Notes
to the Condensed Consolidated Financial Statements
Note
1. The Company
QHSLab,
Inc. (f/k/a USA Equities Corp.) (the “Company” or the “Registrant”) was incorporated in Delaware on September
1, 1983. In 2019, the Company consummated a share exchange agreement with the stockholders
of Medical Practice Income, Inc. a Florida corporation (“MPI”). As a result of the acquisition, MPI became a wholly-owned
subsidiary of the Company and 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 as a result of a merger with and into its newly formed wholly-owned
subsidiary, USA Equities Corp., a Nevada corporation (“USA Equities Nevada”), the surviving entity pursuant to an Agreement
and Plan of Merger. USA Equities Nevada is deemed to be the successor to USA Equities Corp., the Delaware corporation. 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 months ended March 31, 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.
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 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 three month period ended March 31, 2023. As of March 31, 2023, two customers each comprised greater than 10% of the outstanding
accounts receivable balance, one at 17.1% and the other at 12.5%.
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 $223,390 as of March 31, 2023 and December 31, 2022. The Company completed
testing of its internally-developed software application (“QHSLab platform”) 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. During the three month periods
ended March 31, 2023 and 2022 there was $18,616 and $0 of amortization recognized, respectively. There were no impairments recognized
during the three month period ended March 31, 2023 and the year ended December 31, 2022.
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 |
13.4 years |
|
|
Web Domain |
Indefinite life |
|
|
Trademark |
Indefinite
life |
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.
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 March 31, 2023 and 2022, there was $63,547 and $28,979 of research and development
expenses incurred, respectively.
Stock-based
Compensation: The Company applies the fair value method of ASC 718, Share Based Payment, in accounting for its stock-based
compensation. The standard states that compensation cost is measured at the grant date based on the fair value of the award and is recognized
over the service period, which is usually the vesting period. The Company values stock-based compensation at the market price for the
Company’s common stock and other pertinent factors at the grant date.
Earnings
Per Common Share: Basic net loss per share is computed using the weighted average number of common shares outstanding during the
period. Diluted net loss per common share is computed using the weighted average number of common and dilutive equivalent shares outstanding
during the period. Dilutive common equivalent shares consist of options and warrants to purchase common stock (only if those options
and warrants are exercisable and at prices below the average share price for the period) and shares issuable upon the conversion of issued
and outstanding preferred stock. Due to the net losses reported, dilutive common equivalent shares were excluded from the computation
of diluted loss per share, as inclusion would be anti-dilutive for the periods presented. There were no common equivalent shares required
to be added to the basic weighted average shares outstanding to arrive at diluted weighted average shares outstanding as of March 31,
2023 or 2022.
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 $3,707,451 which begin to expire in 2027. Future utilization of currently generated federal and state
NOL and tax credit carry forwards may be subject to a substantial annual limitation due to the ownership change limitations. The annual
limitation may result in the expiration of NOL and tax credit carry-forwards before full utilization.
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 interim 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.
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
| |
March 31, 2023 | | |
December 31, 2022 | |
Accounts receivable | |
$ | 80,829 | | |
$ | 55,964 | |
Allowance for doubtful accounts | |
| (4,590 | ) | |
| (8,230 | ) |
Accounts receivable, net | |
$ | 76,239 | | |
$ | 47,734 | |
Note
5. Capitalized Software and Intangible Assets
Non-current
assets consist of the following at March 31, 2023 and December 31, 2022:
Schedule
of Intangible Assets
| |
Estimated
Useful Life (in years) | |
March 31, 2023 | | |
December 31, 2022 | |
Capitalized software | |
3.0 | |
$ | 223,390 | | |
$ | 223,390 | |
Accumulated amortization | |
| |
| (74,463 | ) | |
| (55,847 | ) |
Capitalized software, net | |
| |
$ | 148,927 | | |
$ | 167,543 | |
Intangible Assets: | |
| |
| | | |
| | |
U.S. Method Patent | |
13.4 | |
$ | 967,500 | | |
$ | 967,500 | |
Web Domain | |
N/A | |
| 161,250 | | |
| 161,250 | |
Trademark | |
N/A | |
| 483,750 | | |
| 483,750 | |
Total Intangible assets | |
| |
$ | 1,612,500 | | |
$ | 1,612,500 | |
Accumulated amortization | |
| |
| (126,196 | ) | |
| (108,168 | ) |
Intangible assets, net | |
| |
$ | 1,486,304 | | |
$ | 1,504,332 | |
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 March 31, 2023 and December 31, 2022 there was $74,463 and $55,847 of accumulated amortization
expense, respectively. Amortization related to the QHSLab platform was $18,616 and $0 for the three month periods ended March 31, 2023
and 2022, respectively, and is recorded within cost of revenue on the Company’s condensed consolidated statements
of operations. There were no impairments recognized during the three month period ended March 31, 2023 and the year ended December 31,
2022.
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 $1,612,500
which was financed through a combination of restricted stock and a promissory note. 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. The assets are being
amortized over their useful lives beginning July 1, 2021. The Trademark and Web Domain are determined to have an indefinite life and
will be tested annually for impairment in accordance with ASC 350-30-35, Intangibles, General Intangibles Other Than Goodwill.
There was $18,028 of amortization expense during each of the quarters ended March 31, 2023 and 2022.
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 $750,000. The principal, along with associated interest, are being paid in 36 equal monthly installments that began in July 2021.
The principal balance of the loan is divided between current and long-term liabilities on the Company’s condensed consolidated
balance sheets. The combined principal due along with accrued interest as of March 31, 2023 is $416,279 and as of December 31, 2022 was
$426,451.
On
November 28, 2022, the Company entered into a fixed-fee short-term loan with its merchant bank and received $111,300 in loan proceeds.
The loan is repaid by the merchant bank withholding
an agreed-upon percentage of payments they process on behalf of the Company with a minimum of $13,776 paid every 60 days. The loan payable
is due in May 2024. As of December 31, 2022, the loan balance of $93,146 was recorded between current and long-term liabilities on the
condensed consolidated balance sheets. As of March 31, 2023, the loan balance is $26,499 and is all recorded in current liabilities based
on the minimum payments due.
Note
7. Convertible Notes Payable
Convertible
notes payable at March 31, 2023 and December 31, 2022, consist of the following:
Schedule
of Convertible Notes Payable
| |
March 31, 2023 | | |
December 31, 2022 | |
Note 1 – Shareholder | |
$ | 100,000 | | |
$ | 100,000 | |
Note 2 – Mercer Note | |
| 706,000 | | |
| 706,000 | |
Note 3 – Mercer Note #2 | |
| 440,000 | | |
| 440,000 | |
Total | |
| 1,246,000 | | |
| 1,246,000 | |
Debt discount and issuance costs | |
| (46,805 | ) | |
| (84,082 | ) |
Total convertible notes payable | |
| 1,199,195 | | |
| 1,161,918 | |
Less: current portion | |
| 1,199,195 | | |
| 1,161,918 | |
Non-current portion | |
$ | - | | |
$ | - | |
Note
1 – Effective May 7, 2021, the Company issued a Convertible Promissory Note in the principal amount of $100,000 to a shareholder
(Note 1). The Note bears interest at the rate of 10% per annum with an initial maturity on September 30, 2022 (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. The Company may satisfy the Note upon maturity or Default, as defined, by the issuance of common
shares at a conversion price equal to the greater of a 25% discount to the 15-day average market price of the Company’s common
stock or $0.50. The principal and interest accrued are convertible at any time through the maturity date of December 31, 2023 at the
option of the holder using the same conversion calculation. As of March 31, 2023 and December 31, 2022, this note had $18,986 and $16,521,
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 $806,000 and warrants to purchase 930,000 shares of the Company’s common stock for aggregate consideration of $750,000.
In addition, pursuant to the Purchase Agreement the Company entered into a Registration Rights Agreement with the investor.
The
principal amount of the Note and all interest accrued thereon is payable on August 10, 2022, and is secured by a lien on substantially
all of the Company’s 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 $0.65 per share. In addition to customary anti-dilution adjustments upon the occurrence of certain corporate
events, the Note provides, subject to certain limited exceptions, that if the Company issues 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.
On
November 11, 2021, Mercer Street Global Opportunity Fund, LLC, converted $50,000 of the principal amount of the $806,000 Secured Convertible
Promissory Note issued August 10, 2021, into 76,923 shares of the Company’s common stock at a price of $0.65 per share.
The
930,000 Warrants are initially exercisable for a period of three years at a price of $1.25 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.
As
a result of the issuance of a $440,000 Original Issue Discount Secured Convertible Promissory Note effective July 19, 2022, (Note 3)
convertible into shares of the Company’s common stock at a price of $0.20 per share, the price at which the $806,000 Note may be
converted into shares of the Company’s common stock has been reduced to $0.20 per share. On July 27, 2022, Mercer
Fund converted $50,000 of the principal amount of the $806,000 Note into 250,000 shares of the Company’s common stock at a price
of $0.20 per share.
On
October 17, 2022, 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 $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. The
$806,000 Note continues to accrue interest at 5%.
As
of March 31, 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
$706,000, along with associated interest, is recorded with current liabilities on the Company’s condensed consolidated balance
sheets. As of March 31, 2023, the $806,000 Note had $60,875 of accrued interest, total unamortized
debt issuance costs of $0, including the Warrant and the remaining discount. As of December 31, 2022, the $806,000
Note had $52,171 of accrued interest, total unamortized debt issuance costs of $0, including the Warrant and the remaining discount.
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 $440,000
and warrants to purchase 550,000 shares of the Company’s common stock for aggregate consideration of $400,000. In addition, pursuant
to the Purchase Agreement the Company entered into a Registration Rights Agreement with Mercer Fund.
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 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, the $440,000 Note provides, subject to certain limited exceptions, that if the Company issues any common stock or common stock
equivalents, as defined in the $440,000 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
$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.
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 $440,000
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.
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 $440,000 Note, a registration statement (the “Registration Statement”) with respect to all shares
which may be acquired upon conversion of the $440,000 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 $440,000 Note,
provided, that if the Company is notified by the SEC that the Registration Statement will not be reviewed or is no longer subject to
further review and comments, the Company shall cause the Registration Statement to be declared effective on the fifth trading day following
the date on which the Company is so notified. The Company is to cause the Registration Statement to remain continuously effective until
all Registrable Securities covered by such Registration Statement have been sold, or may be sold pursuant to Rule 144 without the volume
or other limitations of such rule, or are otherwise not required to be registered in reliance upon the exemption in Section 4(a)(1) or
4(a)(7) under the Securities Act.
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.
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 condensed consolidated balance sheets. As of March 31, 2023, the $440,000 Note had $15,189 of accrued interest, total
unamortized debt issuance costs of $34,421, including the Warrant value, and the remaining discount of $12,384. As of December 31, 2022,
the $440,000 Note had $9,764 of accrued interest, total unamortized debt issuance costs of $61,836, including the Warrant value, and
the remaining discount of $22,247.
Note
8. Preferred Stock
Series
A Preferred Stock
The
shares of Series A Preferred Stock have a stated value of $0.25 per share and are initially convertible into shares of common stock at
a price of $0.05 per share (subject to adjustment upon the occurrence of certain events). The Series A Preferred Stock does not accrue
dividends and ranks prior to the common stock upon a liquidation of the Company. The Series A Preferred Stock votes on all matters brought
before the shareholders together with the Common stock as a single class and each share of Series A Preferred Stock has a number of votes,
initially 5, equal to the number of shares of preferred stock into which it is convertible as of the record date for any vote.
Series
A-2 Preferred Stock
On
December 30, 2021, the Board of Directors of the Company authorized the issuance of 2,644,424 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 $286,078 together with all interest accrued thereon.
The
shares of Series A Preferred Stock have a stated value of $0.16 per share and are convertible into shares of common stock at a price
of $0.16 per share (subject to adjustment upon the occurrence of certain events). The rights of holders of the Company’s common
stock with respect to the payment of dividends and upon liquidation are junior in right of payment to holders of the Series A-2 Convertible
Preferred Shares. The rights of the holders of the Company’s Series A-2 Preferred Shares are pari passu to the rights of the holders
of the Company’s Series A Preferred Shares currently outstanding.
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.
Note
9. Loss Per Common Share
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 quarters ended March 31, 2023 and 2022 as the result would be anti-dilutive.
Schedule
of Anti-dilutive Securities Excluded From Calculation of Earning Per Share
| |
2023 | | |
2022 | |
| |
Three Months Ended March 31, | |
| |
2023 | | |
2022 | |
Stock options | |
| 1,100,000 | | |
| 1,100,000 | |
Stock warrants | |
| 1,560,747 | | |
| 1,026,647 | |
Total shares excluded from calculation | |
| 2,660,747 | | |
| 2,126,647 | |
Note
10. Stock-based Compensation
During
the three-month periods ended March 31, 2023 and 2022, there was $6,000 and $8,920, 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 three-month periods ended March 31, 2023 and 2022, there was $0 and $3,484, respectively, in General and administrative expense
associated with shares issued for services.
There
were no options exercised, forfeited or cancelled during the period. During the three month periods
ended March 31, 2023 and 2022 there were no options granted.
As
of March 31, 2023, all compensation related to 1,100,000 outstanding options has been recognized. The options were expensed over the
vesting period for each Advisor.
Options
outstanding at March 31, 2023 consist of:
Schedule
of Options Outstanding and Exercisable
Date Issued | |
Number Outstanding | | |
Number Exercisable | | |
Exercise Price | | |
Expiration Date |
March 12, 2020 | |
| 500,000 | | |
| 500,000 | | |
$ | 0.40 | | |
March 12, 2025 |
June 27, 2020 | |
| 150,000 | | |
| 150,000 | | |
$ | 0.40 | | |
June 27, 2025 |
January 1, 2021 | |
| 450,000 | | |
| 300,000 | | |
$ | 0.65 | | |
December 31, 2025 |
Total | |
| 1,100,000 | | |
| 950,000 | | |
| | | |
|
Warrants
outstanding at March 31, 2023 consist of:
Schedule
of Warrants Outstanding and Exercisable
Date Issued | |
Number Outstanding | | |
Number Exercisable | | |
Exercise Price | | |
Expiration Date |
May 7, 2021 | |
| 53,704 | | |
| 53,704 | | |
$ | 0.74 | | |
May 6, 2023 |
June 17, 2021 | |
| 12,189 | | |
| 12,189 | | |
$ | 0.83 | | |
June 16, 2023 |
August 10, 2021 | |
| 930,000 | | |
| 930,000 | | |
$ | 1.25 | | |
August 9, 2024 |
February 23, 2022 | |
| 14,854 | | |
| 14,854 | | |
$ | 0.705 | | |
February 22, 2024 |
July 19, 2022 | |
| 550,000 | | |
| 550,000 | | |
$ | 0.50 | | |
July
18, 2025 |
Total | |
| 1,560,747 | | |
| 1,560,747 | | |
| | | |
|
During
the quarter ended March 31, 2023, 15,900 outstanding warrants expired.
Note
11. Related Party Transactions
Convertible
notes payable, related party: See Note 7.
Note
12. Income Taxes
For
the three month period ended March 31, 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 one year and, in accordance with its terms, has been renewed for additional year-long
periods.
Under
the terms of the agreement, designated receivables are sold for periodic advances of up to $150,000. The Factoring Company retains a
reserve of 10% of purchased receivables with the balance available to the Company. Factoring fees begin at 1.8% for the first 30 days
a purchased invoice is outstanding and increase the longer an invoice remains outstanding. After 90 days, the Factoring Company has the
right to assign the invoice back to the Company. The Factoring Agreement includes minimum average monthly volumes.
As
of March 31, 2023, 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 net amount included in other current liabilities is $5,023
and $3,098 as of March 31, 2023 and December 31, 2022, respectively.
There
are no pending or threatened legal proceedings as of March 31, 2023. The Company has no non-cancellable operating leases.
Note
14. Subsequent Events
Management
has evaluated subsequent events through the date of this filing.