condensed Consolidated Statements of Stockholders’ Deficit
(Unaudited)
| Preferred Stock- Series A | Preferred Stock - Series A-2 | Common Stock | Additional Paid-In | Accumulated | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | (Deficit) | ||||||||||||||||||||||||||||
| Balance at January 1, 2024 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||
| Conversion of notes payable | - | - | ||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| Balance at March 31, 2024 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||
| Common stock dividend on A-2 Preferred Shares | - | - | ( | ) | ||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| Balance at June 30, 2024 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||
| Net income | - | - | - | |||||||||||||||||||||||||||||||||
| Balance at September 20. 2024 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||
| 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 20, 2023 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||
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, 2024 | For the Nine Months Ended September 30, 2023 | |||||||
| Operating activities | ||||||||
| Net income (loss) | $ | $ | ( | ) | ||||
| Adjustments to reconcile net income (loss) to net cash from operating activities: | ||||||||
| Allowance for doubtful accounts | ||||||||
| Amortization | ||||||||
| Amortization of debt and warrant issuance costs | ||||||||
| Stock-based compensation | ||||||||
| 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 | ( | ) | ||||||
| Financing activities: | ||||||||
| Proceeds from related-party borrowings | ||||||||
| Proceeds of loan borrowings | ||||||||
| Repayments of loan borrowings | ( | ) | ( | ) | ||||
| 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 | $ | $ | ||||||
| Common stock dividends on A-2 preferred shares | $ | $ | ||||||
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 unaudited condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern. The Company has only recently operated profitably, is highly leveraged and has only recently begun to generate cash from operations. 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 increased positive cash flows and profitability 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 unaudited condensed consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
Note 3. Basis of Presentation
The unaudited 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, 2023.
The accounting policies are described in the “Notes to the Consolidated Financial Statements” in the 2023 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, 2024 are not necessarily indicative of the operating results for the full year or for any other subsequent interim period.
Accounting Policies
Use of Estimates: The preparation of unaudited 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 unaudited 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 unaudited 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 estimates future expected credit losses over the life of the receivables based on past experience, current information and forward-looking economic considerations and adjusts the reserve for uncollectible balances as necessary based on experience. 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-month period ended September 30, 2024 and one customer that comprised greater than 10% of the outstanding accounts receivable balance as of September 30, 2024.
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 three years which is the estimated economic life of the software and is included in the cost of revenue on the condensed consolidated statements of operations.
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 net of accumulated amortization 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:
| 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 occur which 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 (“ASU”) 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, or “ASC 606”, the Company recognizes revenue upon transfer of control of goods or completion of performance obligations, in an amount that reflects the consideration that is expected to be received in exchange for those goods and services. 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, immunotherapy treatments, and digital medicine services 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 or services.
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 clinical decision support services utilizing the Company’s internally-developed software. Revenue is recognized each month based on actual services provided during that month.
The Company has entered into an agreement with a third party to provide clinical research services utilizing its proprietary internally-developed software. The agreement details the performance obligations of the Company and revenue is recognized as those obligations are met.
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.
The Company’s revenues consisted of the following:
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Allergy Diagnostic Kit Sales | $ | $ | $ | $ | ||||||||||||
| Integrated Service Program | ||||||||||||||||
| Immunotherapy Treatment Sales | ||||||||||||||||
| Clinical Study Revenue | ||||||||||||||||
| Subscription Revenue | ||||||||||||||||
| Shipping and Handling | ||||||||||||||||
| Training & Other Revenue | ||||||||||||||||
| Total revenue | $ | $ | $ | $ | ||||||||||||
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, 2024 and 2023,
there was $
| 11 |
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 loss carry forwards of $
Recently Issued Accounting Standards
In November 2023, the Financial Accounting Standards Board (“FASB”) issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (“ASU 2023-07”), which requires all public entities, including public entities with a single reportable segment, to expand disclosures, on an annual and interim basis, about reportable segments and requires more enhanced information about a reportable segment’s expenses, interim segment profit or loss, and how a public entity’s chief operating decision maker uses reported segment profit or loss information in assessing segment performance and allocating resources. ASU 2023-07 is to be applied retrospectively to all prior periods presented in the financial statements with an effective date for all public entities for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Adoption of ASU 2023-07 had no impact on the Company’s unaudited financial statements.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures (“ASU 2023-09”), which requires enhanced income tax disclosures, including specific categories and disaggregation of information in the effective tax rate reconciliation, disaggregated information related to income taxes paid, income or loss from continuing operations before income tax expense or benefit, and income tax expense or benefit from continuing operations. ASU 2023-09 is effective for annual periods beginning after December 15, 2024, with early adoption permitted. The Company is currently in the process of evaluating the impact of this pronouncement on it 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.
| 12 |
Note 4. Accounts Receivable
Accounts receivable is recorded in the unaudited 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 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:
| September 30, 2024 | December 31, 2023 | |||||||
| 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, 2024 and December 31, 2023:
| Estimated Useful Life (in years) | September 30, 2024 | December 31, 2023 | ||||||||
| 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 the Company’s 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. Amortization related to the QHSLab platform 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 $
The Company evaluates intangible assets with infinite lives for impairment at least annually and evaluates intangible assets with finite lives when events or circumstances indicate an impairment may exist. No impairments or changes in useful lives were recognized during the nine-month period ended September 30, 2024 and the year ended December 31, 2023.
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 $
The
Promissory Note provides for various events of default similar to those provided for in similar transactions, including the failure to
timely pay amounts due thereunder. In the event of a default, the interest rate on the outstanding principal would increase to predetermined
interest rate defined in the Promissory Note. The Company
has deferred certain principal payments and MedScience has indicated that it would forbear taking any action but reserves all of its
rights under its agreement. The most recent notice of forbearance was received on February 19, 2024. The combined principal due along
with accrued interest as of September 30, 2024 is $
On
August 12, 2024, the Company entered into a fixed-fee short-term loan with its merchant bank and received $
| 13 |
Note 7. Convertible Notes Payable
Convertible notes payable at September 30, 2024 and December 31, 2023 consist of the following:
| September 30, 2024 | December 31, 2023 | |||||||
| Note 1 – Shareholder | $ | $ | ||||||
| Note 2 – Mercer Note | ||||||||
| Note 3 – Mercer Note #2 | ||||||||
| 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 terms and conditions of which may not be indicative of what a third-party investor may agree to. 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. On October 1, 2022, the Maturity Date of Note 1 was extended to December 31, 2023 and further extended to December 31, 2024 during the quarter ended March 31, 2024. As of September 30, 2024 and December 31, 2023, this note had $ and $, respectively, of accrued interest, which is included within other current liabilities on the unaudited 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 “$806,000 Note”) in the
principal amount of $
The
principal amount of the $806,000 Note and all interest accrued thereon is payable on August 10, 2022, and is secured by a lien on substantially
all of the Company’s assets. The $806,000 Note provides for interest at the rate of
The $806,000 Note provides for various events of default similar to those provided for in similar transactions, including the failure to timely pay amounts due thereunder. In the event of a default, the interest rate on the outstanding principal would increase during the continuance of the default to a Default Interest Rate defined in the $806,000 Note. Additionally, all outstanding amounts would be paid at the holder’s discretion at a Mandatory Default Amount also defined in the $806,000 Note.
On
November 11, 2021, Mercer Street Global Opportunity Fund, LLC (“Mercer Fund”), converted $
The
As
a result of the issuance of a $
On
October 5, 2023, at the request of Mercer Fund, the Company agreed to reduce the conversion price with respect to $
On
March 4, 2024, at the request of Mercer Fund, the Company agreed to reduce the conversion price with respect to $
On February 19, 2024, the Company received the most recent notice from the manager of Mercer Fund of its agreement to forbear from the exercise of any rights it might have as a result of any defaults under the $806,000 Note and the related documents between the Company and the Mercer Fund, provided that the Mercer Fund reserved all of its rights under such agreements.
As
of September 30, 2024, all original issue discount
and debt issuance costs, including the allocated relative fair value of the Warrants, have been recognized. The principal
balance of $
| 14 |
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 $440,000 Note and all interest accrued thereon is payable on July 19, 2023, and are secured by a lien on substantially
all of the Company’s assets. The $440,000 Note provides for interest at the rate of
The $440,000 Note provides for various events of default similar to those provided for in similar transactions, including the failure to timely pay amounts due thereunder. The $440,000 Note provides further that the Company will be liable to the Mercer Fund for various amounts, including the cost of a buy-in, if the Company shall default in its obligation to register the shares issuable upon conversion of the $440,000 Note for sale by the Mercer Fund under the Securities Act or otherwise fails to facilitate Buyer’s sale of the shares issuable upon conversion of the $440,000 Note as required by the terms of the $440,000 Note. In the event of a default, the interest rate on the outstanding principal would increase during the continuance of the default to a Default Interest Rate defined in the $440,000 Note. Additionally, all outstanding amounts would be paid at the holder’s discretion at a Mandatory Default Amount also defined in the $440,000 Note.
On February 19, 2024 the Company received the most recent notice from the manager of the Mercer Fund, LLC that it agreed to forbear from exercising any rights it might have as a result of any defaults under the $440,000 Note and the related documents between the Company and the Fund, provided that it reserved all of its rights.
The
The Company accounts for the allocation of its issuance costs related 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 $440,000 Note, along with associated interest, is recorded with current liabilities
on the Company’s unaudited condensed consolidated balance sheets. As of September 30, 2024 and December 31, 2023, without
giving effect to additional interest and penalties of $
Note 8. Preferred Stock
Issuance of 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 $
Issuance of Series A-2 Preferred Stock
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 Stock 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.
As of September 30, 2024, the holders of the series A-2 Preferred Stock had received shares of common stock in satisfaction of dividends accrued through December 31, 2023.
| 16 |
The Company calculates net income or loss per common share in accordance with ASC 260, Earnings Per Share. Basic and diluted net income (loss) per common share were determined by dividing net income (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 outstanding common stock options, common stock warrants, convertible debt and preferred shares have not been included in the computation of diluted net loss per share for the three and nine-month periods ended September 30, 2023 as the result would be anti-dilutive.
The Company had net income for the three and nine months ended September 30, 2024. As a result, the computation of the weighted average number of outstanding shares for the diluted earnings per common share for these periods included shares relating to the potential conversion of Series A and Series A-2 Preferred Stock to common shares. Other potentially dilutive shares were excluded from the calculation based on the exercise price of those shares.
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Stock options | ||||||||||||||||
| Stock warrants | ||||||||||||||||
| Total shares excluded from calculation | ||||||||||||||||
During the nine-month periods ended September 30, 2024 and 2023, there was $ and $, respectively, in stock-based compensation associated with stock options included in research and development expense.
There were options exercised, forfeited or cancelled during the period. During the nine-month periods ended September 30, 2024 and 2023 there were options granted.
As of September 30, 2024, all compensation related to outstanding options has been recognized. The options were expensed over their respective vesting periods.
| 17 |
| Date Issued | Number Outstanding | Number Exercisable | Exercise Price | Expiration Date | ||||||||||
| $ | ||||||||||||||
| $ | ||||||||||||||
| $ | ||||||||||||||
| Total | ||||||||||||||
Warrants outstanding at September 30, 2024 consist of:
| Date Issued | Number Outstanding | Number Exercisable | Exercise Price | Expiration Date | ||||||||||
| $ | ||||||||||||||
| Total | ||||||||||||||
During
the nine months ended September 30, 2024,
Note 11. Related Party Transactions
Due
to Related Parties: Amounts due to related parties consist of cash advances received from our principal shareholder, bear no interest
and are due on demand. These terms and conditions may not be indicative of what a third-party investor may agree to. As of September
30, 2024 and December 31, 2023 amounts due to related-parties totaled $
Convertible notes payable, related party: See Note 7.
Note 12. Income Taxes
For the nine-month period ended September 30, 2024 and the year ended December 31, 2023, the Company did not record a tax provision. The Company did not earn any taxable income during the year ended December 31, 2023. Although the Company had taxable income in the period ended September 30, 2024, it anticipates that any income taxes payable will be offset by a reduction in its net operating loss. The Company maintains a full valuation allowance against its net deferred tax assets.
Note 13. Commitments and Contingencies
There are no pending or threatened legal proceedings as of September 30, 2024. The Company has no non-cancellable operating leases.
Note 14. Subsequent Events
On October 18, 2024, the Company entered into a Consulting Agreement with Juan D. Oms, MD, FAPA, pursuant to which Dr. Oms will provide strategic advisory services in psychiatry and behavioral health to the Company. In consideration of his services, Dr. Oms received a one-time payment of shares of the Company’s common stock (the “Share Payment”). The term of the Agreement is twenty-four months.
| 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, 2024 and 2023 and notes thereto contained elsewhere in this Report, and our annual report on Form 10-K for the twelve months ended December 31, 2023 including the consolidated financial statements and notes thereto contained in such Report. The following discussion and analysis contain 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 making and remote patient monitoring, to address chronic care and preventive medicine and are reimbursable to the medical practice.
Increasingly, regulators and insurance companies have come to recognize what health care technologists have been saying for nearly 17 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. More health insurers have realized 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.
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.
Our ability to operate profitably is determined by our ability to generate revenues from the licensing of our QHSLab software and the sale of diagnostic related products and treatment protocols and the provision of services through our QHSLab system. 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.
| 19 |
Results of Operations during the three and nine months ended September 30, 2024 as compared to the three and nine months ended September 30, 2023
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 SaaS subscription agreements to provide physicians with access to our proprietary internally-developed QHSLab platform software that provides clinical decision support and patient assessments for numerous chronic conditions seen in primary care settings including allergy, asthma, anxiety, depression, and chronic pain for example. During the fourth quarter of 2022, we began entering into Integrated Service Program (“ISP”) agreements to provide physicians’ offices with agreed-upon clinical decision support, digital health assessments, administrative, and billing services utilizing our QHSLab platform software. During the quarter ended September 30, 2024, we entered into a clinical study agreement with a third party to provide clinical research services utilizing our QHSLab platform software.
For the three months ended September 30, 2024, we generated revenues of $544,285 compared to $336,407 of revenues for the three months ended September 30, 2023 which was driven by a 126% increase in our ISP revenues combined with the recognition of the initial milestone related to our clinical study during the period.
For the nine months ended September 30, 2024, we generated revenues of $1,505,945 compared to $1,093,974 of revenues for the nine months ended September 30, 2023. The increase in revenues in the first nine months of 2024 were attributed to a 143% increase in revenues generated from ISP services to $449,203 compared to $184,803 during the nine months ended September 30, 2023; a 21% increase in sales of Allergy Diagnostic Kits to $648,175 compared to $536,738 for the nine months ended September 30, 2023 and the inclusion of revenues as a result of the achievement of the initial performance obligation associated with our clinical study.
Our revenues consisted of the following:
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Allergy Diagnostic Kit Sales | $ | 220,115 | $ | 148,912 | $ | 648,175 | $ | 536,738 | ||||||||
| Integrated Service Program | 161,751 | 71,600 | 449,203 | 184,803 | ||||||||||||
| Immunotherapy Treatment Sales | 63,872 | 88,934 | 242,679 | 287,704 | ||||||||||||
| Clinical Study Revenue | 74,250 | - | 74,250 | - | ||||||||||||
| Subscription Revenue | 12,829 | 15,922 | 45,538 | 55,334 | ||||||||||||
| Shipping and Handling | 8,171 | 7,814 | 26,991 | 26,170 | ||||||||||||
| Training & Other Revenue | 3,297 | 3,225 | 19,109 | 3,225 | ||||||||||||
| Total revenue | $ | 544,285 | $ | 336,407 | $ | 1,505,945 | $ | 1,093,974 | ||||||||
Cost of Revenues and Gross Profit
Cost of revenues consists of the cost of AllergiEnd® test kits and allergen immunotherapy pharmacy prepared treatment sets, shipping costs to our customers as well as administrative services and labor expenses directly related to our ISP sales.
For the three months ended September 30, 2024 and 2023, cost of revenues was $179,152 and $146,897, respectively.
The Company generated a gross profit of $365,133 during the three months ended September 30, 2024 compared to $189,510 for the three months ended September 30, 2023. Gross margin improved to 67.1% for the quarter compared to 56.3% during the three months ended September 30, 2023.
For the nine months ended September 30, 2024 and 2023, cost of revenues was $560,209 and $490,294, respectively.
The Company generated a gross profit of $945,736 during the nine months ended September 30, 2024 compared to $603,680 for the nine months ended September 30, 2023. Gross margin increased from 55.2% during the nine months ended September 30, 2023 to 62.8% during the nine months ended September 30, 2024. The increase in gross margin for both the three and nine-month periods ended September 30, 2024 was attributable to a combination of changes in the product mix including the growth of ISP revenue and improved cost structure since the acquisition of intangible assets from MedScience and synergies across our core product lines as well as the recognition of revenue as a result of the achievement of the initial research performance obligation associated with the clinical study which utilizes costs already included in cost of goods sold.
As we continue to introduce new products at an early stage in our development cycle, our 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, 2024, sales and marketing expenses totaled $122,816, an increase of $8,797 compared to $114,019 for the three months ended September 30, 2023.
For the nine months ended September 30, 2024, sales and marketing expenses totaled $378,946, an increase of $12,891 compared to $366,055 for the nine months ended September 30, 2023.
The increases in sales and marketing expenses for the periods ended September 30, 2024 compared to the same periods in 2023 relate primarily to increases in marketing expenses and payroll-related expenses as we are investing in more sales and marketing activities to support our increasing ISP revenue. We expect our sales and marketing expenses to continue 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 fully utilize our products, sales and marketing expenses could decrease as a percentage of revenues, though we may increase our marketing efforts as funds become available.
| 20 |
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, 2024, general and administrative expenses totaled $55,699, an increase of $8,422, compared to $47,277 for the three months ended September 30, 2023.
For the nine months ended September 30, 2024, general and administrative expenses totaled $193,096 a decrease of $12,703, compared to $205,799 for the nine months ended September 30, 2023.
The increase general and administrative expenses in the quarter ended September 30, 2024 is primarily due to increases in sales processing, cloud-related hosting and legal fees partially offset by continued decreases in management consulting services. The decrease in general and administrative expenses for the nine months ended September 30, 2024 reflects the larger decreases in management consulting services earlier in the year more than offsetting the increases in the sales processing, cloud-related hosting and legal fees during the period.
Research and Development
Research and development (“R&D”) 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, 2024, R&D expenses totaled $79,500 which is an increase of $34,081 compared to $45,419 for the three months ended September 30, 2023.
For the nine months ended September 30, 2024, R&D expenses totaled $186,949 which is an increase of $17,460 compared to $169,489 for the nine months ended September 30, 2023.
The increase in R&D expenses for both the quarter and nine months ended September 30, 2024, as compared to 2023, was driven by increases in software development expenses as we continue to expand the commercialization of our QHSLab platform software and R&D consulting expenses including the appointment of a medical and scientific affairs liaison during the second quarter of 2024. We expect that our R&D expenses will continue to increase as we invest in and expand our operations and further develop new products and services as part of our growth strategy.
Other Income and Expense
For the three months ended September 30, 2024, interest expense decreased by $9,256 to $39,325 from $48,581 for the three months ended September 30, 2023. For the nine months ended September 30, 2024, interest expense decreased by $87,957 to $104,311 from $192,268 for the nine months ended September 30, 2023.
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 2024 included only interest on the outstanding debt balance as all debt issuance costs including legal fees and warrants issued in connection with the second Mercer note in July 2022 (“Second OID Note”) and the first Mercer note issued in August 2021 (“First OID Note”) were fully amortized by the end of 2023. The amortization of those costs, which are non-cash expenses, during the three months ended September 30, 2023 totaled $6,701, or 12% of interest expense during the quarter and $61,836, or 32% during the nine months ended September 30, 2023.
There was no other income for both the three and nine months ended September 30, 2024 compared to $1,371 for the three months and $2,290 for the nine months ended September 30, 2023 which were related to the redemption of awards on a credit card.
| 21 |
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, 2024, we had current assets totaling $349,274, including $95,945 of cash, $198,221 of accounts receivable, $40,033 of inventory, and $15,075 related to prepaid expenses and other current assets. At such date we had total current liabilities of $2,089,850 consisting of $243,143 in accounts payable, $140,539 in other current liabilities and $1,706,168 representing the current portions of outstanding loans and convertible notes. There was $10,060 in long-term liabilities on our balance sheet related to the non-current portion of a loan payable.
On December 31, 2023, we had current assets totaling $156,132, including $51,582 of cash, $71,382 of accounts receivable, $25,181 of inventory, and $7,987 related to prepaid expenses and other current assets. At such date we had total current liabilities of $2,057,049 consisting of $78,907 in accounts payable, $196,590 in other current liabilities and $1,781,552 representing the current portions of outstanding loans and convertible notes. There were no long-term liabilities on our balance sheet as the entirety of our loans payable are included in current liabilities.
We generated cash flows of $87,387 from operations during the nine-month period ending September 30, 2024, we used cash of $24,462 in operations during the same period ending September 30, 2023. The generation rather than use of cash was driven by an increase in revenue and improved gross margins during the nine-month period ended September 30, 2024 compared to the same period ended September 30, 2023.
During the third quarter of 2021, we issued a promissory note of $750,000 (the “Acquisition Note”) 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. 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.
All amounts outstanding under the First OID Note and Second OID Note were payable on August 10, 2022, and July 19, 2023, respectively, and are secured by a lien on substantially all of our assets.
The remaining principal and interest accrued on the Acquisition Note was $423,931 as of September 30, 2024, and we are in default under this Note. We last received a notice of forbearance from the holder of the Acquisition Note on February 19, 2024, in which it reserved all of its rights. We also are currently in default of our obligations under the First OID Note and the Second OID Note. We last received a notice of forbearance from the manager of Mercer Street Global Opportunity Fund, LLC, the holder of the First and Second OID Notes, on February 19, 2024, in which it reserved all rights it might have as a result of our defaults under the First OID Note, the Second OID Note and the related documents between us and the Fund. Amounts accrued as interest under the Acquisition Note, the First and Second OID Notes do not include interest and penalties which would be payable if the holder of such Notes elects to exercise its rights under the default provisions of the Notes. There is no guarantee that the manager of Mercer Street Global Opportunity Fund, LLC and the holder of the Acquisition Note will continue to forbear from exercising such rights as they may have to collect amounts due, including seeking to foreclose upon such liens they may have on our assets.
| 22 |
Plan of Operation and Funding
The accompanying unaudited 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 $4,014,143 at September 30, 2024, generated net income of $28,350 and net losses of $381,725 for the nine months ended September 30, 2024 and the year ended December 31, 2023, respectively, and generated cash from operations of $87,387 in the nine months ended September 30, 2024, and used $159,627 of cash in operations in the year ended December 31, 2023. We are currently in default of our obligations under our OID Notes and the Acquisition Note. 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.
Our working capital requirements are expected to increase in line with the growth of our business. We will remain highly leveraged as we seek to expand our business. Existing working capital and anticipated cash flows are expected to be adequate to fund our operations over the next twelve months. If necessary, we would seek to supplement such amounts through the issuance of debt or equity.
In addition to using our cash to satisfy our working capital needs, we have begun to make payments on our outstanding indebtedness to avoid continued growth in the amount of accrued interest and penalties, and to retain the support of our lenders. While the holders of our First and Second OID Notes and MedScience have agreed to forbear from exercising their rights as a result of our defaults at this time, there is no guarantee they will continue to do so. If they elect to exercise their rights, the amount of accrued interest and penalties owed under the agreements will substantially increase. Further, should they demand immediate payment of all amounts currently due and, in the case of Mercer, exercise its rights under its Security Agreements, it would have a material adverse effect on our business and jeopardize our ability to continue operations. Any future effort to restructure existing indebtedness through agreements with our current lenders to allow us to increase the amount we can devote to expanding our operations will require the consent of our current lenders and likely would require the issuance of additional debt or equity securities. Should we seek to raise additional capital to satisfy our lenders, there is no assurance sufficient amounts will be available.
While we are focused on our business, we intend to continually explore our options to raise additional capital or, when available, borrow additional funds on terms which we believe are favorable to us. Additional issuances of equity or convertible debt securities will result in dilution to our current shareholders, could require the issuance of equity securities at prices we believe are below our true value 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 borrowings could require that we grant the lenders a security interest or other rights that impede our ability to operate as we deem best for our shareholders. Further, any default under a loan agreement could result in an action which could force us to seek bankruptcy protection. 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 maintain or expand our existing operations, take advantage of prospective new business endeavors or opportunities, which could significantly and materially restrict our business and adversely impact our financial results.
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 wars in the Ukraine and Israel, increases in inflation and other risks detailed in the risk factors sections detailed in our Annual Report on Form 10-K for the year ended December 31, 2023.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures.
As of September 30, 2024, our chief executive officer, who is also our chief financial officer conducted an evaluation regarding the effectiveness of our 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. Many of these deficiencies stem from a lack of adequate personnel, including individuals with experience in financial reporting. Management has identified corrective actions for the weakness and will periodically reevaluate our ability 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.
| 23 |
PART II - OTHER INFORMATION
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, 2023, 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.
| 101.INS | Inline XBRL Instance Document | |
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | |
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
| 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, 2024 | |
| 25 |