The following discussion and analysis of our financial condition and result of
operations contains forward-looking statements and involves numerous risks and
uncertainties, including, but not limited to, those described in the "Risk
Factors" section of this Report. Actual results may differ materially from those
contained in any forward-looking statements. In some cases, you can identify
forward-looking statements by terminology such as "may," "will," "should,"
"expect," "plan," "anticipate," "believe," "estimate," "predict," "potential" or
"continue," the negative of such terms or other comparable terminology. These
statements are only predictions. Although we believe that the expectations
reflected in the forward-looking statements are reasonable, we cannot guarantee
future results, levels of activity, performance or achievements. Moreover,
neither we, nor any other person, assume responsibility for the accuracy and
completeness of the forward-looking statements. We are under no obligation to
update any of the forward-looking statements after the filing of this Report to
conform such statements to actual results or to changes in our expectations.
The following discussion and analysis of financial condition and results of
operations relates to the operations and financial condition reported in the
consolidated financial statements of QHSLab, Inc. and its subsidiaries for the
years ended December 31, 2022 and 2021 and should be read in conjunction with
such consolidated financial statements and related notes included in this
report.
Overview
We are a medical device technology and software as a service (SaaS) company
focused on enabling primary care physicians (PCP's) to increase their revenues
by providing them with relevant, value-based tools to evaluate and treat chronic
disease as well as provide preventive care through reimbursable procedures. In
some cases, the products we 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 $4,231,250 in
revenues utilizing our products during the year ended 2022, of which $2.85
million was the result of providing allergy diagnostic tests to patients and
approximately $1.39 million 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"). The ultimate impact of the COVID-19 pandemic and the
responses of governments and individuals to the outbreak, such as the movement
to work from home, disruptions to supply chains and the attacks on the efficacy
of vaccines is highly uncertain and we do not yet know the full extent of
potential impacts on our business, finances or the global economy as a whole.
However, these effects could have a material impact on our liquidity, capital
resources and operations.
COVID-19 has accelerated both the healthcare provider and patient acceptance of
virtual care 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 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.
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, helping to increase our gross
margin.
21
Results of Operations during the year ended December 31, 2022 as compared to the
year ended December 31, 2021
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 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 year ended December 31, 2022, we generated revenues of $1,243,186
compared to $1,414,421 of revenues in 2021. The revenue decrease for the year
ended December 31, 2022, reflects the negative impact of international shipping
delays on our inventory combined with deteriorating economic conditions stemming
from rising interest rates and inflation. Revenues in 2022 were primarily driven
by sales of Allergy Diagnostic Kits of $685,062 and Immunotherapy Treatment
services of $484,411 as we continued to expand the roll-out of our product lines
and customer base. During 2022, we also initiated several new product lines
including subscription revenue of $18,654, Training and other revenue of $11,288
and Integrated Service Program revenue of $8,137.
Our revenues consisted of the following:
For the Years Ended
December 31,
2022 2021
Allergy Diagnostic Kit Sales $ 685,062 $ 854,930
Immunotherapy Treatment Sales
484,411 516,013
Subscription Revenue 18,654 -
Training & Other Revenue 11,288 -
Integrated Service Program Revenue 8,137 -
Shipping and handling 35,634 43,478
Total revenue $ 1,243,186 $ 1,414,421Cost of Revenues and Gross Profit
Cost of revenues consists of the cost of the AllergiEnd® test kit products and
allergen immunotherapy pharmacy prepared treatment sets, shipping costs to our
customers as well as labor expenses directly related to product sales.
For the years ended December 31, 2022 and 2021, cost of revenues was $623,667
and $743,673, respectively.
The Company generated a gross profit of $619,519, for the year ended December
31, 2022 and $670,748, in 2021. Gross margin increased from 47.4% during the
year ended December 31, 2021 to 49.8% during the year end December 31, 2022. The
increase in gross margin 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.
22
For the year ended December 31, 2022, sales and marketing expenses totaled
$530,317 compared to $592,068 for the year ended December 31, 2021.
The decreases in sales and marketing expenses for the year ended December 31,
2022 compared to 2021 relates to the shift of marketing efforts to a more
internal effort rather than relying upon third-party providers. 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.
General and Administrative
General and administrative expenses consist primarily of costs associated with
operating a business with publicly traded securities, including accounting,
legal and management consulting fees.
For the year ended December 31, 2022, general and administrative expenses
totaled $387,512, a decrease of $66,496, compared to $454,008 for the year ended
December 31, 2021.
The decrease in general and administrative expenses for the year ended December
31, 2022, as compared to 2021, was primarily due to decreased fees for legal,
investor relations and management services partially offset by an increase in
bad debt expense related to the creation of our allowance for uncollectible
accounts, expenses associated with processing payments on the sales invoices
generating revenue which began during the third quarter of 2021 and
accounting-related expenses.
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 year ended December 31, 2022, R&D expenses totaled $190,117, which is an
increase of $99,243, compared to $90,874 for the year ended December 31, 2021.
The increases in R&D expenses for the year ended December 31, 2022, as compared
to 2021, were driven by the completion of testing of our QHSLab platform
software. 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 Expense
For the year ended December 31, 2022, interest expense increased by $186,952 to
$433,442 from $246,490 for the year ended December 31, 2021. Interest expense
during the year of 2022 was all related to interest on outstanding debt
balances, primarily outstanding convertible notes payable. The increase in
interest expenses for the year ended December 31, 2022, was due to higher debt
balances, primarily related to Original Issue Discount Secured Convertible
Promissory Notes entered into during August 2021 and July 2022. Interest expense
during 2022 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 sale of our convertible note in 2021, the convertible note
sold in July 2022 and the note issued to purchase assets related to our
AllergiEnd® products. The amortization of those costs, which are non-cash
expenses, totaled $254,182 or 59% of the interest expense during 2022.
23
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 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.
On December 31, 2021, we had $445,782 of current assets including $286,855 of
cash, $70,474 of accounts receivable, $65,740 of inventory, $22,713 related to
prepaid expenses and other current assets. We had total current liabilities of
$874,954 consisting of $20,370 in accounts payable, $253,865 relating to the
current portions of loan balances, $542,104 relating to current portions of
convertible notes payable and $58,615 in other current liabilities. Our
long-term liabilities balance of $509,477 consisted of convertible notes
totaling $100,000 and $402,956 associated with the long-term portion of loans
payable and accrued interest expenses of $6,521.
The decrease in our assets from December 31, 2021, to December 31, 2022, relates
primarily to use of cash in operations combined with lower accounts receivable,
inventory and prepaid balances as we actively manage our available cash balance.
The increase in our liabilities from December 31, 2021, to December 31, 2022,
relates primarily to the Original Issue Discount Secured Convertible Promissory
Note in the principal amount of $440,000 (the "$440,000 Note") issued along with
warrants to purchase 550,000 shares of our common stock for aggregate
consideration of $400,000 combined with accrued interest on all our outstanding
loan balances.
We used cash of $350,994 and $354,738 in operations during the years ended
December 31, 2022 and 2021, 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 will primarily be
used to fulfill our inventory requirements and expand our sales and marketing.
The remaining principal amount of the First OID Note and all interest accrued
thereon was payable on August 10, 2022, and is secured by a lien on
substantially all of our assets. On October 17, 2022, the Company received
notice from the manager of Mercer Street Global Opportunity Fund, LLC, the
holder of our OID Notes, of its agreement to forebear from the exercise of any
rights it might have as a result of any defaults under the First OID Note and
the related documents between the Company and the Fund, provided that the Fund
reserved all of its rights under such agreements. The Note continues to accrue
5% interest. There is no assurance how long the holder of the First OID Note
will provide forbearance from default. If the holder were to seek to exercise
its rights under the Note, it could have a material adverse impact on the price
of our common stock. 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 to $758,171 as of
December 31, 2022.
The principal amount of the Second OID Note and all interest accrued thereon is
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.
Plan of Operation and Funding
The accompanying 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 $3,514,896 at December 31, 2022, generated net losses of $996,001 and
$770,176 for the years ended December 31, 2022 and 2021, respectively, and used
cash of $350,994 and $354,738 in operations in these periods. Although we are
generating revenue from the sale of our AllergiEnd® products and the licensing
of QHSLab, we anticipate that we will continue to generate negative cash flow
for the immediate future. These factors, among others, raise substantial doubt
about our ability to continue as a going concern for a reasonable period of
time. Our continuation as a going concern is dependent upon our ability to
obtain necessary equity or debt financing and ultimately from generating
revenues and positive cash flow to continue operations. The 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.
24
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. 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 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 the risk factors sections detailed in
this 2022 Annual Report on Form 10K.
Critical Accounting Policies
Our significant accounting policies are described in the notes to our
consolidated financial statements included elsewhere in this annual report.
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QHSLAB, INC. 